Delhaize and Unilever may not yet have felt the need to visit a relationship counseler, and of course, the jury’s still out on who (if anyone) will actually win in their battle.

For now, Unilever has lost shelf-space for around 300 of its brands at Delhaize stores.

Delhaize may potentially lose some of the sales that those brands got for it, in case consumers want a specific brand rather than a private label or a substitute brand.

The consumers lose not just in terms of their choice being reduced, but perhaps also in becoming confused about the specific value / benefits of competing products when the certainty of their customary brands is removed. Remember, brand loyalty is built on the predictability of a repeated experience over a period of time. If  you remove that factor from the purchase, each purchase becomes an experiment again, until a similar predictability is found.

(For those who missed the previous post, you can read it here.)

Referencing this battle, reactions to a discussion in at least one online poll on www.retailwire.com seem to favour retailers, or equally blame both retailers and suppliers. Only about a quarter of the respondents felt that retailers were not being fair. Considering that the respondent universe comprised of professionals from retail companies, suppliers as well as service providers, this seems to be a surprising result. Or perhaps not? Perhaps brands are no longer delivering a significant value to be able to command a premium over private label?

Some of the reactions from that discussion are reproduced below with permission from Retailwire.

 

• It’s hard for me to feel for both retailers and vendors when they obviously do what’s best for themselves, regardless of the long-term impact. In this case though, I would tell Unilever to go aggressive and pull all their lines from Delhaize. Then up the marketing of these lines with a cooperative marketing program involving the other retailers. Let Delhaize try to survive with shelves full of private label products and see how long they last. (Marc Gordon, President, Fourword Marketing)

• First, you seem to be talking more about Europe than the U.S. and that’s a different animal. However, given the universality of the question, I’d say first that the best and worst of people and companies come out during hard times. The best redouble their efforts to build meaningful long-term relationships with their trading partners. Unfortunately, it seems that most are simply trying to squeeze an extra penny or two out of the other. To your specific question–No! CPG companies are only starting to rationalize their portfolios. There are still way too many products out there simply for the sake of putting their name out there–not because the product moves. Some manufacturers are starting to cut back on their lines, but I suspect much more is needed. As to developing private label, what do you expect? Retailers have been copycating for years. But I think consumers have gotten wise to the fact that just because it looks like a brand doesn’t mean it has the same quality. And to any retailer who can’t do any more than copy, shame on them! (Len Lewis, President, Lewis Communications, Inc.)

• Fast moving consumer goods companies still need to rationalize brand portfolios in many cases, as so many retailers are finding higher profits in reduced SKU counts, without losing shopper loyalty. Depending on how this shakes out with specific retailer strategies over time, this may or may not make room for more local brands and niche players in some instances. Private label is a whole different animal today than it was even four or five years ago. The top tiers are not just inferior substitutes for national brands; they are national brand equivalents (or better) and widely recognized as such by consumers who are switching, and are not likely to come back. As for retailers copycatting, that’s always been a factor. Sometimes retailer behavior is outrageous, but there are laws protecting trade dress, etc., and branded manufacturers frequently litigate, and win. (Warren Thayer, Editor, Refrigerated & Frozen Foods Retailer, BNP Media)

• There is significant brand proliferation in FMCG. Think about cereal, ketchup, salad dressing or the myriad of other categories that have duplication on top of duplication. I led an industry-wide study that proved retailers could remove 12 – 18 percent of the actual SKUs from a given category (almost across the board) and not lose sales–in fact retailers will grow their sales (by unit volume and revenue). Consumers want true variety and differentiation – not the same thing in the same size. How many red ketchups in the 24oz bottle do you really need on the shelf? In many cases, there should be a couple of national brands and the store brands.
  The study also showed that the very large marketing dollars thrown at retailers to help promote products are in many cases not enough to cover all of the downstream costs and activities retailers engage in to accommodate duplication of brands. The inventory carrying costs alone are staggering. The FMCG companies will not want to hear this, but without fail, we found that there is too much duplication and with careful consumers, retailers should make sure they are offering the very best solutions for their customers while maximizing profits and opportunities. (Kevin Sterneckert, Research Director, Retail, AMR Research)

