WPP_playbook2_Retailing in the recession_09 2009_15S - Page 1 - RETAILING IN THE RECESSION Playbook 2 THE SKY DID NOT FALL VOUC HER 50 OF % F 20 50 110 AUTUMN 2009 VE SA VE SA VE SA 1 THE SKY DID NOT FALL 1 2 6 8 10 12 16 20 22 26 THIS ISSUE Introduction Strategic Summary The Consumer Key Take-Aways - Consumers Retailers Suppliers Key Take-Aways - Retailer/Supplier Media Action items Resources his is the second in our Playbook series designed to help retailers and suppliers navigate through the recession. Because a traditional report is too static for these swiftly changing times, we’ve chosen to present our findings in a Playbook series that enables us to react quickly and to regularly review and renew our conclusions and recommendations. We headlined our first Playbook “THROUGH THE LOOKING GLASS.” That was last winter when the collapse of the finance system and the dramatic decline in the stock market had left consumers shocked, frightened, and disoriented. We suggested that consumers would progress through this recession in three stages, roughly analogous to the way individuals cope with—and emerge from—grief. Consumers then were in Stage One: Acute Distress, which is characterized by anger and sadness. We anticipated Stage Two: Acceptance and then Stage Three: Moving On. In this second Playbook, we assert that consumers today are solidly in Stage Two. Consumers have begun to spend, but they spend on items they deem to be truly important. Wallets no longer expand to accommodate wants. Rather, consumers are restricting their spending to fit their budgets. People are forced to make choices. But unlike the recent past, the critical choice is about which item to buy, not which credit card to use. We also see a fundamental shift in values taking place as increasingly consumers think more communally and consider the environment and product provenance when purchasing. That said, consumers are much happier to be good citizens when they’re saving money or at least not paying extra for the privilege. Retailers and suppliers who understand these new realities will add chapters to business lore. Those who ignore them will risk chapters of bankruptcy law. We believe that many of these changes are long-term, even permanent, and will remain in place even when consumers arrive at Stage Three. We take a closer look at these new realities in the Strategic Summary that opens this Playbook. Then we examine the consumer and analyze the implications for retailers, suppliers, and media. This analysis is converted into practical advice in the Take-Aways and Action Items. The Playbook series is specifically designed to benefit WPP clients with insights drawn from the organization’s unparalleled knowledge of consumers, retailing, brand and shopper marketing worldwide. For additional insights, please check out the Fast-Track briefings and TV programs produced by The Store—WPP. And refer to the Resource Directory at the end of the Playbook. The Playbook series, along with our regular The Store—WPP webcasts, podcasts, and The Store TV (www.thestorewpp.tv) will help you succeed in today’s most difficult and unpredictable economy. DAVID ROTH CEO The Store —WPP Europe, Middle East, Africa and Asia david.roth@wpp.com STRATEGIC SUMMARY 2/3 THE SKY DID NOT FALL To compete successfully in this world, manufacturers and retailers need to respond to reality as it exists in the mind of the consumer. THE SKY DID NOT FALL. Just a year ago, consumers stood in fearful anticipation of a global financial meltdown— or worse. Feeling vulnerable and helpless they stopped spending. Consumers have got used to the dark clouds. They feel less wealthy but also less helpless. Consumers are realizing that they’re in control. They know what they want, what it really costs, and where to get the best price. The consumer doesn’t want bloat in the size of packaging or stores. The ethos of the internet, where the individual is at the centre of a personally-created universe is now the reality of retail. To compete successfully in this world, manufacturers and retailers need to respond to reality as it exists in the mind of the consumer: my income, my spend, my store, my aisle, my products. Even when consumers feel financially secure again, and that day will come, they will continue to spend cautiously. They will continue to want more things and nice things. We humans are acquisitive animals. But out of self-interest, because it’s fashionable, or because we really care, we will be more self-conscious about our acquisitions and the impact we have on others, on the environment, and on society. Of course, we humans also are fickle and we will be tempted to return to the free-spending past. Not so easy: New consumer, meet new retailer. Retail is being reengineered to be simpler for the supplier, retailer and, ultimately, for the consumer. New consumer behaviours and values, reinforced by changes in the supply chain and the reduced availability of credit, will be difficult to reverse. 