Devangshu Dutta
December 24, 2008
At the outset let me mention the fact that in the title of this post lies a Freudian slip. The intended title was “Corporate Responsibility – Beyond Labels”. But the new – unintended – title captures the thought perfectly. (And I’ll come back to that in closing.)
Third Eyesight was recently asked by a multi-billion dollar global consumer brand to facilitate a round-table discussion focussing on the issue of how to drive ethical behaviour and sustainable business models into their sector. This company has a well documented strategy and action plan until 2020, and their team was travelling together in India visiting other corporate and non-corporate initiatives, to learn from them.
For the round table, we brought together brands, retailers, manufacturers, compliance audit and certification agencies, craft and community oriented organisations and non-government organisations (NGOs working on environment stewardship. Some were intrinsically linked to the consumer goods / retail sector, others were not. Among those present was Ramon Magsaysay award winner Mr. Rajendra Singh of the Tarun Bharat Sangh, an organisation that has, over the last several years, worked in recharging thousands of water reservoirs leading to the rebirth of several rivers.
The diversity (and sometimes total divergence) in views among the participants was a powerful driver for the debate during the day, which was the main intention behind having a really mixed group.
(Try this experiment yourself. Get a bunch of people together who define their work as being in the “corporate responsibility” stream. Then ask them the meaning of that phrase, and watch the entirely different tracks people move on. You might be left wondering, whether they are really working towards a common goal.)
At the end, though, the result was productive, since the divergent perspectives opened avenues that may have previously not been visible.
In the case of our discussion, the topics that were covered included labour standards and compliance, reduction of the product development footprint, closed-loop supply chains, water management, organic raw materials, energy conservation and community involvement in business. Some of the issues raised were:
My view is that these diverse areas and views can be aligned most effectively if we look at responsibility and sustainability in all its dimensions. These dimensions, to my mind, are:
– The Environment
– The Community
– The Organisation
– The Individual
Here is a suggested list to start with, which we can use to try out thought-experiments, viewing each issue in different dimensions and from different points of view (for example, buyer based in a developed market, supplier based in a developing country, an individual working in the supply chain, his family and broader community):
In closing, let me come back to “Babel”. According to the Book of Genesis, a huge tower was built “to the heavens” to demonstrate the achievement of the people of Babylon who all spoke a single language, and to bind them together into a common identity. God apparently was not particularly happy with this self-glorifying attitude, and gave the people different languages and scattered them across the earth.
Whatever your religious (or non-religious) affiliation, this story holds a gem of a lesson.
No matter how noble the cause of the corporate responsibility warrior, it is good to be humble and allow diversity rather than trying to capture everyone under one monolith with an apparently common goal. The diversity may be a lot more productive and help to spread the benefits wider than one single initiative.
The day that we spent on the sustainability round-table certainly demonstrated that very well.
Devangshu Dutta
December 16, 2008
A keystone of a retailer’s business is the loyalty that customers show in shopping at his or her store.
Loyal customers help to sustain a basic level of sales and reduce the need for expensive broadcast-style marketing spending that the store may otherwise have to do in order to keep the traffic and business flowing. This is as true for chain-stores as it is for independent mom-and-pop stores.
Therefore, as competition increases along with the number of stores selling the same products within a common catchment, retaining the loyalty of the customer becomes crucial, both in terms of strength of relationship (which is reflected in how much of the total spend the customer spends at the specific store) as well as the duration of the relationship.
In some parts of the more developed markets regulation may prevent the overcrowding of grocery stores and supermarkets. However, in markets such as India, one can see as many as four or five mini-supermarkets coming up on barely a kilometre along a busy street, before you even count the numerous kiranawalas. How can a store ensure a continued loyal custom from a certain share of that catchment?
Managers at modern chain stores may draw some comfort from studies which suggest that customers with higher incomes tend to be more “loyal” than customers with lower incomes. Since Indian chain stores tend to be targeted on high-income customers when compared to the traditional kiranawala, they may benefit from an intrinsically more loyal base of customers.
