Boardroom is comprised of original perspectives from leading experts in food retail on a selection of the most critical issues executives must confront in boardrooms across the country and around the world. We are excited to share a series of Q&As with various authors from papers included in the journal that will give an expanded perspective on the key topics.
FMI members are in a highly competitive, low margin business. Success is predicated on constant evaluation of changing market conditions, continual cost reduction and process improvement, along with investments in a variety of growth strategies, to drive the retail profit engine. Our partners at Oliver Wyman have identified two archetypes of successful retailers: “Bears” and “Sharks”. The former are disrupters, often stealing share from existing competitors; the latter simply outswim (read: outperform) the rest also, winning against the third archetype, “Salmon” (food for both bears and sharks!).
In the third part of our series, I spoke with David Waller, Oliver Wyman Retail Practice Partner, and Jacqui Martinez, Oliver Wyman Retail Practice Partner, on potential growth strategies for retailers and the strategies that will allow them to survive in an increasingly competitive and changing environment.
What made you so interested in exploring growth strategies for retailers?
Jacqui Martinez: Most of the time our clients are focused on the near term, and they have to be. They very rarely get the chance to take a step back and think about the five year plan. When you’re in that daily grind you miss what happens over the long run, so we wanted to take a step back and look at 30 or 40 years of retail history. What has happened? What are some of the underlying forces behind that? And then therefore, what are some of the principles that should govern the day-to-day grinds that every one of our clients has to go through?
David Waller: If I think about the central challenge of retail, it is growth. The article draws some attention to why that is – retailers have to avoid the headwind they face from cost inflation that generally exceeds price inflation. How do they not get blown away by the headwind? Moreover, growth is historically how Wall Street evaluates retail success, and that challenge goes from routine to being hard, when you no longer just manufacture growth by minting more stores. In the US right now, it’s especially acute. There are at least three different tidal forces that are working against traditional retailers. You have the rise of discounters, emergence of online business models, and the trend toward consolidation. In many ways, I’m interested in growth strategies because of the centrality of that challenge and how severe it is becoming for many players who have coasted for a while and are now in more precarious straits.
What advice would you give to retailers to successfully manoeuvre the transition from “bear” to “shark” or “a new kind of bear”?
Martinez: I would say the capabilities that make you a successful bear will not make you a successful shark. The sooner you recognize that and start to plan for the capabilities you need in your next lifestage, the better off you’ll be. People who are successful bears have an advantaged format that is attractive to customers. They are able to stamp out that format in a very uniform way ensuring a high level of execution across a wide number of sites. They are also able to pick the right sites to put those stores. In some ways, the capabilities that make you successful at doing that play against you when what you’re trying to do in lifestage three is get more out of every square foot that you already have. A lot of the things you need to do in lifestage three involve localizing your offer in every store and fighting against the uniformity that made you successful in the second stage.
Talk a little about not only “strategies to survive”, but strategies to thrive in an increasingly omnichannel environment.
Waller: I think the first principle is truly making the most of your assets. For a traditional retailer that often means coming to grips with what your assets actually are. We tend to think of that as physical assets – stores and warehouses, for example. But most retailers are quite rich in customer relationships and customer insight. Retailers with a loyalty program end up having very long and comprehensive histories of what customers bought, when they bought it, and the circumstances under which they bought the products, which is really powerful. Today’s retailers need to make much better use of that information. There is a little bit of a paradox there. If you think about what retailers spent their time getting good at, a lot of it centers on cultivating product expertise. They organized themselves around product lines. Some aspects of product knowledge are less important these days, as consumers are relying more on online reviews and rating and not so much on expert opinion and curation. They are starting to expect more of the limitless selection that is made available by the online experience rather than what fits within the constraints of a store. If you’re going to make the most of that product expertise then you need a more serious private brand offer that inspires meaningful brand loyalty. But even that is connected to the whole notion of capturing and acting on customer information. Online retailers are accessing that information at a prolific rate.
What are the challenges and opportunities for companies as they navigate away from face to face contact with customers?
Waller: All of this raises the question of what is a store good for. Convenience has been one factor, but it gives nowhere near the same advantage it once did because of the rise of home delivery. That forces you to answer a different question – what can’t you do online? Well, you can’t touch things online; you can’t taste or smell or feel or try onproducts. There are stores that are going to have to think about reinventing the layout, the look and feel, the way things are presented to customers, and changing the expectations of what you’re in a store to do. Retailers need to make it less about the products on the shelves and more about the experience of shopping.
Another challenge centers on customer relationships. You could argue that today that relationship is up for grabs. Some CPG companies would argue that the customer is theirs, because the product itself is theirs. Until customers are mostly buying products directly from CPG companies, that is a somewhat strained argument. In terms of the competition for that relationship, online aggregators or online retailers can make the similar claim if customers are loyal to their sites. But in general, online engagement across the board is low.
If you flip the question around as you did, you can ask: what are the opportunities in this space? I think there is a huge and unexploited opportunity to connect to just other areas of consumer’s lives, treating them as not just customers in a transaction but as people. The best example lately is in the health space – connecting what you eat with health information can be huge, but should be done carefully to guarantee privacy protections.
Any final thoughts you want readers to take away from this Growth Strategies section?
Waller: I would say a lot of the ideas that Adrian Slywotzky pulled together in his book – The Upside – are pretty relevant here. One in particular is this notion of double betting – the idea generally is you don’t know exactly who is “eating your lunch next.” So as a retailer you need to look for other channels to sell and deliver your products, especially the private label ones. But also it is incumbent on you to experiment with different business models. It is hard to know where the next success is going to come from, so you want to position yourself to play lots of potential games and as you start to see that one game is more attractive than another, redouble your efforts there. Most retailers have historically learned the skill of rapidly replicating a successful format. That skill can be especially useful if you are positioning yourself to do that simultaneously with several different and competing formats or business models.
*This interview is the third of a six-part Q&A series between FMI executives and Oliver Wyman partners on the inaugural issue of our joint journal Boardroom.
By Mark Baum, SVP of Industry Relations and Chief Collaboration Officer, Food Marketing Institute