4/5 THE SKY DID NOT FALL Sustainability already has replaced disposability as the centrepiece of the retail marketing lexicon—because it’s the right thing, and because it’s good business. Reducing packaging, range, store size, energy consumption and waste has produced efficiencies. Some of these measures have been motivated by the need to control costs during the recession and have resulted in leaner, more competitively positioned organizations. Walmart is reducing the size of its stores, removing clutter from the aisles, and editing the assortment in every category. Reducing packaging, range, store size, energy consumption and waste has produced efficiencies. The new retailer will operate stores that are easy to navigate, respect the shopper’s time, and offer plenty of choice but less frivolity. Packaging will be minimized. And packages will be bundled according to quantities the consumer wants to buy, not the amount the manufacturer wants to sell. Products will be reliable, safe, and environmentally responsible. They will be offered at prices that deliver value, if not at the absolutely lowest price. The most striking indicator of this fundamental change is Walmart’s strategic “rollback.” The company that grew in 40 years to become the largest retailer in the world with over 7,000 stores in 16 countries producing more than $400 billion in annual sales is thinking smaller. In an initiative it calls “Project Impact,” Walmart is reducing the size of its stores, removing clutter from the aisles, and editing the assortment in every category. In a sense, it is performing a core retailing function—making shopping easier for the customer. But because of its global scale and impact, Walmart also is reshaping the nature of consumerism. Product selection in every category will be rationalized throughout mass retailing as suppliers respond to Walmart’s directives. In a related and important development, the decline in product range found in stores will be accompanied by the coming of age of e-tailing (online retailing) and m-tailing (mobile retailing) with shopping-based applications. When the bricks and mortar world is constrained, retailers and suppliers may find that their business model depends increasingly on the digital world as more consumers click online for product research, broader selection and the purchase reassurance found in online customer communities sharing product reviews and evaluations. AS THE SKY CLEARS, WE WE’RE BEGINNING TO MAKE OUT: 1. A new consumer who is more confident and determined to buy only what he or she actually can afford and really needs, who will reject a $3,000 computer with enough power to navigate a rocket in favour of a $300 netbook with just enough power. 2. A new retailer that operates smaller, well edited stores organized to meet the needs of the new consumer, not the supplier. 3. A new online retailing presence that moves e-tailing from its status as an addon to store volume to a place at the core of the business as a contributor to retail prosperity and brand development. Retail and manufacturer brands that understand and respond to these three phenomena can exit the recession recharged for success. 6/7 THE SKY DID NOT FALL ANXIETY IS SUBSIDING. There is still plenty to keep people up at night: unemployment, troubled mortgages, and diminished retirement savings. But consumers are adjusting. According to The Futures Company, consumers are rationalizing their purchases to fit within four strategies. Consumers are gravitating to the safe and familiar, they prefer the emotional comfort they derive from their favourite brands. THE CONSUMER 1. COPING Day-to-day life must go on. To cover the basics, like paying the rent and putting food on the table, consumers are adopting strategies to make their money stretch further. They are looking for the best value and are willing to shift to alternatives such as private label products if necessary. 2. RETREATING At the same time, consumers are gravitating to the safe and familiar, which means—all things being equal—they prefer the emotional comfort they derive from their favourite brands. Starting the day with a bowl of house brand cereal may deliver the same nutritional benefit as the national brand, but with less of a psychological lift. Similarly, consumers are spending more time at home, and increasingly favour local institutions and High Street stores to which they feel a strong connection. 3. ESCAPING These days, escape does not mean a wellplanned holiday off the coast of Spain. More often, escape is an affordable luxury that liberates the mind, at least for a moment, from daily pressure and financial stress. 