Jan 31, 2022 | Change, Innovation, retail
Life in FMCG world is, almost unbelievably, becoming more competitive than it has ever been. However, the nature of competition has changed radically over the last 25 years.
Performance measures that we have relied on in the past no longer serve as well, we need a rethink.
The business model, while retaining the foundations that had delivered such success to supermarket chains in the past, has morphed.
No longer do big brands hold sway.
I suggest ‘Net Distribution Gain’ should be a standard measure in the FMCG marketer’s toolbox.
The previous business model used to be big add budgets splashed on TV, an OK product that appealed to the general average consumer, drove weight of distribution and shelf offtake.
That has all changed.
Most brands have disappeared, for those remaining, the name of the game is shelf space and position.
Where there used to be 5 or 6 brands competing in a decent sized category, there is now one, sometimes two, or at most three proprietary brands in big categories competing with house brands under various guises. These remaining brands have eroded their position by allowing retailers to convert their marketing budgets from brand building into price promotion, shelf position, and retailer margin enhancement.
Gaining distribution these days is a matter of buying it, and for a new product, if you are successful, there will be a copy house brand coming very quickly.
The outcome of all this is that innovation is at an all-time low, and the cycle just accelerates.
Retailers practise the one in one out method, it has become a standard procedure across supermarket retailers. It recognises their inelastic store sides and imposes minimum sales discipline on the suppliers.
For a supplier, having one of your competitors products deleted to make room for yours is a win, but for the retailer, it makes little difference which SKU is sold beyond any differences in the delivered margin. However, genuinely new products, ones that warrant net new space in a category, are where the real category gains and marketing success lie hidden.
NDG should be a standard measure to use by suppliers considering the planning and KPI of product launch strategies. There are several choices, which could become very complex with the addition of a weighting index based on shelf position:
One in one out of your range
Yours in, competitor SKU out
New space for the category.
Clearly in the last case the retailer is making choices elsewhere in the category mix, and the ripples widen, but for the category marketer, a NDG would be an indicator of a successful genuinely new product as distinct from a line extension of a successful competitive SKU.
Dec 13, 2021 | Customers, retail
A dictionary will define price as something like: “The amount of money for which something is sold’
Pretty obvious.
However, price can mean many different things to different people in different contexts.
Years ago, I ran a food manufacturing business that sold product through multiple distribution channels. Supermarkets, route trade, distributors, food service, direct via our own vans, and export.
The pricing architecture had a common starting point, the ‘List price’ after which everything changed depending on a wide range of factors such as: the relative power of the channel, volumes, payment terms, negotiated promotional and incentive programs, supply and demand at any specific time, geography, variable freight charges, seasonal factors, clearance prices, rebates, and others.
Exactly the same products, subject to a whole range of variations, both formulaic and negotiated.
In that complexity, how do you define what the ‘right’ price is?
At one point we made the attempt to calculate the actual price based on the net cash flow from the products and customers. In the days before flexible digital tools, this was a brain buster, and consumed too much time and effort to deliver a return, but was a good idea at the time.
Added to the complexity which discourages most from developing the understanding necessary to optimise whatever the net price ends up being, is the impact of unintended consequences and the channel conflict that is almost inevitable.
For example, the small retailers we serviced saw their competitors as the supermarkets and were very noisy indeed when they could buy a case of product at Woolies cheaper than they could buy it direct or via a distributor. They did not care about the nuances of our pricing architecture, or the fact that they might buy a case, and a supermarket buy multiple truckloads. Their concern was serving their customers by not having them go to Woolies for cheaper prices, while remaining profitable.
As a young bloke doing the backpack thing around Europe, I stayed at one point for a few weeks on a small Greek island. On the occasions a cruise ship came in, the retailers of all types simply substituted one price list and price display for another, somewhat more expensive. The locals knew not to buy that day. Amazon takes that flexible pricing strategy to the limit with its use of your browsing and purchase history to automatically set the price their algorithms indicate gives them the best combination of the purchase being made at the maximum margin.
So, what is the right price?
Whatever you and the buyer who completes a transaction determine it to be, in those circumstances, on that particular day.
Dec 1, 2021 | Branding, Innovation, retail
Promotional pricing is often the only tool used to generate volume. Ask any salesperson ‘Why’ and they will say ‘because it works’. Go next door and ask a marketer, and their response is more likely to be something like: ‘to encourage non-users to try the product, and if they like it, to come back, become loyal customers’
Therein lies the paradox. The well intentioned promotion of a brand results in killing it.
