The dark clouds of recession and rain seem to be lifting just a little bit. Governments have been energetically throwing seeds of stimulus and economists are eagerly spotting “green shoots”. The festive season is around the corner, with anticipation of higher sales.

So perhaps it is time to cheer. Or perhaps not.

In the recessionary environment during the last year or so, ‘cutting back’ rather than ‘building’ has been the philosophy for most businesses.

The implications of these cut-backs are not always visible in the place you have originally made the cuts. But, unfortunately, they inevitably impact the area which should be the last to be touched: customer experience!

The problem arises not so much from the cut-back. Obviously if the business prospects are looking negative or less positive, the management needs to adjust its expectations and also its expense and investment framework.

No, the problem lies in the fact that most such initiatives are internally focussed. Whether it is supply chain (“lean inventory”), operating strength (“fewer people”), merchandise rationalisation (“narrower range and fewer brands”), the implications and benefits that are identified are mostly internal to the business. The driving philosophy is that “a penny saved is a penny earned”.

During the navel-gazing we forget the fundamental principle that the purpose of a business is to deliver a set of goods or services to meet the customer’s needs and expectations; if those needs are not served, the business interest is not served either.

Here are a few examples from the recent past:

• A modern retail chain has no stock of bread and basic cooking oil on the second afternoon of a 3-day long weekend. When asked, one of the sales associates says that they got no deliveries due to the holiday the previous day. When you walk across to the traditional kirana store, it is fully stocked-up with fresh merchandise, and apparently has had no delivery problems at all from the same brands either the previous day or that morning itself. Someone at the “organized” retailer seems to have forgotten that “lean” shouldn’t mean reduced footfall-conversion.
• A telephone service provider receives a complaint for a faulty line. The provider promises to rectify the complaint within 6 hours. After 6 days the line is still down. The call centre executives on multiple follow-up calls sound helpless – one even says: “Maybe the complaint did not get across to the service engineer.” One of them – maybe it is only to push the responsibility off to another part of the organization – hints at the unavailability of enough field staff.
• An elderly couple in a well-established large retail store is very clear that they only want to buy 100% cotton products. The enthusiastic sales associate pushes the store’s own heavily advertised brand of T-shirts, assuring the customer that it is cotton. After the first wear and wash the customer sends one of the T-shirts for ironing, only to have it returned with a large burn – the fabric, apparently of synthetic fibre rather than cotton, has not been able to withstand the ironing. Somewhere, someone has cut corners – it could have been the buying executive who wanted to meet a price point target, or it could have been the HR manager who thought that product training was a superfluous expense, or both.

These are all companies that have spent millions on store-fronts, real estate, IT systems, brand logos and hip advertising. After all, those are the visible vehicles for the brand and the brand promise.

Unfortunately, because of the internal disconnect between the strategic intent and the operational reality, these millions are now dripping down the drain, one customer relationship at a time.

Which brings me to one significant area of concern – the people who interface with the customer.

In western economies, due to the high cost of manpower, consumer-facing businesses are run on the basis of highly system-driven processes, lean staffing and a self-help orientation, whether the customer is interfacing with a call-centre or with a physical retail store. There are also significant cultural and infrastructure differences that make these models work in those economies.

In modernising countries such as those in Asia, it is quite understandable that the new consumer-facing companies are trying to emulate western “best-practice” models. However, often they falter on two accounts.

Firstly in these relatively hierarchical societies, customers don’t want to feel “help-less”. They may not exactly enjoy an intrusive sales associate, but they enjoy even less the feeling that there is no one around who can help when they want it. A number of retailers have failed this “quantity” test in the last few months.

Secondly, it is not just a “warm body” that is needed to ask a polite question and smile brightly, but someone who is empowered and feels accountable to solve the customer’s specific issue. That is a “quality” issue. Part of it is related to the huge gap between the personal context of most consumer-facing staff and their customers’. The other, significant, issue is the culture of accountability – that the salesperson or the service executive makes the effort to understand and solve the customer’s problem, rather than only focussing on following the law laid down in the operating manual. These needs can only be addressed through training – lots of it, and repeated liberally – and creating a culture that, top to bottom, is focussed on the customer.

Analysts have said that recessions are a great time for the good companies to separate themselves from the rest. That is true to an extent.

However, I believe that in recessions many companies, bad or good, suffer due to circumstances beyond their control – it is in the recovery after the recession that is a much tougher filter.

