Brands must change channels

The balance of power between the manufacturer and grocery retailer is becoming increasingly distorted. With more than half of the UK’s top 500 packaged grocery brands in decline, the retailing pendulum still appears to be swinging in favour of the private labels. There can be little surprise that the decline of many major brands is being caused by the continual growth of private labels and copycat brands.

This imbalance can also be seen in other countries where the marketing of brands is sophisticated and concentrated. In these highly competitive marketing arenas, the manufacturer has ceded authority to the retailers and is losing key opportunities to create a dialogue with the consumer.

The UK has become the most advanced of any country in the sophistication of its private label marketing. Private label in the UK peaked around 26 per cent of packaged grocery sales at the end of 1994. By contrast, it averages just 15 per cent of supermarket grocery sales in the US.

Tesco is now the leading retailer in the UK, with a 20 per cent share of packaged grocery – the top five in the UK account for a 65 per cent share. In the US, the leading retailer manages just a six per cent share, and the top five account for 21 per cent. It’s not just packaged grocery that’s the attraction in the UK, the battle now extends to petrol and forecourt stores too.

A trend towards segmentation is appearing across many fmcg markets in the UK. Prices are deviating further from the mean. At one end, manufacturers are increasing prices through premium branding, while at the other, cheaper value lines are emerging. Squeezed in the middle are layers of brands at different prices. This gives manufacturers even less room for manoeuvre.

Despite manufacturers’ efforts to add value with premium brands, there is still a downward price spiral in many categories. Average prices for such grocery goods as baked beans, breakfast cereals, fruit juices and sliced bread have fallen by up to a fifth in real terms over the last three years.

Price discounting has also engulfed the petrol retailers. Esso, the UK’s biggest petrol retailer, recently announced an aggressive plan to maintain its number one position by offering the lowest petrol prices within a three-mile radius of its outlets. With Shell retaliating by slashing prices, consumers are delighting in a short-term treat.

Through an understanding of the brand and market elasticity, it is often possible to maximise revenues by balancing the relationship between price and volume. However, with so much price discounting at stake, evidence suggests the law of diminishing returns applies to sales promotions, and many promotions are running out of steam. Manufacturers need to take a holistic view, with a new “channel vision” to maximise their distribution.

The chart (left) shows some of the new channels investigated by McCann-Erickson Research & Information Consultancy that need to be considered. The range and sophistication of non-traditional retailing channels is a function of consumer knowledge, access, convenience, and the saturation and state of traditional channels.

Direct marketing has attracted widespread media attention since Heinz claimed in 1994 it was moving its UK product budget below the line. This provides the manufacturer with a new vehicle to create a dialogue with the consumer. But direct marketing should not be used in isolation, as it cannot provide the same empathy or long-term effects as advertising.

Direct delivery is a channel that allows the manufacturer to reach out to the consumer without incurring retailers’ margins. Food Ferry in London is leading the way, but Flannagans has recently launched, selling Sainsbury’s products, and is the first home-shopping company to link up with a retailer.

The move from an analogue to a digital world means that electronic shopping needs to be quantified and experimented with. Because of the ever-increasing penetration of computers in the home, it will not be long before groceries are again delivered to the doorstep- the Internet provides the network for free transfer of orders. The electronic forum has already started, and Windows 95 will be a key catalyst.

The forecourt and service station battle is escalating. Manufacturers need to realise that this outlet is generally under-used. It provides the consumer with convenience.

Some experimentation with these new channels is critical to get on the learning curve. Clearly some channels will fit more closely with brand territory than others, depending on the characteristics of the brand.

New channels provide manufacturers with the opportunity to reassert the dialogue with the consumer. Many market categories are in a state of intense competition, where small players are entering and eroding the advantages of large players. What is clear is that those who do something different today will set the agenda for tomorrow.