Retailing Is Being Led By It

Kurt Salmon Associates global expert, Peter W Harding tells

Vikas Kaul during a recent visit to India.

Till the late eighties, channel power wrested squarely with manufacturers simply because they had control over one crucial weapon: information. But developments in information technology shopper cards, scanners have democratised information and broken the manufacturers stranglehold. Therefore, today the retailer is the king. Yet that may not last long. Thats because the Internet, at least in theory, has the potential of usurping that power.

Will that ever happen? What is holding it back? How are players adapting to the newly-emerging equations? And, of course, what will it do to the hidden persuaders of the twentieth century manufacturer brands, as they cope with the rapidly proliferating private label business?

 

To take a peep into the future, The Strategist caught-up with Peter W Harding, vice president, member of the board of directors and global marketing director for Asia, at Kurt Salmon Associates (KSA), a $80 million management consultancy firm specialising in retail and consumer product industries.

Hardings work has focused on developing winning demand-side and supply-side strategies. To pan on the rapid changes in consumer psyche, he created KSAs annual Consumer Pulse Survey and the bi-annual KSA-NPD brand report, which provides brand marketers and retailers with consumer perceptions of over 250 national, designer and store brands in the US.

Also, to get a firm grip on the changes breaking out in the retailing industry, Harding led the team that created the Efficient Customer Response (ECR) strategy for the grocery industry. Based in KSAs New York office, Harding is a graduate of Bristol and Bradford Universities.

Excerpts from an exclusive interview:

Q. In the retailing business, a great many things are being triggered by rapid developments in information technology. How have customers responded to these changes?

A. The promise of the web-marketing is very strong and I am talking specifically of the US market. The reality is that as of today, there is very little commercial business being done through the world-wide web. Most companies have a home-page on the web. Today, it is predominantly information. Many retailers, too, have pages on the web. More importantly, a number of new retailers are tapping the web. One example would be the virtual vineyards. They represent a number of small California vineyards, who normally would not have the resources to go out and market their product. Wine aficionados can go to these virtual vineyards, work their way through all sorts of information about wines and make selections. Thats one example of companies that have been quite successful by informationalising the products that were earlier being retailed.

Q. On the one hand, there is web marketing/teleshopping/home shopping. On the other hand are mediums like conventional direct selling and conventional retailing. And these are now competing with each other. What shape will the future take?

A. We believe that in the US, by the year 2010, over 50 per cent of the merchandise will reach the consumer without ever passing through the retail store. A lot of that will go through catalogue-type retailing, through the web or interactive on-line retailing. Some of it will be from the store but never delivered through the store in the sense that it will be ordered from the store and will be shipped directly to you.

We have talked about the Internet as a tool for retailing. Early breakthroughs will probably happen in the area of groceries because groceries is something that the households have to buy every week, whereas things like are apparel tend to be more infrequently purchased. We have done some modelling on this. If you have the right kind of market community, in terms of number of households from the moderate to upper income level, and you could achieve a penetration level of 25-30 per cent, you will see that there is a real possibility to home deliver the products less expensively than having to go through a

retail store.

When you get to that is a chicken-and-egg story. That is the point at which it will emerge as very strong competition to conventional retailing. Because, although many people are very interested in home delivery, they dont want to pay extra for it.

Q. What is the barrier in reaching that stage?

A. It is really having sufficient physical quantity of the product of enough dollar value being delivered to the home on a regular basis.

Q. What is preventing that from happening?

A. To introduce a brand new idea like this is going to take significant time. You have to invest in the distribution facility, in the trucks, in developing the software and in training. These are pretty substantial investments. All these models might look good but until somebody does it and proves them right, there is significant business risk. There are probably half-a-dozen start-ups in the US who are attempting this, region by region. For example, there is company called Peapod. It has a strategic alliance with (in each of the big cities) a grocery supermarket chain. Customers in that city can order through an on-line Internet-type connection. Peapod picks up the order and delivers it home. Thats already in place. There are several other start-ups doing similar kinds of tests so everyone expects that within three or four years this should prove to be a viable concept.

Q. Are the companies who are doing this from the conventional retailing background?

A. That is the key. Peapod is a brand new start-up. They are working with existing supermarkets. I dont expect any of the traditional retailers to become leaders in this new channel of retailing. In fact, new developments in retailing dont come from existing retailers. It comes from start-up companies. A very good example being Wal-Mart. Twenty years ago, very few people had ever heard of them. Today, they are a hundred billion dollar retailer.

