By Steve Bayliss, Group General Manager Marketing, Foodstuffs (NZ) Ltd.
Hey. It’s tough being a retailer – I hear you crying in sympathy already. But take property for instance. There’s a lot of media at the moment about the ever escalating house price crisis. Not necessarily a bad thing if you’ve owned your home for a few years. Not so good if you’re trying to get on the housing ladder. The same issue also impacts retail spaces. Prices are continuing to grow through the roof making it harder to find space for new developments, and even harder to derive a sensible economic return. And that’s just the property bit. Costs across the board – be it health and safety, development compliance, technology, etc. – are all on the upswing.
And we know it’s certainly no easier on the supplier side of the FMCG landscape. Pressures from Group Offices wanting a return. Increasing costs. Pressure from consumers (we’ve taught them to be deal hunters after all) and retailers for deals and discounts.
So what’s the solution to this tension we all face every day? Well, sadly there isn’t a universal fix-all, but there is a jolly good place to start: innovation.
I’ll often meet businesses who would like to reduce deal doing to increase their weighted average margin. But every time they squeeze back on dealing, sales go through the floor. I’ll then make the observation that if their product is largely undifferentiated and therefore, from a consumer perspective, substitutable for a cheaper alternative, you’re trapped. If your rubber gloves just benchmark alongside the competitive alternatives from an emotional and rational perspective, the brand on deal will win every day. All day, every day. You are boxed into a corner and your future is being the best deal doer in the market. Bin the marketing department and hire darned good sales people fast. But be aware, you are now officially in a race to the bottom. Because there will always be someone somewhere who is prepared to sell cheaper than you are.
On the other hand, smart innovation, innovation that genuinely improves product performance, taste, in use experience, or another factor important to your customers, can break you out of the deal (slow death) trap. Look at Lewis Road and Whittaker’s performance over the last few years. They have been among the most innovative companies I’ve seen in our industry. And not with totally whacky off-the-planet ideas dreamed up by food scientists housed in global headquarters. They’ve taken relatively mature, and one may imagine tapped out categories, and totally reinvented them based on the New Zealand environment. And their rewards have been exceptional. Sure they still deal a little, but not that much, and largely to create trial opportunities to bring new users into their franchises. Importantly their rate of sales maintain themselves at extremely high levels post deal. If you’re into Lewis Road Chocolate milk, a bottle of milk and some cocoa powder just isn’t going to chin the bar. You’re not swapping out to save a dollar.
The craft movement is doing this to traditional beer brands right now. And the team at Garage Project (amongst others) are getting an enviable undiscounted premium. My wallet knows this as a fact.
So, if times are tough, and they are for everyone, innovation isn’t the only answer. But it certainly should be on the list of priorities.