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August 10, 2008
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Devangshu Dutta
July 14, 2008
In early-June Big Bazaar (part of Future Group) was reported to have broken off its relationship with Cadbury’s. About 2-3 weeks later the two were reportedly back together. The alleged differences and the apparent solutions have been reported widely, as also the feeling that some issues remain unresolved.
If that reads like something you would find in a celebrity tabloid, you’re probably right. The relationship between brands and large retailers is truly one of the “love-hate” kind. And this case is no different from many other such relationships in various markets around the world. In fact, the Future Group itself is reported to have had similar run-ins with PepsiCo’s FritoLay and GlaxoSmithKline in the past.
I won’t dwell on the various allegations and clarifications about commercial structures and differential pricing in this particular case, since the view from outside isn’t really clear. But it is certainly worth noting that this case is not unique, and thinking about what the future (no pun intended) might hold for brands in markets such as India.
There is no doubt that brands love the scale that large retailers provide them, with the quick access to a large footprint in the market, and the high visibility. On the other hand, as a vendor, they hate the negotiating edge that this scale gives the large retailer. Brand generally rule fragmented retail environments such as India. Large retailers, on the other hand, squeeze out more margins in the form of bulk discounts, placement fees and the like. There’s more: special promotions, differential merchandising and delivery needs…the list of demands seems endless.
On the other side, retailers love brands for the footfall they bring. The brand typically creates a “need to buy” on the consumer’s part, and invests in creating a distinctive proposition which is valuable in a cluttered market. In many cases the brand would have also advertised where it is available. This is all good stuff for the retailer, who then essentially has to make sure that the brand is available and visible in-store to the customer to convert the walk-ins into sales. However, what retailers don’t like is the fact that brands will generally charge a premium of 10-50% over a comparable generic product. In some cases the premium may be so high that the brand product’s price itself is multiples of a generic product’s price.
The retailer-brand partnership is a very powerful one, even from early days. Many consumer brands and branded companies have scaled up significantly with the growth of their retail customers. The US market due to its sheer size and its evolution offers numerous examples including companies such as Levi Strauss, Hanes, Fruit of the Loom and Proctor & Gamble that grew on the back of discounters such as Wal-Mart and K-Mart as well as retailers such as JC Penney, Macy’s and Sears. Similar examples appear from other countries where the modernisation and consolidation of retail have happened over decades along with economic development.
An established brand provides the new retailer credibility, even as the retailer provides the brand new shelf-space. Or the other way around: even a new brand provides value to an established retailer by identifying the market need, developing the product, managing sourcing & production, and establishing the consumer’s interest in the product, while it is the established retailer who provides the much-needed credibility and presence to the new brand.
For most, this remained a happy relationship for a long time even as the retail environment grew and evolved. Retailers focussed on creating shelf-space and managing it, while the brands focussed on creating products and desirability.
However, economic shocks various times and the rise of low-cost imports raised questions in retailers’ minds about the value added by the brand compared to the margin they supposedly made on the higher prices. At the same time, better communication and travel infrastructure as well as falling costs made it easier for retailers to consider approaching factories directly.
Enter private label, the “other” in the love-hate triangle.
Over the last couple of decades, department stores, hypermarkets, grocery stores and even discounters have worked seriously on private label. The opening premise was that you could entice the customer with a lower price (sharing some of the margin earned by direct sourcing), and as long as you gave a comparable product the consumer was happy. Many Indian retailers followed a similar route when they began exploring private label.
The strategy has had a varied degree of success, much of it to do with how the private label has been handled (indifferently in most cases). Recognising this flaw, many retailers around the world have attempted to improve their handling of their private label product development and also presenting it also in a manner (including advertising) similar to a national or an international brand. Some of these retailers’ own labels are now serious brands in their own right even though they are restricted to only one retail chain.
The difference between a “label” and a “brand” is the inherent promise that a brand has built into the name, the repeated experience that the customer has had with the brand that reinforces this promise, and the relationship that develops between the consumer and the brand. All of this requires structuring, nurturing and careful management, and it costs time, effort and money. When the economy and individual incomes are growing, consumers are willing to shell out a little extra for a brand and all that it stands for.
