Recently a supplier told me how they had just been de-ranged from one of the major chains without warning. Despite their double digit growth and their volume forecasts, which projected another bumper year, they were now looking down the barrel of a $500K hole in their current years sales targets.
The de-listing of brands in core grocery categories will play out more frequently as the major grocers begin effectively to act on the wealth of basket and shopper-level data that their loyalty programs produce. Products that command shopper loyalty will hold their place, but products with readily available substitutes are at risk.
It is an interesting dynamic that we will see play out here, as supermarkets run the risk of annoying shoppers who find their favourite brand is no longer stocked, which could be a point of difference for independent operators if range reduction in the supermarkets goes too far.
For most FMCG suppliers, Woolworths and Coles will remain a top-priority for the foreseeable future. But there are also opportunities to grow outside of the two major retailers, and a more diverse mix of distribution channels is often more favourable.
This could be good news for convenience and independent operators who are looking for a point of difference to compete against the major chains. Range and assortment will be a major point of difference in the future, however to achieve this it will require some change in thinking for suppliers.
Today, the bulk of company marketing research is devoted to such activities as development of market potentials (for both existing and new products), analysis of customer buying habits and requirements, measurement of advertising effectiveness, share-of-market studies, determination of market characteristics, sales analysis, establishment of sales quotas, and development of sales territories.
Beyond this value in reporting on historical and current conditions, however, there will be a trend toward increased use of marketing research as a creative tool to help solve future management problems, such as distribution, product awareness and new business acquisition.
Suppliers tend to look at their category in a way that is defined by market research, but which may not relate to how shoppers think about the categories. As a result they may hold onto their position within the narrowly defined subcategory, but miss broader trends that erode their business.
The new reality for FMCGs is tough, but many suppliers manage their businesses in a way that actually contributes to the challenging environment. In some categories suppliers aggressively use price increases to grow the bottom line, often ceding control of their categories to new low-price entrants.
Suppliers cost structures inclusive of third party support, can make them vulnerable to smaller, leaner competitors with lower overhead structures. Multinational FMCG suppliers are particularly at risk because they carry overhead cost allocations from global and regional support structures.
Too often, FMCGs set unrealistic top and bottom-line growth targets, a misstep that leads them to manage their businesses for the short term. In order to hit a profit target, many management teams are forced to cut back on brand marketing and are tempted to increase prices. And if the price increases lead to unexpected volume losses, suppliers are forced to “deal back” prices by running increasingly deep and frequent promotions. Each of these actions makes it even more difficult for the supplier in the future.
As the retail landscape continues to consolidate and technology evolves, suppliers will intensify their efforts to test innovative new business models.
It is fair to say that for most companies new business acquisition, particularly within the greater independent space has been left to chance, and any new business in this area has been achieve by accident rather than by design. This is not a criticism, it is completely understandable when you consider that a typical book and order call for a supplier can be anywhere between $35 - $70, and can be more than double this if there is any selling involved. So why would you deploy your most valuable asset against your lowest value activity.
The challenge here however, is that for many years suppliers have been winding back on in-field representation, relying on their presence in the major chains to drive product awareness and increased distribution within the independent channels.
Alternatively they have left it to third parties to represent them and drive their sales and ranging within this space. For those larger suppliers with sophisticated sales teams, the focus has been on servicing and driving their existing customers with little or no focus on new business.
The danger of these strategies is only now becoming apparent, as only market leaders or products that are not easily substituted will be safe on the supermarket shelves, forcing those suppliers at risk to re-think their marketing strategies for the greater independent channels, if they want to have a voice.
If we are to take anything away from what the major chains are now doing is that, the Australian retail landscape is becoming less and less hospitable for under-prepared suppliers. But for suppliers best prepared for the new reality, opportunities for sustained profits and growth will continue to emerge.
Craig Matthews is the MD of Stock Box, with over 30 years industry experience in retail development, specialising in independent retail programs.