Consumer Marketing Archives

UK Brands Face Financial Crisis

September 12, 2018 by Toby Desforges Leave a Comment

Engage Management Consultants have recently concluded a study that suggests UK brands face a potential financial crisis in the short term. Whilst the UK manufacturing industry as a whole faces slow growth rates and rising input costs driven by currency devaluation, the UK’s consumer brands face a unique set of financial pressures arising from the actions of their retail customers. Here I look at these unique pressures and look into some of the actions that leading brands are taking to mitigate the worst effects.

For decades brands have depended on the supermarket trade for much of their sales but Engage’s study shows the supermarket industry to be in systemic decline. Supermarkets and larger hypermarkets together currently deliver over 70% of brand sales for many manufacturers, therefore, this decline is not only bad news for brand growth but it is also likely to undermine the financial health of UK brands.

UK Brands and Retailers are Poor Bedfellows

Major supermarket retailers have become effective at encouraging investment from brand manufacturers. By demonstrating the value of their shopper base and using price promotions to build this base further, they have secured greater levels of funding. This has never been an easy relationship: UK brands and retailers often have conflicting goals and retailers have driven a hard bargain. Already, many manufacturers find that, in the UK, they spend up to 15% of gross sales to support their brands in supermarkets and hypermarkets.

In today’s environment, supermarkets are seeing footfall decline as shoppers turn to new retail environments for grocery purchases and this is leading to new, more aggressive trading strategies that will erode brands’ financial performance potentially provoking a financial crisis for some UK brands.

Retail Consolidation

The UK grocery sector has long been dominated by large players however, the newly concluded merger between Tesco and Booker and the forthcoming merger of Sainsbury and Asda will make the UK grocery sector one of the most consolidated in the world, with potentially more than 60% of the market’s sales in the hands of just two players.

Mergers of this scale are bad news for sales teams. They force sales teams to renegotiate. Often historic deals that are fraught with discrepancies which teams must unpick. but also the newly-created entity demands both readjustment and recognition of its larger trading status. Recent similar mergers in other markets, for instance, Thailand, have led to a reduction of margins in the order of 1.5%, which is significant in an industry who’s average margins had fallen to just under 10% by 2015 (according to Deloitte).

Retail Price Competition Stresses UK Brands

As the supermarket industry declines and the number of players reduces, competition is set to increase. Incumbent players will seek to drive greater market share even before the Sainsbury / Asda merger goes through. Naturally, they will do this by driving retail prices down in their stores with the cost of these price reductions largely being passed on to manufacturers.

At a time of increased cost pressure and growing uncertainty about the impact of Brexit this will also inevitably lead to lower trading margins for brands in the UK, both this year and within 2019. But price competition and changes in shopper behaviour are also likely to impinge on the return on capital employed that retailers enjoy which means they will take further action that will impact on their suppliers.

Retail business model restructuring

Retailers depend on returning high levels of cash to underpin the low operating margins they make. This high level of liquidity enables supermarket retailers to deliver attractive returns on capital to their investors. Engage’s research has uncovered that major global players like Tesco and WalMart have seen a consistent decline in their returns over the last five years. As a result, both retailers have taken two significant steps to address this.

Firstly retailers are reducing the inventory they hold by cutting the number of brands they stock and by holding lower inventory of the remaining brands on their shelves. As a result the total sales that a brand enjoys from retailers taking such action reduce, on average, by close to 2%.

Secondly, retailers are simply paying more slowly. In Tesco’s case bills are paid 10 days slower on average than they were 5 years ago, reducing some UK brands’ ready cash flow by over 3% per annum.

Tough choice to avert a financial crisis

All this means that Finance teams in the UK are now making tough calls on their businesses. In our conversations with functional heads across Sales, Marketing, Insights, and HR, we are consistently hearing that budgets are being slashed. This means that bonuses are smaller and harder to come by, above and below-the-line activity budgets are being reduced or ring-fenced, research plans are being pared back or canceled and employee development initiatives are being shelved.

Industry leaders respond

The leading lights in the industry are doing just this: rapidly taking proactive steps to mitigate risk and even prosper from the countless opportunities that this new environment presents. Many of the largest players are currently taking steps to better understand the fast-evolving UK retail landscape, to reassess retail channel priorities as well as to redefine and crystallise future sources of brand growth.

This is leading to a concerted multi-functional effort across consumer marketing, customer marketing, and sales, as these combined teams collectively reconsider customer priorities, build more integrated brand and customer plans and determine a vision for the ‘store of the future’. Many of these leaders are taking the opportunity to assemble real and virtual customer-focused teams across all relevant commercial, financial, operational as well human capital development functions, with the aim of blending the best resource to deliver against cross-functional initiatives which will underpin future sustainable growth.