However, brands get into trouble if income and spending perceptions turn downwards, and comparable products are available. The 10+ per cent premium between branded and generic begins to look like an important saving to the customer. Or conversely, due to the growing market more suppliers for the same product appear that the retailer can use as a foil to the branded market leader. With falling import barriers, more diverse contract manufacturing becomes available for sourcing private label merchandise. The scenario becomes particularly grim if the relationship between the brand and the consumer is not old enough to have become lasting – in this case, replacement of the brand with an alternative or a retailer’s own label is truly feasible.
The Indian market, at this time, shows all of the above ingredients. Inflation is making consumers reconsider how and where they spend their money. The growth of the market over the last few years has attracted several companies with alternative products and brands e.g. ITC as a challenger to biscuit-cookie major Britannia as well as to Pepsi’s potato chip brand Lays. Retailers such as the Future Group, Shopper’s Stop and Reliance have actively incorporated imports into their sourcing strategy. In many cases, the brands that most want to be on the modern retailer’s shelves are new to the market, and don’t yet have a strong imprint on the consumer’s mind.
However, at the same time, retailers themselves are still developing the systems and disciplines to manage their relatively new businesses. They are more than fully occupied with rising real estate costs, and managing the front end. If a brand can handle the product and supply side for a reasonable margin, they are more than happy to ride with the brand.
There is place for the branded suppliers in the market, and for them even to lead the market. Even as retailers grow, branded suppliers won’t lie down or die quietly. Many of them (such as Hindustan Unilever) are also actively engaging with smaller retailers, to help them improve their business processes and competitiveness. On the other hand, they are also reconciled to the inevitable growth of modern retailers, and are developing “key account management” functions, parallel distribution processes etc. to cater to the large retailers differently from the rest of the market.
So will brands survive, or will it be the retailer with the muscle of the storefront relegate them to a small portion of the market?
As long as the competitive pressures and economic cycles remain, the relationship between retailers and their branded suppliers will inherently be a tug-of-war for margin.
In either case, whether individual brands or retailers win or lose in the short term, the consumer will hopefully be a beneficiary in terms of better product, more variety and some sanity in terms of prices.
Devangshu Dutta
June 10, 2008
Why do entrepreneurs start companies? Why do individuals form organisations?
An obvious reason is that they cannot do everything themselves. Another is that they don’t have all the resources / skills that are needed to grow the business. If they work well, teams can certainly achieve more than individuals alone.
However, another compelling reason comes to mind for creating an organisation – the concept of immortality.
All living beings are susceptible to the phenomenon of “death” at some point of time or the other, and immortalise themselves through producing the next generation through reproduction.
Just as reproduction is a way to immortalise the genetic code of the species in our next generation, organisational development is a way to immortalise the “genetic code” containing ideas, principles and philosophies.
However, this can only happen if the leader / founder / entrepreneur faces the Big Reality: “I am mortal”. Once he or she faces that fact, there are two choices for him / her – the organisation / business can die with him or her, or there can be another generation to carry on the genetic code.
Mortality is the root / route to immortality. If one is truly wedded to the principles of the organisation, one will create the framework and the environment for the next leadership to emerge, and will nurture the next generation to the leadership position.
The route / root to Immortal is “I M Mortal”!
A couple of great resources come to mind, both from Jim Collins and his co-authors: “Built to Last” and “From Good to Great”. (A great concept from the latter book is that of “Level 5 Leadership” which is well worth a read.)
Devangshu Dutta
June 2, 2008
When we began studying the basic fundamentals of marketing, our professor introduced us to the 4-P framework covering Product, Price, Place and Promotion created by “the Great P” of Marketing, Philip Kotler, whose textbooks are classics among marketing management studies.
In time, others modified it to 5-P, 6-P and 7-P, but the basic framework stands best on the original four legs defined by Kotler.
The principle is that to design an effective marketing strategy you need to:
If you are truly disciplined, you may then extend any of these into spider-webs of clearer attribute definition. For instance, when you get involved with defining the product it can start from “breakfast” and then be further defined by attributes such as taste (e.g. sweetened or unsweetened), texture (e.g. crunchy or wet), fullness (e.g. light or filling), and go further into the benefits (e.g. helpful in losing weight, or in gaining body mass) etc.