The variety of factors behind this “loyalty” may essentially boil down to the fact that with rising incomes the perceived benefit – lower prices, potentially better products or service – from comparing alternative stores may be outweighed by the perceived cost (time) of seeking these options and the personal adjustment involved in shopping in an unfamiliar environment. (Or, perhaps, to put it more bluntly: “rich customers couldn’t be bothered”?)
However, as the number of competing offers increases, promotional noise draws the consumer’s attention to benefits they might be missing out on, whether this is through flyers in the mailbox, kiosks set up near the consumer’s primary store, or even a full-blown ad campaign across multiple media. With every new offer or promotion, there is a temptation to try out an unfamiliar retailer.
This is more acute during recessionary times, when just about every competitor is shouting out deals to lure the customer to at least step into their store. And don’t think that high income customers are immune from the “toothpaste-discount” bait. During such times, whether they acknowledge it or not, everyone is down-shifting. It is at such times that loyalty is truly called upon. And it is also at such times when retailers start to think of loyalty schemes.
Most loyalty schemes are focussed on the objective of retaining existing customers through the use of incentives that are available only to loyalty programme members. They will ask a customer to provide some personal and contact information, and will provide some reference – a set of coupons to be redeemed during future purchases, or a card (index, swipe or smart) – that must be presented during subsequent transactions. In almost all cases, there is an attempt at getting the customer to return to the store because, as we all know, when we step into a store to redeem anything, almost without exception we end up shelling out more money than the redemption is worth. Since the value of the cash-back equivalent can be anywhere between 1 and 10 per cent (sometimes higher) customers are happy with the bribe, while the store is happy to ring up the additional sales.
However, it is surprising – or perhaps not – how many loyalty schemes turn into shams. In many such cases, the true benefits and the liabilities during the life cycle of the loyalty programme or of the customer’s relationship with the store have not been considered deeply enough. We all have multiple examples from our personal lives, which offer valuable lessons on such shambolic “loyalty schemes”. For instance:
Very often we find that a loyalty scheme has been conceived by an executive in charge of advertising to get the message out more cheaply (?) and focussed on a set of frequent customers. There is little link with the other parts of the operation, such as merchandising, store planning, or even promotion management, and certainly no influence. Thus, a second and potentially more powerful objective – using customer shopping data to tighten merchandising and improve the targeting of promotions – is virtually ignored.
Some companies have decided that managing a loyalty programme would offer lower benefits than the cost of maintaining the scheme, and decide to pass on the amount to the consumer directly in the form of lower prices. However, given the times, and the prospective goldmine of consumer purchase information that consumers willingly provide through such transactions (despite all vocal concerns about privacy) I would expect loyalty schemes to mushroom in the next few years.
The fact is, whatever our income levels, evolution has deemed that we become creatures of habit. Once a certain path has been followed successfully, a berry has been eaten safely, a transaction has been made satisfactorily, we are inclined to return to it again and again.
Trust, predictability and precedence are huge factors in developing loyalty, and when translated into the modern life of shopping (especially for food and groceries), this translates into the phenomenon that has been called first store (or primary store) loyalty. This can lead to as much as almost 70 per cent of grocery shopping being carried out at one store. Typically consumers will have a strong secondary store, and the balance grocery shopping would be split between multiple stores based on product availability, convenience and opportunity, deals and other factors.
But just because customers are genetically wired for loyalty to the familiar, the retailer should not treat this loyalty with contempt. Or even laziness. Because that can tip over the loyalty scheme into being a loyalty sham. And that is it only one letter away from “scam” – a dangerous label in these times of the consumer-activist.
Devangshu Dutta
November 13, 2008
For all those who have admired the consistency and presentability of produce in western supermarkets, here’s proof that tough times really focus us on substance and force us to look beyond skin-deep beauty.
Even in fruits and vegetables.
British supermarket Sainsbury has challenged European Union guidelines that restrict the sales of fruits by certain physical standards. Sainsbury’s is questioning EU regulations that prevent selling “ugly” fruit and vegetables. Due to EU regulations such as size of cauliflower (minimum 11 cm diameter) and the shape of carrots (requirement that there should be a single root, not multiple), Sainsbury estimates that up to one-fifth of what is produced in British farms cannot be sold in the supermarket. According to Sainsbury’s estimate, not following these regulations can help to reduce prices by up to 40%, and reduce wastage by up to 20%. The retailer is also trying to drum up customer support by running an online poll (94% responses were in favour of Sainsbury’s move, at the time this column was being written).
