Devangshu Dutta
September 14, 2009
The dark clouds of recession and rain seem to be lifting just a little bit. Governments have been energetically throwing seeds of stimulus and economists are eagerly spotting “green shoots”. The festive season is around the corner, with anticipation of higher sales.
So perhaps it is time to cheer. Or perhaps not.
In the recessionary environment during the last year or so, ‘cutting back’ rather than ‘building’ has been the philosophy for most businesses.
The implications of these cut-backs are not always visible in the place you have originally made the cuts. But, unfortunately, they inevitably impact the area which should be the last to be touched: customer experience!
The problem arises not so much from the cut-back. Obviously if the business prospects are looking negative or less positive, the management needs to adjust its expectations and also its expense and investment framework.
No, the problem lies in the fact that most such initiatives are internally focussed. Whether it is supply chain (“lean inventory”), operating strength (“fewer people”), merchandise rationalisation (“narrower range and fewer brands”), the implications and benefits that are identified are mostly internal to the business. The driving philosophy is that “a penny saved is a penny earned”.
During the navel-gazing we forget the fundamental principle that the purpose of a business is to deliver a set of goods or services to meet the customer’s needs and expectations; if those needs are not served, the business interest is not served either.
Here are a few examples from the recent past:
These are all companies that have spent millions on store-fronts, real estate, IT systems, brand logos and hip advertising. After all, those are the visible vehicles for the brand and the brand promise.
Unfortunately, because of the internal disconnect between the strategic intent and the operational reality, these millions are now dripping down the drain, one customer relationship at a time.
Which brings me to one significant area of concern – the people who interface with the customer.
In western economies, due to the high cost of manpower, consumer-facing businesses are run on the basis of highly system-driven processes, lean staffing and a self-help orientation, whether the customer is interfacing with a call-centre or with a physical retail store. There are also significant cultural and infrastructure differences that make these models work in those economies.
In modernising countries such as those in Asia, it is quite understandable that the new consumer-facing companies are trying to emulate western “best-practice” models. However, often they falter on two accounts.
Firstly in these relatively hierarchical societies, customers don’t want to feel “help-less”. They may not exactly enjoy an intrusive sales associate, but they enjoy even less the feeling that there is no one around who can help when they want it. A number of retailers have failed this “quantity” test in the last few months.
Secondly, it is not just a “warm body” that is needed to ask a polite question and smile brightly, but someone who is empowered and feels accountable to solve the customer’s specific issue. That is a “quality” issue. Part of it is related to the huge gap between the personal context of most consumer-facing staff and their customers’. The other, significant, issue is the culture of accountability – that the salesperson or the service executive makes the effort to understand and solve the customer’s problem, rather than only focussing on following the law laid down in the operating manual. These needs can only be addressed through training – lots of it, and repeated liberally – and creating a culture that, top to bottom, is focussed on the customer.
Analysts have said that recessions are a great time for the good companies to separate themselves from the rest. That is true to an extent.
However, I believe that in recessions many companies, bad or good, suffer due to circumstances beyond their control – it is in the recovery after the recession that is a much tougher filter.
When the customer’s mood is beginning to move up, so are his or her expectations. Companies that have not cut muscle along with the fat, companies that have not only focussed on themselves in the downturn but have remembered the customer at all times, are the ones which will manage to retain their customer relationships. And will grow faster.
Devangshu Dutta
July 16, 2009
The grocery market is loud. From the times when food markets were in streets and town squares, hawkers have cried out their wares, and the freshness or newness of everything made evident to the customers passing by. So, I guess, it is no surprise that today’s FMCG and food market is also tuned to high-decibel promotion.
You don’t need to search too long for the reason – margins are generally thin on these frequent-use products and inventories need to move fast. And what you don’t make a noise about may not be visible to the customer and may remain unsold.
But if that was the whole story, most players should be focussing on one brand, or at most a few brands, and should be using their advertising budgets to maximum effect on these.
