Realistic Optimism, a keynote for the New Norm…

Success in business in unprecedented times means being able to accept the realities of the ‘here & now’ and going back to basics while rivals await a return to the old normal… 

As we approached the fourth (!) anniversary of Lockdown, and my family celebrated Mother’s Day in our favourite local restaurant, crowded to capacity with an eight-person queue awaiting tables, it struck me that despite the havoc wreaked by Lockdown fallout, good businesses that consistently delivered more than it says on the tin, have never had it so good. 

In fact, those businesses that refused to fall into a rabbit hole in search of Lockdown causes, but instead focused on dealing with the effect, going back to the basics of establishing what business are we in, agreeing consumer need, defining how we could meet that need consistently, and meet it better than available alternatives, every time, are doing well…

Recognising that the greatest casualty of Lockdown was trust, in that shell-shocked consumers now believe nobody. Trust was further diminished via a succession of moves by brands trying to cope with unprecedented cost increases. These moves, including shrinkflation, skimpflation i.e. ingredient dilution and drip-pricing, saw brand owners dilute hard-won brand equity by insulting the intelligence of their most loyal and increasingly savvy consumers in their assumption that the changes would not be noticed…

Moreover, when challenged, the use of Letter-of-the-Law defences, such as ‘full indications‘ of value re weight/volume declarations on pack, simply drew attention to the fact that consumers make their decisions to purchase based on perception, Spirit-of-the-Law ‘facts’, and retaliate via ‘tell-a-friend’ complaints to their social networks.

Thus years, even decades of building trust in the brand, that guarantee of consistency in offering, was traded for a theoretical gain in product profitability, as brand loyals switched to more trustworthy rivals and even own-label. Moreover, big, powerful brands that increased prices way above inflation ‘because they could’ are now experiencing loss of demand as consumers resist the scale of the brand premium and switch to own-label, find it comparable in quality and then have to be won back to the brand at extra marketing cost…

For the latest insights re the extent of Lockdown fallout, a stroll down any High Street will reveal rows of barbershops that are empty, save for a single barber consulting his mobile as he awaits a possible ‘walk-in’. Adjoining them will be pubs with too few drinkers for time of day, interspersed with restaurants that have more staff than guests…

The pattern is repeated amongst shops and supermarkets that are trying to cope with diminished demand, attempting to serve the needs of uncertain but increasingly savvy shoppers that demand demonstrable value for money, every time.

Meanwhile, the new Big Four mults are Tesco, Sainsbury, Aldi and Lidl, as Morrisons and Asda try to compete under the extra constraints of servicing excessive debt.

The evidence of Lockdown Fallout is all around us. This is our market in the here and now.

As practical business people, we need to optimise our business model within a context of these new realities. 

Welcome to doing business in the New Norm…

The one positive aspect emerging from the Lockdown turmoil is that in times of unprecedented market disruption, business opportunities abound, in that with many rivals awaiting a return to normal, those businesses that can accept market conditions ‘as is’, re-engineer their offering to meet the real needs of savvy consumers, better than available alternatives, and deliver more than it says on the tin, every time, have to win…

In short, those businesses that can ‘park’ issues like the cause of Lockdown and instead focus on managing its effect, have more chance of success in optimising the available opportunities.

Given that trust was the greatest casualty of Lockdown, the restoration of consumer trust in brands, both supplier and retailer, has to be a priority. Consumers should not have to second-guess at every stage of the buying journey. Moreover, given that the FMCG model is based on the fact that causing the consumer to make their first purchase of a brand is such an expensive process, the sale is made at a loss. It is only when the user’s expectations are exceeded by brand performance that they make a repeat purchase with less inducement that we break even on that second sale. Then, with luck, the second purchase leads to a third, at which point some profit is made. Trust is the basis of this process and has to be preserved above all else…

Given that in flat-demand markets, any growth comes at the expense of rivals – doing basic things better than the available alternatives has to be the way forward. This means being completely open-minded re assessing business and brand attributes in terms of need satisfaction compared with competitor offerings of their Product, Price, Presentation and Place combinations. Only if we can conclude that we have some competitive advantage (or can adjust the elements of our marketing mix to deliver a difference that satisfies a consumer) can we proceed…

The next reality has to be the current state of the customer base. We have to accept that the new Big Four mults are now Tesco, Sainsbury’s, Aldi and Lidl, as Morrisons and Asda slowly succumb to the market realities of servicing debt that became excessive when interest rates suddenly reverted to a more normal 5%+ after decades of artificially maintained near-zero costs of borrowing.

Although private equity-owned companies are measured in multiples of EBITDA, i.e. pre-tax Net Profit is less important, until it comes to refloating or selling the company, trying to grow market share by investing in price reduction makes servicing debt even more challenging. Excessive financial re-engineering only adds to the doubt…

The quick answer can be to sell off assets to help reduce debt; meaning reduce the size of the estate to a point where the company is more suited to the New Norm private-equity business model.

Add radical changes of company culture/management style resulting in the loss of key people and the result can mean that recovering lost share and growing the business becomes near impossible…

Post-Lockdown retailing was made for the discounters. Aldi and Lidl are each significantly larger than Tesco globally and are privately-owned with low levels of debt. They are thus capable of optimising UK market conditions in terms of growing sales and market share via good quality and low prices.

Furthermore, when necessary, they can choose to run their UK operations at a loss to achieve their ambitions. They will continue to grow share at the expense of Asda and Morrisons without fear of adequate retaliation…

Taking a longer view, the advent of retail media will radically change the financial dynamics of UK retailers. The sale of first-party data allowing access to a brand’s shoppers in the aisle will generate significant incremental and high-margin revenue for retailers that can supply good quality data via a large assortment of branded goods.

However, in the process, this will limit retailers’ ability to optimise the potential of consumer demand for own-label by causing them to have to maintain their current 50/50 split of brand and own-label in their assortments. This Retail Media revenue can be used to supplement the bottom line, allowing retailers to compete aggressively on price…

However, retail media growth will cause problems for the discounters in that with the 10/90 split of brand and surrogate label, they will not have sufficient brand data to sell. They will, therefore, have to radically change the business model to something closer to a 50/50 split by offering more brands in their assortments, or experience loss of market share as the price wars intensify…

All of these are the new realities and must be factored into business strategies. Above all, given that the uncertainties will continue, suppliers need to carefully monitor the financial health of their main customers, keeping in mind that bankruptcy happens very slowly and then too suddenly to allow any remedial action. This means continuously calculating the incremental sales required to recover losses when a customer goes bust.

There is still considerable Lockdown fallout damage lurking within supplier and retailer businesses, and it is crucial that you take remedial action before you read about another ‘unexpected’ casualty in your morning’s NamNews bulletin.

Realistic optimism means effectively managing these market realities in the New Norm, better than the next guy by applying the basics…