Adapting To Cyclical Change

SO, JUST WHEN WE THINK we’ve got this channel blurring idea nailed and we can differentiate ourselves as retailers, we have a major shift in our economy. Consumer-shopping patterns are changing again. With more private label and more searching for value around the edges, I doubt channel blurring is behind us. In fact, at this stage, we face more change than ever.

Business cycles don’t change. Consumer habits regularly shift from thrift to extravagance and back. Remember the shift to simplicity after the terrorist attacks of 9/11? But what is different about the current economic crisis is that it shifted so quickly and dramatically: the families of many of those most directly affected by the economy will view their buying habits from a different perspective for a long time to come.

How about retailers? How should we react to change? The answer, according to a phenomenal speaker I heard recently, is “quickly.”

I recently heard Shelley Broader, CEO of Michaels Stores, Inc., speak about our journey. Last fall, she said, things happened so fast, especially around the holidays, that some retailers seemed to just try “waiting it out.” But the stores that did that didn’t understand that the economic shift had caused a major change in consumer values, practically overnight.

No matter how rapid, retailers have to respond to change or they WILL lose. After standing pat, Abercrombie and Fitch has been down 30 percent over the last two quarters. As they waited this out, did they miss the reality that the teenager would be on a budget – and still have access to multiple channels? Broader challenged us as manufacturers and retailers to question every assumption we’ve ever had about our consumers. Their shift from extravagance to nesting means they will no longer decide to spend if it seems ridiculous or stupid.

So as we think about beverages, what kind of decisions should we make around new product introductions? With ongoing health trends, it’s certainly about “what do I need” versus “what do I want?” But we’ll also see a reduction in the SKU’s in a category. Recently, the Wall Street Journal stated that retailers were cutting selections by about 15 percent. Too many choices can be confusing, conflicting with our push towards simplicity. Items on the shelf and in our back rooms that aren’t turning can be costly. Consider new beverages that really add value to the consumer and continue to offer benefits that aren’t available today. Delete the dead items. We must understand our customers, and evaluate our assortments.

Grocery has been hit most severely among all the channels suffering the effects of channel blurring. Grocery stores, still the primary places consumers shop for food and beverages, became supermarkets, taking on new lines while other channels nipped at their food and beverage heels. So, how should they change in light of the changes we’ve discussed?

Let’s look at bottled water as an example. It’s a great lens because it has evolved into a distinct group of brands, positioned from Super Premium to Value, with a strong volume base in the mid-ranges. Super Premium brands have maintained their position, driving retail dollars to the register, while value brands (especially private label) have driven their volume using discounting. Unfortunately, two of the major mid-range brands in this category, also lack differentiation (i.e. reverse osmosis versus spring) and have suffered so much that they’ve driven the category declines.

The lesson is that consumers are telling us water is a category that has a product that meets their needs at both ends of the spectrum. Other beverage categories in grocery have this type of dynamic. Soft drinks have three segments: private label or value brands, mid-range (core brands), and in the past five to seven years, premium niche brands. I would suggest that groceries should review each beverage category for opportunities like these and focus on driving volume with price in value categories and registering ring and margin with premium categories.

We know there are three ways to build revenue: increasing the number of customers, increasing the frequency they purchase products, or increasing the amount they spend per transaction. Going back to our customers and thinking about channel blurring, grocery MUST differentiate, and our data will tell us how. Michael’s, Broader told us, evaluated their sales against demographics and found that wedding supply sales had increased across all income levels, not just lower income markets. Winn Dixie came out of bankruptcy by understanding their position as a retailer in the markets they did business and entered into a marketing campaign that let their customer know they were “getting better all the time.”

Consumers, regardless of income, are trending towards nesting and values. Understand your data, differentiate within the areas you do best, and ramp up the ways that you can effect change. There are many more beverages on the market than the last time the consumer was in a ‘nesting’ mood. Evaluate your variety, add new products that make a difference, and focus on high volume value and high margin premium as a way to drive change in your categories. This is the worst time to be ‘stuck’ doing what you’ve always done, so make changes now. Definitely don’t waste your time ‘waiting it out.’

Debbie Wildrick, the SVP of Sales and Marketing for Equa Water Corporation, is a sales executive and channel strategy specialist in the CPG industry. The former Senior Director of Vault and Proprietary Beverages at 7-Eleven, Inc., she has extensive experience in retailer, supplier, and technology aspects of the consumer packaged goods business.