• How many shoppers (in the US, anyway) would drive out of their way to get Unilever soap? Probably not too many. Price, proximity and shopping habits are stronger than most CPG loyalty. Higher ticket items, like durables, and higher involvement categories like skin care, have more resilience. Retailers are understandably using the recession as a catalyst to drive sales of private label. Are they playing fair? Well, no.  Manufacturers are over a barrel, giving as much information as they can in order to stay in good standing with retailers. Further, some retailers have even used promotions that pull on national brand strength to promote private label. Publix Supermarkets ran a Buy-One-Get-One, where shoppers could buy a national brand (Thomas’s English Muffins) and get the Publix private label brand free. This drove trial – and presumably–conversion to their brand. No, they aren’t playing fair. The question for national brands is how to stay relevant and on shelf. (Liz Crawford, President, Crawford Consulting)

• Technology and collaboration should be helping to solve this problem, and it is a problem that existed before the current downturn and will continue when the recovery comes (hopefully very soon!!). If the retailer can show empirically that the new product lines do nothing to add to the profit mix, or worse do something to harm it, at the store, the supplier should yield and remove or not introduce the items. If the manufacturer can show empirically that the new product lines work to bolster the profit mix at the store level, the retailer should yield and add the items. This may be over-simplifying the situation, and there will always be exceptions, but without collaboration both retailers and suppliers are going to lose and the shopper will suffer as well. (Ron Margulis, Managing Director, RAM Communications)

• “SKU Rationalization” is a dangerous game…as the volume of sales per item does not necessarily reflect the impact to the brand as a whole. The push-pull of private label vs. branded product has been going on a long time and it’s not stopping any time soon. While it’s possible to create an apparel store built solely on private label merchandise, I don’t believe it’s possible in FMCG. All those advertising dollars have, in fact, made a difference. It’s also true that not all private label merchandise is create equal. I might be okay with generic canned food, but there are other products that have a distinct difference in quality. Q-Tips, Band-aids, some cheeses come immediately to mind. There’s a reason why book sellers carry slow movers. There’s a reason why apparel retailers buy a full compliment of colors, even if the percent contribution isn’t the same across all of them. Similarly, there’s a reason why FMCG retailers need to carry brands. It adds to their own brand credibility. (Paula Rosenblum, Managing Partner, RSR Research)

• I’ll take on whether retailers are “playing fair” by copy-catting national brands/morphing them into private labels: 8-10 years ago, I would have cried foul; these days, it’s par for the course. Yet another reason why vendors have to keep their innovation pipelines full or risk being one private label switch away from extinction. Think of your retailer knocking you off as the sincerest form of flattery (if you can bear it)! (Carol Spieckerman, President, newmarketbuilders)

• As indicated in the poll questions, there is sufficient blame on both sides. Retailers are dealing with manufacturers who force impractical line extensions through financial influence (incentives) detracting from a balanced category. Private Label is skimming the cream of category sales and threatening to take a disproportionate amount of shelf space. Private Label also can trade down category average pricing through poorly thought-out pricing schemes that do not reflect the market place. The extreme in either direction reduces the optimization of the consumer-centric effort we are all chasing. Manufacturers are the Mecca of product innovation. Private Label merely mimics. When we deviate from true innovation and the goal is to reduce the shelf space of competitors, everyone loses. The leap to Private Label is a result of cash-pinched consumers looking for a bargain. Private Label has a place in retailer strategy, but it should not be the entire strategy. Nor should the overwhelming ownership of space by a single brand. The premium or angel customers will continue to buy brands that exhibit the features and benefits of quality and consistency. Which customers do we want to develop as our base? Angel customers or bargain hunters? By lowering standards, quality and differentiation, we move into a downward spiral into Heck. Manufacturers must put forth innovation and quality as the model. Retailers need to maintain the balance in the categories that maintains a profitable mix of customers. It is about strategy and thinking beyond next week. Ask John Galt. (‘GMROI’)

• There were several reports on just-food.com last week out of the Consumer Analyst Group of New York (CAGNY) conference in Florida about what some of the bigger brands plan to do about rationalizing their portfolios. Some were particularly interesting and relevant to this discussion. As for the sub-debate about differences between the US and the ROW (rest of the world)–also very interesting and relevant especially when looked at in the context of globalization vs consumer preferences for locally produced food (a subject on which there is still much to be said as it cannot possibly be, in my view, an either or proposition). ( Bernice Hurst, Managing Director, Fine Food Network)

• For FMCG, a CPG firm must ensure they have a brand strategy to address the intended audience. Most will say they have that, but the truth is that they try to “cover the Earth” with a wide assortment to capture any and all consumers they can. In these economic times, there will tend to be even less “rationalization,” so to speak, since CPG firms will try to grab any demographic who is spending money.  Of course, regions vary in their propensity to embrace things like private label, however there are great examples across the globe of deep penetration of P/L, some of which have already been mentioned, and also Trade Joe’s in the US. P/L success has more to do with intentions of the retailer, rather than the line of products, specifically. (Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM)

• Where’s the data? Which consumers are buying which products? Which ones are not selling so well? Where’s the demand? Both sides can play the win-lose drama as long as they like and both will lose. (Camille Schuster, President, Global Collaborations, Inc.)

