Thursday, February 18, 2010

Driving forces in channel development

No matter if you are a merchant of a crowded market in Beijing or a retailer in shopping centre in Birmingham or the Streets of Copenhagen, you can be absolutely certain of one thing: That your customers have never had so many options as they have today.

To say it frankly, there are few retailers, or suppliers for that matter, that would be missed if they suddenly, over night, would be extinguished from the face of the earth. As consumers, we are overwhelmed with possibilities and offers. One store, or chain, more or less, would considerably change our possibilities to buy what we wanted, at any given moment we wanted it. The world is full of similar retailers, selling similar products. The market is flooded with standardised goods in standardised concepts. So one of the biggest issues facing 99% of all retailers today is, in a world when we are no longer needed, how can we see to that we are wanted?

Globalization, the fact that retailers cross borders at an increasing scale and speed, is giving more options to consumers than they had yesterday. And during the same period that the retailers has grown from their respective local origins into the global monsters they are today, the availability of production resources has developed even more, as modern technology has found its way even into the otherwise labour intensive Asian factories.

After WW2, and during the golden consumption decades of the 50s and 60s, production resources of the world had a hard time coping with the demand of the growing consumerism of the west. All this is now a thing of the past. To say it at the very least, there are already too much products and production capacity to meet a real need, from consumers of the world. And as the earlier less quality minded Asian industries are moving into high tech and providing design up to the level of their western adversaries, they have moves up to being equivalent.

So what is the logical consequence when similar product sare being distributed by retailers under heavy pressure to increase volumes and saturate the market before their competitors do?

Needless to say, this affects price. And why shouldn’t it? In a world of abundance of equally good products, performing equally well the only difference lies in the price. And as the low price alternatives has moved up in quality, the medium price segment has been the target for many of the big box retailers, using their international presence to by volumes at the right place for the time, and then distribute it to the place where the buyer is. As one spokesperson choose to put it: “Bad products are´nt just that bad anymore.”

And when the market don´t grow as fast as the retailers expand their already vast distribution networks with yet another store, price is certainly in the focus.

But there is yet another aspect than bad product quality that has to be overcome if consumers should be willing to increase the share they buy on discount, and that it the psychological one. Namely, the fact that consumers have used their ability to pay a little more, and thereby expressing themselves as being at a certain level on the career ladder. In many western countries a large middle class, has led to a majority of the traditional retailers being in the medium price segment. And in a world with a direct correlation between price and quality, who would like to be the one buying at the low end.

However, the aspect of quality has changed along with the rising quality in general. Look at fashion retailing as one example. A few decades ago clothing were largely bought as durable investments that should last over a certain period of time. Fashion was at the high end, a not really at the reach of the large mass of consumers. Since then personal expression and individualism has evolved the public into being more interested in showing who they are. The durable aspect of clothing has given away to the fashionable aspect, and clothing is not really worn to the end of the technical lifecycle of the textiles.

The Spanish fashion gigants Zara and Swedish H&M have been the ones which have harvested from this transformation, and have to a large extent made it happen. While the traditional clothing retailer used to work with a few collections each year, Zara and H&M are constantly pushing new fashion to their store at a price level much lower than otherwise expected from a fashion retailer. Zara has a reputation of copying trends and model from the catwalks and then get them to the stores faster than the famous fashion brands themselves. The Spanish retailer has some 200 designer working full time to get the right models out to the stores faster than anyone before them. In a Zara-world, getting a top or a pair of trousers from the drawing board and to the stores in less than three weeks is an everyday operation. Zara launches two minicollections each week, using no promotions or tv-commercials whatsoever. There is no fixed assortment and as a true fashion retailer, it changes with what is hot right now. The store being their only medium, they are situated in a building with an “interesting architecture” and as consumers learn that they are launching new stuff at the speed of light, their customers come there often.

H&M has been growing internationally the last decades into being a hot fashion retailer, and hardly anyone buying from their 5th Avenue store in New York, where the windows change during the days to show a different offers to the people passing by at their way back from work, than what they saw when they walked buy on their way there, could guess that H&M still struggle with a low quality image of the elderly consumers in Sweden that remember its first years in a time were clothing where meant to last.But now, when fashion is changing faster than ever, who needs durable cloths? And can anyone doubt a retailer that has sold both Lagerfeld and Stella Mc Cartney outfits at discount prices?

The horn of plenty is leading to a situation where consumers have understood that whatever I want to buy, there is probably a better price somewhere else. And when they have slowly realised that low price necessarily do not mean low quality, the bargain hunting has reached a new level. Because, if one could find a product with the same function and similar perceived quality, at a considerably lower price, but without the frills of the market leading brand, would´nt that be a smart thing to do? And at the same time, wouldn´t one be a total moron to pay more for a similar product if one had the choice? This psychological change has made the low end to become the “smart buy”-segment.

To borrow the words of Allen C. Questrom, JC Penney Company: “While there once was a stigma at-tached with bargain hunting, the only thing consumers seem to be embarrassed about is paying the full price”.