4. RISK SHARING Most purchasing of durables is on hold. But when consumers need to purchase a big-ticket item, they are looking to minimise and share the risk. To stimulate the moribund car market, for example, some companies reassured prospective buyers with the promise of a full refund if the customer were to become unemployed. To win the loyalty and somewhat increased spending of consumers during Stage Two, suppliers and retailers must ask themselves how to best position their products and services against these four strategies. While consumers are more prepared to spend money today than they were in Stage One, a thinner wallet means that they can not afford everything they desire and continue to make trade-offs. The shift to own label is a particularly interesting coping strategy because it is a global phenomenon driven by a universal consumer interest in saving money. How own label plays out in Stage Two of the recession varies by market, however, depending on the maturity of the local own label business. In markets, such as the U.K., where own label has a long and successful history, consumers are starting to move back up to premium own label. This shift follows aggressive retailer promotion of their value own label at the start of the recession. It is an indicator of growing confidence that the worst of the recession is over. Shoppers are moving up selectively, however, according to TNS, the global market research firm. U.K. consumers also are shifting from own label back to branded products, according to TNS Worldpanel, a barometer of consumer purchasing. This behaviour suggests that today’s more sober shopper believes that branded products sometimes offer a greater value. In fact, the price difference between own label and manufacturer brands has narrowed as manufacturers promote aggressively to drive volume and defend against own label. In markets, such as the U.S., where own label traditionally has been weak and slow to establish itself, shoppers now are more assertively moving away from branded products to own label in order to save money, of course, but also because own label products are more available. Availability increased as retailers accelerated and expanded their own label programs as a strategy for driving volume during the recession. Own label penetration in less mature own label markets is set to grow. As a result of the Stage One and Stage Two consumer effort to save money and trade down if necessary, consumers everywhere have learned that sometimes the cheaper brand is good enough. Now, unless consumers can be convinced that a product is tangibly or emotionally better—whether branded or own label—they will select the less expensive alternative and pocket the savings. The consumer’s inclination to trade down or out of a category remains a looming threat. 8/9 THE SKY DID NOT FALL When shoppers do not want to be tempted, the straight forward price and product presentation of an underwhelming online site may be just what the shopper wants. KEY TAKE-AWAYS CONSUMERS Despite the difficult economy, the retail category grew by 7 percent in brand value last year. Consumers have become frugal, not ascetic. They live in homes, not monasteries. Make it easy for them to find affordable treats that they can enjoy, and justify. Well, maybe a new lipstick wouldn’t hurt. It’s not all doom and gloom. Despite the difficult economy, the retail category grew by 7 percent in brand value last year, according to the BrandZ Top 100 Most Valuable Global Brands 2009 study, produced by Millward Brown Optimor. That is not a bad performance considering the economic environment and the fact that the total value of the brands in the 17 categories included in the study increased by 2 percent. Lead me not into temptation. Consumers discovered another benefit of online shopping during this recession. Online they feel more in control and less tempted to add to their intended purchase with impulse buys. This consumer behavior may be a positive outcome of a negative characteristic of most online sites, which still are not as appealing, well merchandised, or seductive as in-store displays. When shoppers do not want to be tempted, the straight forward price and product presentation of an underwhelming online site may be just what the shopper wants. New media reaches new customers. It’s more important than ever to know where your customers are and how best to reach them. In a recent survey, JWT asked young adults in North America, the U.K., Australia and Brazil what they’d be willing to give up if budgets become tight. The most important items to keep—by a wide margin—were cable TV, mobile phones, and the internet. Fewer than 10 percent of the young adults would give up their mobile phones, while about two-thirds were willing to live without their magazine subscriptions. These preferences suggest that innovative use of new media may offer some of the most focused and costeffective ways to reach customers. 