Barriers and opportunities for small business innovation in supermarkets.
Innovation in supermarkets
Small business suppliers to supermarket chains are substantially compromised by the lack of resources to innovate.
Peter Drucker stated 50 years ago that innovation is the only really sustainable competitive advantage, and the passage of events have proved him correct.
Commercial survival requires that you are able to continually innovate, or you rapidly find yourself left behind, simply because everybody else is.
Knowing this does not however, make the challenge any less daunting, especially in an environment like FMCG where the retail gorillas stamp on variation as a source of transaction costs, and are actively seeking to reduce SKU numbers by pushing housebrands.
Lets define what we mean by innovation for the purposes of this post.
It does not include business model and process innovation. Both are terrific ways towards commercial sustainability, are paths every business must follow, but have little to do with innovation from the customer perspective, at least in the short to medium term.
By contrast, product innovation is concerned with new stuff that adds value to consumers.
Pretty simple definition, that precludes line extensions, which are just a fact of life, and product changes, which are again a fact of life. We are seeking to talk about the things that really make a difference, and how and why that happens.
Following are some thoughts on the nature of the strategic environment we find ourselves competing.
Innovation Paradox. Big businesses get big by being able to reproduce things without variation, their processes ensure consistency, and reject the outliers. This goes as much for people as it does products, so generally large businesses have more difficulty seeing and acting on something new than small ones. There are obvious exceptions, and large businesses everywhere are seeking ways to overcome the innovative inconvenience of their scale, with greatly differing levels of success. Nevertheless, the generality holds, but the small business end of the FMCG supply chain has been decimated, perhaps almost eradicated by the scale of the supermarkets and the power of their business model. Where is the innovation going to come from I wonder.
Risk. The risk profile of every business is different, but as a generality small businesses have a greater capacity to take risky decisions, but a less capacity to absorb them when they go pear-shaped. Large businesses survive on consistency as noted, and success for individuals in a large business is usually counted by their successes, failures are frowned upon, so the tendency to take risks is reduced, hence, their inability to innovate. Again there are notable exceptions, but they always occur when there is a leader who mandates and lives risk tolerance.
Wide view. Any organisation, no matter how big, only has a small proportion of the people thinking about the categories they compete in, so why do you think you will come up with the great ideas? Those using what I have always called “Environmental Research” always do better. This has nothing to do with hugging trees, and everything to do with understanding the context in which the behaviour of your consumers happens. When you understand the context, and see shifts, the opportunities suddenly become more easily identified.
Habit. Consumers are driven by their own habits, and once formed, it takes a lot of effort to break them. Habits work because they make our lives easier, and we are loathe to risk what we know works, for that for which there may be a question.
Boundaries. Innovation efforts need boundaries, or they tend to wander off into irrelevancy. I have found it far better to provide those boundaries in the pre-workshop, if that is what you are doing, material. It is necessary to encourage people to as the cliché goes, “think outside the box” but it is counter productive to have people thinking outside the municipality. Far better to ground the process in a context that is familiar, where there is market and customer knowledge available to feed the process. Without such grounding you tend to get uncertainty and irrelevancy, and ideas and conversation that skates across the surface rather than digging deep to where the problems and opportunities that provide the fodder of successful innovation are buried. I love the metaphor of Classical music and Jazz in the context of innovation, the score provides the boundaries. To be a good classical music player, you need to be a master of your instrument, and be able to reproduce note perfectly what the composer has written, the allowable variation is very small, the emphasis is on technique. Jazz by contrast requires that you are a master of the instrument, as well as the music to the extent that you can take what a composer has written and innovate around the base rhythm and melody, so you need to be not just a master technician, but a master of the music. Great innovation in a commercial environment has exactly the same characteristics.
Think different. The great 1997 Apple advertisement said it all, but how many corporate entities will tolerate the crazy ones? Very few. If you are to truly be an innovator, somehow you have to accommodate some crazy ones. Generally they are tough going, irreverent, unconcerned with status and the status quo, constantly irritating the nice smooth flow of processes that deliver the consistency that corporates thrive on.
Problem definition. Innovation occurs when a problem is solved. Often it is an old problem solved in a new way, sometimes it is a problem unrecognised until the solution comes along, the classic example being the post-it-note. A huge part of the challenge of innovation is the identification of the problem. Rarely does a problem emerge with a fully-fledged solution, but as Einstein, in my view one of the greatest marketing thinkers who never receives any credit at all once said, “if I had an hour to solve a live changing problem, I would spend the first 55 minutes defining the problem, the rest is just maths.”