These businesses are well placed to weather the storm, however, they represent only a small minority of the UK’s branded manufacturers. Many of the others are struggling to identify where to start and how to engage cross-functionally to formulate a response.

There are accessible resources available

To support leaders and managers in the industry during these tempestuous times, Engage has partnered with a team of UK and Global industry experts in order to build a roadmap that describes the key actions that companies should be planning for the future as well as helping them to identify immediate opportunities to begin working together ever more closely as a team.

Both the roadmap and Engage’s findings are freely available to managers in the consumer goods sector. If you would like our experts to share these with you as well as taking the opportunity to discuss some of the specific issues that you face, then please get in touch.

Promotions – a hard habit to break

June 18, 2015 by Toby Desforges Leave a Comment

I work in an industry that is addicted to promotions. An average consumer goods company will spend 10% of gross sales on promotions. Applied to the world’s 250 leading consumer goods companies this equates to an annual promotions spend of close to US$310 Billion. That’s roughly US$44 spent for every person on the planet and nearly twice as much as is spent on cancer research every year in the EU. And yet research suggests that less than one third of promotions break even (see page 18 of “The Shopper Marketing Revolution“). Promotions have become a habit that many will find difficult to quit, even if ultimately it may kill their business.

How did we get hooked on promotions?

Let’s be honest, promotions were not always a bad idea. Every now and again a great offer enticed new buyers to the brand and get loyalists to stock up or prevent them from trying something else. In those days promotions could be planned well in advance, production could gear up for them and they’d even become an event. Retailers, then, unlike now, were unconsolidated and the extra sales were a welcome bonus from an appreciated supplier.

Then the world of marketing changed, consumers stopped attending to adverts and retail became dominated by massive brands and so promotions became a more important part of the effort to persuade consumers to buy the brand in-store. As retailers grew, promotions then became an essential cornerstone of both their corporate profitability and their brand positioning. When the balance of power shifted towards the retailers, promotions became an essential part of the contracts manufacturers signed to get their goods into stores.

The pernicious promotions addiction

Today promotions are a habit. As shoppers we are used to stores and websites dripping with messages about the latest offers. Manufacturers dedicate not only huge financial resources to promoting but also huge human resources. Over the last couple of weeks, I’ve been working with two very different companies in very diverse markets and yet in both, managers estimate nearly 80% of the time is spent planning, executing and evaluating promotions. Retailers too are preoccupied by promotions; Morrison’s is just the latest UK retailer to announce further price cuts in response to declining sales.

This is a pernicious addiction: some brands claim that 80% of their sales are made on promotion and others report they are on promotion more often than not. Demand for most brands is simply insufficiently elastic to pay for this: Even a reasonably profitable brand (making say 25% EBIT) would have to sell 66% more in order to break-even on a 10% price discount (see page 219 of “The Shopper Marketing Revolution“). According to Deloitte’s, the average composite net margin of a global consumer goods business is 9.6%, so for most securing a break-even is probably economically impossible.

Promotions are a hard habit to quit

So why not just quit? The blunt answer is either fear or ignorance. Fear is a powerful reason for not changing behavior in any context. The risks of stopping promotions are clear: shoppers might go elsewhere; retailers might withhold support, or; competitors might fill the gap. All of these would be reasonable reasons to continue if they were proved true but so often they are not, which leads to the other reason why we continue to promote which is ignorance.

In truth most managers don’t know if shoppers would leave the brand or not, but even if they did, many managers have no idea which shoppers would leave. In most categories the market can be split into deal buyers and loyalists. The consequence of losing deal buyers would certainly be lower volumes but concurrently could also drive better profits. For many, today, it’s tough to access this equation so the risk of quitting remains unquantified.

Likewise discussions with retailers almost always revolve around price and margin despite nearly 30 years of effort to change this. In the absence of tried and tested alternatives, maintaining the status quo is far easier. Lastly, since most manufacturers are unprepared to change, it’s almost impossible to gauge what the competition will do and so the habit persists.

Breaking the promotions habit

Knowledge is the only cure for fear and ignorance. If brands want to learn what will happen if they stop promoting, they could just stop and find out, but that’s fraught with risk. The logical alternative is to test and learn in the same way tech start-ups do: Try a limited, targeted pilot and see what happens, take the learning forward into the next pilot and keep learning until you have so much knowledge about what works and what doesn’t that fear and ignorance become things of the past.

The technology now exists to micro-target shoppers and retail has always been a phenomenal laboratory, so defining a discrete shopper group and a small group of stores makes this sort of testing easier. If the risk is still too great then virtual stores can be a solution. And whilst its potentially costly to conduct research in this field, the payback is enormous – breaking even on every promotion would double the profits of the almost everyone of the top 250 consumer goods firms.

