The past four years since the first Lockdown have seen fundamental changes and unprecedented trends develop that materially affect supplier and retailer businesses everywhere.
Whilst it can be left to others to (hopefully) explain the cause and purpose of the global Lockdown, pragmatic business people have to focus on how to cope with and optimise business opportunities amidst the resulting fallout. A key step has to be identifying the main trends emerging, where they are headed, how they affect us, and what to do about it…
Given that the greatest casualty of Lockdown was trust, we now have to deal with a world in which no one takes anything at face value, be it supplier, retailer or brand, and they want demonstrable value for money vs. available alternatives. Moreover, we have to deliver more than it says on the tin every time, to ensure profitable repeat purchases. If the consumer has to second-guess every element of the offering from a brand using letter-of-the-law rather than spirit-of-the-law assurances, then an alternative offering will probably appear more attractive…
Therefore, trust has to form the bedrock of all our relationships with consumers (See our August Editorial - Trust in the brand.
Shift from Brand to Own-Label:
Given the unprecedented increases in the cost of living arising from inflation-based price increases, it was inevitable that consumers would have to compromise on their need for brands and ‘settle’ for equivalent own-label products.
Brand owners were traditionally able to capitalise on a perceptible difference in quality by charging a brand premium. The problem for brand owners is that a consumer forced to settle for own-label may find the product was ‘not as bad as they were led to believe’. They may begin to query the size of the brand premium and may require extra inducement to return to the brand when things ‘revert to normal’…
Therefore, to maintain the current 55% (brand) to 45% (own-label) relationship, brands will have to moderate shelf-price increases in the face of retail brand improvements, and also advertise more effectively to brand loyals in the aisle via retail media, rather than via increasingly wasteful traditional media.
Meanwhile, it will be in retailers’ interest to try to preserve current brand/own-label relative shares in order to attract incremental retail media revenues. Thus, it is unlikely the current 55/45 split will reverse in the new norm…
Shift from Mults to the Discounters:
Again, unprecedented cost of living pressures has caused mult-loyals to move from major retailers ‘down’ to Aldi and Lidl in a search for more economic purchases via cheaper surrogate labels. As with own-label, many found the discounter experience was not ‘as bad as expected’, represented real value for money and helped them challenge the premium associated with shopping in the mults. All this on a brand / surrogate label balance of 10/90…
As long as current levels of inflation continue, it is unlikely that the appeal of the discounters will diminish, so they will continue to grow share at the expense of the mults.
Moreover, given that Lidl and Aldi are each bigger than Tesco globally (global sales: Aldi £123bn, Lidl £86bn, Tesco £65bn), each of the discounters can afford to sell at a loss in order to drive their UK market shares, if necessary…
However, with the advent of retail media, another dynamic enters the mult/discounter relationship. As you know, retail media networks are driven by the availability of good quality first-party data i.e. insights derived from measurable shopping behaviour arising from retailer loyalty card-based purchases of national brands. This means that for the mults, purchasing behaviour of their shoppers can be more valuable than basket contents. If necessary, the incremental revenue arising from the sale of this access to shoppers in the aisle can be used to cut shelf prices and retrieve share from the discounters.
In order to compete by securing retail media revenue, the discounters will have to adjust their brand/surrogate label balance to something like 50/50 from the current 10/90. It is probable the discounters will make this change before they surrender market share. It all depends on their global willingness to run local UK losses to maintain current momentum…
Shift from Primary Routes to Omnichannel Routes to Consumer:
Given that Lockdown has radically changed consumer value systems, we are in a consumer-centric new norm. In other words, those consumers who have survived, albeit under enormous pressure re their jobs, homes, increasing cost of living and constant uncertainty, they know their value. In return for their custom, they want to be able to buy anytime, anywhere, any place, in whatever way they require. This means suppliers will have to make their products available via every possible route to the consumer or suffer a loss of share to more flexible rivals. Suppliers will have to find ways of balancing fulfilment costs by supplying direct or via outsourcing, managing all prices & terms harmoniously in the process.
Either way, it is inevitable that the cost-to-serve will increase, making diminishing net margins a feature of the new norm. And having experienced omnichannel convenience, it is unlikely that new norm consumers will revert to limited access…
Shift from Offline to Online:
Success online means living with Amazon, operating to their standards of consumer-centricity, and still losing money… Many organisations entered online without realising the true cost of online fulfilment, with consumers unwilling to pay more than £5 delivery fees for drops that cost up to £25 to reach their front door. Meanwhile, Amazon was allowed by the market to take 30 years to gain a degree of coverage that enables it to make up to three parcel drops with each van stop, while rivals have to drive perhaps ten miles between stops.
These online rivals, along with traditional bricks & mortar retailers, also have to compete with Amazon’s 500m-strong catalogue in terms of available range. And as far as retail media revenues are concerned, Amazon are already achieving $40bn+ per annum.
When it comes to categories like healthcare, Amazon is in a position to offer diagnosis based on a combination of data from wearable tech, their knowledge of consumer lifestyle, consumption habits, food & non-food, and fulfil prescriptions to fit, deliver to patients’ homes and check progress. Compare that with a pharmacy’s current capabilities…
Moreover, with Boots currently for sale again, a £6bn acquisition could give Amazon an opportunity to provide a full national healthcare service at a stroke…
Shift from Providing More Than it Says on the Tin to Shrinkflation, Skimpflation and Slack-filling:
One of the more ominous trends arising from Lockdown fallout is the tendency of established brands to trifle with the trust of brand loyals by attempting to disguise price increases via a combination of shrinkflation, skimpflation and slack-filling. Regular readers will be aware of the ‘rationales’ put forward to justify the moves and defend against inevitable criticism.
Brand owners continue to point out that pack details give all necessary information, thus meeting letter-of-the-law requirements, ‘forgetting’ that consumers are driven by perception, the spirit-of-the-law i.e. their expectation based on years of brand loyalty, causing them to become increasingly aggrieved at their perception of being short-changed by a hitherto trusted favourite brand.
This anger may even result in them telling-a-friend: “Please me, and I will tell one friend. Disappoint me and ten friends will learn of my displeasure”. But in the new norm of social media influencers, multiply this impact by ten or even thousands to gauge the potential damage to brand franchise…
Shift from Near Zero Interest Rates to Current Normal Rates:
Following decades of artificially based near-zero interest rates that mis-footed private equity purchases of large retailers when suddenly faced with new norm borrowing costs, it was inevitable that the change to reality would cause tensions in some businesses. Recent startups, based on the assumption of continuing low rates, fell into the same trap. These positions will be difficult, if not impossible, to unwind.
And of all the trends outlined above, it is highly unlikely that current interest rates will revert to near-zero levels in the next decade, if ever. Too much damage has been done by Lockdown, and we are now in repair mode for the foreseeable future.
Overall, it appears that these unprecedented changes and trends are irreversible, and suppliers taking the risk of forecasting beyond one year ahead might benefit from acting on that basis…
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