This post is the 5th in the series, how to beat the supermarket gorillas at their game. Like David taking on Goliath, small businesses supplying into FMCG (Fast moving Consumer Goods) markets simply have to find the points where they can exert some leverage, where their relative agility can deliver them an advantage against the disadvantage of size.
It is important for them to remember at all times that they have two customers types, and they are different.
One wants to make money from you, and is almost entirely devoid of any personal investment in any of your marketing activities, profile, or brand. The other needs you to solve problems for them, or just fill an everyday need , and is highly likely to respond to any one or more likely a mix of your marketing activity, including those the supermarkets favour, i.e. Price reductions, shelf highlights and paid off location displays.
Supermarket are interested in the role you can play in making their brand the one chosen by consumers, weather or not the consumer then chooses to buy your brand of widget while you shop is almost entirely irrelevant to them, what is relevant is how much in total consumers buy, how often they buy, and how they feature in the consumers mix of retail preferences. Do they just do the fortnightly big family shop with them, do they drop in regularly to top up, or even just to buy a few necessities? From the retailer issued loyalty cards, if you have one, supermarkets know just about everything about the behavior of each consumer, and increasingly as social media and location data is integrated, they will have the opportunity to know just about everything about the consumers total buying behavior, inside and outside of their stores.
The planning of your marketing and sales promotion activity must take these realities into account, so following are two lists of the key considerations for small businesses as they contemplate climbing into, or just surviving the Gorilla ring.
- Maximum margin. As with any retailer, supermarkets want to buy as cheaply as possible, and sell as high as possible, and they have perfected techniques to extract added margin from suppliers via a range of promotional, payment and ranging/space allocation charges. At the same time, they pro-actively manage price, adjusting to local and regional competition and trading conditions to maximise their take at the check-out. Suppliers are often seduced by the scale of supermarkets and the potential sales on offer. Without rigorous go/no-go points, a focus on the sales and margin outcomes they want, and clear and aggressively enforced set of trading terms, they usually find themselves losing any negotiation.
- Two businesses. Supermarkets are in two businesses. The first is renting retail real estate to suppliers, the second is selling product to consumers. These are different games, and supermarkets are very good at both. Category management discipline dictates the manner in which retailers range, locate, and promote products, but do enable small businesses that know the “rules” to find ways to be creative and pro-active and to use category opportunities to their benefit. It is however, not easy, or for the faint-hearted, to be successful suppliers need to be absolutely on top of their strategies, and understand intimately their own target customers, and the ROI of promotional activity.
- Low shelf price. Supermarkets around the world use price as a consumer “bait”. The Australian gorillas have both made low prices a central plank in their strategies to attract consumers. Everyday low prices, deep price specials, off location displays and promotional prices are all funded by suppliers, at least to a significant degree. Coupled with the maximum margin strategy, this is a poisonous mix for suppliers without aggressive account management, and a deep understanding of their costs and consumers. The trade-off is in the scale of sales that can be delivered by supermarkets.
- Exclusive range. Retailers love something that consumers want, but can only get in their stores. Some products will always be available in both, but increasingly, small suppliers will have to make choices about which retailer they favour, but in turn, this can be used to suppliers advantage, as it shores up distribution in at least one of the gorillas. Problem is that the reach of the gorillas is so big that such a choice eliminates you from up to 40% of the potential sales.
- Better than competitive terms and promotional arrangements. All retailers work to a set of trading terms, and as noted, have perfected the management of them to extract the maximum from suppliers. However, there is always pressure to give a bit more than is given to the other retailers, usually “disguised” in all sorts of ways, an extra promotion beyond terms, a guarantee of a longer buying period, longer payment terms, and all sorts of other creative ways to get a competitive margin advantage. The next time you are tempted, just think about the repercussions if that buyer now pressing for an advantage turns up as a buyer for the other one next month. It does happen, as many can attest.
- Stock or inventory turn. This is a common and base measure for all retailers. How often can they turn the stock over?. The quicker the better, obviously. If your stock is turning 10 units a week, and there is a product the retailer can put in the same shelf space that will turn 12 units a week at the same margins, guess which one gets the space! Obviously it is more complicated than this, as there are % and absolute margins and consumer choice to be considered, but stock turn is an absolutely key measure. Of course, if they can turn case a week over, but do not pay for it for 45 days, the supplier is effectively funding the gorillas working capital.