By promotional pricing the product down, you reward current users who would have bought at full price, while not being effective at persuading potentially new users to try for any reason other than price.
The power of habit is huge in routine purchases, like the ones we make every week in the supermarket. A regular consumer is not necessarily loyal to a particular brand, they are more unthinking, more habitual than most marketers will concede, especially to themselves. If a choice is to be made to change brands, that decision takes up cognitive capacity better dedicated elsewhere, and involves risk, which we are programmed by evolution to avoid.
To change habits, we must change behaviour, an extremely challenging thing to do.
Psychologists have found over and over, the best way to change habits is to change little things, one at a time, progressively leading to the changed behaviour that in its turn becomes a habit. Each stage takes 3 or 4 times to become sufficiently entrenched to start to take on the characteristics of a habit.
Back to our supermarket.
Price promotions follow each other on a weekly basis. No brand is given the time to establish its routine purchase as a new behaviour, as there is a price promotion of an alternative brand every week, often several at the same time.
The net result is that for every product on shelf, the discounted price becomes the ‘real’ price, which becomes less and less relevant as consumers are trained by the retailers to think that the discount price is the real price for the products and the categories.
That, in a nutshell, is why we are seeing less and less brands on the supermarket shelves, and as a direct result, less and less innovation, as suppliers have little chance of recouping development costs in such an environment.
Nov 29, 2021 | Customers, retail
On Friday last week, I had to go into the city. About 10.00am I turned up at Town hall station, and the shopping precinct around it was crowded, people lining up to get into shops that a few days previously were deserted.
It took me a while to realise that it was ‘Black Friday’.
Retailers were making extreme offers to generate a sale, and seemed to be succeeding. When I got back to my home office and opened my computer, it was deluged with digital ‘Black Friday’ specials from everyone to whom I had deliberately or inadvertently given my email address since 2010. ‘90% off Black Friday Special’ was not an uncommon header.
‘Black Friday’ is the wrong description, coming as it does from the US where it joined Mother’s Day and Father’s Day created by Hallmark cards, as a marketing construct. In contrast, Black Friday should be called ‘Stupid Discount Day’ or ‘The day we went broke’.
The attraction of deep discounts does a few things to a retailer’s sales numbers:
- Generates volume, (hopefully) sometimes at a loss on the discounted item, so retailers are hoping you buy something else at the same time to recover margin. This volume comes, if it comes, with the advertising costs. For a small retailer, these costs might be just a few banners in the window, and someone outside the store spruiking, but are more likely to include some email marketing, and social media posts, and usually some of which are paid to generate reach.
- Rewards non-customers who buy once, try, and you hope come back. Rarely happens, especially in the madness of a mass discount.
- Attracts the worst customers, those who never buy anything at full price, who only chase discounts. It is often these same customers who create most customer service costs.
- Rewards existing customers who would have bought anyway at full price This usually results in a ‘pantry stock’ that kills sales and margin in subsequent periods.
- Erodes brand positioning, sometimes built up over years, establishing a new ‘base price’ for their products and brands.
Most of the offers in my computer were for digital products, where the marginal cost is zero, so they can give away 90% price and not go into the red. Bricks and Mortar retailers, the ones with queues outside them in the QVB, Town Hall station underground mall, and the giant Westfield next door do not have the luxury of zero marginal cost.
I suspect many of these retailers are desperate after 2 years of struggle, and desperation often leads to very poor decision making.
Hopes that deep discounting will increase volumes sufficiently to recover margin are almost always in vain. When you do the numbers, depending on the gross margin, and additional promotional expenses, volumes have to increase by a factor of at least 3 or 4 in order to break even. The more frequent outcome is a very nasty shock when the P&L is done at the end of the month.
Anyone can sell anything at a deep discount. It does not make you successful, just thoughtless, desperate, stupid, or a bit of all three. The lesson should be, not to go broke being successful.
Sep 15, 2021 | Analytics, Category, retail
‘Elasticity’ is something most of us did in economics 101. Why have we not used it more than the evidence of my eyes would suggest?
The price elasticity of demand is usually defined as the relationship between changes in price and the resulting changes in volumes sold.
