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August 10, 2008
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Devangshu Dutta
May 1, 2008
We touched upon food price inflation last month and – no surprises – it is still hogging the headlines. It is, after all, an emotive topic. We are terribly concerned not just as food and grocery professionals, but also as consumers and general public. After all, food and grocery are typically half of our monthly spend, give or take a few percentage points.
Inflation often brings with it swift (sometimes knee-jerkingly quick) reactions – price controls, export controls, subsidies to farmers and food producers, and various others. Some of these measures work but only in the short term, while others may have no immediate visible impact on the market at all but may be truly insidious because of that.
However, a significant set of questions has not really been touched yet: how the food supply chain is structured, how it is driving consumption, what impact that might have on food prices and several broader cost implications.
Thousands of years ago, when hunter-gatherer human beings stumbled upon agriculture, it was a breakthrough similar to the discovery of controlled fire. Hunter-gatherers were dependent on the natural availability of food, while agriculture created the opportunity to have some control over food supplies and reduce the natural feast-famine cycle. Thereafter, farming, processing and storage techniques kept evolving incrementally to ensure that more food could be produced for each unit of land and effort, and stored for longer – all moving towards ensuring “food security”. This led to the age of empire-building, where monarchs grew their wealth (essentially food territory) with the help of military-imperial complexes, and the greater wealth in turn supported the military-imperial complex.
This remained the trend for a few thousand years, until the age of industrialisation and the age of petroleum. Through the industrialisation and the world wars, the military-imperial complex gave way to a military-industrial complex, which essentially became the military-industrial-petroleum-agricultural complex. Suddenly, there were not just machines to plant, reap, thresh, sort, clean and process, but also petroleum-based substances to dramatically increase output and to keep the produce fresher for longer.
As US farms and then European farms industrialised, the parameters that began to be applied were the same as in any factory – how to produce more while spending less – and every year the target was to grow more for less. Underlying this was the principle of “efficiency from larger scale”. The same philosophy played out further down in the supply chain – from processing to extend the shelf-life of the product as it was (such as chilling, cleaning, sorting) to processing and packing in order to change the nature of the product itself and gain additional value (such as tomatoes to paste or potatoes to chips).
Standardisation became a vital link in industrialisation – if you can standardise produce, you can cut down human handling – while you may lose product variety (including flavour and colour) you gain in terms of driving down the cost of production. By reducing unpredictability you can also concentrate on building the scale of business, because it becomes more repetitive.
The interesting side-effect of this is that, gradually, we are converting ourselves (and people in many industrialised economies already have) into petroleum-burning machines rather than those running on solar energy, because increasingly the agricultural supply chain is dependent on non-renewable petroleum and its products, rather than by the natural energy of the sun being converted into food by the plants.
And the important thing to keep in mind is that, in this switch-over, the energy efficiency is actually going down rather than up – we are using more calories of fuel source to produce each calorie of food energy.
The issue is more acute now than ever before, because now the growth markets of choice for industrial agriculture companies are China and India. If these two countries move through the exactly same path as have the western economies in terms of agriculture and food processing, given the population base itself, clearly the impact will be 5-7 times (or more) on the demand for petroleum as well as the fall-out on the ecosystem.
You may ask, why should retailers worry about this?
Firstly, pure cost considerations – clearly, the costs of petroleum are not coming down, and explosive demand through industrialised agriculture will only serve to push them up. How far can you push the food bill every month, before people start buying less? What impact would that have on large retail supply chains and farmers whose processes are increasingly built around products of industrial agriculture?
Secondly, what consumers are already beginning to express in western markets will possibly happen in India in the next few years as well: concern about where and how the product has been produced, what has been the fall-out on the environment and on the overall health of people involved with that supply chain as well as the health of consumers.
Carbon footprint, food miles & locavores (people who only consume food that is produced within 100 miles of where they live) are terms that retailers are increasingly hearing.
And an alternative set of questions is also being raised. Is it ok to burn non-sustainable fossil fuel if you get “carbon credits” by planting trees somewhere else – have all the carbon costs been accounted for from the start to the finish of the production process? Is it better to reduce the food miles and have food produced locally in a high-cost economy’s industrial agricultural model, or to have naturally grown foods from a more primitive farm in Africa or Asia where the environmental impact is only the “carbon debit” of the air-freight. And, even if the produce is carbon-friendly, what about the nitrogen footprint (from the fixation of nitrogen into fertilisers) and the methane footprint (from large scale animal farming)?
This one page is surely not enough to present any in-depth analysis, but I hope it will serve to kick-start the process of questioning how India (and China) should take the lead in creating an alternative and more sustainable model for food security for large populations. There is a lot of research being done, and much yet to be done, to quantify the true cost of blindly pushing for scale in the food chain. Truly “progressive grocers” need to take an active role in supporting this.
