Apr 2, 2024 | Branding, Change, retail
The retail landscape is changing, even as the two retail gorillas hunker down and set about extracting more from the current model.
Following are a few of the macro trends I see that will continue to erode the current model that has been so successful.
Declining customer loyalty.
I have no numbers, but anecdotally, where in the past you shopped at Coles or Woollies, now you have Aldi, Farmers markets, Costco, Harris Farm, and a range of specialty retailers all competing successfully for the consumers dollar. I no longer know why anyone sees any of the major retailers as ‘their’ store. Loyalty is something that is given in acknowledgement of great service, and the gorillas have failed in that space.
Changing customer habits.
Associated with loyalty, customers are looking for things other than just the lowest price. Increasingly they want product provenance, domestically produced product, they are increasingly sensitive to the ingredient lists, and spurious health claims. This is all happening as the gorillas remove the options from their shelves in the game of short-term margins.
The continued growth of home delivery by the gorillas since Covid gave it a turbo-boost seems here to stay. Interestingly, home delivery also seems to be a useful brand building tool for the gorillas. Anecdotally, consumers tend to stick with one or the other of Coles or Woolies for delivery in greater numbers than they exhibit loyalty when shopping for themselves.
Investment attraction.
Aldi has invested successfully, Costco while going more slowly than expected, appear here to stay, farmers markets have become ‘corporatized’ to some extent, Harris Farm continues to invest, and specialty stores continue to ‘pop up’ although few survive for the long term. It seems that the market is sufficiently big, that with only two major players there is risk capital going in at the fringes, and in the long term, the fringes tend to become mainstream. Looming over all this is the shadow of Amazon, and more generally the move away from the bricks and mortar business model. I was betting a few years ago that the Harris family would cash in and sell to Amazon, a transaction consistent with their strategy in the US. So far, I have been wrong.
More recently, the public and political attention focussed on the gorillas can only have a negative impact on the investment attraction of FMCG retail.
Business model proliferation at the fringes.
While the supermarket model absolutely dominates the current landscape, technology and changing consumer attitudes are enabling evolving business models to compete for the consumers dollar. Two of my neighbours combine to buy meat in bulk direct from a farmer in the Southern highlands. It started as all the meat from a single animal, which meant lots of mince. Recently much of that mince is being made into sausages, and they are experimenting with differing sausage flavours for variety. This proliferation seems to me to be another signpost that change is coming, like it or not.
Margin pressure.
While all this is going on, margins through the supply chain are under increasing competitive pressure. This pressure impacts enormously on the decision making of incumbents, offering niche opportunities to newcomers and new business models to make a case with consumers.
It seems to me that the incumbent retailers are waiting to see what happens. History tells us that this is not an effective strategy. The better course is to shape your future in some way that suits your aspirations. It would be naive to say this was easy, it is excruciatingly hard, which is why so few are able to make the transformations necessary.
I keep on harping about the failure of Woolworths to leverage the start they made with Thomas Dux. To my mind it was a classic strategic mistake to back away.
My conclusion is that the current management culture at both the retail gorillas lacks the courage to explore, be curious, make investments that are separate from the main business, and stick to them in the face of short-term challenges. Instead, they have chosen to hunker down and optimise the current model.
Jun 28, 2017 | Marketing, Strategy
Amazon has bought Whole Foods in a deal worth $13.7 Billion, around $18 billion Australian. The gorilla of the digital retail troupe has invested in an old fashioned, albeit trendy, bricks and mortar retailer. This Whole Foods purchase makes it very clear that Amazon...
Apr 20, 2016 | Customers, Marketing, Operations, retail, Strategy
Coles and Woolies are locked in a battle for share of the customers wallets and throats that becomes more complicated every day. The competitive landscape has changed. The old model of them against each other and independent wholesaler supplied groups, has been spiced...
Oct 29, 2014 | Marketing, Small business, Strategy
Any business that has done business with the supermarkets knows that they are not there to do you any favours. They have shareholders to keep happy, customers to sell to at the lowest prices possible consistent with their margin objectives , competitors to beat, and shelf space for sale to their suppliers.
In order to survive and prosper selling via supermarket distribution takes a business model that is tailored to the demands that the retailers make.
Following are 10 strategies that have worked in the past, the more of them you cover off the better, and the first few are mandatory.
- Understand the supermarket business model. The supermarket business model is based on three factors: high volumes, lowest possible supply chain and transaction costs, and low prices. With some minor category exceptions for some retailers, they do not vary from this model, in Australia or overseas. Given the scale of their operations, they get to set the rules, and there is little room for negotiation, even for major suppliers.
- Be savvy with data. Mass market retailing is a data intensive game. The retailers have mountains of data at their disposal, and plenty of suppliers willing and able to interpret it for them, with the obvious disadvantage to those who do not interpret. Scan data, combined with the loyalty card data increasingly being used is a goldmine of demographic, behavioural, and promotional information. Being in a position to present data with your interpretation, and having the credibility to interpret the retailers and your competitors data is a price of success.
- Aggressively execute on Category Management. Category management disciplines are the foundation of the retailers ranging, promotional and in store product placement strategies. It is data intensive, and an integral part of he business model, and as such sufficiently important to be treated as a separate “to do” for those to whom success with supermarkets is essential. Allowing your products to be “category managed” by your competitors is simply not sufficiently competitive , or aggressive. You need to execute on category management in partnership with the retailers, even if you are not in the “category captain” role.