Margin maintenance. This is tangled up with risk profile, but is separate. Over the years I have done many proposals for new products killed at the gate by the margin problem. “If we launch this, it will erode our margins” often true, but the standard response I give is “better us than someone else”, but it is often a futile response when the ultimate decision maker is compensated by short term considerations. After all, Kodak managed to survive for 40 years after they invented the digital camera in1975, several generations of CEO had passed through in that time, all taking their packet, it was just the last in the line who had a problem.
Value not just price. Consumers look for “value”, but way too often that is translated by suppliers and the retailer into “price”. Price is just one way of reflecting value, but it is the most obvious, and easiest to articulate.
Barriers. Every industry has its own set of barriers to innovation in addition to the more general ones above. In the case of the Australian packaged goods industry, they are several, all associated with the concentration of power in the retail trade.
Margin squeeze
Speed of house brand copying the successful products
Timing of distribution and advertising
On shelf management of facings, cut in, position, promotional programs and stock weight
13 week “live or die” time
On shelf upfront costs
Category management if you are not the category captain, and few small businesses are, you are at a significant disadvantage
Risk averse retailers
Habit. Everyone is used to doing business in a certain way, so that is the way it is done.
Opportunities for suppliers.
Similarly to barriers, every industry has its own unique set of opportunities that when seen are open for businesses to chase.
Social media. FMCG suppliers have not yet solved the problems of how to best use social media to market their process in supermarkets.
Mobility. Engagement with the web and its tools is now mobile, a majority of net interactions are mobile, and most people have their smart phones with them all the time. Using this capability and the geo-location capability to foster a direct relationship between the brand owner and the consumer with the supermarket playing the distributor role is a real opportunity currently under-recognised and utilised.
Food service and ingredient. These are fragmented markets, where innovation, service and brand can still play a real role, and getting a return on your investment is still up to the quality of your business, not the whim of a buyer in a gorilla suit. Depending on whose numbers you use, sales outside the major chains of ingredient and to food service outlets from fine dining to fast food, is north of 60 $billion.
Digital coupons. Retailers in Australia have ensured that the redeemable coupon, so prevalent in the US does not get a start here, too much transaction cost, but a digital coupon? Why not? There have been several tries of various types, Groupon being the most obvious, but smartphones make it so much easier to collect coupons and redeem them in some way, not necessarily even associated with the retailer.
Range optimisation. Category management as it has evolved has always been data intensive, and from a retailers perspective, the objective has been margin optimisation. The next step I suspect will be range optimisation which is really just margin optimisation with a far greater understanding of consumer behaviour thrown into the mix. We have all operated with the view that our various research tools and their data gave us enough to work with, and they did, but suddenly there is the “big data” behaviour mining opportunity offered by social media and geo location, in addition to the fragmentation of times we shop, and how we place and receive orders. Range optimisation to accommodate all these changes just became in my humble view, the FMCG marketing challenge of the decade.
Innovation from the waste. Until very recently, produce that was outside the specs for appearance was consigned to the waste bin, juicing, and other marginal uses, it was not deemed good enough by retailers to sell, not because it was nutritionally or organolepticly deficient, but because it looked crook. Along came the idea of highlighting the products visual imperfections, “Imperfect pick” is the term Harris Farm have used, Canadian chain Loblaws has successfully rolled out “ugly fruit” in Canada, and both Woolies and Coles appear to be tinkering with the idea currently. There are a myriad of opportunities to utilise undervalued product to build a category, for example, shin bones are the foundation of Osso Bucco, many of us will sample great Osso Bucco at an Italian restaurant, but never cook it at home, when it is an easy, tasty meal with a very low meat cost. Pretty simple marketing I would have thought.
Innovation is tough, but it is also fun and makes the future. Those who just wait for the future to happen will be overwhelmed by it, those who take a role in shaping it will at least have the chance to do well.
This post is the 8th in the series examining the means by which small businesses can deal with the retail gorillas.
The one that started it, back in October 2014, is a summary of the 10 ways to beat the gorillas at their own game, a summary post that generated a lot of interest, so I expanded the individual points in subsequent posts.
The first expanded post was the 3 essential pieces of the business model
The second, 5 ways to compete with data
Third, 6 category management ideas for small business at Christmas
Fourth, 9 imperatives for small businesses to build a brand
Fifth deals with the reality for all supermarket suppliers, that they have two customer types, requiring different approaches.
Sixth, deals with the least understood large cost impact on small businesses: Transaction costs.
Seventh suggested ways for small businesses to collaborate for scale,
Transaction cost. The least understood cost in business:
This post is the sixth in the series that sets out the means by which small businesses can take advantage of their small scale, and be successful competing against the industry giants for expensive supermarket shelf space. Remove transaction costs. Easy to say, hard...Suppliers to Supermarkets have two customer types.
Big dogs hold the cards
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.
Entirely 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.
Supermarkets.
- 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.
Consumers.
- 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.