OPPORTUNITY RISING: How Brands are Using Fragmentation to their Advantage
Rapidly changing demographics and social trends have altered - seemingly overnight - the way people shop for and consume products, and the way retailers and manufacturers must market and deliver them.
The situation is primed for early movers, although visionaries are not necessarily always appreciated.
For example, when Josh Hix and Nick Taranto pleaded the case for their home delivery meal kits on Shark Tank, they were met with a chorus of pessimism from Sharks Kevin O’Leary and Robert Herjavec.
Mark Cuban, however, saw the growth potential, stepping forward with $500,000 for six percent of their company, Plated. The premise was simple - charge a $10 membership fee and a $48 monthly minimum to deliver ingredients and recipes for four entrees that users prepare and consume at home. A few short years later, Plated is established in 80 percent of the country and regularly sells out of inventory. It has received more than $20 million in Series A funding to ramp up production and fulfill demand- a sign that service still has considerable growth potential in our digital age.
Like many other rising retailers, Plated was quick to capitalize on market trends:
- An Aging Population: A quarter of the U.S. population is comprised of people 55 or older.
- An Age Gap is Emerging: This year, the number of Millennials will swell to 75.3 million, overtaking Baby Boomers, and highlighting the burgeoning age gap between these two dominant generations.
- An Increasingly Urban Population: Over 60 percent of Millennials prefer urban centers to rural or suburban dwellings. They also earn less than Boomers while working longer hours, meaning they have less time to shop and less space to store goods.
“Immigration, too, has a huge impact on consumer products retailing,” says Dan O’Connor, CEO of RetailNet Group, a research and analytics firm, adding “[…] all roads are leading to a very fragmented marketplace.” This, in turn, applies pressure to consumer products marketers and retailers who need to better determine their audiences’ needs, what products they should carry, and how they will merchandise these products in a way that resonates with their target consumer. O’Connor, an industry thought leader, recently shared with WestRock some of the biggest marketing and merchandising challenges that retailers and manufacturers are facing in today’s fragmented marketplace. Here are some of O’Connor’s most salient points:
- BIG BOX TOO BIG. One effect of digital innovation on supermarkets is a notable migration of nonfoods sales to online sellers. “This will reduce the content needs of hypermarket stores by 20 to 40 percent over the coming years,” O’Connor predicts. “If the typical super center was 50-50 food/nonfood, and if 25 percent of nonfoods went online, then more than 10 percent of the store is empty. But suppose we forecast that number at 50 percent, not 25 percent? Then you’ve got to reduce a quarter of the store content. Ultimately, this will lead to smaller store formats, which will impact packaging and promotion enormously. Maybe case-packs go to 12s instead of 24s.”
In the meantime, O’Connor contends: “This situation could hand CPG merchandisers a huge opportunity, since seasonal and promotional aisles in existing stores could increase from between one and one-and-a-half aisles to two or two-and-a-half. National brands looking to own large sections in stores may find the real estate available and reasonable.”
- PERMANENT DISPLAYS. Customization has become the norm in merchandising displays. For example, the average production run size at WestRock has decreased by 40 percent over the last decade, despite remarkable growth in overall business. A marketplace modification of this magnitude brings with it higher costs tracing to more plate changes, set-ups, and re-starts. As a result, major manufacturers are gravitating toward the option of permanent displays. It’s a trend that happens to dovetail with concurrent trends toward shoppers looking for more service and large stores with extra space for rent.
“Solution centers are going to become more important,” O’Connor says. “Retailer apps will continue to integrate all sorts of in-store features. Home Depot uses videos to show you how to fix your sink, with an expert on screen telling you what stuff you need. If you’re Moen, you can help Home Depot create the content - which is incredibly tough- in and of itself - and then be there in-store to provide the stuff.”
- HIGH SWITCHING COSTS. One paradox of technological enablement is that, while it intensifies price and product transparency in addition to leading to fragmented consumer demand, it also plays into the hands of huge mass merchandisers who can afford whizz-bang mobile apps loaded with incredible content. “Walmart and Amazon get the consumer engaged with an app that has 17 feature sets - recipe finders, product information, pricing options. The product search begins more often on Amazon than it does on Google, and so the switching costs go up for other retailers,” O’Connor says, making the point that a consumer locked into one retailer’s app is going to be expensive to lure to another store.
“We’re moving toward this world of apps. [Walmart’s Savings Catcher]allows consumers to keep digital records of all they’ve bought, to take a picture of their receipts and get credits if a product at a competing retailer offers a lower price. You can envision a world in which retailers have near perfect information on a shopper. It’s going to really change what’s put in front of consumers in store.”
- PROMOTIONAL PRICING PRESSURES. Another aspect of Walmart and Amazon’s business models that should be emulated by mass retailers is national pricing. Though the debate is in its early stages, Congress is looking long and hard at technology’s ability to allow personalized pricing to consumer segments and intervals. Senator Jay Rockefeller (D-WV) has been on a witch hunt of “data brokers,” arguing that they unfairly use consumer data to enable preferential pricing for certain individuals. In a hearing of his Commerce Committee, Sen. Ed Markey (D-MA) said that pricing and promotion segmentation was a harmful and questionable practice. “It’s not redlining but ‘weblining,’” he said. “It’s telling people, you’re in the wrong financial group, the wrong racial group, the wrong sex.”
Should the tune play out badly in Washington for business, zone pricing could be endangered, says O’Connor. “More than 50 percent of super marketers’ profitability can be attributed to zone pricing. If you put different ZIP codes into a retail search and come up with different prices, I don’t think that’s sustainable.”
- RETAILER-MANUFACTURER INTEGRATION. All this leads to the primary imperative facing retailers and suppliers in the years ahead - working together to attract and retain customers with products that meet their unique needs. The retail shift to smaller stores will demand SKU rationalization to tailor and reduce the number of items carried. More importantly, they are going to need to train their sales and marketing teams to address changing retail requirements, deploying more regionally based sales and marketing personnel to tackle regional fragmentation.
Ultimately, several forces are converging to foster fragmentation, chief among them the highly empowered consumer who knows what’s available, at what price. “Most say it’s all about technology. I say it’s one-third technological change and two-thirds societal change,” O’Connor avers. “I think that if I’m on the board of a major retailer, I would expect management to be updating their strategy once or twice a year. They’re going to need a faster cycle of store updates to remain relevant in the years ahead.”
For information on how WestRock is developing innovative in-store solutions to turn shoppers into stoppers and browsers into buyers, call your WestRock representative.