These are tough trading times with fierce competition and fragile consumer confidence. And yet these are the conditions in which outstanding talent can shine and in which some companies continue to drive double-digit growth. Catherine Sleep reports back from IGD’s annual convention for the retail sector.
Tate & Lyle CEO and IGD president Iain Ferguson kicked off proceedings yesterday [Tuesday] at this flagship event in the UK retail arena by reminding the 650 delegates in attendance of the importance of growth. Growth is not only necessary to attract the best people, but also to attract market capital, and perhaps now more than ever.
Traditionally considered a safe, albeit unglamorous, haven for stock market investors, food manufacturers and retailers have generally underperformed the FTSE 500 this year. Investors have been turned off by food scares, political controversy over nutrition and obesity, and concern over an increasingly complicated regulatory climate. As a sector, there is a need to communicate more effectively with both the public and fund managers.
All eyes on growth
David Reid, deputy chairman of Tesco, one of the world’s fastest growing retailers, reinforced Ferguson’s views, stating that growth was crucial to shareholders. TSR (Total Shareholder Return) combines growth in share price with dividends paid and has become a key tool in assessing business performance. Staff also demand growth – the finest employees need to see their company growing to feel motivated, and they require exciting advancement prospects if they are to be retained. Suppliers will also be keen to devote their best account managers and most exciting promotional activity to the work they do with those retailers who show most growth, Reid added.
That said, growth must be masterminded in a controlled fashion. New projects must be piloted carefully, cost models checked and rechecked and a watertight distribution, IT and supply chain infrastructure established. Growth must, after all, be profitable.
“You cannot save your way to prosperity”
David Reid, Tesco
R&D investment paramount
Nestlé UK chairman and CEO Alistair Sykes stressed the importance of continuing to invest in new product development and research, in periods of recession as well as economic boom. Indeed, innovation has always been the linchpin of the Swiss company’s strategy. For example, Nestlé claims to have invented the first infant formula in the late nineteenth century, establishing a brand new product category. In 1938 the company created the first successful instant coffee, still one of its leading categories today. Nestlé now invests some £520m (US$869.9m) in Research & Development each year to create new products and maintain consumer enthusiasm by extending and improving existing brands.
Sykes said it was particularly important to invest in categories that are already mature, citing the example of the new KitKat Kubes, which build on the strength of the KitKat brand while tapping today’s demand for confectionery to graze on through the day, or to share with friends.
He spoke of the need to think long-term when growing the business in new regions. Building local roots is vital, and explains why Nestlé stayed put in Russia during the economic crisis of the late 1990s when so many other foreign companies withdrew.
Sykes also warned against the temptation of focusing too heavily on short-term price-cutting and promotions, often driven by retailers in the UK. This inevitably cuts into profits and leaves insufficient reserves for investment in R&D. Such short sightedness hampers innovation, and in the long term companies, investors and consumers pay the price.
Tolerance of occasional failure
Unilever chairman Niall FitzGerald echoed Sykes’ belief that investment in innovation is vital. He stressed that there needed to be room for risk-taking and occasional failure. To much amusement he cited his own company’s example of Persil Power, a laundry powder that packed an extra scrubbing chemical, which, it was discovered, was so harsh that it rotted clothes.
This raised a laugh, but the point remains. If new product development teams become afraid to raise their heads above the parapet and take a risk, they will not come up with the most innovative new product proposals.
Furthermore, when Persil Power was withdrawn from the market, the share price took a big hit, but the size and success of Unilever’s other brands meant the company’s overall profitability was barely affected. Indeed, such apparent debacles can have a silver lining, forcing management teams to take a fresh look at their products and marketing strategies.
FitzGerald also urged manufacturers and retailers not to lose sight of local cultural practices and preferences in their search for global growth. Major brand custodians know there is no such thing as a truly global consumer, and suppliers and retailers must think ‘multi-local’ – “neither mindlessly global nor hopelessly local”.
“Be neither mindlessly global nor hopelessly local”
Niall FitzGerald, Unilever
Consolidation and competition contentious
With so many of the great and good of the UK retail sector in the room, the battle to buy Safeway could not go unmentioned. There was near-unanimous agreement with the competition watchdog’s verdict that only William Morrison should be permitted to bid, but much doubt that the acquisition would actually happen.
Big Food Group CEO Bill Grimsey took the opportunity to call once more for a rethink on how the market is defined. Current definitions allow major players in the out-of-town supermarket sector, such as Tesco, to expand unchallenged into the convenience store sector. Grimsey foresees a situation where the only choice consumers in some towns have is between Tesco and Tesco Express, a monopoly in anyone’s book.
One thing is certain; in a climate where growth is the prime indicator of corporate performance, the impulse for consolidation will remain undimmed. The extent to which these impulses remain unchecked is a matter for the competition authorities.