10/11 THE SKY DID NOT FALL The most important determinant of success in this difficult economy is not the sector served but the strength of brand equity. RETAILERS ARE SURvIvING. Those that supply basic needs, such as food and value apparel, continue to be somewhat less vulnerable than those serving more discretionary sectors. That said, the most important determinant of success in this difficult economy is not the sector served but the strength of brand equity. Retailers that continue to focus on their core business and execute well seem to outperform those who have attempted to compensate for softer sales by expanding into new and less familiar territory, according to TNS Worldpanel. Discount is thriving, of course, especially food discounting and apparel value players. But many of the mainstream food merchants, such as Tesco in the U.K., also are relatively strong because they fortified their brand proposition with a credible discount presence. In the U.S., chains that focus on the range of basic foods, such as Kroger, are performing better than the organizations known for premium foods and peripheral, higher margin categories. Drug is relatively strong as well because the category primarily serves consumer “needs” around which drug retailers mix a limited number of “want” items, so that the average shopping basket totals a modest $12, according to research by MVI. But it’s not only about price. The German-based food hard discounters, Aldi and Lidl, have taken their no-frills, cut-case, private label, limited range concept and added another dimension to their brands—quality. By communicating that their stores offer not just low prices on food, but quality food at low prices, the companies have widened their appeal, adding affluent shoppers to their core of lowincome customers. Retailers like Primark and Zara are similarly challenging mid-market retailers in non-food, with an offering in clothing that combines quality, even high-end fashion, with price appeal. In the U.S., value discounters like Family Dollar and Dollar General also are reaching more affluent consumers by refining their store prototypes and adding more consistent assortments. While special buys continue to produce a low-price image and a treasure hunt shopping experience, predictability in product range helps assure shopper satisfaction. It’s about price-plus. Price remains important but, even today, the customer wants more. The price-plus promise is made succinctly by Aldi—Spend a little. Live a lot.—and The Home Depot—More saving. More doing. While Walmat’s EDLP slogan, “Low Prices, Always,” would seem to be perfectly pitched for today’s shopper, the company retired those words in favour of the more nuanced “Save money. Live better.” RETAILERS 100% Value 12/13 THE SKY DID NOT FALL CONSUMERS ARE BACK. They’re in the stores, but making fewer shopping trips. The name of the game is conversion. Suppliers need to assist retailers in maximizing the basket size of each trip by converting shoppers into more categories. This effort helps a retailer take a greater share of the customers’ smaller wallet. It also leaves less money on the table for shopping trips to the competition. Therefore, according to Glendenning, the category marketing experts, suppliers need to present their categories in ways that project relevance, value, and a positive experience. CATEGORY RELEVANCE: Consumers need to quickly understand why a product improves their lives in some way, such as protecting their health or the health of their family, or adding a sense of emotional well-being. The more relevant the perceived benefit, the more the product will seem indispensable and a required purchase. CATEGORY VALUE: Value covers a lot of territory. It can be about price, convenience, an emotional experience, an educational opportunity or a combination of factors. It can be simple or complicated. One aspect of value is constant, however: value perception can not be left to chance. Suppliers need to explain value. Price is just a number until the supplier frames a context that makes the number relevant and appealing. CATEGORY ExPERIENCE: All the thought that goes into shaping the consumer’s in-store category experience can be reduced to this: Does it make it easier to shop? The follow-up questions are about then getting to a purchase decision. Does the experience add to the customer’s inclination to buy? Will the purchase make the customer feel happier, inspired, relaxed, productive, secure, somehow better off? SUPPLIERS The multi-pack quick fix for driving volume is history. It will be replaced by a more considered blend of ranges and products that together produce a desired margin. Suppliers need to understand that the Stage Two consumer is the new consumer. The consumer mentality has changed and “more, bigger, better” is no longer a reliable formula for category growth. In this challenging environment, retailers will depend on suppliers to help stimulate category growth. To grow share, however, suppliers will need to act counterintuitively, trimming their offering of stock keeping units (SKUs) until every item is relevant to the consumer and contributes to productivity. Suppliers who perform well will do well. Retailers will be more strategic about the categories in which they want to compete and the level of commitment will vary among the chosen categories. Suppliers can anticipate an overall sku reduction. Pricing will be more complex. The multi-pack quick fix for driving volume is history. It will be replaced by a more considered blend of ranges and products that together produce a desired margin. 