WPP_playbook1_Retailing in the recession_01 2009_19S - Page 1 - RETAILING IN THE RECESSION Playbook 1 THROUGH THE LOOKING GLASS SALE WINTER 2009 THIS ISSUE 1 2 4 5 6 8 10 14 16 Introduction Strategic Summary Three Stages Initial Impact The Consumer Downshifting Trading Out/Trading In Key Take-Aways Action Items Resources 1 THROUGH THE LOOKING GLASS Although little is certain in this global economic turmoil, we know this for sure: It will end. Many of today’s retailers and suppliers will be history. Most will simply survive. A select few, however, will fall into a third category. They will emerge stronger—because they seek opportunities where survivors see only challenges. This vision requires intelligence and invention. That’s where we come in. Using the unparalleled insight and resources of The Store —WPP, these Playbooks will identify and analyse what’s working and what’s not in retailing and brand marketing worldwide. They are intended to help stimulate and focus conversations among WPP experts and clients; conversations that translate Playbook insights into actions to gain competitive advantage. We begin this first Playbook with a strategic summary. It explains today’s retailing weakness as act one in a three act drama. This perspective helps inform both immediate and long-term activities. The strategic summary is followed by his report is the first in a series of Playbooks to help retailers and brand insights into consumer behaviour, key take-aways for retailers and suppliers, marketers succeed in today’s and selected action items. unprecedented global financial and For additional in-depth information, economic crisis. A playbook should be filled with rules, check out three recent webcast Fast-Track Briefings about Retailing in the Recession regulations and directions deemed produced recently by The Store —WPP. immutably correct by experience. The problem, of course, is that experience Learn how to view the complete webcasts at the end of this report. is inadequate for today’s challenges. These regular webcasts, podcasts, Some venerable financial institutions and the quarterly Playbooks are part have suddenly disappeared. Others have of The Store —WPP commitment to received protection from governments known for the promotion of free markets. sharing best retail practice worldwide and its promise to deliver honest, current, and Consumers recently hungry for premium useful insights to help clients succeed in goods now are on a spending diet. the challenging and rapidly changing state Inflation is reversing to deflation. of retailing worldwide. We seemed to have passed through the looking glass. We have entered a place where useful DAVID ROTH advice can not be formulaic, where CEO The Store —WPP a playbook in the traditional sense is Europe, Middle East, Africa and Asia anachronistic and insufficient, but where david.roth@wpp.com guidance is required more than ever. T TAKE A DEEP BREATH We are at the end of a long run. Consumers are out of money. Retailers are out of ideas. Today’s unremitting negative economic news is but the first stage in an uncharted journey. It is a frightening and disorienting experience. Our consumer-driven way of life is shifting and the outlines of the coming era are still blurred. SO WHAT TO DO? For retailers and brand marketers, the question is existential. Priority number one is survival. With the caveat that there are no easy answers for navigating through this sea change, here are three prescriptive actions required to survive: 1. GENERATE CASH Cash is requisite for survival. Consumer spending in the United States rose to 71 percent of GDP during 2008, from 63 percent about twenty-five years ago. Spending is likely to retreat to those earlier levels over roughly the next decade. The conventional wisdom already has dismissed any sales growth in 2009 and does not expect even modest stirrings of recovery before middle of 2010. We know that this stressful period will end, but we don’t know when. We also know that doing something is better than doing nothing. 2. STRENGTHEN TRUST Remain true to everything your brand promises and to your commitment to your customers. 3. COMMUNICATE Stay intensely engaged with your customers, employees, and all of the business’s other important constituents. Beyond survival, to emerge as a stronger company, seek the opportunities lurking in this crisis. Be especially sensitive to the changing needs and attitudes of your customers. 