When the customer’s mood is beginning to move up, so are his or her expectations. Companies that have not cut muscle along with the fat, companies that have not only focussed on themselves in the downturn but have remembered the customer at all times, are the ones which will manage to retain their customer relationships. And will grow faster.

The organic movement has touched a variety of products, including clothing, cosmetics and home products. Possibly the most emotive area is organic food, because food products are directly taken into the body while other products have a limited and external contact. 

In a sense, before the appearance of industrial agriculture and the application of synthetic nutrients and pesticides, all farming was organic. In fact, the traditional Sanjeevan system of India dates back several millennia. 

Even the existing organic farming movement has been around since its founding in Europe in the early-1900s. This was initially treated as fad and its proponents were seen as eccentric (at best) or insane. However, as damage to the environment and to human health became a bigger concern, organic farming emerged as the healthier option. 

Organic farming is based on the following fundamental premises: 

• a farm that uses natural rather than synthetic inputs throughout, from seeding (or insemination in the case of animals) to post-harvest
• methods that are sustainable rather than exploitative or injurious to the farm and its surroundings, with an emphasis on conservation of soil and water resources

The aim is to drive a more healthy approach all around – for the environment, for people, as well as for the animals and plants. 

The organic trade (all products) is currently estimated at over US$ 40 billion globally, with an annual growth of approximately US$ 5 billion. Organic production is driven today more by demand than by supply – in many cases supply constraints of certified organic produce is more of a concern than the market demand. 

Every year, increasing numbers of consumers consciously buy organic products regularly or occasionally on the basis that it is good for them and good for the planet. Certainly, true organic farms do not use synthetic materials, avoiding damage to the environment and can help to retain the biodiversity. Whether measured by unit area or unit of yield, organic farms are more sustainable over time as they use less energy and produce less waste. 

It is not as if, after decades of individual enthusiasts pushing their ideas from the fringes, consumers have suddenly become more environmentally conscious. This mainstream awareness has possibly been pushed up in recent years by the involvement of large companies which have spotted the tremendous growth of a profitable niche. “Organic” is the new speciality or niche product line that can be priced at a premium due to the greater desirability amongst the target consumer group, with potentially higher profits than inorganic products or uncertified products. Today, at least in the two largest markets (the USA and Europe), large companies have the lion’s share. For instance, statistics from Germany show that in 2007 conventional retail chains sold over 53% of organic produce, while specialist organic food retailers and producers lost share during the year. Similarly in the US, after the development of the USDA National Organic Standard in 1997, significant merger and acquisition activity has been visible.

However, as the interest in organic products has grown, so have the noise levels in the market. With that the potential for confusion in customers’ minds has also grown.

In day-to-day conversations, we tend to treat organic as superior to inorganic. But the reality is a little bit more complex.

For instance, we expect organic products to contain more nutrition and be better for our bodies. While this may be true of organic animal products compared to their inorganic counterparts, it has not been demonstrated for plant products, other than anecdotal experience of taste and appearance.

There are studies that suggest that inorganic farming can produce more crop per acre and more meat per animal, and is, therefore, the better option for a planet bursting with overpopulation. (Some proponents extend that argument to genetically modified foods as well, but let’s stay away from that for the moment.) 

However, there are also other studies that counter this argument by suggesting that the organic farms can end up being more efficient and productive in direct costs, yield and long-term sustainability. 

Then, the big question is: if organic foods are no better nutritionally than inorganic and could be as productive for the farmer, are organic brands just skimming the gullible customer while the going is good?

We might expect certification and regulation to clear the air, but in many instances these leave out as many things as they include. Labelling is yet another concern. Countries where labelling is more stringently monitored allow logos such as “100% organic”, “organic” (more than 95% organic ingredients) and “made with organic ingredients” (over 70% organic ingredients). In other countries logos and where labelling may be less strictly monitored, the use of the term organic is far looser and even more confusing. What’s more, the usage of terms such as “Bio” or “Eco” can also mislead consumers into believing that there is something distinctly superior about the product they are about to buy when, in reality, it is often only a marketing gimmick.

Further, just because something is certified as organic does not mean it is a higher grade of product. Organic produce may end up having a shorter shelf-life, or may also be otherwise inferior to inorganic produce in the store. In fact, as the KRAV (Sweden) website states: “The KRAV logo is a clear signal that the product is organically produced but does not say anything about the quality. That must be guaranteed by the producer, i.e. yourself”. This is similar to saying that the fact that someone has a management certification from a certain institute means that he or she passed the tests of that institute in a particular year, but that does not automatically make him or her a good businessperson.