- Build a brand that has relevance and connection to consumers. The alternative to having a brand that has at least a small but demonstrable group of consumers your brand has no effective substitute, and who will perhaps change their choice of retailer for, is essential. To be a price taker with no leverage at all, is to be an irrelevant supplier who is absolutely dispensable.
- Recognise you have two customers. The supermarkets may be your direct customers, but the consumer is also your customer, indirectly. As a part of brand building, you need to open communication channels with consumers, so that they are predisposed to buy your products. This may seem like brand building, and it is, but it is more short term direct, and actionable than building a brand which is a long term investment. Direct promotional and communication activity can now be a part of your tactical marketing plans in a far more directed manner than has ever been possible before.
- Remove transaction costs. Transaction costs have two basic causes, the first is not getting “it right first time” requiring rework to correct, and the second is the penalty of small scale. It costs the same to raise and process an invoice of $1,000 as it does for an invoice of $100,000. To the extent that technology can be applied to process the invoices, the costs will not be material, but if people are involved, the costs of the $1,000 invoice is 100 times as much as the $100,000 invoice. This relationship is reflected throughout the supply and distribution chain, and even minor improvements can deliver substantial savings. The source of Woolworths superior performance over the last decade compared to Coles has been the impact of their reductions in transaction costs that have dropped straight to the profit line. Wal-Mart became the biggest retailer in the world by focussing on the reduction of transaction costs of all types, and passing the savings on to consumers as lower prices.
- Collaborate for scale. Small suppliers to supermarkets have to find ways to apply leverage to their opportunities. Collaborating to reduce various forms of transaction and supply chain costs , as well as pooling data and data capabilities are logical if challenging tasks. Many produce suppliers have found ways to collaborate, but their produce is unbranded, and commoditised by retailers, so it is harder for branded FMCG but nevertheless possible.
- Constantly innovate. It is almost a cliché, but nevertheless true, that to stay still is to be left behind. Innovation is a part of the necessary armoury of success. Not just innovation in the product supplied by the means of its production and supply require constant innovation.
- Build agile value chains. Commercial agility is the ability to alter processes in the face of changed circumstances without resorting to non value adding discussion and debate, and without losing sight of the objective. Agility is not flexibility, which implies that things “bend” then go back to normal. By contrast, agile value chains have the characteristic of being able to evolve rapidly, and improve in the process.
- Do not play. The last and most obvious strategy is to ignore the supermarkets, and play in channels they do not control where the value in the product is able to be recognised in some way that is impossible in the high volume low margin supermarket game. Depending on how you measure, and what category we are talking about, supermarkets control between 50 and 80% of FMCG sales, which leaves some 30 billion of Australian FMCG sales left over, not an insignificant sum.
That is an awful lot to do, and the best time to start was a while ago. However, the second best time is now, so go to it. If you need a bit of assistance, just get in touch, and I will bring along my 35 years of experience with this stuff and put it at your disposal.
Aug 26, 2011 | Change, Management, Marketing, Small business, Strategy
The decision yesterday by the federal Court to allow Metcash to purchase Franklins from Pick n Pay, then onsell, presumably with tied supply agreements is another nail in the coffin of competition in the retail trade, despite the interpretation of the law by the courts.
Now you have Coles, Woolworths and Metcash with a share above 90% of the supermarket trade, limited choice for consumers, a nightmare for suppliers, particularly the decimated local suppliers who have struggled against the increasing power of the retailers for 30 years, and have largely failed.
Several things will emerge that will accelerate change in the supply landscape.
- Scale should dominate the strategic thinking of suppliers. You need to be a gorilla to play with gorillas, so get big or get out. The only alternative is to back off and be a small specialty producer, concentrating on the small share of retail trade not controlled by the 3 gorillas.
- It will be increasingly difficult at the smaller end of the size scale. The businesses left that turn over between a couple of million, and 50 million, many of them regional, with extreme pressure on their finances at a time when banks are not being helpful despite their advertising, will struggle. There are only a few left, and many of those will go to the wall.
- Competition between supply chains, from growers through to retailers will increase. Soon, if you supply Coles, you will not be able to supply Woolies, without risking your position with Coles. Suppliers will need to make choices, and gear up to integrate themselves into a supply chain system, losing their independence, and closing off options. This may not be a bad thing, but it is a substantial change from the current practice and way of thinking, and it limits the scope of customer base available through which to reach consumers with your product.
- The move to housebrands will accelerate, further enabling global sourcing by retailers, squeezing local suppliers. The $A has punched this process along over the last couple of years, adding more pressure to local suppliers who, having lost shelf space for their brands, were relying on contract packing to stay afloat
- Retailers are lousy marketers, good at sales, but lousy marketers. With housebrands coming to dominate categories on price, attractive to consumers in tough times, where will the innovation come from? Where is the incentive for local suppliers to risk their limited capital in doing something different?.
The ACCC, governments at all levels and the courts implicitly decided years ago that the SME end of the food industry was fair game, the survival of the fittest, and all that, and from an economic perspective, it may be the right thing to have done, but at what cost in human terms. The old question I have used in many seminars to make the point about retailer power:
Question. “Where does the 400kg gorilla sleep?”
Answer. “Anywhere he bloody likes”