So less beauty could mean more veggies in the supermarket, and more money in everyone’s pocket including, hopefully, the farmer.
And this may also vindicate anyone who has complained that the beautiful veggies and fruits in western supermarkets taste inferior to their “ugly” counterparts sold on Asian hand-carts. Give us more substance and less style, any day.
Let’s look at some other substantial issues that merchants should consider.
Remember “I can’t get no satisfaction”? That’s what Mick Jagger and his mates in the Rolling Stones hit the world in the face with in 1965, allegedly in response to the rampant commercialism they had seen in the US.
After 43 years – at least judging by the modern supermarket shelves – apparently we still ain’t getting no satisfaction. In fact, the array of choice tends towards “overload”.
A typical developed country supermarket is estimated to carry over 40,000 SKU’s. Can you think of 40,000 types of items (or even 10,000) that you would need from the supermarket for your home?
So here’s the result. During my travels, if I’m in a store that is unfamiliar I could spend over an hour wheeling a trolley around before reaching the checkout. The first 5-10 minutes are focussed on figuring out the aisles based on my list. The next 10 minutes are spent picking what is actually on my list. And the rest of the time before the checkout is usually spent browsing through the thousands of SKU’s and picking stuff that we never knew we needed when the family made the shopping list.
Now, the guys who run the supermarkets are generally a smart bunch – they’ve figured that the more options you put in front of consumers, the more they buy. My cash receipts are proof of that. But, as American professor and author Barry Schwartz (“The Paradox of Choice”) says, the point where the choice becomes counter-productive is already well-past in developed markets.
With such overwhelming choice, consumers get into analysis-paralysis. And even after they finally purchase something out of the enormous range, you get shades of post-purchase dissonance. Only, in this case the dissonance, the dissatisfaction is not related to a bad product, but: “What if there I had made another choice? What if there was a better product than this? What if there was something available for less?”
During these times, it is pertinent to also put this in the context of business costs. There is surely a cost of providing that humongous choice in supermarkets. Have we considered what the saving could be, if the variety was reduced, if the product range was consolidated?
Consider the time (and therefore cost) spent on product mix and pricing decisions – surely merchandising teams have to be larger if you have a larger product mix, since each person can only handle a finite workload. Consider the cost of logistics of handling a widely diversified range. Consider the efficiencies lost in diverse production mix. So, does the consumer really need, really even want all that choice?
Retailers like the German chain Aldi raise precisely those questions. Aldi sells about 1,100 SKUs compared to the usual 40,000. And it claims that the typical shopping basket in Aldi’s UK stores is 25% less than competing supermarkets.
Indian retailers, of course, are possibly yet to reach that pain threshold of choice. There are possibly some potentially useful choices that are still missing. But even here, it is well worth taking a hard look at the product offering. With availability levels that can dip as low as 50-60%, it is probably worth asking – what if we dropped XYZ product from our range? Would it really hurt our sales or even our image; or would it help us to focus better on the products that really matter?
If we took our attention away from building such false choices, could the business become more profitable and therefore more sustainable?
The US and European markets are often the source of many a management thought and business model related to consumer products and retail, and of “best practices”.
So, in closing, I should share this question someone asked me recently: “when do you think consumer spending will bounce back in the US?” My first response was, “If only I had a crystal ball”. But the next thought in my mind was what if US consumers actually came to a decision that they had “enough”? What if their excessive consumption was no longer the role model for consumers in emerging economies? What if, instead, the frugal consumers of India and China became the global role model?
What would your business model look like then? Would your corporate be more socially responsible? And would it have a better chance of lasting longer?
For those who are interested in taking this inquiry even further, I can recommend John Naish (“Enough: Breaking Free from the World of More”, 2008), John Lane, Satish Kumar, M. K. Gandhi, Alan Durning (“How Much is Enough?”), or any number of ancient Indian, Chinese, Greek or Roman schools of thought, many of them pigeonholed into “religious” or spiritual categories.
