What does the emerging FMCG landscape look like?

 

retail crash test dummies abound

retail crash test dummies abound

Watching the rather sloppy way Grant O’Brien was moved on by Woolworths last week, I got to thinking about all the converging things happening that will impact the FMCG landscape over the next few years. A superficial look would suggest that things are pretty set, and change that happens will be incremental,  but a closer look would suggest there is a lot of paddling going on under the surface.

These are the things I see:

 

Coles resurgent. 

In the 40 years I have been around, I have seen the pendulum swing a couple of times, and it looks like Westfarmers have pulled off another mighty swing with Coles. Across pretty much any parameter you choose to look at, they are catching or have caught Woolworths, and remain on the improve.

Woolworths momentum.

In this high fixed cost retailing game, momentum is a huge contributor, not just to the financial outcomes, but to the day to day operations and shop floor “feel”. The momentum seems to be all against Woolies now, after enjoying the benefits for a long period. Their failure to drain cash from Coles by putting pressure on Bunnings with Masters has not just  crunched their financial results, but it seems to have knocked the wind out of their confidence at the sales face across all their formats except perhaps Dan Murphy’s, which seems to be bucking the trend. Woolworths do not have a player in the office supplies game, which must be hurting them, further draining competitive resources.

Discounters are winning.

Aldi is doing really well, opening stores and taking share hand over fist. I have not seen the figures that would substantiate the notion that woolies are losing more to Aldi than Coles, but it would not surprise me at all. On top of Aldi’s blitzkrieg, it seems that their German competitor Lidl is coming. Lidl is a potent long term competitor with substantial experience across many markets.

Costco is seemingly carving out a niche, although not as aggressively as was first forecast, but the crowds in the Costco store at Auburn in Sydney would suggest they are not going away any time soon.

The $A.

After a period well above US $ par, the Aussie is back to more like its long term position. However, the carnage wrought by those few years on the mid sized supplier base cannot be turned around. Retailers by going offshore when they could and leaving their local supplier base to contract will have a continuing impact, as now the dollar is sensible again, there are few suppliers left  with the wherewithal to be reliable national suppliers. It is also clear that those who have survived are a pretty resilient bunch, and are disinclined to replace their eggs back in a basket they cannot control.

Housebrands.

Coupled with the carnage of the high $A, the retailers strategic decision to rationalise proprietary SKU’s and replace them with tiers of housebrands to capture the proprietary margin has further led to the rout of the mid sized suppliers. Those left who might be inclined to chance their arm are generally not large enough, and lack the sophistication to manage a business relationship with a major retailer, but some will probably go broke trying.

Margins.

Many FMCG suppliers lose money on most sales to supermarkets. The negotiating power of the retailers, resulting trading terms and promotional guarantees that enable retailers to never pay beyond the discounted price, while restraining top line price increases to compensate  has led to the situation where only a madman or the financially illiterate would stake their house on success in FMCG.

Innovation avoidance.

Markets evolve with innovation, but the barriers against success are so large that risk avoidance is the priority. Suppliers trumpet a new pack colour scheme as an “innovation”, and retailers get serious by asking the few second tier suppliers left to copy the proprietary market leader for yet another housebrand “innovation” . Retailers think they are good at innovation, but the experience from around the world as well as locally is to the contrary.

Promotion as marketing.

Continual price promotion only erodes the value of a brand, but brand building is a long term proposition, while staying on shelf is an immediate priority. Guess which wins, and we are rapidly approaching a brandless future beyond the few global mega brands that have the grunt to stay on shelf while spending with consumers to brand-build. Marketing budgets have been consumed by promotion spend. We have a generation of marketing people  who have never experienced or even seen real marketing in FMCG.

Wholesale death.

Metcash as pretty much the last man standing is being squeezed by overheads and competing access to consumers outside the major chain supermarkets. Their recent financial results demonstrate the challenge of being the middleman in an environment where it is increasingly easy, and there is increasing motivation to go around the middleman. They seem to be trying with IGA, and with some success, but the local positioning of IGA mitigates against the mass merchandise wholesale business model they operate.  Nevertheless, I do see IIGA as a potential bright spot for smaller suppliers who are unwilling or unable to service Woolies and Coles.