Instead we see exactly the reverse phenomenon in the market – more brands, more sub-brands, more varieties of everything. Why? Because newness sells – it creates excitement, anticipation, and in customers with a sense of experimentation it creates the urge to buy.
The old proven method of doing this was the “New Improved” starburst on the pack. The slicker, updated method is to launch a new variety that is apparently different in some way. For instance, if the old supplement helped to strengthen bones, the new line might contain separate “child” and “adult” versions (growth vs. osteoporosis). The old shampoo might have helped to keep hair clean and prevent dandruff – the new one might leave the customer wondering if she should pick the dandruff-fighter that also reduces hair loss, or the variety that makes her hair glossy, or even the one that provides a date for the next weekend! By the time she reaches the end of the shelf, she might have forgotten that her need essentially was to prevent dandruff.
Due to this, the grocery and FMCG product mix is fractal. Each grocery shelf or grocery store is susceptible to fragmentation. Each such fraction is supposed to act as the seed that can allow a new segment in the market or a new use occasion to grow, and provide the FMCG company or the retailer with an avenue for additional business. This phenomenon is particularly visible in a growing consumption environment – consumption feeds proliferation, while proliferation provides further occasions to consume.
However, an unfortunate outcome of this proliferation of brands and SKUs is the heightened noise, in which the brand often loses its unique voice. Also, over time, the brand may be too thinly spread or be undifferentiated from its competitors, and its sales only sustained through ever increasing bouts of expensive advertising – a vicious spiral.
Another issue is the real estate availability and the cost. Chris Anderson wrote about “the long tail” about 5 years ago – the myriad products for which the market is limited, but demand may be sustained over a long period of time through internet sales. However, while the long tail works for e-commerce businesses such as Amazon that carry limited inventory, the physical store runs out of space for micro-segment items very quickly.
All of these factors obviously start hurting visibly when the market turns down, and when marketing investments start being evaluated against the returns. This is when proliferation starts giving way to “rationalization”, reduction of the brand portfolio, narrowing the SKU focus.
We are already seeing signs of this in many of the developed modern retail markets currently, where retailers and their suppliers are closely analyzing which parts of their portfolio they need to sustain, and which they need to drop.
The story in the Indian market is slightly different for a variety of reasons.
First, the market is still growing, and for most FMCG suppliers there are vast expanses of the market are still blank canvases.
Secondly, India has been a branded supplier driven market for a long time, and remains so, by and large. However, the SKU and brand density is nowhere close to what is seen in the West. There is plenty of headroom still for new varieties to be added and new brands to be developed.
But possibly the most important factor is the new modern retailers, who are desperately seeking additional sources of margin. When there is a limit to the traffic that you can divert from traditional mom-and-pop stores, and when you hit the glass ceiling on transaction values per customer, proliferation becomes the game to play. Therefore, these retailers are either busy introducing own labels or encouraging new branded vendors who would offer them higher margins than the more established brands.
Own label is obviously the tricky one. The customer needs to feel comfortable with the switch – in the US, a study showed that consumers would more easily switch to own label merchandise in categories where the “risk” was perceived to be low (such as household goods, rather than children’s products). Also, the best own label gross margins typically come from products that are presented to the consumer as “brands” comparable to national branded products, because the pricing is more on par.
So, on the retailer’s part, this requires sophistication of product development and brand management that may be expensive and may need time to develop. A short-cut could be the acquisition of an existing brand, its entire assets including the organisation, as some retailers have been reportedly looking to do. How well they integrate the brands into their businesses remains to be seen.
In the long term, like their counterparts in more developed markets, these retailers may also come to the point where they wonder whether these owned brands offer them enough return on the expense and the management effort spent on them, or whether they would be better off just buying brands that consumers are already familiar with through multiple channels.
In the short term, however, we can expect proliferation, fragmentation, fractalization in all its forms. We can expect the illusion of plenty of choice to continue driving sales, and more and more products to fulfil needs that even the customer doesn’t know he has.
