Where can you get the best training in marketing?... Harvard? Stanford? INSEAD? The answer is still by joining Proctor and Gamble or Unilever or L'Oreal or one of the handful of consumer goods companies who created modern marketing. They gave us the concept of brands as we now know them, invented image-based advertising and pioneered market research to explore consumer wants and perceptions. These innovations have been adopted throughout our society, by government, by charities, by consumer groups as well as by all sorts of commerce from financial services to pharmaceuticals. Apart from all this flattery by imitation, the brand inventors have also been richly rewarded in terms of profits. The heyday of brands arrived with the diffusion of commercial television in the 1960s but even today, 40 years on, the profits of fast moving consumer goods (FMCG) brand owners are holding up remarkably well.
This profitability is remarkable in the sense that over the last two decades manufacturers have complained continuously about the struggle they are having faced with ever more powerful retailers. Each year the magazine Progressive Grocer (US) polls manufacturers on their belief that power is shifting in the industry. In the latest poll (1998) 57% observed further shifts in power towards the retailers (as against 10% towards manufacturers). This belief has been consistent over 15 years — manufacturers have perceived retail power increases each year since the survey began. This 'conventional wisdom' of a shift in power is backed up with clear quantitative measures of the concentration of retailing: in the largest European states and the most important US regions, the top 4 or 5 retail operators now typically control over half their markets. Yet over this same period, FMCG manufacturers have increased their yearly profits and the value of their assets i.e. brands.
This is not to say that retailers have not also developed profitably in recent times. Particularly in the UK, retailers have increased their profitability without bankrupting their suppliers. US retailers (with some notable exceptions) have been relatively less successful, though ironically, it is the British retailers who, held hostage by the British stock market, now seem to be falling behind in the race to globalisation. The chart below shows how retailers and manufacturers stack up, in terms of value, size and profitability.
The market capitalisation and return on capital employed (ROCE) of the top manufacturers is still significantly ahead of the biggest retailers.
Compared to UK retailers, US retailers missed out on an increasing FMCG cake during the 90s. This was not through a failure to negotiate good buying prices from suppliers. The issue was whether retailers could hold up selling prices to the consumer. A pool between two waterfalls does not trap more water if the flow from upstream is increased. The only way to enlarge the pool is by damming the downstream outlet.
This observation leads to a key message of this book: retail profitability is a function of the retail industry's success in creating consumer loyalty. To win this loyalty retailers are turning to the same tools long used by manufacturers: mind-space and shelfspace and... brands.
Thus the threat posed to manufacturers by more powerful retailers is not fading away. Retailers are concentrating now globally as well as nationally and are becoming equipped as never before to analyse and then influence the shopping habits and behaviour of their customers. Beyond this, the whole FMCG industry is facing major new challenges. Out-of-home consumption is creating inviting new opportunities, but the downside is the threat posed to existing business. European-type hard-discounters (a la Aldi) continue to expand their share of the total grocery market. Selling non-branded, cheap products in utilitarian stores devalues the whole industry and constitutes the single greatest threat to its continued profitability.
Lastly, the use of information technology both within existing retailing and alongside will bring far reaching change. Home shopping and other versions of 'E-commerce' represent exciting new routes to the consumer. IT offers new tools for understanding consumer segmentation in ever finer detail, down to the ideal of tailored, one-2-one marketing. On the operations side, IT can reduce the efficiency advantages enjoyed by Hard Discounters: the goal of handling several thousand stock keeping units almost as efficiently as handling a mere 6 or 7 hundred may not be unattainable.
Retailers and manufacturers have famously adversarial relationships, but we believe this book will help the two parties co-operate as well as compete to develop an innovative and profitable FMCG industry. Haggling over rebates will never increase the value the FMCG industry offers the consumer, or help high quality brands and a high quality retail experience compete against alternative forms of distribution. Understanding each other's business helps effective competition, but it should also underline the need for co-operation and to avoid situations where all parties loose out—including possibly the consumer.
The book is divided into three parts. The first looks at the marketing of FMCG goods from the point of view of manufacturers. Readers familiar with current FMCG marketing might wish to skim read Part I and concentrate on Parts II and III. The second part explores the present and future aspirations and business strategies of retailers. Part III shows how manufacturers and retailers compete for profits in the industry. We look at areas of co-operation and conflict, and discuss competitive and co-operative opportunities.At the risk of anticipating the arguments presented in the rest of the book, we summarise below our key ideas and conclusions. Rendering three hundred pages into six provides clarity and coarseness in equal measure — we hope the reader will be interested enough by these sound-bites to read on.