That about sums it up…

From mainstream to extreme

So EDLP – Every Day Low Prices – retailers have challenged the medium price segment from below, possible by rising average product quality and boosted by consumers changed perception of what quality is all about. As discounters of all categories has moved across the continent, there is almost always a discount alternative within reach of all consumers.

German Aldi and Lidl within the supermarket segment.
Swedish IKEA within interior decoration
Finnish K-Rauta and German Bauhaus within DIY
British Dixon and German MediaMarkt within brown and white goods
Swedish H&M and Spanish Zara within fashion
American Toys R US within toys

The ones having the hardest time to cope with the newcomers are often the local, by tradition, medium price segment, mainly because the discounters of today use their massive purchase power to buy the same brands as traditional retailers do but at a lower price and then selling it buy less margins. And often having newer and better looking stores, who would want the old ones?

The medium price segment has, in general, been to similar in terms of quality and perception compared to the discount alternatives to be able to compete on the same level. That is the difference in price has not been up to par with the value it deliver. The medium price segment have not been able to deliver value for money, the option of self expression or any of the criteria needed to compete at the same level as the big box discounters.

So if you really want to stand out in a crowd it is the upper segment you have to go to, not necessarily luxury, but up to the premium level. The arrival of the discounters came timely as consumers demand of new products began to rise on every level. In a time where more and more wants to define their personality and show who they are, and at the same time have it all, buying some of the things you need at a lower price is almost necessary to be able to buy the things you want.

Looking at all the things any European fills (or litters) their home with, continuing buying everything at medium price level would not make room for all the consumption that any middle class wants these days. Anyone would expect to own a car, or two, a mobile per person, a DVD, a comfortable home, an ok closet given the line of work you do, the possibility of going on vacation at least once a year, and so on. The income of the working force has not risen in the same pace as the possibility to spend it. It usually takes some degree of compromise to get all the things you want. And this is where today discounter comes in handy. Discounters make it possible to by standardised products, with an ok quality at a low price, and thereby make room for some consumption in the premium segment within prioritized areas, primarily those who really define the consumer as an individual. So one person could by a BMW and the go to Lidl for cereals, while another person buy a luxury fishing gear and an Armani suit, while skipping the car totally.

Buying discount is no longer a thing for the poor, and buying premium is not only for the rich. The consumers jump from one extreme to the other depending on what the category and the product or brand means for oneself as an individual. If it helps define who you are in a good manner, then it is bought at the premium segment, and if it is considered an unprioritized commodity it could just as well be bought at the lowest price possible. And this is a major difference from yesterday, when everyone consumed at the same level as you were on the income ladder. The rich were buying luxury and the poor at discount heaven.

Markets with increasing sameness and competition, diverges from mainstream to extremes, that is the bulge that the medium price segment consists of, is flattened out and replaces by to minor bulges, one at the smart buy, and one at the premium segment. And at the same time markets diverge in another dimension as out of town category killers at the same time as convenience concepts pop up in neighbourhood and city centres. The extremes are growing, thinning out the middle.

This development has led to dramatic changes in the retail concepts of the mature markets of the world.

As a consequence of the increasing competition retailers are bringing new formats into the action. To a large extent, those formats could be fitted into four main categories of development, each with their own characteristics and success factors.


Discounters are the fastest growing retailers today as an overcrowded marketplace logically breeds price competition. The discounters generally offer a smaller range to be able to create an efficient supply and logistic engine to feed the stores. For some consumers they are a supplement of the ordinary super market for specific items, and for other people the main store.

Considering that 90% of a typical shopping basket for a family is built by choosing among some 150 articles, it is understandable to grasp the ongoing behind the recent growth of the discount sector.

Discussing discounters it is also critical to realise that discounters are not all the same. Some hard discount concepts like Aldi carry 90-100% private labels, while other like Lidl supplement PL with the market leaders in every category, if possible, giving the consumer a reasonable offer even if brand con-sciousness is a factor. Other growth strategies includes small scale, small village locations, such in the case of the German Schlecker.

The psychological factor behind the public acceptance of buying cheap in terms of a polarized consumption has been discussed earlier.

Also, several discounters has moved up on the image ladder projecting themselves as “a real supermarket” by shaping up store environment, shopping experience and adding certain products to build a quality image. An example of the latter is Danish Nettos incorporation of ecological products. Through better logistical systems the number of SKU:s can also be set at an higher level to meet consumer demands and play the game of being, the real thing.

Being a true hard discount operator, controlling costs within the organisations are critical to be able to achieve financial goals. For companies such as Aldi typical staff costs is around 3-3,5% of total turnover, and the small range combined with a well oiled logistical machinery are keeping stock costs at some 0,01% while marketing stays around 0,1% of the turnover. Total operational costs (excl. goods) are kept below the 10% level. Keeping costs down are essential to be able to keep prices down.

Dealing with discounters

Discounters are serious about their price image and totally committed to preserving their image as an every day low price provider. Any branded goods supplier trying to tell them stories about brand strength being a reason to sell their goods at a higher price are shown to the door, and suplemented buy a non-branded product.