4/5 THROUGH THE LOOKING GLASS THREE STAGES Fearful of job loss, home repossession, and diminished savings and net worth, consumers act as if they are mourning the loss of a life that had seemed eternally optimistic, abundant, and secure. They are likely to transition through stages that are roughly comparable to the way individuals cope with—and emerge from–grief. As you respond to today’s consumer, note the following three stages and be alert for signs that the consumer is transitioning from one stage to the next. Be ready with the right product, prices and, most important, with the right attitude. STAGE 1 – ACUTE DISTRESS How consumers feel: – Angry, sad, helpless – “There’s no end in sight.” – Betrayed How consumers act: – Stay home – Buy mostly necessities – Reject extravagance – Pay down debt – Begin making compromises STAGE 2 – ACCEPTANCE How consumers feel: – More comfortable. “It will get better.” How consumers act: – Begin accepting that they didn’t need all that stuff – Form a revised set of values – Spend a bit more money – Value product function over form – Reject excess STAGE 3 – MOVING ON How consumers feel: – More confident. “It is much better.” – “It will get better, but not like it was.” How consumers act: – Look for real eco component – See life as “we” rather than “me” – Purchase with concern about product provenance – Purchase to a new set of values from a tighter portfolio of stores, brands, and products – Act more restrained and less impulsive about major purchases – Continue to seek value as a major consideration IMPACT STAGE 1 Stage 1 has had a drastic impact on consumer spending. It is important to remember that we will experience improvement and that companies that partner with consumers on this journey have a shot at emerging stronger. At the same time, it is important that retailer and brand marketers relate to consumers as partners, not as objects of research. — The idea of value has changed The traditional binary links—high price/high quality; low price/low quality—have been disconnected. Competitors from all segments of retailing are competing for the same sweet spot where high quality and low price converge. — Suppliers are paying the price During the recent period of inflation, when commodity prices rose rapidly, suppliers gained multiple price increases. Now, in a deflationary period, retailers are trying to reverse that price appreciation. — Discount is king Retailers that traditionally have traded on price and value are doing well and gaining market share. — Liquidation is the new reorganisation Retailers that would have reorganised, such as Circuit City, in the U.S., and Woolworth’s in the U.K., are going out of business because they lack suitable buyers and available credit, and because demand for retail space is much diminished. — Survivors divide into two groups Retailers that are experiencing strong traffic and want to grow basket size. And retailers, experiencing weaker traffic, that want to increase shopping visits. To an extent, this trend reverses the situation of just a few years ago when consumers sought product differentiation rather then price. Target did well in that environment, while Walmart is in its element. No one really knows what life will be like in the later stages of economic recovery. Conspicuous frugality is the new conspicuous consumption. In this fundamental shift away from conspicuous consumption, a sense of responsibility and community is likely to replace the luxury logo as the badge of accomplishment. Companies that partner with consumers on this journey have a shot at emerging stronger. At the same time, it is important that retailer and brand marketers relate to consumers as partners, not as objects of research. Consumers will remember your brands for the role you play as reliable neighbours and comforting landmarks on the emotional landscape. These companies will make frequent course corrections to how they understand and communicate their brand. While maintaining the core brand values and proposition, they will recalibrate to reach the changing customer. Future editions of the Playbook will explore these possibilities more fully. For now, we take a deeper look at consumers, retailers, and suppliers in Stage 1. 6/7 THROUGH THE LOOKING GLASS Consumers feel a need to simultaneously cut costs and maintain their accustomed lifestyle. They are more likely to respond positively to retailers and brand manufacturers who appreciate that apparent contradiction. THE CONSUMER WORRY Consumer attitudes to this downturn vary country-to-country, but one reaction is constant—worry. The Futures Company has developed a scale it calls “The Four Ps” to measure consumer worry. In the United Kingdom, it found that about half the population is at the extremes: a quarter is “placid” and a quarter is “panicked.” The majority are in the middle, feeling either “ perturbed” or “pressured.” When consumers are feeling this stressed, it is especially important to build trust, to be empathetic, and to be on their side. Consumers feel a need to simultaneously cut costs and maintain their accustomed lifestyle. They