Q. What are conventional retailers doing in this context?

A. There are two areas and they are somewhat related. The supermarket industry has adopted a strategy called ECR (efficient consumer response). For many years, the industry had believed that it was truly the lowest cost distribution channel. They did not realise that up-starts like Wal-Mart had developed logistic and inventory systems that were making much better use of the information technology than the traditional supermarket. In fact, it surprises many people in the US when they are told that less than five per cent of the supermarkets (all of them have scanning systems in place) actually use that information to reorder products back to the store. Most of them still do that on a manual basis.

Q. These measures are at the operational level. What is happening at the strategic level?

A. At the strategic level one is witnessing continuing consolidation within the supermarket industry. The first key area that many supermarkets are working on today is the home-meal replacement. In the US, the demand for the basic consumer foodstuff items is going to be flat. All of the growth will come in the prepared food. In other words, in the ready-to-eat and ready-to-heat products. So strategically, there is shift away from selling ingredients to selling solutions.

Q. What has been the impact of the growth of private labels on brand marketers? How has that impacted their strategy?

A. The growth of private labels was also one of the major reasons manufacturers begin to look for new ways to become efficient. And they have been very strong encouragers and sponsors of this ECR movement. What has happened is, that for many years, they have absorbed some of the costs of inefficiency, with the result that the prices of their branded products had unnecessary costs covered by them. Then came a quality private label product that does not have these costs attached. So, it can be priced at a discount. Therefore, manufacturers are looking at how to cut some of these extra costs of the supply chain to compete with the private label product.

Q. What about its impact on the relationship between retailers and manufacturers?

A. For many years there was often a feeling this wasnt true with Wal-Mart but was true with many of the other supermarkets that, in a sense, they were competing. The industry tended to think that the way to win in this business is for the manufacturer to win at the retailers expense and vice versa. What happened was that both companies and the retailers spent too much time focusing on buying and selling among themselves. In the process they forgot about the consumer. There was too much inefficiency built up at the buy-sell interface. What Wal-Mart said was, Look, we need to work closely with our suppliers by using information technology. We can together cut costs and pass that to the consumer and if we did that, we will get more volume business so we both benefit. That was the difference in Wal-Marts approach. So now they are looking at the whole thing as a win-win situation.

Q. What if their brandscompete?

A. The private labels were growing because inefficiencies had pushed the price of brands too high. So there was an opportunity for private labels to grow. That was the major driving force behind the ECR on the part of brand marketers/manufacturers. It is a great concern. However, smart manufacturers recognised that you have to provide a set of choices to the consumer. Many of them are working in partnership with their retailers in what we call category management. It is a process of managing the whole category of products and planning the assortment of products within that which provides the best way of selling to all possible requirements of the products, but without having unnecessary duplication. Often, there are too many indistinguishable products in the store. That confuses the customer and at the same time, increases the cost. Companies that have the best understanding of their consumers are in a position to provide that kind of advice. So if there is a risk of loss of business to the private label,

it doesnt come at the expense of their own brand. Thats one way of

managing it.

Q. Apart from the price factor, what other factors are responsible for the rise of private labels?

A. One is the price, of course. The second is smart retailers have realised that information technology puts them in the drivers seat when it comes to the retail environment of the future. It used to be manufacturers who had all the consumer information. They could have that because they could afford it with their brands. They could use this information and throw advertising based on that. Consequently, they controlled the supply chain.

With the growth of information technology, private sale information and the use of the shopper cards, retailers today have a lot more information about the customers and this is becoming an information business. Now, the fact that retailers have more information about customers means that the retailer is well-placed to decide which brands to carry, which ones are wanted by customer and which are less important.

Where can I develop the private label brand that can lead to extra profit and build my store image, and at the same time cater to the needs of my customers? So what we are seeing today is that we have got really two kinds of stores. There are the ones that carry both the national brands and private labels such as Sears and Penny. Then there are speciality stores that sell their own store brand merchandise such as The Gap. In the latter case, the store is the brand.

Q. Did it also have to do with consumer perceptions that the companies were charging too much for the brand?

A. In some cases, yes. Until a few years ago, the private labels brands - with a few exception - were often of inferior quality. During the last few years, the good retailers have developed private label programmes that ensure that the quality is equivalent to the national brands and the price is somewhat lower.

So I think that today, consumers have a choice. Some consumers are totally loyal to the brand. Others are less loyal. They are influenced by an alternative product and they are the ones who will try a private label. There are traditional jeans brands like Levis and Wrangler on one hand and store brands like Gap and the very successful Arizona on the other. Both of these are doing well. What is getting squeezed out are the quasi-brands. They have a name that you might somewhat recognise but they dont mean anything to you.