6.1.1 Physical Network
The first fundamental difference between manufacturers and retailers is that retailers are physically tied to a fixed set of locations. No market analysis of a retailer is complete without a map showing the locations of their stores. And how puny the pins always seem compared to the spaces between them.
Location is of the highest importance to retailers: choosing the right location, as every shop, bank or fast-food outlet knows, is critical to success. In studies on shop choice, location comes up repeatedly as the dominant reason for choice (see Table 6.1).
Location has no direct equivalent for manufacturers — the nearest equivalent would be distribution or shelfspace. Shelf-space is fundamental and concerns physical presence and accessibility, but the influence of location in retailing is more absolute than the influence of shelfspace on FMCG sales.
Most large manufacturers aim to make their brands available to the whole of their target segment. This target segment might be spread across a whole country, or in some cases, several countries. Manufacturers rely on the distribution industry to make their brands available to almost all consumers. They assume, for the most part, that direct competition will sit side by side with them on the shelves. Lack of shelfspace is fatal, but shelfspace on its own will not sell consumer products. The key for FMCG marketers is to target specific consumers, so that a proportion of shoppers will prefer their offering. Product brands, such as, say, Cafe Hag (a decaffeinated coffee: the whole sector worth only 14% of instant coffee sales) can afford to target very specific segments of consumers.
Table 6.1 Reason for choosing main supermarket, among regular users
Location Near other shops/services
'Forces et faiblesses de 22 groupes European', using statistics from Secodip study: 'Scenario pour lapres 1993', LSA, No 1289,30 January 1992, pp. 28-36 (these statistics on p. 30).
The physical situation of retailers is different. The set of locations determine the 'coverage' of the chain, the group of consumers who could, conveniently, use one of the stores on a regular basis. Coverage defines the store's total potential target market.
The coverage of a chain of stores depends on the number of stores, the population density around the stores, plus traffic flows and transport infrastructure. Coverage depends not only on physical aspects, but also on people's standards of convenience and willingness to travel.
Convenience is relative: it is difficult to get a shopper to drive past one supermarket to reach another. Relative convenience may change over time. A shopper may for years drive 15 minutes to one supermarket and then be seduced away overnight by a new store that offers no other benefit than being a mere five minute drive from their front door. Thus, it is necessary to consider and measure the coverage of a store in the context of number of stores available to their target households.
Willingness to travel (and thus coverage) will also depend on type of shopping trip. For a top-up trip to buy 6 items, it will never be worthwhile driving for 15 minutes, whereas for a major stocking-up trip, a 15 minute drive is often quite acceptable. This is why there will always be a market for smaller local stores as their convenience provides a sustainable differential advantage for certain types of shopping trip.
Coverage is not black and white, but should be visualised rather as a set of concentric rings, with levels of coverage going from dominant, through competitive to possible. The more attractive the store (range/prices, etc.) the larger its circles of coverage will be (Fig. 6.1, page 116, ignores the different degrees of coverage).
Coverage is clearly of huge importance to retailers — as much or more than distribution to manufacturers—but rather harder to calculate exactly. When Tesco bought the William Low chain they did so to add a large group of new shoppers to their potential market. By our rough estimates, William Low's 67 stores are within 5 minutes drive time for 2.5% of the UK homes, or 1.5 million people, but such estimates are extremely hard to make exact. For example, many shoppers shop from more than one base (i.e. not just from their homes), and willingness to travel is very variable.
Another, always rather approximate, way of looking at coverage is in terms of number of closer competitors.
In traditional strategic marketing, distribution is considered as a variable within the marketing mix: a crank that can be turned and the faster it's turned the more distribution will be achieved. This view of distribution is reflected in the common measures of distribution strength, such as those offered by Nielsen. Nielsen's most popular 'value index' indicates what proportion of stores usually stock the brand (weighted by the value of the stores' sales), and what proportion had the brand available on shelf at the time of the survey. It is common for major brands to approach 100% on these measures. If this distribution index falls, the salesforce is expected to exert pressure to recover any lost distribution. A shortfall in distribution is not seen as a strategic marketing problem. Its resolution is expected in the short term through tactical methods—including salesforce attention and paying the retailer to re-stock. Retail evolution has made this picture of distribution completely out of date.
