Here are some frightening figures for packaged goods marketers. Forty years ago, UK consumers spent 40 per cent of their disposable income on food. Now that figure is down to 13 per cent. In the past few years, consumers’ total spend has increased by 15.7 per cent, but packaged goods has taken only one per cent of that growth. And as retail floor space continues to increase, retailers’ sales and profit per square metre continue to fall.
As Boston Consulting Group consultant Alex Lintner told last week’s Efficient Consumer Response conference in Glasgow, this can mean only one thing: retailer pressure to cut costs – and margins – can only intensify, whether or not relationships between retailers and manufacturers are co-operative or adversarial. The industry now faces a “profitability stalemate”, he declared.
So what can marketers do? One answer is simply more of the same: sustained product innovation to sell more, at a higher price. Just look at what Gillette has done with razor blades. But is that enough? Some leading players such as Procter & Gamble don’t think so. “We have to go beyond products to provide service and help,” declared P&G chairman John Pepper at P&G’s headquarters in Cincinnati last week.
What does that mean? Here are some possible examples. Consumers could use digital microscopes (which are now on sale in the US as toys) to send pictures of their hair, skin or pieces of stained fabric over the Internet to P&G to get personal product advice, or even a customised product. Or, having filled in a carefully designed questionnaire, they could be mailed Millstone coffee (P&G’s upmarket coffee in the US) blended and roasted to their particular palette.
Or how about a smart washing machine that tells you that you’ve put a dry clean-only item in the wash or that one of a pair of socks is missing? It then looks through what you’ve put in the tub and, using a special washing ingredients mixer, adds exactly the right mix of detergents, enzymes, bleaches and so on to that wash. In exactly the right dose.
Alternatively, what about consumers signing an annual supply product with P&G for Pampers and other baby products, in exchange for which they get free access to expert medical and health advice for their child? Or a “smart mirror” that uses digital photography to let you test products by digitally playing around with hair styles, treatment effects and make-up combinations?
None of these are realities yet. They’re just experimental concepts but they illustrate how companies such as P&G are thinking much more holistically about consumer value: not product, but “service and help” too.
P&G is not alone. In fact if anything, retailers could soon be under more pressure than manufacturers to go this route. A new report for the Coca-Cola Retail Research Group unveiled at the ECR conference by WPP’s The Store predicts, for example, that today’s hypermarkets and superstores, which account for about 35 per cent of consumer spend today, will see that dwindle to about 14 per cent over the next 15 years, forcing some to close.
Why? Because these stores’ core business – the regular, planned shop – is on the decline as consumers prioritise convenience. Second, because a growing proportion of planned shopping will be done remotely. That’s not just home delivery, but every possible permutation and combination of remote ordering and fulfilment.
On the back of this research, The Store’s Maureen Johnson sees retailers experimenting with different approaches, at least three of which are heavily dependent on Pepper’s formula for added value. Some examples include customised products and solutions, extra services (including in-home services), specialist sourcing and ordering for consumers, expert advice (say, from chefs) or supply chain transparency so that concerned consumers can track, say, food safety right back to the farm.
Retailers are already chasing such options. Royal Ahold chief executive Cees van der Hoeven warned the ECR conference that the inconvenience of shopping at very large superstores means they could face a crisis. Meanwhile, according to Hoeven, by buying up struggling Internet home shopping companies in the US, Ahold can “determine the future” of the industry there. Consumer demand for such services – and for home meal replacements – will “grow dramatically”, he predicted. Never mind that it’s currently difficult to make money out of it. “If consumers want it, it will be there.”
Likewise, Marks & Spencer chief executive Luc Vandevelde hinted at a future for M&S as the UK’s leading high quality convenience food operator. Food already accounts for 45 per cent of M&S sales, he pointed out, and there’s huge potential in “restaurant meal replacement” (rather than “home meal replacement”). Of course, this just happens to be M&S’s forte. What it needs now is widespread distribution through many convenient, local food-only stores. Watch this space.
Meanwhile, Terry Leahy has committed Tesco to a similar “follow the money” strategy. If consumers want new dimensions of service then “retailers have got to move with them”, he declared.
What do initiatives and comments like these add up to? First, packaged goods manufacturing and retail marketing looks set for an exciting period of reinvention (to use a current P&G buzzword). As P&G chief information officer Steve David said last week: “If we don’t reinvent marketing, we’re toast”.
Second, some key building blocks of this reinvention will come from unexpected sources. The smart washing machine, for example, depends on the adoption of radio frequency identity tagging in clothing – an emerging technology that could affect everything from supply chain efficiencies to how we shop. One example: a smart shopping trolley that takes note of everything you put into it and automatically deducts it from your account, so that you never have to stand in a queue again.
Third, despite Lintner’s gloomy predictions, as soon as we begin to think beyond the confines of narrow product manufacturing and retailing we begin to glimpse massive opportunities for growth. Opportunities, that is, for those who are fast enough and imaginative enough to seize them.
Alan Mitchell’s book Right Side Up: Building Brands in the Age of the Organised Consumer is available from Harper Collins Publishers, at the special price of £16.99 (rrp £19.99) including postage and packaging. Telephone 0870 900 2050 and ask for department 832D