Number 30: Spring 2005
Retail Evolution
By Martin Payne
Editor's comment: The retail environment is very dynamic with the emergence of major chains operating across countries but also room for specialist or niche stores. At the same time, the way in which retailers operate or communicate with their customers is offering new opportunities.
One of the issues that we have been tracking at Through the Loop is the retail environment. This is a factor that has major implications for manufacturers as well as other retailers and service providers. Consequently, a strong understanding of how retail is evolving is crucial in developing business and marketing strategy.
While there are many factors impacting on retail, the growth of on-line shopping is starting to have a major impact on the retail environment. This was clearly visible in the UK in December 2004 with many major retailers reporting poor sales at a time that is traditionally their busiest. While some companies reported good seasonal sales, other retail chains had a poor sales period and this suggests that their offer may have become out-of-tune with what the market now demands. Conversely, on-line retailers reported buoyant sales. Recent research has indicated that on-line expenditure is accounting for a larger share of consumers’ wallets with sales on-line in the UK growing by over 27% in 2004. However, this is about more than an apparent switch from bricks & mortar to on-line retail and could be an indication of a more significant consumer shift. It could indicate greater cynicism on the part of consumers who firstly may have tired of retailers selling Christmas products from August onwards and, secondly, postpone their shopping knowing that the prices will be reduced. Clearly, retailers have to rethink how they view consumers.
There are also signs that manufacturers are looking to become more responsive to the growth of retail groups. The recent takeover of Gillette by Procter & Gamble could be seen as building volume to work better with major retail chains such as Wal-Mart. More likely it is Procter & Gamble looking to achieve a global balance of power with the larger retailers. The larger retail chains have held a level of control due to their position between the manufacturer and the consumer. While manufacturers have been looking to address this issue, there are now a number of areas or issues that suggest the “power struggle” is becoming more even.
Retailers have also found that their growth is limited within their national boundaries. While some retailers have moved into new geographic markets, this is more difficult with a bricks & mortar operations and so they have been forced to look at new ways to grow business within their home countries. Their marketing strategies have had to become more sophisticated.
There are now a number of issues that are leading retail development and offering new possibilities for retailers and manufacturers to address consumer opportunities. These include the following:
- The ability to develop greater consumer understanding through improved deployment of customer relationship marketing.
- A need for a more flexible approach.
- An opportunity for specialists.
- More in-store communications using technology.
Closer than close
Customer relationship marketing (CRM) has always been at the heart of retailing. It is usually the retailers who have the relationship with consumers, not the manufacturer. CRM is about relationships, not technology although recent developments in database marketing have enabled retailers’ CRM programmes to become more sophisticated
One of the major factors that has supported the rise of Tesco has been its Clubcard loyalty scheme. Unlike many other so-called loyalty schemes, the Tesco Clubcard is not a marketing promotion but it is a process for collecting consumer information that not only allows more personalised marketing communications that are more appropriate for consumers but it is at the core of the company’s business strategy. Clubcard is a pillar of the strategy around which decisions are made for different elements of the company’s operation. This has helped Tesco to increase its market share lead in the grocery market.
Similarly the ability of on-line retailers to track consumers’ on-line behaviour, either purchasing or viewing, provides valuable consumer information that feeds back into recommendations for consumers and detailed knowledge of consumer behaviour for the retailers.
While other retailers may not be as advanced as Tesco in their tracking of consumers, they do have the ability to look into shopping baskets. As a result they tend to know far more about consumer behaviour than manufacturers. However, the development of technology with direct communications and distribution channels provides ways in which manufacturers can develop more understanding of consumer buying behaviour and ways in which they can influence this. Could this help to shift power back to the manufacturer? This may be more difficult in practice as retailers are able to view consumer purchasing behaviour across a large number of manufacturers while the manufacturers can only analyse consumer activity within their own product range. Retailers still evidently have a clear advantage here.
More flexibility
Many retailers have become more flexible in their operations. This has been essential because of the increasing competition and the more discerning consumer. In the fashion sector, for example, retailers that focus on seasonal collections may struggle against newer entrants such as Spain’s Zara. The fashion retailer has an approach that is, in some ways, not far removed from that of the direct PC company Dell. This means that it is not left with excess inventory that needs to be sold cheap to make room for the next collection. Zara has very fast turnaround times and will shift stock from store to store from poor selling stores to ones where the line sells well.