are more likely to respond positively to retailers and brand manufacturers who appreciate that apparent contradiction. TO HELP UNDERSTAND IT, CONSIDER THE FOLLOWING FOUR “MENTAL WALLETS” DEVISED BY THE FUTURES COMPANY. BASIC Routine shopping. “My family needs these items.” SANITY Small daily treats, a cup of coffee and a newspaper. “I need to take the edge off this stressful morning.” LIFESTYLE Similar to sanity items, but bigger ticket and more entwined with personal identity. “I need to exercise daily at the gym to feel at my best.” FUN Indulgences. “It’s an expensive restaurant, but a great evening out.” People tend to economise in the “basic” and “fun” categories to enable their spending on “lifestyle” and “sanity” items. Those small everyday treats are lifestyle anchors. They reassure us that even though some of our shopping behaviours are changing, our identities are in tact. This news is potentially good for retailers and brand marketers. It means that brand loyalty is resilient. A consumer who prefers a particular brand in good times will still prefer it when times are tough. Rather than switch to a less costly alternative, a consumer may save longer to make the desired purchase. 8/9 THROUGH THE LOOKING GLASS To understand this phenomenon, MVI divided consumers into two categories based on how they perceive their financial situation. The income statement shopper These individuals and families are struggling to make ends meet. They evaluate their financial situation by comparing their income to their expenses. This group comprises those living payday to payday, looking carefully at what’s coming in—or not; and what’s going out. The balance sheet shopper These individuals and families evaluate their financial situation by comparing assets and liabilities. While often solidly middle class, owning homes and investments, members of this group have obligations and are not feeling well off in this economy. Both income statement and balance sheet shoppers are abandoning some habits (trading out) and adopting new habits (trading in), resulting in both threats and opportunities for retailers and brand marketers. STEP TO THE LEFT While predisposed to remain brand loyal, consumers are stepping to the left, downshifting—from wants to needs and from durables to consumables; from products that have long purchase cycles, durable goods, to recyclable products like food. The durable wants—home wares, home furnishing and electronics, for example— are being hit hard as discretionary spending is deferred, delayed, or eliminated. Downshifting does not mean slamming on the breaks, however. Consumers are moderating spending in order to preserve their lifestyle. Durable necessities, like a refrigerator that needs replacement, are doing OK, as long as the consumer has access to credit. While they are trading out of expensive durable goods, consumers also are trading into less expensive premium items. Last summer, high-end ice cream was among Walmart’s best selling products. TRADING OUT BEHAVIOUR TRADING IN BEHAVIOUR 50 VOUC O % HERF F £20 £5 £10 VE SA VE SA VE SA The trade-in behaviour of income statement shoppers produces “The New Value”, while the trade-in behaviour of balance sheet shoppers produces “The New Premium”. THE NEW VALUE BEHAVIOURS OF INCOME STATEMENT SHOPPERS — Coupon redemption — Smaller packs — Second-tier brands — Private label — Promotion responsive THE NEW PREMIUM BEHAVIOURS OF BALANCE SHEET SHOPPERS — Transparency — Preservation of the self or the world (sustainability) — Higher purpose Amid all this trading in and trading out, underlying consumer trends endure. Although they bend somewhat over time to accommodate economic realities, long-term trends are exactly that, long term. For example: Stop-go-lives The fluctuations of the economy will not change the rapid pace of modern life and the impact on our lives. The added tensions of slow economic growth, tight credit, and unemployment actually may increase our need for down time. Navigating well-being This long-term trend will continue, but perhaps with an emphasis on emotional health. The trade-out behaviour of income statement shoppers produces “The New Poverty”, while the trade-out behaviour of balance sheet shoppers produces “The New Frugality”. THE NEW POVERTY BEHAVIOURS OF INCOME STATEMENT SHOPPERS — Trip consolidation Fewer shopping visits — Category rationalisation Buying a shampoo conditioner combination instead of buying each product, thereby eliminating an entire category — Back to non-modern trade A return to purchasing from second-hand shops and pawn shops THE NEW FRUGALITY BEHAVIOURS OF BALANCE SHEET SHOPPERS — Bulk purchases — Lower cost solutions — Reducing meals out but eating better at home — DIY £50
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