Countries and regions that have a poor record of environmental consciousness, poor transparency norms, are also not seen as the best source for organic produce even if it is apparently from a certified producer. In some cases, certification may be carried out second-hand and unverified, leading to instances such as the one in 2008 where the US retailer Whole Foods pulled out pesticides-laden “organic-certified” ginger that was shipped from China. The mixing of inorganic ingredients of uncertain origin, especially in blended products such as juices or snacks, can also make a mockery of the organic labelling.

Another visible concern today is the carbon footprint, and some people raise the question whether buying local (whether inorganic or organic) may be less environmentally damaging than importing produce from distant countries. In such instances, the evidence of lax certification, such as the Chinese case mentioned earlier, takes support away from the cause of organic imports.

Arguments have also been raised about whether the larger “organic” factory farms merely follow the letter of the law rather than the principles behind the organic movement? Small organic farmers allege that large organic-certified factory farms – especially those selling animal products – do not really follow the core principles of “natural” growth, and confine their animals in unnatural surroundings. 

With all these arguments and counter-arguments flying about, some organic (or nearly organic) producers elect not to be certified, letting their customers vote with their wallets. Some of these smaller farmers may be driven by economic necessity since certification could be costly and cumbersome, while others may just find it more feasible to stick with a local sales strategy where the customers are able to physically see the organic nature of the farm. 

It’s clear that all of these questions will take years to sort out – through debate, research, legislation, as well as social and commercial pressure. Meanwhile, most conscientious retailers and concerned consumers will need to do their own studies to educate themselves, and will need to examine each product for genuineness of the organic promise.

And, if you are not quite that savvy, the final message would be: “caveat emptor” (“let the buyer beware”).

George Anderson asks: what medium, what message will it take to break through the clutter and influence consumers to buy whatever it is that is being pitched? Rocky Gunderson, co-founder and vice president of marketing and network development for SeeSaw Networks, believes that digital signage networks are the solution.

The dynamism of digital video display has the potential to make ads more impactful but, from my experience, most of the advertisers and the agencies have little clue about how to really make it work.

So many companies are using digital displays as animated billboards, with the same messages in a different format. John Wanamaker’s lament still applies and, possibly, it is more than 50% of the advertising that is getting wasted now. Either the Digital OOH industry will wake up some day and spruce up their act, or digital signage will become like fluorescent safety jackets – everywhere and unnoticed.

[George Anderson’s RetailWire query: Media Follows Consumers Outside the Home.] 

Delhaize and Unilever may not yet have felt the need to visit a relationship counseler, and of course, the jury’s still out on who (if anyone) will actually win in their battle.

For now, Unilever has lost shelf-space for around 300 of its brands at Delhaize stores.

Delhaize may potentially lose some of the sales that those brands got for it, in case consumers want a specific brand rather than a private label or a substitute brand.

The consumers lose not just in terms of their choice being reduced, but perhaps also in becoming confused about the specific value / benefits of competing products when the certainty of their customary brands is removed. Remember, brand loyalty is built on the predictability of a repeated experience over a period of time. If  you remove that factor from the purchase, each purchase becomes an experiment again, until a similar predictability is found.

(For those who missed the previous post, you can read it here.)

Referencing this battle, reactions to a discussion in at least one online poll on www.retailwire.com seem to favour retailers, or equally blame both retailers and suppliers. Only about a quarter of the respondents felt that retailers were not being fair. Considering that the respondent universe comprised of professionals from retail companies, suppliers as well as service providers, this seems to be a surprising result. Or perhaps not? Perhaps brands are no longer delivering a significant value to be able to command a premium over private label?

Some of the reactions from that discussion are reproduced below with permission from Retailwire.

 

• It’s hard for me to feel for both retailers and vendors when they obviously do what’s best for themselves, regardless of the long-term impact. In this case though, I would tell Unilever to go aggressive and pull all their lines from Delhaize. Then up the marketing of these lines with a cooperative marketing program involving the other retailers. Let Delhaize try to survive with shelves full of private label products and see how long they last. (Marc Gordon, President, Fourword Marketing)

• First, you seem to be talking more about Europe than the U.S. and that’s a different animal. However, given the universality of the question, I’d say first that the best and worst of people and companies come out during hard times. The best redouble their efforts to build meaningful long-term relationships with their trading partners. Unfortunately, it seems that most are simply trying to squeeze an extra penny or two out of the other. To your specific question–No! CPG companies are only starting to rationalize their portfolios. There are still way too many products out there simply for the sake of putting their name out there–not because the product moves. Some manufacturers are starting to cut back on their lines, but I suspect much more is needed. As to developing private label, what do you expect? Retailers have been copycating for years. But I think consumers have gotten wise to the fact that just because it looks like a brand doesn’t mean it has the same quality. And to any retailer who can’t do any more than copy, shame on them! (Len Lewis, President, Lewis Communications, Inc.)