You might also like this video of a talk by Barry Schwartz on Ted.com (below).
Do please share the results of your inquiry with us, too.
Devangshu Dutta
October 14, 2008
If you’re like me, then at any given point of time you have a vague idea about what is in your refrigerator, but not quite. That must why we end up buying stuff that duplicates what is already in the fridge.
Here’s an example of what that translates into for me:
At other times, it is the semi-consumed half-loaf of bread that gets trashed half-way through its fossilization process. Or the new flavour of cheese spread, where the price offer may have been tastier than the spread itself.
I sure there will be at least some among you who would have similar stories. (I would be shattered if I’m told that I am the only one with these tales of inadvertent consumption!)
In the normal course, we would not call ourselves excessive consumers. For the most part, we believe we display rational shopping behaviour. We make our lists before leaving for the market and we generally know which shop or shops we want to stop in at. So, why do we end up doubling or trebling our purchases, when we aren’t actively “consuming” double or triple the amount of food?
Well, the lords of marketing spin have mapped their way into our minds. In a strategy that has been proven over centuries, we are offered things ‘free’ or at a significant discount. The very thought of getting something for free, or for less than what it is worth, is so seductive and irresistible.
(As an aside, just look at what has happened during the last few years in the real estate market and the stock market – everyone thought that they were getting a good deal because the stuff was “worth actually more” than the amount they were paying. Not!)
We believe we are being rational in buying the three packs of juice at the price of two – never mind the fact that juice wasn’t on the shopping list in the first place. The danglers and end-caps jump out and ambush us, as we walk through the aisles. The samplers entice in their small voices: “try me”.
You might say that the really traditional kiranawala is the customer’s greatest friend and also a barrier against uncontrolled consumption.
By keeping the merchandise behind the counter or in the back-room, he maintains a healthy distance between the addiction source and all us potential shopaholics. In fact, he goes beyond the call of duty, and even prevents us from stepping anywhere near the merchandise by delivering to our homes.
The enticing deals and offers that you can’t see won’t hurt you. You won’t call to get that new, exciting BOGO (buy one-get one) offer, because you don’t know that it’s there in the store.
Unless, of course, the sneaky brand with its accomplice – the advertising agency – sidesteps him, and puts out the temptation in your morning newspaper.
By now, surely, you’re wondering whose side I am on.
Well, as a consumer and a customer, I am only on one side – mine!
As someone who is intensively involved with the retail sector, I’m also on the side of the brands and the retailers.
And believe me, we are all actually sitting on the same side of the table.
The years in this decade, after the recovery from the minor blip of dot-com busts, have been like one mega party and most people have forgotten that parties seldom last forever. And the morning after the wild party can start with quite a headache.
Retailers and brands have recently acted as if there is no end to multiplier annual growth rates, and consumers have been only to happy to prove them right. Until now.
Currently, we are passing through a fairly serious global economic correction which started in 2007. But it has only really hit hard in the last couple of months, as the headlines have increasingly started talking about recessions and depressions. Naturally, there are some people who have really lost money, others may be looking at the possibility of lower income. But even those people who sustain their current incomes are “feeling poor”, just as they were “feeling wealthy” when the markets were booming.
Of course, superfluous or discretionary expenditure such as movies in multiplexes, eating out etc. are the first to get hit. But should grocery retailers rest easy – after all, people still have to eat, right?
And how about deals, and multi-buy discounts – isn’t this the scenario where “more for less” will be the strategy which will work?
Well, I don’t believe it is quite so cut-and-dried, or quite so simple. The grocery shopping lists will not only become tighter, but will also be more tightly adhered to. Anything that looks like it may be a wasteful expense will be unlikely.
Remember the deals in the fridge? What you are throwing away now starts looking like money being put into the trash.
Pardon the seemingly sexist remark, but men: your wives will not let you get away with driving your trolleys irresponsibly into aisles where you are not supposed to be!
So how should retailers and brands respond?
Well, a good starting point would be to understand what the real market is. Let us not infinitely extrapolate growth figures on a excel spreadsheet on the basis of the early-years of new businesses. Let us not extrapolate national demand numbers from the consumption patterns of select suburbs of Delhi and Mumbai.