5.1 THE EVOLUTION OF RETAILING
For many years retailers took a back seat in the FMCG industry and manufacturers were able to dictate what retailers should stock and the terms they could expect. In recent years, the retail trade in many sectors of consumer goods has changed radically, while the conventional marketing view of the retailer has changed more slowly.
In the conventional marketing view, distribution is assumed to be passive or transparent. It assumes that retailers pass back to the manufacturers an unbiased consumer market—that is, that the consumer in a shop will behave in the same way as the consumer considering brands in a totally neutral, abstract situation. This tacitly assumes that manufacturers have control of all the marketing variables including price, promotions and presence on shelf. It assumes that if the manufacturer succeeds in targeting a consumer with the product offering, then the distribution, managed and administered by an efficient sales-force and logistics system, can be relied upon to deliver the product transparently to the consumer.
Manufacturers have become increasingly aware of the power of retailers, but this has not necessarily changed their assumptions about marketing. The crank has got stiffer, but the principles of segmenting consumers and positioning brands against brand competition have remained the same.
This assumption is frequently revealed in the market research carried out by manufacturers. In brand preference research, all the major national brands are often measured against each other. In reality, the major retailers consciously and intentionally do not offer all the major national brands and, indeed, many major store chains have a policy of stocking only a few. Similarly, it is conventional in market research to rotate the order of questions to give all brands equal treatment. Do retailers make efforts with store layout to give each brand equal prominence? A transparent retaHer would rotate the brands on the store's shelves, as an interviewer rotates questions; in the real world, of course, retailers place their own brands most prominently. In reporting their purchases and preference to market researchers, consumers often underestimate the amount of own label they buy.1 If the market is not that measured and modelled by market research among consumers, strategic marketing decisions should not be based on this market research.
Brand positioning strategies always include an idea of the price point for the brand. But modern retailers do not follow the manufacturer's recommended selling price: they price according to their own objectives. Evidently, the more sophisticated the retailer, the more likely it is to have an independent view on pricing the brands it sells. The retailer's objectives are largely
independent and quite frequently in conflict with those of the manufacturer. For example, through price competition in the retail trade, many retailers make only small margins on the best-known brands. Thus retailers may not be very motivated to sell such brands even though they recognise the need to stock them.
Despite the enormous changes, 'transparency' is still an underlying assumption in current marketing theory. It underlies many marketing courses and is modelled in computer training simulations originated in the 1970s (e.g. MARKSTRAT) and early 1980s. It is simply no longer appropriate. Students should not be taught that distribution is a marketing mix variable to be bought (e.g. via salesforce pressure), just like advertising, when this is no longer the case. Pricing, promotions and merchandising are no longer controlled by the manufacturers.
Manufacturers have to consider retailers as a separate force in the market. They have to look at the decisions made by 'shoppers' in stores rather than by 'consumers' in an abstract world of brands. They have to compete with retailers for influence over the 'shopper'.Earlier, we described how industries tended to be product oriented in their origins, progressing through a selling phase before becoming market oriented. A similar range of orientations can be observed among retailers. This chapter examines how retailers have evolved, and how they are likely to develop their business strategies in the future. We analyse the basis of retail power—that is, how modern (and future) retailers influence and distort consumer preferences.
Creating a Sustainable Retail Differential Advantage
7.1 RETAIL DIFFERENTIAL ADVANTAGE
Retailers, like manufacturers, need to find some way of differentiating their offerings. Location often used to be a decisive differential advantage for a store, but as saturation and consumer mobility increases, location gives less protection. In saturated markets location continues to be a differential advantage only for small 'convenience' stores. Other retailers, like manufacturers, must aim to differentiate their offerings to create loyalty among their shoppers. Once stores are differentiated one from another, retailers can improve their profits. This was the conclusion reached at the end of Chapter 5. In Chapter 6 we dismissed segmentation via chain proliferation, we dismissed service levels and store quality, and we even dismissed low prices for creating differential advantage for a mainstream store. In this chapter we look at the importance of own label/fresh produce and tailored marketing for creating loyalty, before turning to the management of price perception.
