Retailing, it is said, begins and ends with the consumer. If consumers are not willing to put their hands in their pockets, or if those pockets are empty, even the most innovative product becomes unviable. The last year has seen signs of an economic slowdown, exacerbated by the events of 11 September 2001. So, are we heading for a global recession?
David Walton, MD and chief European economist with Goldman Sachs International, explained to delegates at last Wednesday#;s IGD Global Retailing conference in London that the recent downturn in economic activity is coming to an end.
“The world is a book and those who stay at home read only one page” Joanne Denney, CEO, IGD
The worst fears of the business community following 11 September were not realised, Walton reassured his audience, although anxious manufacturers aggravated the initial concern by over-reacting. Industrial productivity was cut back, thus exaggerating the downturn. Now, however, manufacturers are building output back up to meet the underlying demand. Industrial recovery is underway, led by the US, but it will be steady rather than dramatic.
Fortunately, consumer spend has remained healthy through the downturn, said Walton, most notably in the UK and US. US real income growth has been picking up, despite a small rise in unemployment, while in Euroland a weakening labour market, food price inflation and the introduction of the euro itself have depressed consumer enthusiasm in the shops. In the UK, average earnings growth has held up well, particularly among public sector workers who are benefiting from the extra cash pumped in by the Labour government. Workers in this sector may not believe their conditions have improved, but their shopping baskets tell a different story. Tax cuts and low interest rates have also helped spur growth in consumer spending.
“Retail is a difficult place to be in an economic slowdown” Johanna Waterous, director, McKinsey & Co.
Nevertheless, Johanna Waterous, a director at McKinsey and Company, painted a picture of a “marked schizophrenia in shopping behaviour”. Research shows that some shoppers (typically women over 30) are concerned about their finances right now, and as a result are shopping differently and switching retailers. That said, two products in the portfolios of leading manufacturers that are strongly marketed to women (Unilever#;s Dove personal care range, and Diageo#;s Smirnoff vodka), are outperforming their owners#; other brands. Meanwhile, other consumers (typified by the under-30s male) are spending more freely than ever. Waterous summarised what delegates at the conference already knew – it#;s extremely hard to put your finger on what consumers want despite the mountains of research undertaken.
As with the last four economic troughs, retail has indisputably led the market down. “Retail is a difficult place to be in an economic slowdown,” commented Waterous. “Retail sales tend to contract sooner and deeper, and take longer to recover.” That said, Waterous reiterated Walton#;s stance that what we are seeing now is not a classic recession – and there are few indications that one is on its way.
During the last year or so, the top ten retailers have been able to grow their market share disproportionately to their smaller rivals. During periods of economic slowdown, the gap between robust retailers and junior league players tends to widen. The major players have lower exposure and gearing, and those who operate in a number of different regions are also able to limit their exposure to the markets hit hardest. Nevertheless, the stock market still places heavy demands on these companies – analysts want to see 10-15% sales growth per annum, which is a huge challenge even during the most robust economic climate.
“Global success will come from achieving local scale – for retailers, size DOES matter!” Paul House, commercial director, Tesco Hungary
Waterous outlined some of the flawed strategies retailers often implement when facing a slowdown. Typically, retailers will try to save or buy their way out of a recession. The former involves cutting labour and stocks, and halting expansion and upgrade projects as a knee-jerk cost-cutting response kicks in. This can be dangerous as tired-looking stores and a limited product range turns off consumers – who consequently take their shopping trolleys elsewhere, exacerbating the situation further. The latter response sees increased promotions and deeper discounts, allowing customers to cherry-pick the best deals, resulting in an uneven sales lift and stock imbalances – hardly a recipe for success. At least 30% of retailers adopted one of these strategies during the last economic recession, and paid the price in lower profits.
A more measured response to signs of economic slowdown pays off, says Waterous. Top global performers can afford to play a long-term game, reshape their portfolio and think about consolidation. Second-division players may need to toughen up the performance of their suppliers and streamline labour productivity, while only relegation candidates should really need to resort to the desperate measures of cutting non-performing areas and slower-moving SKU s (stock-keeping units). The bottom line is: don#;t panic, as too many retailers are apt to do.