From a brand owner and supplier point of view, this is bad news at first look. On the other hand, neglecting to se the upside of discounters, could prove disasterous given the fact that discounter share of many markets are up to 30-50%, leaving a small volume for “the others” to battle over.

This being the fact, lets look at discounters from a positive perspective:

Their size and market share make turnover/SKU reach fantastic figures if compared to their competitors. Discounters are good customers if correctly understood and treated as what they are – a logistic battle cruiser always looking for their next target.

- A campaign together with a discounter will move large volumes
- They know what the want and usually leave little room for understanding.
- Centralized organisation makes negotiations uncomplicated

Discounters can, due to their large share create fast penetration of new products and move markets shares, as well as help getting over stocked items out of the warehouse.

On the dark side of things, discounters are price leaders, closely monitored by other operators, and to some extent the ones setting the standard on key products. Discounters must be treated with respect.

Out of town hypermarkets

As demand grows so does the stores. For the car owner, having a time conscious family, making weekly shopping trips, hyper markets are the format of choice.

Providing a range of more than 30000 SKUs, a number which in some cases in Germany and the US could be multiplied with two or even three, the multitude makes all the difference.

Typically situated out of town, the hyper markets offer a huge assortment of both food and non-food articles, striving to get as much share of wallet of their customers as possible. With this in mind they are also the number one developer of service products such as loans, insurances and so on.

Having a range with a multitude if choices in every category, some hyper markets exists as premium suppliers of ecological fresh produce while others are in the lower price segment. Having a large degree of families and given the market development as a whole, hypers on the European arena usually leans towards the discount side, rather than being the premium provider, at least as an image. The size of the assortment leaves room for at price/quality ladder were both the high end products fits along with the bulk family pack at discount prices. As families are a key target segment, price is always in focus, in terms of being able to bring a low price offer to the market at any time, in any category. There is always a good offer of the week.

Dealing with hypers

Hypers have two main differential factors:
Size and price. That is the ability to provide the entire need for even the picky consumer looking for a special brand, as well as providing an EDLP-offer to pay for the gasoline needed to go to the store.

As with discounters hypers move huge volumes, but mainly on campaign-SKUs. Due to logistical reasons hypers also make cuts in their assortment, putting C-brands out in the cold in favours of PL.

Hypers are an interesting partner to get the level below top sellers to the market as they need it to build the image of the total provider. The potential of being a campaign-SKU provider needs not to be addressed.

Neighbourhood stores turning into convenience providers

Yesterday’s neighbourhood stores providing the basic needs for the customers are slowly adding products and services to attract an ever more demanding, time conscious audience.

Stopping by at the convenience store these days could mean gripping a cup of latte, or a snack engineered to fit on-the-go consumption or a quick stop on the way home from work to get something for dinner. On many markets a large degree of the popula-tion eat out at night or deciding what to have for din-ner at the last possible moment, creating the need for a large “pantry” at close range, as going to the super market seems as a major event as a daily routine. To “dock” into the convenience station at the corner requires much less time, and energy.

This has created the modern convenience store with a wide but shallow range of staple goods often complemented with some form of MRTE - Meals Ready To Eat, on the go or at home.

The petrol stations are often providing the same service and function for the driving audience.

Dealing with convenience stores/petrol stations

Convenience stores are interested in one thing only, to be able to provide convenience at any time, thereby providing repeat visits.

This means that they have to carry well known brands in many categories, with package sizes adapted to either smaller households or on-the-go consumptions. No one goes to 7-Eleven looking for a 20 kg sack of flour.

They are also interested in bringing in new interesting products giving new convenience experiences for their customers.

Premium players create innovative shopping environments

While discounters roam the market with their lean and mean assortment/price-combination, other types of players emerges in the other end of the market.

Premium providers, either in the form of evolved super markets, product specialists, serving a small niche, have “everything” within a category or experience shops inviting the consumers to be involved in the product itself.

The premium segment grows as a counter weight to the discounter. However, the volumes cannot be compared to the discounters, but still, the premium providers are an interesting factor adding vitality to the market, above the level of the traditional supermarket.

One premium providers that deserves mentioning are M-Preis, an Austrian supermarket having the pay off, the Seriously Sexy Super market. Combining an astonishing architecture, unique for every store, with a wide assortment lifts M-Preis far above the average.

Others include Vom Fass, niche operator selling unbranded oil, vinegar and spirits enabling their customers to pick from over a hundred bottles, combining it with their liquid of choice and thereby creating their personal product, at the same time as they have an interesting chat at the store.

Dealing with the premium provider

Premium providers survive by being special, enabling them to charge more due to the shopping ex-perience as a whole.

Therefore selected and small exclusive brands always should find their way into the premium alternatives, which also add life to the category as such, as it is often frequented by connoisseurs and early adopters looking for the next kick.

Needless to say, price comes second.

Logistics and branding

Apart from the four main development directions there are also the branding and logistics powerfield to take into consideration. There is a common misconception that low price operators cannot use branding. Anyone that have visited a flagship store of an discounter knows this is not true. On the other hand, a streamlined logistic optimizes concept could be a part of a premium concept. Beeing a premium player does not exclude cost optimization!o