Opportunity?

Amongst the doom and gloom, I see several bright points of opportunity.

  • While the traditional marketing strategies no longer work, it remain a fact that it is consumers who actually put their hands in their pockets to buy something. Retailers are just a choke point in the system exercising control, and the emergence of digital marketing offers small businesses the opportunity to engage and motivate their consumers to ignore the predations of retailers and express their purchase preferences with their money.
  • The shortage of retailer suppliers may lead to a loosening of the noose around those remaining, and open opportunities for them to focus on a niche to deliver a product offer that the retailers do want, but that is hard to copy effectively. Combined with digital marketing, there are opportunities to engage with consumers in ways not dominated by price promotion and generic substitution.
  • Local suppliers with a following in a region do have an opportunity to build a business. Coles have been playing with this for a while, and it does work, although the model of local supply does not sit very comfortably alongside the national supplier mentality that exists.   For retailers to really get behind this opportunity to nurture “local”  they will have to wear an increase in transaction costs, as well as make exceptions to their trading patterns. The big blokes may not, but there are real opportunities in the independents and non chain retail segments.
  • Niche retailing will boom, and suppliers have the opportunity to participate. Harris Farm in Sydney continues to rise and rise, and even Thomas Dux, owned by Woolworths but operated largely separately are harbingers of the future. Consumers are increasingly engaged in their retail food shopping, they want their concerns and individual tastes to be met, and that cannot happen in a mass retail outlet focussing on discounting and housebrands.

I am sure there are thoughts I have missed, and would welcome feedback on them as well as comment on those above.

8 Things you do not say to a supermarket buyer when launching a new product.

Words spoken cannot be taken back

Words spoken cannot be taken back

Gaining distribution in supermarkets is really hard, and more to the point, expensive.

Supermarkets control the key  “choke point” between you as a supplier, and consumers. On occasions when you are pitching a “me too” product, a decision just comes down to the retailer margin and the amount of promotional and advertising dollars that are being thrown at the launch, which both reassures the buyer that you are committed, and offers some confidence that consumers may be receptive. Generally with a “me too” product, you need to be prepared to take something out of your own range to make space, or be able to pinpoint with data an under-performing competitors product that can be deleted.

New products are usually a bit more complicated. For a retailer to put a new product on shelf, in addition to their existing ranges, it is often more than just a simple one in one out decision, particularly if the new product claims to be opening up a new category or subcategory.

In either case, the simple fact is that retailer stores do not have elastic walls, and space needs to be made somehow.

Over the years, I have launched many new products, some category creating products that have been a huge success, and some not so much, and many line extensions of various kinds. However, in the launching of them, I have done hundreds, if not thousands of presentations to supermarket buyers, and found a number of things that should not be said of you are to be successful.

It really is important to recognise that even though you may think your new product is the best thing since sliced bread, supermarket buyers see hundreds a year, and have heard it all before, so your presentation must be sympathetic to that simple fact.

Some of the wrong things to say which have come out of long experience are:

