Last week I was in Washington, D.C. to attend the “Global Retail Forum” sponsored by Management Ventures, Inc. The audience consisted of representatives of some of the world’s biggest consumer packaged goods brands, and they were clearly concerned by some of the facts presented there. As the evidence mounted on changes in the retail scene, I sensed the mood shift from interest in current events to concern for the future. As one member of the audience jokingly put it, “I’ve started working on my resume here!”
So what caused such concern? Retail developments in Europe were the subject of considerable scrutiny. Senior sales managers and trade marketers in North America are well-acquainted with Wal-Mart as a customer, but chains such as Aldi, Mercadona and Tesco are, for the most part, familiar names of stores in other places. A number of presentations by Management Ventures described the impact these retailers are having on suppliers and consumers in Europe, along with disquieting suggestions that their influence may soon be felt more strongly here.
The most challenging presentation at the conference was given by Ethan Sinick of Management Ventures. The points he made may not be new news to people who work in Europe, but they do underscore the dramatic changes that have taken place there in the retail scene. For those of us outside Europe, they may be portents of things to come.
Deep discounters such as Aldi and Lidl aim to provide low prices for quality products along with attractive shopping conditions and exciting “here today, gone tomorrow” promotions. Aldi does not stock branded goods. Instead it aggressively benchmarks its own-label goods against the leading brands in the category, content to copycat successful new products rather than innovate themselves. This has helped them attract a broad range of shoppers beyond low-income bargain seekers. While selection may be limited to Aldi products, people are confident that the product quality will be good and the prices low.
Lidl, another deep discounter, actively pursues a trade-up strategy for its own brands, saturating categories with a range of private-label options, from basic to premium. In-store communications focus on value rather than price. Asda (owned by Wal-Mart) and Tesco are reported to be experimenting with similar discount strategies (the latter in Eastern Europe).
Supermarkets in Europe have found themselves squeezed on all sides by the deep discounters, the convenience stores, and the hypermarkets, and have been steadily losing share over time. In the face of these challenging conditions, one Spanish chain, Mercadora, has managed to re-incarnate itself as a supermarket in discount form. Mercadora stocks a large number of categories, but offers a limited number of brands. Multiple facings per item help make each category visible and create the illusion that a good assortment of products is being offered. Mercadora’s goal, however, is to stock only one product offering per category, provided that that offering is their own brand. Mercadora does little in the way of promotion, but actively deploys staff to persuade people to try the own label product in preference to the branded ones stocked. This practice has also been taken up by other retailers in Europe, such as Carrefour.
The UK-based Tesco and Mercadora share a common practice. Both invest extensively in consumer and shopper research. In order to take their customer insights to the next level, Tesco has invested heavily in Dunnhumby, the company that manages and analyzes data from the Tesco customer loyalty program. When shoppers present their loyalty cards at the checkout to take advantage of special deals and offers, Tesco is able to use the resulting data to track individual purchasing patterns and adapt to shopper needs. Key to the analysis is to “follow the money” and maximize the penetration, frequency and value of shopping trips over time. In addition to the loyalty card, Tesco invests in more consumer observation research than any other company, including in-store test kitchens to get feedback on new products. As Ethan pointed out in his presentation, except for cases where brands serve highly specialized needs, manufacturers have little to add to the knowledge Tesco has gained through its own research on the product categories they sell.
There are three common themes that run across the examples cited:
1) Retailer as enemy as well as partner
It is one thing for a retailer to drive a hard bargain. It is quite another thing for a retailer to actively attempt to lure buyers away from your brand. All three retailers seek to sell high quality products that match or better the existing brands, and usually at a significantly lower price. Lidl’s strategy of category saturation, however, makes it even tougher for branded goods to justify their existence, and Mercadona’s active pitching of customers at shelf further undermines brand loyalty.
2) Shopping trip not shopper segmentation
Most retailer formats in the U.S. align against income. Kroger and Target have an upscale shopper-base and - not surprisingly - the dollar stores are heavily reliant on people with an income below $20,000. In Europe, the segmentation is different. Aldi’s unique promotions target the whole household and all incomes, not just those who are budget constrained. As a result, a colleague of mine in Germany told me that the most common make of car in the Aldi parking lot is a Mercedes. Tesco takes this even further, developing a wide variety of store types to deal with a wide variety of shopping needs.
3) Retailer as trust mark, not just low prices
A recent legal ruling will prevent Wal-Mart from offering banking in the U.S. in the near future, but in the UK, Tesco has been able to leverage its brand equity and extend its services not just to banking and insurance but to telecom, holidays and do-it-yourself legal advice. Talk about brand experience! Tesco is not just a store you walk around in – it’s a site you can download music from, a name on your credit card, and a travel agent you can book a holiday from. A packaged good brand cannot come close to generating this type of engagement simply from getting people to buy and use the product.
So what is the prognosis for the U.S.? Aldi is already established and growing. Tesco is launching a convenience store format on the West Coast. Kroger, another Dunnhumby client, is starting to adopt the approach used successfully by Tesco in the UK. The impact of these changes on the broad retail environment remains to be seen, but one thing is sure: life will not be getting any easier for branded goods manufacturers in the U.S.
As retailers become more consumer-savvy and build real relationships with their customers, it will become ever more difficult for national brands to hold their ground. I would argue that their best defense is to continue to build and maintain strong brands above the line. Broadcast communications can help brands build equity. Strong brand equity helps brands get onto consumers’ short lists before they enter the store. Then, present the brand in-store in a visible and compelling fashion. The brands which reinforce strong pre-existing demand with effective activity at the point of purchase are the ones which will be able to maintain sales and profit in the face of changing retail conditions.
(For thoughts on branding at the point of purchase, download the latest Millward Brown Point of View)
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August 3rd, 2006 at 8:38 am
Thanks for your perspective on retail developments in Europe. While I believe most of what you note does have implications for US marketers, there is one important difference that could ameliorate the impact: Specifically the development of discounting in the two markets is different. Where the European model is based on sourcing and store brands, the model in the US evolved from discounting branded goods. And as such brands became a store’s signal of quality, whereas in Europe the task has fallen on the banner (store name) to drive communication of quality and/or discounting. So until US consumers are willing to abandon national brands, I still see a job for that concerned attendee.
Cheers
August 4th, 2006 at 8:19 am
Hi Philip,
I guess that this is one subject on which we are going to have to disagree. Wal-Mart is a store dependent on one single factor - low priced branded goods - European retailers have evolved themselves into brands which also offer the consumer the benefit of low prices.
With above the line support for major brands in the US being diverted into price promotion and lower quality variants for stores like Wal-Mart, I believe the Europeans will be pushing at an opening door, provided they tailor their offer and communication to the US consumer. And that, of course, will be the challenge. Wal-Mart learnt to its cost that the “pile it high, sell it cheap” model does not work in Germany. Will the European retailers be savvy enough to build their brands appropriately here in the US? If they do, I think existing US retailers and brands are going to be in for a tough time.