ResearchTalk

My, oh my, how things have unravelled.

Back in September, Research World looked at the impact of the downturn and the focus was on the collapse of financial organisations.

But now the focus has shifted to collapsing retailers, among them household names such as Circuit City in the US and Woolworths in the UK, one of the world’s oldest retailers.

What’s more, “Ten chains ‘face closure’ in 2009” declares a headline from a UK consultancy as a dismal prelude of the carnage to come.

In this Darwinian environment, retailers need to adapt or face the real prospect of death.

Global
It’s no surprise that the downturn has spread and is even hitting the high growth BRIC economies.

But, says Christopher Ruane, head of ?What If!’s retail innovation practice in China says that “The fundamentals in China are nowhere near as bad [as the West].” He says that Mercedes has enjoyed a good year, that Disney has successfully launched a premium-priced language learning centre, and that designer brand Marc Jacobs is opening a new branch “within 3 blocks of another Marc Jacobs store.”

Javier Medrano, VP marketing for Grupo Bimbo, one of the world’s largest bakery firms, concurs for Mexico and Latin America: “For the last two years the [Mexican] government has been campaigning against childhood obesity so a lot of companies are launching new products and lines…[thereby helping to stimulate the economy],” says Medrano.

Masstige
India, though, may be a BRIC exception. While still expected to achieve high single-digit growth, Piyul Mukherjee, director of Proact Research and Consultancy says that the number of stores in malls has mushroomed over the past five years, and that most “…are going to find it tough.”

That, says Mukherjee, is because the middle class have failed to embrace these new stores, many of which feature high-end brands such as Rolex and ‘Mango’. The result? They could well prove to be as much a victim of flawed business models as of the downturn.

Value, value, value
Perhaps predictably, consumers focus on value during harsh times. But what does that mean in practice?

In the West’s most mature economies, the focus seems to be on trading down, often to store or lower-priced brands. Gill Aitchison, president of global shopper & retail research at Ipsos, says that an Ipsos MORI study in late 2008 found that 61% of UK shoppers had started to buy more own label/store brands, while 26% had widened their repertoire of supermarkets to get better value.

Aitchison does, however, warn retailers to maintain their core offerings: “While shoppers are watching their spending, they still expect choice and variety. Therefore, full-service retailers who are limiting their stock and delisting products will see a decrease in shopper satisfaction. Discounters [e.g. Aldi, Lidl], on the other hand, who already have created expectations of reduced SKU options, will not suffer this.” In short, retailers that cater to both price and value seekers are expected to do particularly well in the current climate.

In fast-growing markets such as China, India and Mexico, where the growing middle class has developed an appetite for quality and variety, and where the effects of the downturn are far less severe, value is about more than simply price.

In China for example, foreign retailers Carrefour and Tesco do particularly well: “It’s partly about refinement, partly about quality, and significantly about safety – I can’t over emphasise how important product safety is in China, people are aware that food especially is often not safe here (eg. melamine milk scandal),” says Ruane.

And in Mexico, the search for value has led to a resurgence of local mom and pop stores: “A couple of years ago we really saw a slight decline in new traditional local stores opening. The supermarkets were offering really good value…but recently that’s been changing again because now people are now more conscious of prices, they don’t have enough money to spend for a week’s worth of products, they are buying two or three times a week in smaller quantities in smaller stores,” says Medrano.

Middle-squeezing
Vivek Sharma, group director, marketing strategy & insights at The Coca-Cola Company contends that during a downturn “it’s the middle men that get squeezed.” By which he means that retailers need to occupy a position of good value (e.g. Wal-Mart) or a distinctive niche (e.g. Whole Foods).

It’s the reason, he says, that Nielsen data shows that Wal-Mart and dollar stores are outperforming the likes of mid-market Target.

It’s also why the UK’s Woolworths is closing: “Woolworths sold a wide range of merchandise but never achieved a positioning of being the best at any one thing,” says Aitchison.

Foreign invasion
Western retailers have been making inroads into other countries for a while. And when they do, they need to be careful on the level of local adaptation.

Minimal adaptation can sometimes work. Ruane says that their influx in China has forced domestic retailers to “significantly raise their game, while other domestic retailers have gone to the wall. Price promotions and clean stores are much more common because of the impact of Tesco and Carrefour.” But, he says, Tesco and Carrefour have also adapted by installing wet markets (for selling fish etc.) to accommodate local preferences.

But foreign approaches don’t always work, however logical they may seem.

For example, Indian supermarket chain Big Bazaar has steadfastly eschewed the ‘clean and tidy’ look of Western supermarkets: “Big Bazaar knows that people like a mess inside, they don’t want clear, clinical aisles like in the West,” says Mukherjee. Big Bazaar also refers to the ‘bum-brush factor’ – they say that the moment bums fail to brush each other, sales go down!