End of season sales may be excellent for consumers but for retailers they represent a way to dispose of excess inventory. This is unlikely to be very profitable or image-enhancing. A more flexible approach means that the retailers will be selling what consumers are buying. The elimination of stock clearances will improve profitability and enhance the retailer’s brand image.
Flexibility can also mean being more adaptable to individual consumers. This could include introducing differential pricing to encourage off-peak store usage, therefore maximising staffing in the store and reducing checkout waiting times. Flexible pricing could also be used to encourage trial of different products or visiting different areas of the store.
Big is better?
Recent decades have seen the growth of major retail chains and the emergence of so-called category killers, especially in out-of-town locations and, consequently, the concentration of more power in the retailers’ hands. The focus may have shifted from the manufacturer to the retailer but what about the poor consumer? The large retailers may have brought prices down but at the expense of what? It can be argued that consumer choice has been compromised. A recent report noted that the only way to tell which town’s high street you are in was to listen to the accents of the shoppers. High streets have become increasingly similar with the same retail chains, not just across the UK but also across international markets. In many categories retailers may stock just the market leader and number two brands alongside its own label. Not only does the consumer have less choice but smaller manufacturers are unable to achieve distribution and it is harder to launch new products.
Will this bubble of retail expansion burst? In the short term, it is more likely to be issues such as planning restrictions or a shortage of suitable sites that will slow down expansion rather than halt or reverse it. The success of Dell is well-documented but other manufacturers may look at alternative distribution as a way to reach consumers, a good example being where products can be downloaded or purchased digitally such as music or films although electronic books do not appear to be the success that many forecast. However, retailers can also drive new distribution channels, both for expansion and protection. Tesco’s development of alternative formats or Amazon’s recent move into DVD rental are examples of this.
The concentration of retail power into fewer hands could be seen as contrary to a key consumer trend towards more individual expression and individuality. Clearly a different town or shopping centre will no longer provide alternative shopping options so consumers may search out specialist retailers, possibly in remote locations (on-line, mail order), in order to find an offer that is different to what is otherwise available. Forward-thinking manufacturers have moved from mass marketing towards more targeted offers. Where do retailers stand in this area? Some retailers have developed specialised formats that target different markets. The Co-op has long been a retail group with activities in many areas. Tesco has become involved in increasingly more product areas but even within the core grocery business it has developed a number of formats that target different shopper types or shopping occasions. Despite its much-publicised problems, Marks & Spencer has moved its food business into dedicated Simply Food stores. More recently, these Simply Food outlets have been targeting railway stations and motorway service stations to reach a different type of consumer or occasion.
There could be a natural limit to how much retail chains can grow. Does the growth of these category killers actually inhibit consumer choice? Diversity could be the way forward for retailers that are looking to provide added value for consumers rather than a ubiquitous offer that does not vary from store to store, city to city or even country to country.
The Pros and Cons of New Technology
New in-store technology provides opportunities for retailers and manufacturers to reach consumers. In-store television networks are offered by individual retailers such as Tesco or through groups of retailers such as The Pharmacy Channel or dedicated channels in hair salons. These are already being used by major brands as a new way of developing point-of-sale communications with consumers. There have been claims of success for such ventures but will there be times when consumers do not want to be overloaded with commercial messages?
Technology may also be seen to be too invasive. There has been much discussion about Radio Frequency Identification (RFID) tags. These hold far more information than the traditional bar code and are already present on some products in some stores. They can be used to help a retailer identify an individual’s shopping habits or target consumers with individual offers. The introduction of the tags in some stores has already led to major consumer protests in Germany. Retailers and manufacturers must remember that the ability to gain consumer data through new technology may provide valuable insights for them but only if consumers accept the technology. This acceptance should not be taken for granted.
The way forward
It is clear that there are many new issues in retailing that open up opportunities for both manufacturers and retailers. Many of the new areas are as a result of the development of technology but there are also new business models and strategic approaches that have the ability to upset traditional retail structures.
None of this will work if strategy is not developed around consumers. The technology may be leading-edge but the key to its success is its ability to fit in with consumers’ desires and add value to their shopping experience without invading their privacy. It is the consumers who will determine the success or failure of any venture and so they should be at the centre of any new developments.
While the retailers still control the relationship between manufacturers and consumers in general terms, there are ways in which manufacturers can look to become closer to their target market or consumers themselves may start looking for alternatives to a “one-size-fits-all” retailer. Here there are new opportunities for both retailers and manufacturers.
Pool Version 2.0
© Martin Payne / Through the Loop Consulting Ltd 1998-2005