Let us help

We’d be delighted to help you quit your promotions habit, if you’d like to know more about how we can help, contact me.

It’s time to integrate consumer, shopper and digital marketing

October 22, 2014 by Toby Desforges 1 Comment

Ages ago I wrote a blog suggesting that digital marketing did not yet mean shopper marketing. Back then digital marketing was all about getting positive word-of-mouth whilst shopper marketing was about delivering the best experience in-store and both were very, very different to consumer marketing.

But since I wrote that commentary the world has changed somewhat: mobile makes constant communication a reality; it’s now well-accepted that an awesome digital campaign is not measured in ‘likes’ but in buys and retail has become ‘omnichannel’. Today it’s increasingly difficult to draw hard lines between behaviors of consumers and shoppers and it’s impossible to ignore the role of digital in influencing both.

Companies have also changed since I wrote my original article. Most consumer goods businesses we work with have invested in headcount to build shopper and digital teams. However, these teams often seem to be treated as entirely separate entities from the consumer marketing team and that, to me, is a mistake.

Consumer marketing and shopper marketing should not be separated

A marketer’s mission is to drive the consumption brand. This is done by tapping into consumer’s needs and desires, unlocking consumption occasions and constantly enhancing the usage experience. But no product can be consumed unless it is first bought by a shopper. This means that the requirement to change consumer behavior is inextricably linked to the need to change shopper behavior. Separating the process of developing consumer strategies and shopper strategies increases the probability that the link between the two will be broken leading to inconsistencies and inefficiencies.

Digital is media not marketing

I don’t get why ‘digital marketing’ needs to be a separate school of marketing. I see clearly the value of being able to direct highly targeted communication and the major benefits of measurability; I fully get the complexity of honing content to ensure the right messages reach the right people at the right times and I understand that there are a bunch of skills required to make this work brilliantly that I don’t have.

BUT this is just as true in traditional advertising.

I don’t call advertising “marketing” because I recognize advertising as a tool that marketers use to get results. So I’m confused as to why digital needs to be a separate function of Marketing and as to why it needs to be separate from traditional consumer marketing or to shopper marketing. To me digital tools are equally valuable in marketing to consumers as they are in marketing to shoppers, so surely treating digital as a separate discipline will ultimately also lead to incoherence too, won’t it?

Consumer, shopper and digital are all “Marketing”

I hope that it won’t be very long before the terms ‘consumer marketing’, ‘shopper marketing’ and ‘digital marketing’ cease to exist. Traditional consumer goods marketing is changing to take on a broader view of the discipline that recognizes that modern consumer brands must market not just to consumers, but also to shoppers and to retailers. None of these tasks is possible without the use of digital platforms.

Each of these tasks is of equal importance and all require both strategic consistency and executional specialization to be successful. However the requirement for executional specialization should not determine the structure of the marketing organization. As the world becomes more inter-connected, marketing strategies and organizations must also become more integrated. In short consumer, shopper and digital marketing must all become “Marketing”.

Integrating consumer, shopper and digital marketing

When Mike Anthony and I wrote our book “The Shopper Marketing Revolution”, our hope was to create a model that effectively integrates consumer, shopper and customer marketing. Perhaps it’s time we wrote a new edition to reflect the changes that have happened since we finalized the text early last year. However, I still believe that marketers that can clearly define which consumers they are targeting, what shopper behavior they want to create and where that behavior can be created have a fighting chance of creating a truly effective marketing mix which will drive financial returns.

I believe what’s now essential is that organizations embrace the ideas that consumer marketing and shopper marketing are simply “Marketing” and that digital is part of the marketing process. CMO’s should recognize that their teams are responsible for the ‘total marketing’ of their brands and that requirement for specialist capability does not necessitate the creation of organizational silos.

If you feel the same way (or if you passionately disagree!), please do share your thoughts here.

The Future Of Grocery Shopping 

May 16, 2013 by Toby Desforges 1 Comment

Ten years ago, if you had a shop selling books, airline tickets, music and video and consumer electronics, you probably weren’t too bothered by e-commerce. Sales on the internet were a marginal thing; there was little evidence to suggest the mass market was going online. Today if you still own a shop in these areas you are either highly specialized or going out of business. Nobody can argue that, in these categories, online shopping has not radically changed the retail landscape. Today this is far from being true in grocery retail. So should CPG marketers worry that the future of grocery shopping might be radically different to what we have become accustomed to today? [Read more…]

Reducing Trade Expenditure – Think ‘Consumer First’ Not ‘Store First’

November 20, 2012 by Toby Desforges 4 Comments

In 1995 POPAI told the world that 70% of purchase decisions were made in-store and in May this year they announced their latest research showing that this number had climbed to 76%. Manufacturers around the world have seized on these figures to justify progressively higher levels of expenditure in retail. [Read more…]