  1. Our research says that this product will increase the total size of the mart by $50 million in three years”. You both know that research is usually rubbish, and that everyone lies to supermarket buyers about theirs. If you cannot support the research claims with very solid data, just be honest about it, recognising that even supermarkets buyers cannot tell the future, and be realistic.
  2. Our sales forecasts are conservative” See above, and the truth is that the forecasts are usually these days just spreadsheets with autofill, and are really meaningless. Speak more about the assumptions that are the foundation of the numbers rather than the numbers themselves.
  3. You are the only chain that has yet to confirm their acceptance and promotional program for this product“. Nonsense. While someone is always last, it will not usually be one of the big retailers. They know you need them more than they need you, so better to honest, although being desperate is also the wrong tactic.
  4. XY company, the current category leader is too slow and locked into their ways to react quickly, so we will have this new segment to ourselves for a long period”. Big companies do not  usually get big by being stupid, they may be a bit slower than the small guys, but they do know their stuff, and can move quickly when necessary. A buyer will see your confidence as misplaced, and react accordingly.
  5. ABC Co do not have the will to risk their cosy positon by innovating” or some similar comment. Denigrating a competitor is a common fault, and should never be done, you just might be denigrating the people who give the buyer his most profitable products, and he will  not take kindly to having his stocking decisions being questioned.
  6. This product has been protected by patent” More rubbish. Only very few companies have the resources to develop something genuinely new, patent it, then be prepared to spend the megabucks to protect the patent. The last one I can remember is the Nestles cappuccino product in a pouch, a genuine innovation that gave them just a small amount of time before the copy cats arrived. If Nestles cannot so it, you almost certainly cannot, and the buyer knows it, so do not kid yourself.
  7. We have first mover advantage“. This is sometimes true, but is may not worth all that much unless there are long lead times involved in equipment. When a new product can be made on existing plant, you cannot usually count on more than about 12 weeks start, after which the copy cats can arrive, correct any mistakes you have made, and capitalise on your investment with consumers to open up the new category. Sometimes it is better to be second mover, and step over the carcass of the pioneer, who gets the arrows in his back. Having said all that, First mover in a genuine innovation does give you a good chance at distribution.
  8. Our plant is state of the art“. Retailers do not care much about your plant, so long as their orders are filled, the product is safe for consumers, and moves quickly off their shelves.

There are 40 years experience in these points, some of it painful, but there is no greater (commercial) feeling than seeing a product you have conceived, developed and successfully launched still on the shelves 20 years later, still meeting consumers needs and delivering profits to all concerned.

5 ideas for SME’s to compete using data.

Data management & analysis

Data management & analysis

The second of 10 ways to beat the supermarket gorillas at their own game, after understanding the way the supermarket business model works, is to be savvy with data.

Supermarket retailing is heavily data intensive. These days, any retailing beyond the archetypical lemonade stand by the side of the road is data intensive, but particularly supermarkets. Commonly a supermarket range is up to  30,000 Sku’s across a number of different formats and geographic and demographic locations, and several thousand suppliers, all with their own focus and story to tell.

The supermarkets physical space needs to be allocated across the Sku’s chosen to be on range in the way that best delivers a return on their investment in the particular store and strategically across the chain.

SME suppliers to chain supermarkets usually are playing from a position of weakness, as they lack the scale to have the data and category management resources that supermarkets demand. However, their strength is that they can be far more agile and market sensitive that their bigger rivals, often SME’s can develop and launch a product before a multinational can get the first development workshop together.

Whilst supermarkets have a wealth of data at their fingertips, both their own, and that supplied by their large suppliers, they recognise that not every piece of data is worth the digits it is written with. Data is only of any value if it leads to some sort of actionable insight, and it is here that SME’s have an advantage despite the disadvantage of small size. Making the connections between differing seemingly disconnected data points is where the gold is hidden.

There are several points at which data can be collected, from which insights can be gained. Internal, observed and purchased.