- Minimum inventory levels. Coupled with the point above, retailers aim for the minimum inventory levels consistent with ensuring that stock is available on shelf at all times. This requires some pretty fancy and data intensive footwork by both retailers and suppliers, but the pressure is on suppliers for more but smaller deliveries to central warehouse for redistribution. This often has the effect of increasing the logistics costs for the suppliers, who instead of delivering a semi load every second day, are required to deliver a half semi every day.
- Assistance with the “last 20 feet”. The most expensive and prone to error is the distance between the back dock of an individual supermarket, and the shelf. Supermarkets generally welcome the assistance of supplier employed labor to assist with that last 20 feet, but there are rules that must be followed. However, for a supplier there is considerable benefit in being able to ensure there is stock on hand, and that the planogram allocated shelf space is in fact taken by your products, while often being able to take advantage of opportunities as they arise at store level.
- Favoured brand and size. Consumers loyalty to brands varies widely, but generally is significantly reduced from 20 years ago. However, most consumers have a number of products that are acceptable to them as substitutes for each other, but with a favorite if all other things are equal. Anticipating consumers and reflecting their views and needs is the biggest variable left in the hands of suppliers, and success comes with the capability to use data to model and optimise the behavior triggers that exist.
- Lowest price. Price dominates the FMCG markets, but is still not the only factor. Consumers each have an individual perspective on what constitutes value to them, in any given set of circumstances, and shop accordingly. For most, price is the dominating factor, but there are many others. The opportunity for smaller businesses is to find the niche where price is less dominant, and build their business in that niche. Very easy to say, but very hard to do, but there are some out there delivering great results by focusing on things other than price, and ensuring they deliver consumers value.
- Convenience. Consumers are time poor, and shopping for households is usually a chore. Making it easy by adequate parking, easy access, wide isles, all in one place, logical shelf and store layouts, and many others makes a big difference in the choices consumers make about where they will shop.
- Courtesy and assistance. So rare these days, but genuinely connecting on a human level makes a huge difference to consumers. On the other hand, consumers are increasingly cynical and dismissive of the rote “have a nice day” and plastic smile.
- Confidence in the products on shelf. Consumers are prepared to make changes in their choice of retailer on the basis of their confidence, particularly in the fresh categories, fruit and vegetables, meat, and dairy. With the exception of dairy, there are almost no proprietary brands in these categories, so consumers are relying on the retailer to take the place of the proprietary brand and provide reassurance of the integrity of the product. The recent very public recall of the “Creative Gourmet” and “Nanna’s” brands of frozen berries have heightened the concerns with produce, and the supply chains that deliver them. Unfortunately, the owner of these brands, Patties Foods is one of the last significant Australian owned businesses in the FMCG supply chain. Although they have reacted well to date to the problems, which should not have been happened with reasonable diligence of their supply chain, they stand condemned for the QA failure that allowed the failure in the first place. The recall and current focused concern with country of origin labelling in produce categories certainly offers an opportunity for Australian sourced produce to gain some leverage back, should they be able to take up the challenge.
Many of these factors will require trade-offs, some short term, others longer term. For example, for added distribution, most suppliers will consider fattening retailer margins while retaining low on-shelf prices in the hope that sales volumes will recover the difference, but often low price is counter to the long term health of the brand. Diversion of resources from branded marketing to retailer margins in return for distribution is the often the hardest choice that needs to be made. Over the last 20 years the supermarkets have won the debate and sucked the resources suppliers have away from brand marketing activity to their margins, to the detriment of the long term health of proprietary brands.
In Australia with the two gorillas holding 75-80% of sales, depending on the category, it has been a branding disaster, now consumers are increasingly confronted by an array of brands they do not know, often housebrands produced under contract for retailers, often by the owners of their former favorite brand, now no longer available.
The minefields outlined above require experienced and dispassionate navigation, get in touch for a dose of both.