• Brands are the initiators of product and package innovation.
  • Until Private Label companies or a collaboration with retailers can fund research and development and spend back big dollars back against the brand, the brands will always have customers looking for their new products.
  • Retailers cannot give up the slotting fees that brands pay for shelf space. That is why many stores get more branded skus then they probably need.
  • I am not sold that manufactures can’t execute with creative accounting, “Brand partnership stores.” Retailers work on slim margins but as more retailers self manufacture there is AN opportunity to sell to yourself.
    (‘YOURBOYS’ )

About 7 months ago a spat occurred between the leading retail company in India Future Group and branded supplier Cadbury’s, with respect to margins offered to the Future Group. (A friend described it as a Bollywood saga.) Future Group had also previously had run-ins with other suppliers including the likes of Pepsi. (The previous post is here.)

Now there’s a European film noire sequel in the making, in a battle between the Belgian retailer Delhaize and European FMCG big daddy Unilever. Delhaize has suspended purchases from Unilever as, according to Delhaize, Unilever is making “unacceptable demands” that the chain stock more Unilever brands.

Like other branded suppliers, Unilever has obviously been impacted across Europe and the US as retailers have become more sophisticated in their approach to private label and squeezed out brands that they have been able to replace with their own products.

Given further weakening of the economic scenario, it is likely that consumers would switch to cheaper private labels offered by retailers, and retailers would be tempted to give over even more shelf space to their own labels where they get higher margins than branded products – a continually losing spiral for the branded FMCG companies.

According to a consumer survey carried out by an agency in Flanders in northern Belgium, apparently 31 per cent of shoppers polled were choosing to shop at chains other than Delhaize, and another 19 per cent were not happy with Delhaize decision (but there doesn’t seem to be indication yet that they would switch). Most of the customers who said they were remaining with Delhaize are either switching to other brands or to Delhaize’s own label products.

However this brawl ends, and whether it turns out to be a win-lose or a lose-lose situation, even this survey demonstrates that the retail store has the upper hand – less than one-third of the surveyed customers displayed their hard-core brand loyalty by switching to other stores.

That is obviously a worrying sign for branded suppliers who have invested humongous sums of money and decades of effort in developing their brands. But it also raises questions about whether the consumer is really perceiving any value out of the billions in advertising and millions of man-hours spent by the FMCG companies in developing the nth variation of toothpaste or detergent.

Tough times raise tough questions, and the ones that comes to mind are these:

• In recent years FMCG companies have rationalized their brand portfolios, but have they done enough?
• Are they really clear about the value the remaining brands are delivering?
• Are the retailers really playing fair when they build up so-called partnerships with suppliers, only to take on board the product learnings and then develop own-label copycat products (sometimes down to package colouring and graphics)?

What do you think?

The internet seems to be as much alien territory for bricks and mortar retailers as catalogues are. Bricks and mortar retailers seem to struggle with the medium – most of them try to graduate from their corporate web brochures to transaction sites, and end up doing injustice to both. Many of them are not able to figure out how to create the traffic to their online store, how to create the excitement and liveliness to convert their traffic into transactions, and how to take the transactions to their final closure in terms of payment and delivery in a delightful way.

Of course, there are some notable exceptions – but possibly they are notable because they are exceptions rather than the norm. Many bricks and mortar retailers are also tied down by systems and processes that work very well for their physical store and distribution network, but fail miserably during the online experience.

However, what’s surprising is that even the basics of e-business seem to be escaping bricks and mortar retailers. Starting with search results.

Retailwire quotes a recent study by a search service provider which found that “online retailers claimed 38 percent of the search listings in 2006, 30 percent in 2007 and 35 percent in 2008. The next biggest category was shopping comparison sites at 25 percent in 2006, 26 percent in 2007, and 19 percent in 2008. Brick-and-mortar retailers lagged at 8 percent in 2006, and 12 percent in both 2007 and 2008.”

However, the study does show a steadily improving share of search listings on the part of the bricks and mortar retailers the last three years. It would be interesting to see whether the pressures of the market will push them to get more aggressive and strategic with their online presence to show a marked improvement in share in 2009.