When we have the numbers right, let’s look at the business fundamentals at those basic levels of consumption. Is there a viable business model?
Is the business full of productive resources, or are we overstaffed with “cheap Indian labour”?
Is your modern retail business or your food / FMCG brand really providing value to the Indian consumer? For instance, two very senior people from large retail companies were very vocal this last weekend in stating that the value provided by local business to the value-conscious consumer was grossly underestimated by the industry.
I believe that best filter for business plans is the filter of business sustainability. How sustainable is the business over the next few years? What is the real demand? What are the true cost structures, and can these be supported on an inflationary basis year-on-year, or will you be squeezing the vendors for more margin at every stage until the relationship goes into a death spiral?
Let’s look at macro-economics. Are you actively looking at generating and spreading wealth and income around, or is your focus only on stuffing that third pack of juice into the fridge for it to go stale? If your strategy is the latter one then, to my mind, that is neither a sustainable economic model nor a sustainable business.
There’s more about the current and developing economic scenario, “realistic retailing” and other such issues, elsewhere on the Third Eyesight website and blog, including a presentation made at the CII National Retail Summit in November 2006 (download or read as a PDF). (The article based on that presentation is here.)
I really look forward to your thoughts and would welcome a dialogue on how you believe retailers and brands should work through the next few years as we unravel the excesses of the recent past.
Devangshu Dutta
September 14, 2008
You’ve walked into your neighbourhood supermarket with your shopping list. The particular detergent that your spouse had put on the list isn’t on the shelf and the sales associate is not sure whether they have any in stock (maybe you get the standard line: “whatever we have in stock is already on the shelf”).
You’ve forgotten your mobile at home so you can’t call to check whether a substitute brand or different pack size will suffice, so you walk out with the item still on your list.
And into the local kirana store. The brand and pack size that you were looking for isn’t there either, but the shop-owner says that he will have it in stock sometime during the next 3-4 hours, and can send it over to your home. Or, he suggests, you could also buy an alternative brand (or pack size). At the end of that conversation you would have very likely bought the alternative offered, or would have agreed to home-delivery of the item you were seeking. (A study by the Institute of Grocery Distribution in the UK in 2006 discovered that, in case of non-availability, 40% of the customers end up buying the same product somewhere else.)
Some people would be cheering, “Yea, more power to the underdog small retailer”. But the point of this example is not the victory of the local, independent kirana over the chain-store. The point I am illustrating is that the difference in the business models and formats of these two competitors, and the impact of on-shelf availability.
Modern convenience stores and supermarkets, and the format that is being largely adopted by the chain-stores in India, is the western model of self-service. Compared to the kirana-model of “being served”, modern retailers depend on product being available and visible on the shelf. Very clearly, visibility and availability drive sales.
And in the current environment, retailers are or should be looking at squeezing more sales out of their existing stores (see the earlier column – “Priority #1: Same Store Growth”).
On-Shelf Availability is driven by a number of factors – some are within the retailer’s control, while others are not.
On the vendor side, availability is driven by a number of factors. In India, vendors themselves can be small to mid-sized companies, with distribution systems that are poor in terms of information linkages. The supply chain may comprise of several levels of stockists, distributors, and wholesalers, with an inherent and in-built delay in information exchange. In this situation there is always a phase difference between demand (non-availability) and supply.
Other than the phase-difference, the order-fill rates at the vendor’s end can also be poor due to supply constraints. The quantity available in stock for a certain product at a regional or state level can frequently be lower than the requirement, and in such cases the manager, or the distributor, can end up allocating the available stocks.
These causes can lead to availability that is as low as 60-65% on average, even among the popular products. “Good” vendors can have supply rates of 85-90%, but even in these there is a high variance.
However, the interesting thing is that a very high proportion of stock-outs (around 75% according to the 2006 IGD study) can be attributed to problems within the individual store. These include poor in-store disciplines, lack of awareness of the impact of low availability, too much work for the sales associates or the lack of motivation.