Devangshu Dutta
May 16, 2009
The world’s largest retailer earned bouquets as well as a few brickbats when it recently opened a Hispanic version of its large store format, named Supermercado de Walmart. The signs around the store are in Spanish as well as English, selling traditional Mexican national brands as well as traditional Hispanic food like tacos, tortas, aguas frescas, sopes, carnitas and barbacoa at the chain’s customary low prices.
The surprise, if any, was that this store was not in a city in Mexico but in Houston, Texas, USA.
Wal-Mart’s logic behind the format is that it would be more relevant to the heavily-Hispanic population in the catchment of the store in Houston, and that it was a natural evolution to what they had been doing for years.
However, some customers and observers do not agree. Quite a number of people are up in arms against this “pandering to immigrants”, which they see as a threat to the unity, homogeneity and identity of the United States of America. One internet commentator condemned this segregation with a rather unique view, saying that segregating customers like this was actually “racist” and belittled the Hispanic customers who live in that area.
We should probably wait for the dust to settle on this debate. Spanish-speaking customers may actually respond positively – or not – to this new format. Yes, some defensive or aggravated English-speaking customers may also boycott Wal-Mart over this move.
As for me, I believe that it is a good move for Wal-Mart to test how far customization can help their business and how finely they can tune their response to customer demands, because they will need all the learnings they can get to effectively tackle markets that are even more different around the world.
Of course, many retailers and marketers in a market such as India would be puzzled by all this fuss. After all, if a Chennai-based company opened stores in Maharashtra, it wouldn’t put up signs in Tamil, neither would a Punjab-based retailer expect its customers in Imphal to understand promotions in Punjabi. Fragmentation and customization is a fact of life to the Indian retailer.
Or is it really that clear?
In fact, India has its share of marketers who seem to think and plan mainly in upper income metropolitan-English, and this bias creeps in not only in the content and structure of promotions but also, unfortunately, influences the merchandise mix. Even while PowerPoint presentations are made about how diverse the country is, and how it is possibly more like many countries rolled into one, we often make use of cookie-cutters for designing our product plan, our marketing strategy and everything else that defines the retail store and the customer experience.
Now, before I am labelled unfair for making sweeping generalizations, let me also say that other than any such urban English bias, there are also another couple of reasons why a retailer may take a template-based or cookie-cutter approach to the market.
Firstly, if you’re launching a new retail chain, there is a need to derive efficiency by driving scale as quickly as possible. Repeating the product formula across locations allows a retailer to increase the impact of merchandising efforts in terms of additional margins due to volume margin terms and better negotiating power with the supplier. Also, the management effort is used in a much more focussed manner, lowering effective management costs.
Secondly, there is the need to demonstrate a consistent image across the entire footprint of the chain, and to appear to be a chain. Repeating the product and presentation formula reinforces the common image and branding.
However, the pertinent question is whether there is any point in following a consistent identity if it appears alien and irrelevant to most of your target customers? In a category such as grocery, where the customer don’t really shop across multiple stores in a chain, is it better to be locally relevant rather than consistent across the country or even a region? Clearly, if you have a national or international template that is locally irrelevant, you don’t have any chance of succeeding with the consumer.
On the other hand, is it really organisationally possible for a chain-store to be local, and if so how can it best strike the balance between chain-wide consistency and tweaking the offer to provide local focus?
To my mind the starting point is the definition of an identity based on a clear value proposition and operating principles. This includes a range of factors from the visual elements of branding to how the staff stack shelves or interact with the customer.
The next step is to make the merchandise locally relevant, because that is what creates the transaction. The answer to “how much local” would also provide the answer to “how the locally-relevant merchandise should be managed”. Organisational models could range from entirely centrally-managed local merchandise and data-driven decisions, to central management of range architecture and purchases but local pull-based replenishment, to outright purchase from local vendors by the specific store’s management to create a truly local store.
Of course, devolving range and purchase decisions to local management raises issues about maintaining control as well. To a certain extent processes and system can help to mitigate the risk of fragmentation of the identity or potential mismanagement.
