John Bradley writes:
One thing that forcefully struck me in my recent updating Store Wars: The FMCG Battle for In-store and Online Success is that the future for manufacturers and retailers alike will, I believe, be quite different from the past in six key areas
1. Skills Transfer. Retailers now have an irreversible stake in winning mindspace from brand manufacturers through their private label brands. Fifteen years ago, a marketing manager could perform perfectly well by considering the retail trade as one relatively homogenous body. Today, if that manager does not intimately understand the individual strategies of his top ten retail customers, he is doomed. Equally, while a retail buyer could have only the haziest understanding of brand strategies in the past, today, he cannot perform at all without an equally intimate understanding of his own employer’s strategies across their multitude of private label brands.
2. Emerging Markets. It is clear that retailers in emerging markets are evolving at a faster rate, and in different directions to developed markets. Retailing in the U.S.A and Europe did not evolve down a pre-determined path to the logical optimised end-point; it evolved haphazardly due to a combination of changes such as radio/tv advertising and barcoding, supplemented by inspirational ideas from retailers. Aldi and Costco were not inevitable; they were a product of their environments, just like Big Bazaar is a product of the Indian environment.
3. Consolidation. Retailer consolidation is resulting in most key markets being dominated by a handful of major retailers who will account for 60-70% of total sales. To try and maintain relative critical mass, manufacturers are consolidating through mergers or acquisition. 20-25 behemoths will own the vast majority of big brands, flanked by a multitude of medium to large sized private label specialist supplies and a host of small, innovators, filling gaps the giants cannot or will not. Buy or be bought.
4. Private label will continue to gain share. In 2011, the biggest brand in the UK was Tesco Finest. The second largest was Tesco Value. As retailers’ brand building skills increase, so will their brand equities. Brand management and the development of more powerful brands is a core part of their and most other strong retailers’ strategies. Increasingly the onus will be for manufacturers to demonstrate how their brands fit in with and compliment retailer’s brands.
5. Online will continue to rapidly grow, both in terms of market share and also for pre-research into buying decisions. Manufacturers have to adapt to competing for sales in an environment which is both unfamiliar to them and one where they have far fewer means at their disposal to influence sales. One possibility is to structure their online operations vertically, becoming online specialists in those categories where consumers are committed or fanatical about product choice. For example, a Canadian company called BlackSquare built a platform that allows wine producers to sell directly to customers online. They make a higher profit margin on every bottle since they bypass traditional retailers, plus they give shoppers the ability to choose from larger collections. Not surprisingly, direct sales are becoming an important source of revenue for wineries – online sales are their fastest growing profit source.
6. Store size/location. The era of the hypermarket is rapidly coming to a close: having 100,000 SKU’s a 20-minute drive away is no longer a benefit when Sears.com has 17,000,000 you can purchase from your living room. Also, having large stores where half the SKU’s sell one or zero units a week cannot be sustained going forwards. Multi-format strategies of smaller stores more conveniently situated for busy shoppers are essential and victory will go to the retailers who get there first. More of the sales coming through smaller stores stocking fewer SKU’s will add to the pressures on manufacturers’ brand portfolios. Esselunga in Italy, seeing that the majority of their shoppers were time-starved working women, changed to offering 70% fewer SKU’s than their competitors to decrease the shopping time.
7. Yes, I know I said 6. Phone apps will push prices down, and history has shown that when prices go down squeezing retailer margins, there is only one place they can go to in order to restore their profitability: the manufacturer. That’s the one thing that never changes.