• Fast moving consumer goods companies still need to rationalize brand portfolios in many cases, as so many retailers are finding higher profits in reduced SKU counts, without losing shopper loyalty. Depending on how this shakes out with specific retailer strategies over time, this may or may not make room for more local brands and niche players in some instances. Private label is a whole different animal today than it was even four or five years ago. The top tiers are not just inferior substitutes for national brands; they are national brand equivalents (or better) and widely recognized as such by consumers who are switching, and are not likely to come back. As for retailers copycatting, that’s always been a factor. Sometimes retailer behavior is outrageous, but there are laws protecting trade dress, etc., and branded manufacturers frequently litigate, and win. (Warren Thayer, Editor, Refrigerated & Frozen Foods Retailer, BNP Media)

• There is significant brand proliferation in FMCG. Think about cereal, ketchup, salad dressing or the myriad of other categories that have duplication on top of duplication. I led an industry-wide study that proved retailers could remove 12 – 18 percent of the actual SKUs from a given category (almost across the board) and not lose sales–in fact retailers will grow their sales (by unit volume and revenue). Consumers want true variety and differentiation – not the same thing in the same size. How many red ketchups in the 24oz bottle do you really need on the shelf? In many cases, there should be a couple of national brands and the store brands.
  The study also showed that the very large marketing dollars thrown at retailers to help promote products are in many cases not enough to cover all of the downstream costs and activities retailers engage in to accommodate duplication of brands. The inventory carrying costs alone are staggering. The FMCG companies will not want to hear this, but without fail, we found that there is too much duplication and with careful consumers, retailers should make sure they are offering the very best solutions for their customers while maximizing profits and opportunities. (Kevin Sterneckert, Research Director, Retail, AMR Research)

• How many shoppers (in the US, anyway) would drive out of their way to get Unilever soap? Probably not too many. Price, proximity and shopping habits are stronger than most CPG loyalty. Higher ticket items, like durables, and higher involvement categories like skin care, have more resilience. Retailers are understandably using the recession as a catalyst to drive sales of private label. Are they playing fair? Well, no.  Manufacturers are over a barrel, giving as much information as they can in order to stay in good standing with retailers. Further, some retailers have even used promotions that pull on national brand strength to promote private label. Publix Supermarkets ran a Buy-One-Get-One, where shoppers could buy a national brand (Thomas’s English Muffins) and get the Publix private label brand free. This drove trial – and presumably–conversion to their brand. No, they aren’t playing fair. The question for national brands is how to stay relevant and on shelf. (Liz Crawford, President, Crawford Consulting)

• Technology and collaboration should be helping to solve this problem, and it is a problem that existed before the current downturn and will continue when the recovery comes (hopefully very soon!!). If the retailer can show empirically that the new product lines do nothing to add to the profit mix, or worse do something to harm it, at the store, the supplier should yield and remove or not introduce the items. If the manufacturer can show empirically that the new product lines work to bolster the profit mix at the store level, the retailer should yield and add the items. This may be over-simplifying the situation, and there will always be exceptions, but without collaboration both retailers and suppliers are going to lose and the shopper will suffer as well. (Ron Margulis, Managing Director, RAM Communications)

• “SKU Rationalization” is a dangerous game…as the volume of sales per item does not necessarily reflect the impact to the brand as a whole. The push-pull of private label vs. branded product has been going on a long time and it’s not stopping any time soon. While it’s possible to create an apparel store built solely on private label merchandise, I don’t believe it’s possible in FMCG. All those advertising dollars have, in fact, made a difference. It’s also true that not all private label merchandise is create equal. I might be okay with generic canned food, but there are other products that have a distinct difference in quality. Q-Tips, Band-aids, some cheeses come immediately to mind. There’s a reason why book sellers carry slow movers. There’s a reason why apparel retailers buy a full compliment of colors, even if the percent contribution isn’t the same across all of them. Similarly, there’s a reason why FMCG retailers need to carry brands. It adds to their own brand credibility. (Paula Rosenblum, Managing Partner, RSR Research)

