Back in the day, one of the first more strategic exercises I did for my first employer (United Biscuits, a food company from the UK) was to build a model which predicted future retail dynamics, and the impact that might have on the business. So far so normal, right? Well, you’d be wrong. The results were a shock to the entire business: brand share would tumble as a result of nothing more than retail dynamics. No-one, it appeared, had really thought about this. Fast forward to 2019, I see many organizations in a similar situation. The retail trade is in flux, but beyond predicting a tougher time with key retailers, and maybe the rise of a few e-commerce sites, too few CPG companies and retailers are looking to understand the bigger picture – and the wider ramifications – of a fundamental shift in retail dynamics. If you haven’t already, its time to do a big ‘what if analysis’ on retail dynamics.
Now is the time to “what-if” on retail dynamics
Why now you might ask? Retail dynamics are swinging faster than ever before, and the changes are hard to predict. The consumer goods industry is used to slow and steady trends: retailers inching up or down a couple of share points. But learnings from China and other advanced e-commerce markets show that today, retail disruption is leading to wild swings in share. Channels are growing and declining faster than most of us can ever remember.
And these changes have significant implications for CPG companies. As I outlined before, the impact of retail disruption goes way beyond the sales team. So if you’ve not done this before, or recently, here are a few key questions, a few key what if scenarios to analyze:
What if your biggest customer, customers or channel was suddenly to decline by twenty percent.
What if e-commerce were to become ten times bigger than it is now.
What if that one of your biggest customers doubled the share of space if gives to private label
What if a limited line store format (like convenience stores or discounters) were to take 20, 30 or 40% market share
What if specialists, who do not stock mainstream brands, were to take 10% market share.
Some of these what if scenarios might be extreme, at least in your market. You can tailor the scenarios to suit your market, but I’d urge you to be a little extreme, at least to begin with. In the last three years, we’ve worked with clients in various parts of the world that have suddenly encountered each of these scenarios, so while they might seem extreme, they are not unheard of. How well would your business cope?
Key questions for your “What If Analysis” on retail dynamics
For each what if scenario consider the following questions:
– What would happen to brand share?
– What would happen to total sales
– What would happen to trade spend by account?
– What would happen to the ratio of total trade spend to total sales?
– What would happen to marketing spend effectiveness?
– What would need to happen to your organization structure and your supply chain?
Retain dynamics often bring pain in many dimensions
I’m not going to predict the answers, but I will share what many, if not most companies find when they do this exercise.
– Brand share goes down. New disruptive channels typically have either narrow ranges, or very wide ranges – in either case large mass brands often suffer. Major brand share in most categories is lower online than offline. And in discounters. In limited range stores, many brands simply disappear. Specialists want exclusives, not the same brand as everyone else. As retailers look to drive more differentiation, mass brands suffer.
– Sales go down – see above
– Trade spend by account typically rises. Retailers under pressure put pressure on their suppliers.
– The ratio of trade spend to sales goes up even faster, as sales stall or decline and trade spend rises.
– Marketing spend effectiveness takes a nosedive. For all the talk of personalization and targeting, much of the CPG
marketing mix is still mass. But shifting trade dynamics often reduce the visibility of brands to the shopper. Either the product isn’t in the store the shopper chooses to visit (think discounter, specialist or convenience store), or there is so much choice, the brand is easier to overlook (think e-commerce). Either way, the ROI on marketing spend is likely to decline.
Retail dynamics will affect the entire organization
All of this means that the organization needs to shift massively. Different people, different skills. And this isn’t limited to marketing and sales. All functions: HR, supply chain, IT and Finance: no part of the business is unaffected.
You could do this as a thought experiment or build the scenarios yourself. Or you could get in touch and ask us to help (an objective view on this sort of thing is usually invaluable). But whatever you do, now is the time to start future-proofing your business against retail disruption. And please, don’t just think about the sales team!