    1. Sales and margin history. No SME should be without a robust and detailed sales and margin analysis of their own sales history, and thus ability to forecast with some certainty.   Every SME has a sales history in their accounting package, most do not use it. Most use the “Office” package, which included Excel, but many do not use the power of the tools in excel. Pivot tables are the most underutilised and useful tool I have ever seen for SME’s. If you are one of  the majority who do not use them, wake up, spend 30 minutes on YouTube figuring out the basics, and start generating insights. Also in excel is the V-Lookup tool, which can be enormously valuable to SME’s to keep accurate track of a whole range of variables in their business.
    2. Sales intelligence. SME’s are usually in a position to have unfiltered market intelligence in the hands of decision makers easily and quickly. Usually the people best positioned to see change as it is evolving are those in direct contact with customers and consumers, often the lower paid front line staff. Being engaged with these staff, or indeed as is the case for many, being that staff as a part of the role of the SME business owner puts you in a position to see shifts as they occur, if you are watching. Finding a way to turn these random conversations and insights into data points that can be connected and acted on can build into a significant competitive advantage. There is  no substitute for the insights gained by simply watching and understanding the drivers of consumer behaviour, then crafting an offer that adds value.
    3. Agile operations. Scale brings its own momentum, despite the huge improvements over the last 20 years by the adoption of Lean practises. Large suppliers to supermarkets, with large factories,  fixed planning cycles  and extended supply chains  are often caught short by the unexpected and unplanned. Agile suppliers can often fill the gaps created, but do so they need to be able to make very quick decision on costs, time frames, and operational  priorities and limitations.  To make these decisions, they need absolute understanding of their cash and financial position,  costs and decision drivers like break even points, the impact of discounts, and negotiation trade-offs they can make. To be truly agile, you need accurate and detailed financial and operational data that is easily useable to make well informed decisions, then track the outcomes of those decisions.
    4. Be experimental. Having good data enables experimentation on a scale that offers great insights,  but minimises risk. The supermarkets are increasingly amenable to enabling SME’s to experiment with all sorts of offerings as they learn as well from the activity. However, you cannot just walk in and expect to be taken seriously without a history of sensible innovation and a relationship with the individual decision makers in the retailer. Having robust, realistic and well understood strategic and operational planning in place is a must if you wish to be experimental and stay in business.
    5. Purchase syndicated data. Scan data can be purchased in many forms, and to varying degrees of analysis and detail. There is a significant cost to this information, firstly the purchase costs, but more importantly, the data analysis capabilities. Increasingly scan data is being matched to the behavioural data emerging from store loyalty cards to add another  dimension to decision making, and this trend will only accelerate.  SME’e can dip in and out of this data, taking a slice here and there to provide insights without the significant investment of being fully engaged. Treated sensibly, it can be used a bit like market research, taking a small and well defined sample and using it as  representative of the whole picture.

None of this is easy, which is OK, because if it was, everyone would be doing it. However, many SME’s simply think it is all too hard, and stay away, effectively walking away from 75% of the volume in the market. For many, this is a sensible decision, but for some, those SME’s with a genuine opportunity to become larger businesses, building solid capabilities in collecting and leveraging data is essential.

 

3 essential pieces of the supermarket business model

sleeping gorillas

A short while ago, I posted “10 strategies for SME’s to beat the supermarket gorillas at their own game”  which generated quite a bit of comment and feedback. Amongst the feedback were a number of requests to go into more detail on each of the strategies,  and so this is the first of the series, focussed on understanding the business  model of the supermarkets.

I deliberately used the word “Gorillas” because of the extraordinarily concentrated nature of Australia’s supermarket retailers, with Coles and Woolworths between them holding over  70% of FMCG sales depending on the category, and whose numbers you believe.

You know the old question: “where do the 500kg gorillas sleep?”

Answer: “anywhere they bloody like”

That was the way it was, a comfy duopoly, however, more recently there have been some major strategy alterations by Coles which has dramatically lifted their financial performance, and Aldi has successfully carved out a growing niche as a third retail presence. In addition, there are still some very good independent retailers around operating out of the wholesaler Metcash, who also competes with some of  their own and franchised retail outlets.

This mix, combined with the opportunities suppliers have to sell into food service and institutional markets and increasingly direct to consumers via the net and other means makes for an environment where the agile and insightful suppliers can be very successful despite the obstacles, but it is a very challenging environment.

The concept of business models is well known, in summary, it is the expression of how a business makes money. It always involves a matrix of revenue generated, the fixed and variable costs of generating that revenue, and the choices that the business makes about its customers and how they will be serviced, and the way they incur the costs of that servicing.

Supermarkets are a great example of a number of seemingly similar competitors that have slightly differing business models. At a macro level they have strong similarities, relying on volume, price, and shopper numbers to succeed, but everyone who shops knows that Woolworths is not Coles, is not Aldi.