(For instance, 35% of sales executives in British study did not plan to pursue retail selling as a long-term career. In a study carried out by Third Eyesight a few months ago, with retail was being seen as a “growth industry”, that figure in India was about 55% and was closely correlated with the frontline attrition rates being witnessed by Indian retailers.)
One of the critical factors in how on-shelf availability is handled is the very different perception various people have of its importance. The store manager or a sales executive may directly correlate lack of availability with lost sales (and lost incentives), while a category merchant may not find it as critical since he or she may be able to balance the margins through the mix of product and the aggregation of sales across stores. The first critical element to be fixed is to have a common view on the importance of availability communicated across the retail organisation.
The second important element is highlighting the visibility of stock within the store – isn’t it surprising that despite the small size of back-office space, how stock that is showing “on the system” can be so invisible?! The product may be stacked in inaccessible boxes, or may have just been kept in the wrong location.
On busy days and during busy hours, merchandise can arrive at the store and simply “disappear” off the radar for a few hours, since the staff may not have had the time to take the stock into the store’s inventory. It sits in the shipping boxes waiting for stock intake, which may well happen after the peak selling hours have passed.
Sometimes the availability issue comes up because the product is very popular, and it becomes virtually impossible to maintain a high availability during the critical selling windows – a typical example may be health and beauty products or popular snacks, where the aggregate availability may be high during the week, but abysmally low during the peaks. A key feature of these categories is also the large number of SKUs, which can be cause for substitutions in the supply chain, and therefore poor availability of a particular SKU.
On the other hand, fresh produce and dairy may show poor availability if daily reports are configured for end-of-day rather than beginning-of-day stock-checks, since fresh vegetables, fruit, fish and dairy may actually be taken into the store during the early hours in the morning.
Many people believe that the best way to tackle these issues is through information technology.
However, IT is only a tool that can enable a business if the processes are robust and people are attuned to a common objective.
The correct sequence, as for many other aspects of business, is to tackle the people issue first. Awareness and common understand can only happen through consistent communication and widespread training. (The 2007 study by IGD (UK) on this issue highlighted the fact that 61% of the sales associates had not received any formal training, while 23% had no communication about on-shelf availability.)
This communication needs to be not just within the organisation, but across the retailer and vendor relationship. This process is, unfortunately, not enabled by the very tactical and adversarial nature of the buyer-supplier relationship. Retail buyers don’t easily share point-of-sale information with vendors due to a variety of real and perceived barriers – confidentiality, power-issues, competitive pressures.
Fortunately, although it is still early days, chain-stores and vendors in India are already beginning to work together. Very often the exercise is actually being led by the larger, multi-national vendors who have been exposed to the concepts of Efficient Consumer Response (ECR) and Collaborative Planning, Forecasting & Replenishment (CPFR) – concepts that have been around for about 15 years.
However, these frameworks require a significant amount of joint business planning as well as point-of-sale visibility being provided to the vendor, and both of those aspects are still weak in the Indian modern retail ecosystem. Such degree of high transparency will only come in with further maturation of the retail businesses and the vendor relationships. Some of the modern retailers are already able to see consistent availability of over 90% through these efforts, and as word spreads, hopefully so will the practice.
Creating a culture of transparency and communicating the desired levels of availability is the foundation on which robust processes can be built for checking and reporting availability, which then can be enabled through technology. The correct sequence, therefore, is People-Process-Technology, and not the other way round.
In closing, let me show the other side of the coin (after all, this column is titled “Devil’s Advocate”!). The additional sales from better availability are very seductive, and can be very profitable, but up to a point. After a certain level, the law of diminishing returns takes over as the cost of maintaining high availability exceeds the additional margin. Particularly in perishables the possibility of product expiry and spoilage is quite high. Of course, during festive occasions there may be no option but to ensure high availability of perishables such as gift packs of snacks and packaged foods, even at the risk of spoilage or expiry.
Having said that, on the whole, modern retailers in India and their vendors do need to focus on on-shelf availability as a key area for increasing the productivity of the existing stores. For many stores, there is significant room an increase in sales. With real estate and operating overheads remaining high, every extra rupee of sales squeezed out of the current square footage will contribute directly to the bottom-line, a fact that Indian retailers cannot ignore today.