The last few years have seen a number of retailers expand abroad, and UK market leader Tesco is well up in this field. Paul House, commercial director for Tesco Hungary, which operates 21 hypermarkets and 27 supermarkets, outlined his group#;s strategy for foreign growth.
Tesco started by identifying markets with fast-growing GDP. For instance, Hungarian GDP rose 3.9% in 2001, and sales in Hungary have grown from £48m (US$69.9m) in 1996 to £456m last year. Moving into extremely underdeveloped retail landscapes enables the group to reap the benefits of the ‘first mover#;. In common with other EU retailers that have branched into Eastern Europe, Latin America and Asia, Tesco has based its foreign campaign on the hypermarket format, relatively untested at home in the UK due to planning restrictions. The format is well received and appears to appeal to customers of most ages and income brackets.
“If you continually have your face directed towards the CEO, then your ass is necessarily toward the customer” Jack Welch, GE
A key lesson House claims Tesco has learned is to utilise local expertise. Nearly all the directors of its foreign hypermarkets are hired locally, and the vast majority of food products are sourced from domestic suppliers. This keeps costs down but more importantly facilitates consumer acceptance. House#;s comments were later echoed by Gerard van Breen, senior vice president, Ahold Global Sourcing, who said his group#;s foreign strategy was to buy good companies and make them better, while keeping them as local as possible, in the eye of the consumer at least.
Looking forward, House predicted that these emerging retail markets would remain full of potential, as many of the growth and innovation tools common at home can be adapted to the maturing consumer profile of emerging markets. To cite a few examples, personal finance will become a more important service as real wealth continues to grow, while online retailing has yet to take off, and a developing taste for international cuisine can be fuelled with a broader product range.
Suppliers under pressure?
More retailers are thinking international, there#;s no doubt, but what does this globalisation mean for suppliers? In splendid isolation as the sole manufacturer on the podium, Procter & Gamble#;s John Molter reckoned it simply gave retailers an even bigger stick with which to beat suppliers. P&G director, customer business development, Molter was downbeat about the impact of retail globalisation on manufacturers, and also pointed out that the increasing dominance of own-label ranges is inevitably rendering global FMCG (fast moving consumer goods) brands less important to retailers. The (manufacturer) brand is no longer king – and retailers have been able to grab a larger share of total system value.
That said, Molter shared a few practical thoughts on how suppliers can protect themselves. He started by reminding delegates that it#;s not all bad news. If your product is listed in Tesco, and Tesco sets up shop in a new marketplace, your products may gain a new outlet too. Retailers still need suppliers, but negotiating skills are key to ensure both parties are satisfied. To build a strong position from which to negotiate, it is vital that resources are focused on building a relationship with the customer – in this case the retailer.
Suppliers may need to restructure parts of their business in order to accommodate this. If one of your key retail customers has structured its sourcing units along vertical lines – with a single team sourcing, say, washing powder, for its global operations – it may be worth creating a sales team along the same lines. There is an increasing tendency to create multi-functional teams that do just this, rather than having different teams focus on sourcing for particular markets.
Even in this much-hyped electronic age, inter-personal relationships have never been more important. Senior executives need to be appointed to relate on an ongoing basis with each major customer, and this should typically be an appointment at country sales director level. Staff retention also plays a vital role in building strong relationships with retailer customers, and all too often manufacturers are unable to retain key staff, commented Molter. Boardroom backing is essential, so customer-facing staff at manufacturing companies may have to sell their vision internally first off.
In a brief panel discussion, Ahold#;s Van Breen was unable to deny that the globalisation of retailers poses more of a threat to suppliers than an opportunity. However, Johanna Waterous reminded delegates that, despite the unarguable power of retailers, their stock market value has fallen considerably over the last few years, while that of consumer packaged goods makers continues to rise – make of that what you will.
Globalisation is a serious challenge – but the prizes are serious too. Those retailers that get it right, and the suppliers that are smart enough to stay with them, will reap huge benefits in terms of cultural enrichment, exposure to new markets and, eventually, share of consumer spend. As IGD chief executive Joanne Denney quoted: “The world is a book… and those who stay at home read only one page.”
By Catherine Sleep, just-food.com managing editor