Elasticity = % change in quantity/ % change in price.
For example, assume you raise the price of a widget from $100 to $120, which causes the volumes sold to go from 1,000 in each period to 900. The price increase is 20%, the volume decrease is 10%. Elasticity is therefore 10/20, or 0.5.
It is the absolute value of the metric that is important, the distance from zero, rather than if it is positive or negative. If the number of widgets sold had been 750 after the price increase, the elasticity would have been 1.25. (25/20) a more elastic response to the price increase than the 10% drop in the example.
It is crucial for marketers to understand the elasticity of their products if they are to optimise the price/volume relationship, as price is the most sensitive driver of profitability.
The challenge is that there are a whole bunch of psychological and competitive factors that weigh into the equation in a consumers mind, simply not accommodated by the simplistic price/volume curve we all saw in that economics 101 class.
You can speculate all you like about price elasticity, but the only way you will know is to evaluate it in the marketplace.
We are currently (September) in the season where there is a glut of avocadoes available. My local Coles store seems to be altering the prices daily, anywhere between 1.00 each to 1.69 each. It is probably that they are partly reflecting the deliveries into their distribution centres, but the data collected at the checkouts will give them a detailed view of the volumes at differing prices, and even the time of day. This data is invaluable market intelligence that can be used to optimise their profitability for the product category.
Given that cost is a lousy starting point upon which to base price, it may be that this Coles is leaving money on the table by reducing the prices below $1.49.
How many less avocadoes would be sold at $1.49 than at $1.10?
Someone in their data analysis system, somewhere, has the data to make this call with close to absolute certainty as it applies to this store.
Theoretical price research, outside of the real purchasing decision making, is at best inaccurate, at worst, misleading. A/B testing used to be a challenge, but increasingly we can use digital tools to interrogate the data that digital capture, in this case the checkout, that has become available to us.
Companies like Amazon with vast amounts of data are so good at it that they know the price elasticity of individuals in particular product categories. They display prices accordingly every time you search, in order to maximise the chance you will buy at the highest price they can charge, based on your history. ‘Dynamic pricing’ is the now common term being used to describe this process.
Once you understand the elasticity of the price/volume profile of your product, you are in a better position to maximise profitability, while delivering value to your customers.
Header cartoon credit: Scott Adams. Not sure the analogy is a great one, but the idea was amusing.
Jul 11, 2019 | Change, retail, Strategy
As Bricks and Mortar stores, (B&M) except those run by on line monsters, Apple, Amazon, and a few others flounder, retail needs to rethink itself.
Easy to say, hard to do.
It is hugely ironic that the most successful B&M retailer on the planet, by the retail industry’s own measure, margin/square foot, is now Apple, and I suspect Amazon is not too far behind.
Rent is the 3rd biggest cost in most retailers P&L, after staff and Inventory. Rent is in effect the cost of distribution, or the major part of it, and is always raised as a cost that on line retailers do not have, which is their competitive advantage, along with convenience.
Of course, on line retailers do have distribution costs, increasingly absorbed in the price paid by the customer, or cunningly disguised as some form of membership, as with the sensationally successful Amazon Prime.
Distribution is the battle ground of retail. Reshaping the traditional retail model by cutting out the retail store, and delivering by some combination of post/courier/pigeon. However, B&M retailers have gutted themselves by electing, on mass, to walk away from their primary competitive advantage: stores, and the relationships they can create and nurture with customers.
The competitive advantage of a store is that a customer can go in, look at, touch, try on the merchandise, and talk to a person, who hopefully has some level of product knowledge, and is able to build a rapport. This is a hugely potent competitive advantage if used well, but instead of using it, most retailers are cutting back their investment in stores, staff, and product knowledge, cowed by the spectre of on line price competition.
It is like a golfer, who when comfortably ahead, stops using his driver because his competitor is better at using his putter, so he uses his putter to compete, on what becomes uneven terms.
Stupid.
If retailers looked at rent, inventory carrying costs, and most importantly the cost of customer facing staff, as the cost of customer acquisition and retention, they may make startlingly different strategic choices. They become items in their marketing budget, which can be subject to creative experimentation, and customer service and retention optimisation, rather than a cost to be minimised.
I suggest that this seemingly simple change in mindset, would lead to a huge change in their capacity to compete and succeed.
Bring out the driver again lads, stop playing the whole game with your putters!