14/15 THE SKY DID NOT FALL The Wal-Mart “Project Impact” stores provide a window into this retail world-to-come. In these somewhat smaller stores not all product categories are equal. Categories are classified as win, place, or show. Suppliers need to understand the relative importance of the category in the store and the position of their brand within the category. Being a successful vendor in a show category could be demanding, for example, but potentially rewarding. And, in the jargon of late night infomercials, that’s not all… Retailers show no sign of dialing down their emphasis on own label. In fact, more in-store space and visibility will be devoted to own label. Suppliers will need to reconcile with this reality, deriving comfort—and sales—from the notion that sometimes the presence of own label assures the shelf space of a branded product. Like the relationship between the moon and the sun, own label often glows only from reflected light. Because developing own label ranges requires a large investment, retailers increasingly are forming buying alliances that include organizations that do not compete head-tohead because they serve different sectors or countries. These arrangements help the partner organizations fast track development and derive mutual benefit from purchasing economies of scale that improve margins. At the same time, national brands will continue to play a major role. Retailers depend on suppliers for a lot of reasons, some financial, and especially for the traffic that branded products attract. For a retailer to abandon national brands completely would require reinventing the business model, which is a possible but daunting prospect. During Stage Two, retailers will push harder toward own label while continuing to offer branded product. And the branded product suppliers will need to introduce new initiatives to secure their business. For example, we’re beginning to see branded product ranges with opening price points, a space avoided until now because of the low margins. As consumers trade down, however, branded product suppliers want to make sure that they cultivate brand loyalty in anticipation of the day that the consumer trades back up. Returning to the celestial metaphor, the retail system depends on both the moon and the sun. They co-exist in changing relationship to each other. With apologies, but to stretch the idea a bit further, eclipses happen from time to time, but they’re always temporary. We’re beginning to see branded product ranges with opening price points, a space avoided until now because of the low margins. 16/17 THE SKY DID NOT FALL Retailers are left with large stadiums designed for a sport that customers no longer want to play. KEY TAKE-AWAYS RETAILER/SUPPLIER Purpose beats impulse. Having engineered stores to grow average ticket with tempting offers on endcaps and checkout lanes lined with impulse items, retailers are left with large stadiums designed for a sport that customers no longer want to play. The “shop ‘till you drop” game is over. Instead, shoppers race through the aisles with blinkers on attempting to avoid temptation and ring up baskets of necessities only. Today, the easiest way to get onto a customer’s shopping list is to put something on display the customer actually wants to buy. Make the shopping trip easier, not more difficult. Value beats difference. In a bright note, we hear less of the word “lifestyle,” which devolved into vague shorthand used to inflate the significance and appeal of even a mundane change in product colour. From fashion to food, people today seek value. Given this trend, the danger is to retreat too completely from differentiation to the point that it dilutes the brand. The opportunity is to differentiate in serious ways that add real value that the customer will perceive, appreciate, and pay for. Otherwise shoppers will trade out of the shopping experience. Seeking a value image. Some traditionally price-driven retailers, such as Walmart and Target, are adding a premium image to their private label packaging to reassure new customers, lured away from more up-scale merchants, that they will not be compromising on quality. Meanwhile, some upscale merchants, such as Whole Foods and Waitrose, are betting that their quality image will extend to recently introduced value ranges. Centre store becomes centre stage. After years of working the edges of supermarkets, adding coffee bars and filling the air with the fragrance of freshly baked cookies, food merchants have moved the action back to the core of the store—both in terms of physical location and products emphasized—as the place to drive sales.
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