GoMe, China’s leading electronics retailer, faced a similar dilemma a couple of years ago when US competitor Best Buy arrived. Best Buy decided to operate traditionally organised stores with clear information displays, in stark contrast to GoMe’s market-style setting devoid of information. GoMe was right, explains Ruane, because: “Shoppers tell us time and again that they don’t believe anything they read or hear in store. If they want an opinion they’ll use the internet and go onto a bulletin board or else seek a personal recommendation, even for a brand they trust.”

Medrano says that foreign retailers have had a mixed experience in Mexico. Wal-Mart successfully operates under four franchises: Walmart (hypermarkets), Bodega Aurrera (high discount), Superama (supermarket with a focus on higher quality and prices), and the members-only Sams´s Club. In contrast, rival Carrefour has exited the market.

And in the UK, German discounters Aldi and Lidl have made significant inroads, so much so that market leader Tesco has ‘copied’ their discount line as a defensive measure.

A successful retailer: Future Group
Mukherjee regards India’s top retailer, Future Group, as a significant success story, one that she expects to continue during the downturn: “…they have a whole bunch of [different] outlets…there’s a whole bunch of consumers out there who will always, whatever you may do, not really want to walk into a large supermarket because they say that’s not my scene.”

Future, she says, have seen off competitors by building a strong national presence under an assortment of value brands. Crucially, while competing brands focused on the middle class, Future targeted the lower middle class through its KB outlets, something malls initially resisted because they didn’t “want that kind of a crowd in the mall.” Malls soon relented once they realised Future’s power to drive footfall.

For now at least, the credit crunch has stymied the ambitions of competing players, both foreign retailers and domestic conglomerates such as Metro, Tata and Birla. The latter, says Mukherjee, “missed the bus on retail at a national rather than a local level,” by starting too late.

Future is now busy building its own portfolio of value brands across all the categories they sell, something they anticipate being very profitable.

A successful brand: Coca-Cola
Coca-Cola has been one of the more successful brands during the downturn. “We once again demonstrated our ability to perform consistently, delivering our eighth consecutive quarter of double-digit comparable earnings growth,” said CEO Muhtar Kent in last October’s trading update.

At the sharp end is Coke’s Sharma. He says that US consumers did not reduce overall grocery spending at first, instead choosing to reduce the number of supermarket trips to counter the sharp rise in fuel prices.

But now that the recession is starting to bite, consumers are trading down to cheaper brands and even eliminating certain categories altogether.

So how does Coca-Cola defend itself against price shopping? Sharma says by focusing on value: “People are starting to look more at value propositions…we look to provide the right price-pack offer and to reinforce our intrinsics.”

Two of those ‘intrinsics’, says Sharma, are the colour red and the distinctive contour-shaped bottles. The latter is now making a comeback in the US because “Whenever you come across Coke, we need to evoke those strong memories people have.”

If you read last month’s piece on ‘Buyology’, you will have seen the success Coke achieved from its sponsorship of TV’s American Idol. Coke’s seamless integration of red and the contour shape into the show was textbook marketing that resulted in very high brand awareness. Sharma modestly proclaims that Coca-Cola is “very happy with the program.”

Online
Despite the growth of online, retailing is largely still an offline story in many categories. In some categories such as financial products and services, electronics, books and digital products, online is significant. Beyond this, the Internet plays an important role in facilitating price comparison for value seekers.

An area of interesting development is China. It now has the world’s largest online population and “Chinese ecommerce has more or less doubled over the past year, albeit from a low base,” says Ruane.

Auctions are particularly popular. TaoBao, China’s answer to eBay, is driven by person-to-person sales of low ticket items. Delivery is extremely low cost due to the low cost of labour and the creative use of city subway systems.

Key barriers to growth include the limited availability of online payment systems, plus “Chinese consumers are much more visual and tactile than western consumers…and there’s a big concern about fake goods, particularly fake consumer goods,” says Ruane.

No Shit, Sherlock!
Shopper research, as distinct from consumer research, is a hot and fast-growing area, according to Ipsos’s Aitchison. This, she says, is because “…it helps retailers to pinpoint actions in store to recognise and counter the economic concerns that shoppers are feeling. And the beauty is, they are generally relatively low cost to implement, compared to advertising or deep price cuts.”

Sharma is testament to its importance within Coca-Cola: “I’ve been doing shopper insights for some years, but it is only relatively recently that we decided to [restructure teams]…my team is… focusing only on what we call commercial and franchise insights, which is all about trying to understand a lot more about the shopper as opposed to the consumer. And I have my colleague who is focusing a lot more on consumer insights. The key is ‘renewed focus’ on the shopper.”