Given that the basic framework is straight-forward and simple to apply, when we ask the question “what is your marketing strategy”, it is surprising to get the answer: “advertising”. It gets somewhat more distressing when we interrogate further, when we examine what the advertising is focussed on: “cheaper prices than competition”.
Okay, let’s grant a couple of reality checks here. One is that most retailers and consumer goods companies in the current stage of the market’s growth want to grab the maximum possible market share in the minimum possible time. Two, if you want to get the attention of a lot of customers very quickly, shouting out a great price offer is one of the easiest ways to do it.
Which brings us to the basic issue: in the current market scenario, if you are a retailer or if you have a brand that you want to scale up fast, advertising extensively about the “great value” is highly likely to quickly give you the footfall and conversions you need.
But the question is, when does it stop being a good tactic and just becomes lazy marketing? And once it’s in that territory, when does it become dangerously weak even as a sustained tactic?
Imagine a scenario with me: the CEO strides into a marketing strategy meeting and says, “I want you to stop advertising the way you do. In fact, I want you to stop advertising, period. But I don’t want sales to drop and I don’t want our brand image to suffer.”
Shock, horror, dismay at the thought of “where is this company going”? Resignations, even, on the CEO’s table?
But just stay with that thought for a minute, and then look at Kotler’s framework again.
Let’s look at “product” holistically because, in the noise of high-decibel advertising about low prices, typically the definition of the “product” is the first to slip from attention. How the customer relates to the store, what her experience is as she walks through from the entrance to the check-out and beyond is part and parcel of the “product”. What does she think the store is about? Does her perception of the store’s “product” (the entire experience of shopping) match with the retailer’s own perception? Does the retailer even have a clear perception of his product?
Secondly, “place”. Sure, in-store product placement is frequently governed by the marketing function. But how many retailers have marketing involved in selecting the store location? A great store location is the best live, “walk-in advertisement” that a retailer can have. If a fashion brand like Zara can eschew advertising (founder Amancio Ortega has been quoted as saying that “advertising” is a distraction), and instead focus on its stores to create the traffic and the awareness about the brands, surely the store location should receive some attention from the marketing heads of food and grocery companies.
Let’s also reconsider how much connection there is between the marketing strategy and the store layout itself (in many cases it is not enough). Whether the customer likes wide aisles and a “clean” experience or prefers a chaotic environment, the store must make a statement that is in sync with the overall business strategy and the target customer. Good retailers understand this intuitively, but it is important also to express it overtly within the organisation and get the marketing team involved in the planning and execution. Further, once the customer is actually in the store, clear price ticketing, intuitive adjacencies and clean signage can make a tremendous difference in converting walk-ins to purchases.
Let’s leave price alone for this inquiry because, whether high or low, it gets a lot of attention anyway, and let’s move to promotion.
If we define marketing’s role as getting customers into the store and getting them to buy, then the surely promotion is the driver of the marketing engine. But does promotion necessarily have to mean advertising?
We’ve discussed Zara’s example of using the stores as the medium of promotion. Another thing that works for Zara is word of mouth publicity, as well as the humongous amount of publicity the company gets due to its business model. (Other interesting companies, such as Pantaloon, Reliance, Wal-Mart, The Body Shop etc. also enjoy promotion through publicity.)
Pizza companies use cost-effective menu flyers dropped at the customer’s door and “box toppers” to drive the next purchase (yes, of course, they also advertise hugely, but during their lean years when they have had to reduce advertising, it is the flyers and box-toppers that have kept them going.) Direct selling companies can also offer some learnings about creating and sustaining interest, as do entrepreneurial start-ups. As a matter of fact, think of the last time you saw an advertisement of the most popular “unbranded” take-away in your area. Ever?
It may be time for us to dust off the notes from the Marketing 101 class, and re-examine what we do.
Sharmila Katre
April 30, 2008
India has a rich tradition of textiles which dates back many centuries. The history of the Indian readymade garment industry, however, is very recent and can be traced back to the Second World War.