However, they do have some common building blocks.

    1. Revenue generation. Supermarkets generate revenue on both sides of the equation.
      • Shoppers buy products, paying at the checkout.
      • Suppliers “pay” for shelf space via a range of charges levied for every variable the retailers can dream up. Volume discounts, payment terms, promotional levies, preferred shelf positioning, promotional slots, access to sales information, and a host of others. Some are items for which suppliers receive an invoice, others are taken as discounts off the invoice price, increasingly applied automatically as a part of the trading term package.
    2. Cost management. Supermarkets work on very low percentage margins, relying on the volume to generate the cash margins.
      • Fixed costs are a significant part of retailers total costs, made up of the provision of the retail floor space, the logistics infrastructure and personnel. Supermarkets attack their fixed cost base aggressively using their scale as negotiation tools with landlords and logistics suppliers, while keeping a very substantial proportion of front line retail staff as casuals rather than permanent employees so they can better adjust staff levels to match activity. The sorts of choices retailers make are between high density shopping centre locations Vs stand alone locations. There are costs and benefits to each which are considered as a part of their strategic decision making.
      • The biggest variable cost is the cost of good sold, and they similarly use their scale to manage those costs downward. Tactics vary between retailers, but the core game is to maximise their margins while keeping prices as low as possible to attract the volume buyers. This is an extremely delicate balance.
      • Transaction costs are usually pretty well hidden in most businesses, but are really significant in the case of supermarkets simply due to the number of transactions they make.  For example, there is a cost to managing the buying relationship with a supplier, but  the larger the supplier, the less is the total costs/unit of sale of managing that relationship. This has led to a dramatic reduction of the number of suppliers supermarkets have in any category over the last 15 years or so a trend further accelerated by the increasingly common strategy of limiting the number of proprietary brands in any category  substituting house-branded products, and reducing the number of relationships to be managed. This has made negotiating shelf space increasingly hard, and because of scarcity, increasingly expensive for suppliers, in turn putting extreme pressure on small suppliers.
    3. Customer service and relationships.   The retailers have each made choices about  the pricing, location, ranging, and service strategies that sets them apart from each other, and more subtly, they have back office strategies that differ. However, their common aim is to have as much market share ass possible, as volume is the profit generator.
      • As in any market, no retailer can be all things to all people, so each makes the choice of the “ideal” customer, and markets towards them, grateful for any overlap. Increasingly the marketing is being supported by customer loyalty cards and the data mining and personalised promotional opportunities that technology is delivering, but the fundamental measures of success remain unchanged: number of shoppers, share of wallet, and basket size.
      • The two major retailers have very large marketing budgets which they spend in a wide  variety of ways, across all channels of communication with customers and potential customers, and often in joint activity with their suppliers, which inevitably, the suppliers end up funding in return  for volume.  The smaller the retailer, the less “mass market” they are, so the tactics tend to differ, although strategically, finding willing supplier partners is a core part of every retailers marketing mix.
      • Consumers generally want choice when they are in a supermarket, the more the better, in any category. Woolworths and Coles stores carry 12-20,000 Sku’s  (Stock keeping unit) depending on the size and location of the store, a typical IGA might carry 8-10,000, while Aldi carry just over 1,000. The sku’s carried in any store also reflect of the demographic and cultural mix. The Woolworths store in Auburn in Sydney has a significantly different product mix to the Woolworths of a similar size in Double Bay.
      • Every retailer uses some form of category management disciplines as a means  to monitor, adjust and locate their inventory onto the sales face in the way that best meets their customers needs and maximises impulse pick-up. This is always a data intensive mix of the volume and margin of the individual Sku, (such as Ski strawberry yoghurt 200gm) group of similar Sku’s (all strawberry 200gm yoghurt) subcategory (all strawberry yoghurt) and category (all yoghurt) and between categories. They make choices about how many brands and types to keep in stock, where they put them, on shelf and in relation to other yogurts, and indeed other chilled products. A facing of yoghurt added is a facing of some other product gone, as the sides of the stores are not elastic. At the core of the category management activities is the need to best satisfy consumers, whilst competing effectively and delivering maximised margins.