7.1.1 What Counts as a Differential Advantage?
In every market there are certain 'key success factors' without which a competitor cannot expect to survive. In retailing, good prices and good locations are essential. Achieving these minima is often in itself a very considerable challenge. Looked at from the outside, these necessary success factors are often those elements described as 'barriers to entry' for new competitors. A differential advantage is what a company can offer on top of the necessary. A differential advantage is obtained when a product is successfully differentiated in the minds of consumers, so that it is no longer totally substitutable with competitive products. If an advantage is to be a true differential advantage it must have three vital attributes. It must be:
(1) Perceived as unique.The idea of a differential advantage is to
set the retailer apart from the competition in the eyes of the
consumer. The offer must be distinct in some way.
Uniqueness in itself will not necessarily motivate purchase,
but it is a prerequisite. A product-offering has to be
perceived as distinct before any added value can be attached
to it. A product-offering can be perceived as being unique
without being particularly attractive: the East German
Trabant was as distinct in its way as the Volkswagen Golf.
The second condition for a successful differential advantage
is that the unique offering must be important to the target
(2) Important to the target market. The differential advantage has
to be important to consumers when they make their buying
decisions. Since the target market of a large store is broad,
the differential advantage must motivate a whole range of
segments. Retailers have a habit of assuming that price is
important to all buyers. More often price is important for a
certain group of shoppers, but relatively less important to
others. Since retailers must go for many segments, they must
find benefits which motivate each type of shopper to become
loyal to the store.
(3) Sustainable. If a retailer finds some differential advantage
that attracts and holds shoppers, competitors will immedi
ately wish to match and neutralise the benefit. To be worth
anything, a differential advantage has to be sustainable
against the competition. To be sustainable, a differential
advantage must be based on some resource that is unique to
the company, and difficult to copy. In general, services (such
as smiling check-out staff) are copiable, and worth copying
if they are profitable. Low prices on manufacturer brands are
copiable unless the store has a structural and sustainable lead in
efficiency. The most sustainable differentiator found to date has been
the procurement of unique and exclusive products sold under the store's name.
7.2 DIFFERENTIAL ADVANTAGE VIA OWN BRANDS AND FRESH PRODUCTS
Through most of history, merchants, wholesalers and shopkeepers dominated the relationship with end consumers. They negotiated with suppliers and carried out the functions of dividing into small lot sizes and packaging (rather rudimentary). They also provided whatever guarantees and reassurance on quality the consumer had.
Manufacturers created brands initially to wrest power from the middlemen. By naming and making their product offering distinct (literally by burning a 'brand mark' on their packing cases) and by advertising its qualities, manufacturers built a bridge over the heads of the merchants to the consumer. They created consumer loyalty for their particular brand. Consumer demand put pressure on retailers to stock the item and the manufacturer was able to hold out for a higher price.
With the invention of brands manufacturers took over the role of lot size, packaging and, most important, of reassurance. As manufactured consumer goods became more sophisticated, with better and more attractive packaging, the relative power of distributors fell. Using more sophisticated advertising (culminating in TV advertising) and promotional techniques, the strength of manufacturers grew with their hold on the consumers' minds. The power and influence of the retail trade declined steadily for over 50 years. At this point various sociological changes (notably the car) encouraged the rise of large efficient retailers. Retail power concentrated and the discounters grew in size until they found themselves back in a position to challenge the hegemony of the manufacturers.
7.2.1 Own Label
Discounters grow by taking sales from small, inefficient shops. Discounters are happy to handle respected manufacturers' brands. These brands are those distributed by the traditional retailers, and the developing, more efficient stores can compete very successfully on breadth of merchandise and, above all, competitive prices compared to the traditional shops. Discounters actually needed national brands to convince shoppers that the products they offered were as good as those in traditional stores. This was particularly true in white and brown goods, where discount warehouses were trusted little initially.
Once competition hotted up, with large discounters competing with other large discounters rather than 'Mom and Pop' stores, selling strategies took hold and it became difficult for stores to make good margins on leading brands. This was the original impetus for own brands. Own labels were originally introduced in a selling climate as a means of countering the power of national brands.
The increased size of retailers meant that, for the first time, many had become large enough to commission 'own brands', sold exclusively through their outlets.At first, own labels reflected the philosophy of their inventors: the discounter could buy them cheaper, and even after taking a healthy margin could offer them to their shoppers at a relatively low price. These were 'type-1' own labels.