During the Second World War, as a contribution to the wartime needs of British rulers, clothing units for mass production were set up to manufacture military uniforms. With India’s independence in 1947, the industry stagnated as the policies of the Government were now diverted towards building a new nation. However, the industry began to expand after 1959 with the revision of the textile policy to allow the import of machinery for manufacturing.
The 1960s witnessed social shifts as a whole generation of young people questioned the very basis of their existence, and the hippie movement was born. Tired of their materialistic ‘man-made’ lifestyle, these young people began to seek answers in communing with all things natural, love and peace being the anthem. They began traveling, to explore, to seek the ancient philosophies of the East.
This voyage of discovery not only led to a change of lifestyle, but also the way they dressed. Natural fibres were rediscovered, and principally amongst them “Cotton”. India, with its natural abundance of this fibre, was an automatic choice of a supply source. Simultaneously, the growing settlement of Indian abroad led to a ready outlet for a variety of India merchandise and clothing textiles as an article of trade because of its growing demand.
This sudden demand for cotton garments resulted in the Indian industry growing by leaps and bounds in a very short period. Export of “High Fashion” garments from India started off with the cheap cotton kurtas and hand-block vegetable dye printed wrap-around skirts in cotton sheeting to meet the demands of the western youth.
Cashing in on the boom any and everybody got into the manufacture of clothing. The Government, realizing the potential of earning foreign exchange for the country, announced incentives and tax exemption for exporters. The fallout was an industry that grew in an unorganized manner and developed a reputation for producing low cost, low quality, volume merchandise.
The 1980s established that the industry was here to stay but, in terms of product profile, India still had not been able to move out of the lower end of the world market and continued to have an average unit value of under US$ 5.
The 1990s saw the industry make a conscious effort to shake off the image of being producers of cheap, low-quality merchandise with unreliable delivery schedules. The second generation had begun coming into the business, and contributed to reorganizing their firms for clearer structure and professionalism. Funds were ploughed back into the business with the emergence of large and modern production facilities. Even though most of the export houses were family-owned, trained professionals were inducted into the business for clear-cut departments and areas of functions. Consolidation and retention of business was the focus of the late nineties as the abolition of quotas planned for the new millennium became a reality.
The industry was euphoric but at the same time apprehensive of what the post quota era would bring. Many of the producers looking for a synergy in the business and also to sustain the large production facilities began tentative forays into domestic retail. The face of the Indian consumer was changing. Exposure to the western society via the electronic media helped in creating a ‘borderless’ world for lifestyle products, and contemporary fashion merchandise found a ready market in domestic retail.
The new global consumer over the years has evolved as a demanding and yet discerning individual. The novelty factor along with price and quality has become the watchword of the new millennium consumer. As consumers around the world change, so does the product strategy to keep consumer interests alive and ensure loyalty.
The new millennium has seen the emergence of the ‘Quick Response’ or ‘Real Time’ merchandising in fashion as a strategic solution to nurture, retain and grow the business. ‘Fast Fashion’ was born. Retailers could no longer work on the concept of two major retailing seasons with a couple of promotions thrown in. Product planning and the merchandise on the racks had to be constantly current and trendy.
Fast Fashion is not simply a solution to increase consumption by introducing greater product variety but a strategy to retain, consolidate and sustain the market through proactive product development and efficient product delivery to consumers, and thereby grow the market by increasing market share or developing new markets.
However, fast fashion has been tried and tested in different avatars through the years. In the 1960s and 1970s it was present in the quick reaction time of the unorganized sector to service the demand for block-printed ethnic clothing merchandise. In the 1980s and 1990s it was represented in the proactively researched product development at the source market level by wholesale importer/designer buyers (like Rene Dehry, Giorgio Kauten, Diff and Steilmann). Today it is technology-aided product research and development techniques (practiced by Anthropologie, Rampage, Zara and H&M), coupled with responsive buying processes.
In product design terms, India has moved on from producing and selling ‘fashion basics’ to ‘basic’ merchandise, and now back to ‘fashion basics’ once again. History says that this is where India’s inherent talents and strengths as a source market lie. Rather than reinventing the wheel or try to catch up with other competitors strengths, India should cash in on its strengths to practice and master fast fashion.