• I’ll take on whether retailers are “playing fair” by copy-catting national brands/morphing them into private labels: 8-10 years ago, I would have cried foul; these days, it’s par for the course. Yet another reason why vendors have to keep their innovation pipelines full or risk being one private label switch away from extinction. Think of your retailer knocking you off as the sincerest form of flattery (if you can bear it)! (Carol Spieckerman, President, newmarketbuilders)

• As indicated in the poll questions, there is sufficient blame on both sides. Retailers are dealing with manufacturers who force impractical line extensions through financial influence (incentives) detracting from a balanced category. Private Label is skimming the cream of category sales and threatening to take a disproportionate amount of shelf space. Private Label also can trade down category average pricing through poorly thought-out pricing schemes that do not reflect the market place. The extreme in either direction reduces the optimization of the consumer-centric effort we are all chasing. Manufacturers are the Mecca of product innovation. Private Label merely mimics. When we deviate from true innovation and the goal is to reduce the shelf space of competitors, everyone loses. The leap to Private Label is a result of cash-pinched consumers looking for a bargain. Private Label has a place in retailer strategy, but it should not be the entire strategy. Nor should the overwhelming ownership of space by a single brand. The premium or angel customers will continue to buy brands that exhibit the features and benefits of quality and consistency. Which customers do we want to develop as our base? Angel customers or bargain hunters? By lowering standards, quality and differentiation, we move into a downward spiral into Heck. Manufacturers must put forth innovation and quality as the model. Retailers need to maintain the balance in the categories that maintains a profitable mix of customers. It is about strategy and thinking beyond next week. Ask John Galt. (‘GMROI’)

• There were several reports on just-food.com last week out of the Consumer Analyst Group of New York (CAGNY) conference in Florida about what some of the bigger brands plan to do about rationalizing their portfolios. Some were particularly interesting and relevant to this discussion. As for the sub-debate about differences between the US and the ROW (rest of the world)–also very interesting and relevant especially when looked at in the context of globalization vs consumer preferences for locally produced food (a subject on which there is still much to be said as it cannot possibly be, in my view, an either or proposition). ( Bernice Hurst, Managing Director, Fine Food Network)

• For FMCG, a CPG firm must ensure they have a brand strategy to address the intended audience. Most will say they have that, but the truth is that they try to “cover the Earth” with a wide assortment to capture any and all consumers they can. In these economic times, there will tend to be even less “rationalization,” so to speak, since CPG firms will try to grab any demographic who is spending money.  Of course, regions vary in their propensity to embrace things like private label, however there are great examples across the globe of deep penetration of P/L, some of which have already been mentioned, and also Trade Joe’s in the US. P/L success has more to do with intentions of the retailer, rather than the line of products, specifically. (Ralph Jacobson, Global Consumer Products Industry Marketing Executive, IBM)

• Where’s the data? Which consumers are buying which products? Which ones are not selling so well? Where’s the demand? Both sides can play the win-lose drama as long as they like and both will lose. (Camille Schuster, President, Global Collaborations, Inc.)

• Brands are the initiators of product and package innovation.
  • Until Private Label companies or a collaboration with retailers can fund research and development and spend back big dollars back against the brand, the brands will always have customers looking for their new products.
  • Retailers cannot give up the slotting fees that brands pay for shelf space. That is why many stores get more branded skus then they probably need.
  • I am not sold that manufactures can’t execute with creative accounting, “Brand partnership stores.” Retailers work on slim margins but as more retailers self manufacture there is AN opportunity to sell to yourself.
    (‘YOURBOYS’ )

Luxury has its ups and downs. Assuming that the economy will look up at some point of time in the near or distant future, luxury brands will shine again, even if they’ve muddied themselves slightly in the puddles of discounting.

Public (and industry) memory is short, especially in fashion, where you might be as good/bad as your last collection. There are plenty of luxury brands which had once been pushed to the dustiest back shelves, that have come back into fashion in recent years. So I’m sure many of the brands will be forgiven their current trespasses.

And, as a precursor to that, someone’s going to come back very soon with the bumper sticker from the post dot-con days which read: “I want to be irrationally exuberant again!”

But on a more rational note, brands which have tried to “democratize” luxury by tinkering with the basic product quality and not paying attention to the brand values would find it harder to climb up again. Just because you want to reach a larger audience you cannot inherently reduce the promise of a brand. Especially when there is true quality available across the price spectrum today.

Who knows, we might even get back to the days when the joy of luxury was based on having truly superior products rather than just a name that a lot of people recognise.