20 April 2013
I recently attended a dinner organised by Criticaleye to discuss current retail trends and how successful consumer goods firms are managing to build sustainable, growing and profitable businesses in the face of these developments. Criticaleye is particularly good at running such events and it is one of the best ways in which members derive value. Senior business leaders from non-competing businesses open up to each other to compare best practice. One or two wise owls like me are added to the mix to tell our war stories and perhaps give a bit of a gentle push if the discussion stalls which it rarely does. The events are held under the Chatham House Rule (see my blog The Chatham House Rule 4 June 2011 tag Pedantry) so I won’t be mentioning any names but suffice it to say they were all major suppliers of branded consumer goods.
Three major trends emerged:
1. There is a change in how consumers buy. The digitisation of data and the ubiquity of mobile devices are leading to a revolution in purchasing habits. While consumers have always been influenced by word of mouth more than by any other medium that is now more likely to be received on social media.
2. There is a change at the retail level with the disruptive effects of online retailing or ‘pure play’. Some are responding with a hybrid approach while others seek to defend their niche but those not making substantial changes to their offer are at risk.
3. The constant pressure on margins in the grocery sector has become extreme. There is nothing new about this trend but participants were all agreed that it has gone too far.
Of these I found the second the most interesting and perhaps the most disturbing.
I have considerable experience in Channel Management going back several decades. Back in the 1970s I did a study of UK Grocery trends to underpin a reorganisation of the Pedigree sales force. The trend of concentration of British supermarkets was already well underway and our challenge was how to best organise our selling effort to influence not only decision makers but store managers in chains where buying was centralised.
In the early 1980s I worked in International Marketing and was able to study the different retail developments in some 20 different countries at close hand. Returning to the UK I first managed a food business and learnt how to balance the needs of the major supermarket chains against each other. Then I crossed over into the consumer electronics world where such trends were less developed, products needed to be properly demonstrated and sold, and the personal touch was still valued as was after sales service.
But even so there were signs of accelerating concentration and highly competitive pricing. Despite this in 1996 the industry came under investigation by the Mergers and Monopolies Commission (MMC). At Sony we were amazed. Our customers were cutting each other’s throats on an hourly basis. One customer used to joke that the strategic planning horizon of a retailer was ten minutes. All of them operated some kind of price promise.
I still have the opening speech I made to the MMC hearing. It is too long to quote in full here but after an introduction explaining our history in the UK, our position of leadership in the industry and indeed industry in general, our unswerving commitment to innovation and quality I went on to explain that while recognising that the commission was concerned about market share as we created markets by definition we would start with 100% market share. In Colour TV we had gained market leadership through the excellence of our patented Trinitron technology. In Home Video we had lost a format battle with Betamax and were now trying to regain ground with our own VHS players. In camcorders we had pioneered the category and had a particularly competitive struggle; and in Hifi Systems we had co-developed Compact Discs and packaging them into systems had been an important step in gaining acceptance of the format.
I said that consumer electronics was far more brutally competitive than the so-called fast moving consumer goods businesses I had worked in before.
Our products required demonstration and so we had always operated selective distribution. Our distribution agreements had been approved by the European Commission. Under these we had rightly refused supply to some of the warehouse clubs that had shown a slight interest in stocking our products. We knew they had no desire to invest in store salesmen etc but just wanted to be associated with the glamour of our brand.
I then got onto the thorny issue of price. Of course we respected the law and did not seek to control the final price charged. However, we knew from consumer inquiries that consumers wanted guidance on price. Thus under the law we recommended a price although retailers were free to set their own price.
Downward pressure on price came from the rapid development of technology particularly Moore’s Law; from the deliberate policy of manufacturers like Sony to drive prices down to broaden market acceptance; from the retailers who competed on price with their price-match policies; and from consumers who had learnt to shop around for the best deal.
Upward pressure only came from two directions: from inflation in the cost base but noone in consumer electronics could recover his cost inflation so he had to keep costs down to survive, hence the offshoring of manufacturing to lower cost territories; and from the weakness of sterling in imported products but even when sterling was forced out of the ERM Sony had lost share when it attempted to increase prices and competitors had not followed. The result was continuous price erosion and low levels of profitability among both retailers and manufacturers.
Many had withdrawn from the market to be replaced by new competitors. I even referred to the Koreans who I correctly described as “extremely strong competition. They are huge corporations with a greater degree of vertical integration, and they have proved very adept at imitation.“
But back in 1996 there was no mention in my speech of the internet and the idea of online retailing.
There was plenty of consumer choice and the consumer could buy our products in chain retailers like Dixons, independent retailers, department stores and others. Our less sophisticated products that did not require demonstration or after sales service could be bought from mail order catalogues or in catalogue shops like Argos. In a way these were the forerunners of Online Retailing in that there is not a huge difference in selling off the page if the page is printed or if it is presented to you on a website.
But there is one critical difference. When Argos printed its catalogue it was for a six-month life and of course there was a considerable lead time in printing. So Argos would fix its range and pricing perhaps eight months ahead of the closing date and throughout that period could not vary the price. But today’s online retailers can easily change the price at will to reflect the state of the market at any one time. Search engines can scour the web for competitive offers and sophisticated algorithms employed to set up a new competitive price.
So a new dilemma has emerged for today’s consumer goods supplier. If he chooses to supply a major online retailer which made its name as a category killer in books, CDs and DVDs but has now spread its wings to an enormous range of goods that company will want to stock his full range and always be at the lowest price. Once the robots have been enabled there is no human intervention. The normal techniques of satisfying competing interests but persuading retailers that their turn on promotion will come won’t work. Exclusive models might but only if the online monster accepts that he can’t have the full range.
Just as the book shops have mainly gone and the recorded music shops have all gone if this trend continues the electronics retailers will also go. But when Woolworth closed not all the business moved to the online sector. Some was lost for ever. When HMV closed the same thing happened. Some people enjoyed browsing in a store and whatever anyone says it is not the same experience online. The UK is well ahead of the rest of the developed world in the pace of penetration by online retailing. It is over 15% of total retail here compared with 12% in the US and just 5% in Japan. Perhaps that is one reason why the UK economy has stalled as so much traditional retail capacity has closed.
But the threat is not just to the traditional bricks and mortar retailers, it is also to the consumer goods suppliers. They must develop a channel management strategy to survive.
One possible strategy is to sell direct themselves.
When I was at Sony I remember having lunch one day with the Managing Director of one of my largest retail customers. He was concerned about our Sony Centre strategy. But I corrected him, we did not own the Sony Centres. They were owned by independent retailers. It was not a franchise as no royalty was paid. But they did commit to stocking only Sony products and in return we helped them with a uniform merchandising style.
My guest did not believe me. He foresaw the day when Sony would want to own all its distribution. I could not see how that was an intelligent use of our capital. Our distribution strategy leveraged the capital of organisations like his allowing us to invest in factories and product development and creating demand through advertising. It was a healthy debate and I felt sure I was right but in today’s internet dominated world maybe the only way for companies like Sony to survive is to develop their own hybrid strategy of online and in store retailing. That way they can say no to the Online Giants.
Copyright David C Pearson 2013 All rights reserved
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