Being agile, persistent,  and prepared to experiment are about the best qualities a supplier to supermarkets can have.

Native advertising or news fraud

lipstick on a pig

Last night Media Watch on the ABC did a piece on the “news report” done on one of the 6.30 current affairs programs on a commercial station. The “report” was a 15 minute advertising free  expose on the sourcing of the fresh produce the retailer sells.

It was a prime example of so called “Native advertising”.

Native advertising is just a term dreamt up by marketers, aided and abetted by commercially desperate media owners  to make excuses for polluting the so-called news with favorable commentary. In this case, the channel concerned had a share of the retailers very substantial advertising dollars way in excess of their audience market share, and the “report” was nothing less than a glowing tribute to the quality and freshness of the produce.

Smells like advertising to me.

The “news”  already seems to have been so polluted by the populist lowest common denominator “cat up a tree” stories that seem to dominate alongside sensationalist claims about today’s brand of extremist, that why would a puff piece on how fresh a retailers produce is make a difference?

Simple answer, because it is nonsense.

The retailer concerned does do a good job, works hard to deliver produce as fresh as they can given the constraints of their mass market model, competitive pressures and profitability objectives, but to put as much lipstick on the pig as the report did is really going too far.

You can watch Media Watch’s (the segment starts at 8.45)  commentary for a while on the ABC’s iView, but if you are still confused about the line between advertising and journalism, and the chance of our institutions and enterprises being held accountable by the media, have a look at this satirical  video by John Oliver that presses the point.

We are pretty savvy consumers of media these days, question is, are we savvy enough?

Heston Vs Jamie, a retail bunfight.

 

Heston Vs Jamie

It is fascinating to watch the evolution of the marketing of the two retail gorillas, Coles and Woolworths.

It is clear what they are doing, setting out to engage consumers with the freshness, range and provenance of their produce, and selling consumers  all the packaged goods they need on the way through the stores. Their strategies are working, but more importantly, they highlight the depth of the opportunity for those few independent retailers left alive, and points to the way the more fragmented food service, ingredient, and emerging home delivery and farmers markets should be marketing themselves.

Coles and Woolies remain mass retailers, vulnerable on the edges.

A few years ago Woolies were undisputed heavweight champ, Coles the belted contender with no hope, but how things can change with a new trainer. Coles has been rejuvenated, and whilst their financial results have been hugely improved, they have a way to go to catch Woolies, but in the marketing stakes, they have taken the lead.

The sponsorship of “Masterchef” was a masterstroke, and they have followed up and leveraged the success extraordinarily well, with Woolies just starting to respond by buying Jamie Oliver to shape up to Heston, Curtis, and Status Quo (I was young in the 70’s) and a massive and very well co-ordinated marketing budget. Bit of an uneven contest.

From a consumers perspective, increasingly their choices are limited to brands the retailers control. Wether they be Coles new “Heston Blumenthal” brand, Woolies “Jamie Oliver” brand, or one of the various other housebrand versions at differing price-points, and pack configurations, they are all housebrands.

Suppliers of packaged proprietary brands have been progressively squeezed out, and those left are mostly sourced via global supply chains rather than manufacturing domestically,  where almost nobody is left standing.

Change always starts at the fringes, as we have seen time and again over our history. Change is happening now in the food value chain, but at the fringes. Organics, local produce, micro suppliers of almost personalised products, restaurants differentiating on the basis of seasons and local supply, “pick your own” farmers markets, food tourism, various home delivery services, all happening outside the supermarket, some pretty basic  marketing communicating the differentiated offer.

Jamie and Heston can take their money to beat each other up in the ad breaks of the nightly news. The increasing number of us who really care about what we eat, will go to the local blokes who genuinely care about what they deliver to us, and buy from them.