But the strongest glue is culture, as the manifestation of the organisational identity. Culture defines most strongly “the way” the organisation works.
Imagine the business as an individual with a well-defined personality. In different cities that individual might speak different languages and dress in different clothes, but still express the same values.
With a well defined and well expressed organisational personality, localisation can occur without fear of corruption of the brand identity, consistency and controls. Then the chain-store can truly become a local store and part of the consumer’s life as it is.
The other choice, of course, is to wait for a significant part of the local consumer to adapt to your international or national template. Would you be prepared for that?
Devangshu Dutta
May 9, 2009
Bernice Hurst, Contributing Editor, RetailWire mentioned the “Let Children Grow” campaign in the UK jointly promoted by The Independent on Sunday newspaper and the highly respected gardening charity, the Royal Horticultural Society (RHS). Launched in 2007, the RHS Campaign for School Gardening, sponsored by the food and grocery retailer Waitrose, is a nationwide scheme designed to encourage schools to create gardens and teach children the skills of growing plants.
It is described as “an ambitious initiative to encourage the nation’s children to grow their own fruit and vegetables”. The programme targets deprived areas, particularly those with combinations of poor health, low income and levels of aspiration. By working with young people, the idea is to improve their health while teaching them what to eat and where food comes from. RHS research suggests it can “help improve academic achievement, behavior and confidence among pupils”.
According to the Independent on Sunday, most of the children “are learning for the first time about gardening, and with it the enjoyment of fresh air, appreciation of the environment, healthy eating and in turn the prospect of a longer life.”
Bernice Hurst asks, “Can/should retailers encourage and sponsor such education programs to inspire consumer loyalty?”
As far as I can tell, if there is a country in love with its gardens, it is the UK, so this should be a hit with the parents and the teachers.
Pre-teens certainly don’t mind getting dirt under their fingernails, so it should appeal to them as well.
Whether this has any tangible impact on Waitrose’s image and business remains to be seen but, then, some things should simply be done because they are the right thing to do.
The RetailWire discussion is here: Looking at Literal as Well as Figurative Growth, and the Independent article is here: Digging for victory: Schools back gardens plan.
Devangshu Dutta
April 15, 2009
The organic movement has touched a variety of products, including clothing, cosmetics and home products. Possibly the most emotive area is organic food, because food products are directly taken into the body while other products have a limited and external contact.
In a sense, before the appearance of industrial agriculture and the application of synthetic nutrients and pesticides, all farming was organic. In fact, the traditional Sanjeevan system of India dates back several millennia.
Even the existing organic farming movement has been around since its founding in Europe in the early-1900s. This was initially treated as fad and its proponents were seen as eccentric (at best) or insane. However, as damage to the environment and to human health became a bigger concern, organic farming emerged as the healthier option.
Organic farming is based on the following fundamental premises:
The aim is to drive a more healthy approach all around – for the environment, for people, as well as for the animals and plants.
The organic trade (all products) is currently estimated at over US$ 40 billion globally, with an annual growth of approximately US$ 5 billion. Organic production is driven today more by demand than by supply – in many cases supply constraints of certified organic produce is more of a concern than the market demand.
Every year, increasing numbers of consumers consciously buy organic products regularly or occasionally on the basis that it is good for them and good for the planet. Certainly, true organic farms do not use synthetic materials, avoiding damage to the environment and can help to retain the biodiversity. Whether measured by unit area or unit of yield, organic farms are more sustainable over time as they use less energy and produce less waste.
It is not as if, after decades of individual enthusiasts pushing their ideas from the fringes, consumers have suddenly become more environmentally conscious. This mainstream awareness has possibly been pushed up in recent years by the involvement of large companies which have spotted the tremendous growth of a profitable niche. “Organic” is the new speciality or niche product line that can be priced at a premium due to the greater desirability amongst the target consumer group, with potentially higher profits than inorganic products or uncertified products. Today, at least in the two largest markets (the USA and Europe), large companies have the lion’s share. For instance, statistics from Germany show that in 2007 conventional retail chains sold over 53% of organic produce, while specialist organic food retailers and producers lost share during the year. Similarly in the US, after the development of the USDA National Organic Standard in 1997, significant merger and acquisition activity has been visible.