Staying with the fundamentals: customer experience is another such, and it’s amazing to see what “attention to basics” can do for business. Amazon.com has bucked the recessionary trends displayed by other retailers in the US, with an 18% sales growth in the last quarter of 2009 and a 9% growth in profits.

I’ve shopped on Amazon.com since the year they launched. Every experience has been completely satisfactory, some delightful. On some occasions Amazon has picked my pocket – made me spend on stuff that I wouldn’t have bought otherwise, by their very helpful suggestions of what others had bought while they were browsing my selections. On other occasions they’ve saved me money, time and heartburn by providing comprehensive customer reviews at a click.

In my experience, Amazon’s sustainable advantage is their customer-orientation – the technology, the supply chain, the design – everything is geared to making the buying experience as good as possible. A Retail 101 principle that many other retailers – online and offline – seem to ignore every day.

At the end of the day, e-commerce is another channel to reach out to customers – some existing customers who may need to be connected with during additional shopping opportunity windows, others who are completely new to your wares and may never walk into your physical stores. But treating it as an additional graft that will work with your existing operating DNA is a mistake –  the online channel is distinctive and needs fresh thinking on the business model and consumer interaction from beginning to end. At the same time we shouldn’t throw out the baby with the bath-water, and forget the basics of understanding and addressing the needs of consumers.

In the last few months, I’ve interacted with retailers and their suppliers from a number of countries in North America, Europe and Asia and, except for a handful, the conversations have not been happy.

In November-December companies in France, Belgium, Germany and the United Kingdom were dealing with a season where there was as much red on the P&L statements as in the Christmas shop windows. In January 2009, the National Retail Federation’s annual convention in New York had participation that was somewhat thinner than in past years, but the gloom in the atmosphere was thick enough to slow everyone down.

On the other side, the factory of the world, China, had been battered by a Year of the Rat that brought increasing costs, erratic power supplies, slowdown in orders, safety concerns and product recalls. All of this culminated in reports of factory closures and migrant workers at railway stations on their way home for the Chinese New Year holiday carrying not just clothing, but all their possessions including fridges and TVs. The resultant unemployment figures expected currently range from 20 million to 40 million people.

The Indian retail sector, of course, has had its share of pain. In an idle conversation on a sunny December afternoon, a real estate broker in Ludhiana had a pithy description for one of the retail chains: “Unhone apne haath khade kar diye hain. Bakee logon ne abhi tak toh haath neeche rakhe huey hain – unke bhi upar ho jayenge.” (“They have thrown their hands up in despair. The rest still have their “hands down” – but they’ll also give up eventually.”)

On the one hand you have the gloom-seekers. In the eyes of some of these people, the retail boom is over. In the eyes of others, the retail boom was all hype anyway, a big bubble of artificial expectations.

On the other hand, you have other people asking some uncomfortable questions: here’s a country that apparently has the largest population of under-25s, where millions of new jobs have been created and incomes have been growing. How can retail businesses be showing a decline in their top-lines?

I don’t think anyone has all the answers, but I can offer at least one speculation, borrowing from the title of a book that came out some years ago, named “Irrational Exuberance”. Robert Shiller’s first edition was related to the dot-com stock bubble, and his 2005 edition added an analysis on housing bubble that was developing at the time. He had, in turn, borrowed the term from the US Federal Reserve chairman Alan Greenspan who in December 1996 had said in a speech: “…how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions…?”

We now seem to be in such an unexpected (but was it really unexpected?) and prolonged contraction. Of course, consumers are feeling more cautious about spending, even if their actual income has not been affected (just as it wasn’t affected when they were feeling suddenly wealthy 12-18 months ago). Obviously, stores that should not have been opened will now get closed, or excessively large stores will be reduced in size. Companies that are over-stretched may collapse completely.

But I would label the mood prevailing now “irrational despair” as far as a consumer market such as India is concerned. From a position of over-optimism, the pendulum seems to be swinging to the other extreme of utmost misery, dejection and complete pessimism, and I think that is a swing too far.

I think it’s worth reminding ourselves of the factors that make India a market for sustained consumer growth. The country looks likely to have a large under-25 profile well into the next several decades. These young people will grow older and get into jobs. They will get married and therefore expand the number of consuming households. If the policy-makers don’t really mess up, real incomes should go up. Infrastructure projects should largely remain on track, regardless of the political party or parties in power, facilitating industry, trade and wealth distribution.

So the time is right for business plans that have sound fundamental assumptions – or as the cement ad says: “andar sey solid” (solid from within).