However, as the interest in organic products has grown, so have the noise levels in the market. With that the potential for confusion in customers’ minds has also grown.
In day-to-day conversations, we tend to treat organic as superior to inorganic. But the reality is a little bit more complex.
For instance, we expect organic products to contain more nutrition and be better for our bodies. While this may be true of organic animal products compared to their inorganic counterparts, it has not been demonstrated for plant products, other than anecdotal experience of taste and appearance.
There are studies that suggest that inorganic farming can produce more crop per acre and more meat per animal, and is, therefore, the better option for a planet bursting with overpopulation. (Some proponents extend that argument to genetically modified foods as well, but let’s stay away from that for the moment.)
However, there are also other studies that counter this argument by suggesting that the organic farms can end up being more efficient and productive in direct costs, yield and long-term sustainability.
Then, the big question is: if organic foods are no better nutritionally than inorganic and could be as productive for the farmer, are organic brands just skimming the gullible customer while the going is good?
We might expect certification and regulation to clear the air, but in many instances these leave out as many things as they include. Labelling is yet another concern. Countries where labelling is more stringently monitored allow logos such as “100% organic”, “organic” (more than 95% organic ingredients) and “made with organic ingredients” (over 70% organic ingredients). In other countries logos and where labelling may be less strictly monitored, the use of the term organic is far looser and even more confusing. What’s more, the usage of terms such as “Bio” or “Eco” can also mislead consumers into believing that there is something distinctly superior about the product they are about to buy when, in reality, it is often only a marketing gimmick.
Further, just because something is certified as organic does not mean it is a higher grade of product. Organic produce may end up having a shorter shelf-life, or may also be otherwise inferior to inorganic produce in the store. In fact, as the KRAV (Sweden) website states: “The KRAV logo is a clear signal that the product is organically produced but does not say anything about the quality. That must be guaranteed by the producer, i.e. yourself”. This is similar to saying that the fact that someone has a management certification from a certain institute means that he or she passed the tests of that institute in a particular year, but that does not automatically make him or her a good businessperson.
Countries and regions that have a poor record of environmental consciousness, poor transparency norms, are also not seen as the best source for organic produce even if it is apparently from a certified producer. In some cases, certification may be carried out second-hand and unverified, leading to instances such as the one in 2008 where the US retailer Whole Foods pulled out pesticides-laden “organic-certified” ginger that was shipped from China. The mixing of inorganic ingredients of uncertain origin, especially in blended products such as juices or snacks, can also make a mockery of the organic labelling.
Another visible concern today is the carbon footprint, and some people raise the question whether buying local (whether inorganic or organic) may be less environmentally damaging than importing produce from distant countries. In such instances, the evidence of lax certification, such as the Chinese case mentioned earlier, takes support away from the cause of organic imports.
Arguments have also been raised about whether the larger “organic” factory farms merely follow the letter of the law rather than the principles behind the organic movement? Small organic farmers allege that large organic-certified factory farms – especially those selling animal products – do not really follow the core principles of “natural” growth, and confine their animals in unnatural surroundings.
With all these arguments and counter-arguments flying about, some organic (or nearly organic) producers elect not to be certified, letting their customers vote with their wallets. Some of these smaller farmers may be driven by economic necessity since certification could be costly and cumbersome, while others may just find it more feasible to stick with a local sales strategy where the customers are able to physically see the organic nature of the farm.
It’s clear that all of these questions will take years to sort out – through debate, research, legislation, as well as social and commercial pressure. Meanwhile, most conscientious retailers and concerned consumers will need to do their own studies to educate themselves, and will need to examine each product for genuineness of the organic promise.
And, if you are not quite that savvy, the final message would be: “caveat emptor” (“let the buyer beware”).