I’d like to repeat issues that I have highlighted earlier as top priority for retailers and consumer products companies in India. These are as follows:

1. Realistic demand estimation: Let’s work with realistic sales expectations, and not expect all consumption to multiply like cellphones have in the last few years.
2. Productivity Analysis: As a retailer (especially in food and grocery), margins are thin. Except for marquee locations there is no excuse for continuous losses. Store productivity depends on merchandise availability, staff capabilities and store operations, customer traffic and a host of other factors, and you need to know what’s working and what isn’t.
3. Moderated growth: Many retailers in India have had tremendous growth in scale without growth in sophistication in processes or people. Some have been driven by motivation to capture market share, others driven by their investors who want an exit, and a few might have been driven by ego. I’m not asking anyone to grow slower that they want to, or slower than they should. However, I would say: do look at Intel. A manufacturing company that makes its own products obsolete in an industry where rapid change has been the norm for the last 40 years. Intel alternates changes in its production and supply chain processes, and products – it doesn’t change everything at once.
4. People: A leader of the industry pointed out a few months ago that there is no shortage of people in India. But the race to the top of the heap (or as it seems now, the bottom of the loss-making pile) has created artificial scarcity of talent. One benefit of the downturn is that artificially inflated compensations for people jumping on the “retail boom bandwagon” will disappear (at least for now). If we can use the experience of people who have been in modern retail trade in India for decades, and train others who are fresh but committed, it will provide a more solid and lasting impact for businesses.

A number of companies worldwide that we know as market leaders and businesses to be emulated found their feet in the depths of the Great Depression of the 1930s. That should give some hope to entrepreneurs and professionals.

However, does that mean that only bad companies or unprofessional managements will fail in the current downturn? Certainly not. Does it also mean that all good companies or competent entrepreneurs will succeed? Again, the answer is, no.

Some bad companies will manage to ride through this trough, while some really deserving people will run out of cash, ideas and opportunities. Life and “natural selection” processes are not fair.

But, by and large, if we can get our heads down and focus on getting the right people together, making money to get through and having something left over to invest in the future of the business, we would have more chances of succeeding than by over-stretching, or by swinging to the other extreme and being totally defensive.

I won’t even attempt to predict how long the current downturn will last. The Great Depression lasted a whole decade, was “walled” by the Second World War, and the first blooms of real recovery only appeared in the early-1950s, or about twenty years from the first downturn. Other recessions have been shorter. In 2000, after the dot-com bust car bumper stickers in the US quoted a political satirist, saying, “I want to be irrationally exuberant again.” Within a few short years, many people were showing those very signs.

We can be pretty sure that such a time will come again. But I’m also quite sure that durable companies are unlikely to be built on bursts of such exuberance.

A recent discussion online on retailwire.com quoted a book “Jump the Curve” by Jack Uldrich, in which he describes rapidly growing trends that stay small for a long time and then suddenly explode. He uses the example of water lilies to illustrate the point about exponential growth.  Say we start with one water lily and it multiplies to cover a pond completely within 30 days. On Day 20, only 0.01 per cent of the pond would be covered, and on day 25 it would be just over 3 per cent. The last days, hours, would show dramatic growth.

The water lily example is just so apt to describe technology adoption in the retail sector (especially in fashion and other soft goods). It’s so slow sometimes that it looks like molasses dripping down a wall. (And when a weed-killer gets dumped in the water at an early stage, the adoption can take even longer. )

In 1985 the industry was breaking new ground with the principles of Quick Response (QR) – then in the 1990s Efficient Consumer Response (ECR), Collaborative Planning and Forecasting (CPFR), and numerous other acronyms appeared in the supply chain alphabet soup. 

During 1999-2001 in my previous company, the team developed a collaborative supply chain enablement solution to create an easy-to-understand common platform for the various stakeholders in a supply chain to work together seamlessly. By 2001 we discovered that we were among a handful of companies speaking the same language, and among a sea of 300+ web-based portals aiming to catch up. And then the bottom fell out of the market. 

As we stand today, about a decade on, design-to-delivery lead times are still measured in months, buyers are still trying to gaze into crystal balls to forecast their future demand, and their suppliers are still trying to consult oracles to interpret their buyers’ orders. 

We may yet see adoption of true collaborative platforms in the next couple of decades. At that point it will look like sudden growth that’s come out of nowhere, and everyone will be asking “how did they ever manage supply chains in B.C. (Before Collaboration) Era?” 

Until then….