Devangshu Dutta
April 4, 2008
April has opened eventfully around the world, when it comes to food prices.
A leading Indian business daily opened the first week of April 2008 with a story saying that chain-stores may be as much as 15-40% cheaper than street vendors for staple vegetables and fruits. When we put this against the backdrop of concerns at skyrocketing global prices of rice and fuel, as consumers we may have a reason to thank the chains for helping to balance our monthly budgets.
But is this really a victory for proponents of organized retail, or a blow against retail chains?
The same article went on to state that chain stores were offsetting the hit they were taking on food by selling other products that offered them more margin, “an option not available to hawkers”, and also quoted leading Indian retailers.
The very same day, media in Hong Kong were covering a survey that stated that supermarket prices in the city were on average 12% higher than independent grocers, with some branded products being sold for as much as 20% higher. The Democratic Alliance for Betterment and Progress of Hong Kong, which carried out the survey, cautioned consumers that they should not be misled by supermarket ads for big discounts and advised them to compare prices frequently between chains and independent retailers.
(The study did not compare price differences now to what they might have been 20-25 years ago, when the market was not so consolidated. Such a study may provide some other interesting insights.)
During the same week, the government of Ivory Coast in Africa also responded to protests by women and youth in Abidjan against rising living costs with an emergency meeting and lower import duties on key food items.
Obviously inflation, especially in food prices, is a global concern right now, so this simultaneous appearance of news across countries is hardly a coincidence.
They, however, do raise concerns about how the chain of food supply and retail is structured, and also some important questions about competitive strategy.
Let’s deal with competitive strategy first. Obviously, the terms “loss leader” or “key value item” have been coined in the last few decades, but the strategy itself has been well-known and widely used since the time humans started trading thousands of years ago.
The foundation of the strategy is built on items that are a staple, usually widely compared by consumers or used as a benchmark when comparing different merchants. A merchant may place a very low margin on such a product, or sell it at cost (or even at a loss).
The concept is simple: attract a customer into the store with an irresistible offer, but make sure that consumer also buys other products that provide enough profit to the retailer.
As a consumer you may feel outraged that someone is “cheating” you, but in our “sensible” and rationally-aware moments we as customers know that this happens frequently, and know how to avoid it. However, we are not always rational – if shopping were purely a rational exercise then automated comparative software would be fulfilling all our shopping needs by now.
Stepping beyond the retailer-consumer relationship, there is also question whether this can be classified as free or fair competition when cash-rich organizations with a wide basket of goods, take the strategy to the doorstep of the small individual trader whose product offering is much narrower and usually concentrated on the staple goods that are being discounted.
There is no really easy or quick answer to this question.
On the one hand, large retailers such as Wal-Mart, Carrefour, Tesco, Metro and others, have been widely credited for achieving cost-efficiencies from scale, and then passing on these efficiencies to the consumer in the form of lower prices (and, apparently, higher standards of living). That is a good thing and definitely of benefit to the population at large, especially in inflationary times such as these. Rather than keeping prices high due to inefficient sourcing, wasteful and expensive handling, and non-value-adding costs in the supply chain, it is surely a good to push for lower costs.
On the other hand, there is no simple way to draw a line when competitive benefit to the consumer becomes predatory pricing within the trade.
If a retailer took price reduction as a “strategic investment” to grow a market (as happens in markets and product categories around the world), when do you start calling it “unfair”? And should you even attempt to label it unfair? What is the cost to the market, when it could eventually concentrate and consolidate market share in few hands? Is the cost to society more in supporting small inefficient retailers, or more if these retailers lose their independence and become employees? (If you’re looking to me for the answers…sorry, I don’t have them yet!)
Value judgements are almost always subjective rather than objective. ‘Large versus small’ conflicts are frequently emotive rather than rational. And even though there are no easy answers, I believe we should think about these questions, as businesspeople, as consumers and as social individuals.
There are some rather interesting (and by no means conclusive) studies, opinion papers and books that have looked at the structure and economics of the food supply chain, but constraints of space force me to postpone that aspect to another column. The questions and competitive strategy will not be disappearing quickly, so I’m sure these will still be relevant then.
Meanwhile, I’m sure we have enough food for thought!
Devangshu Dutta
January 28, 2008
Last year in an impassioned memo, Starbucks’ Howard Schultz identified several strategic and operational decisions that, according to him, were responsible for a deteriorating customer experience at Starbucks.
Starbucks faced the classic problem of any company scaling up (especially a retail brand) – how to be large without being bureaucratic, how to be efficient without losing the soul of the brand, how to be consistent without losing the differentiation edge.
The problem created by Starbucks taking the certain decisions was compounded by the fact that competitors have not stood still either. Competition has improved its core products (coffee), as well as the augmented product (store ambience, service, wait time etc.), and in comparison Starbucks has possibly stood still or slipped back.
Now, almost a year after that memo, Starbucks begins 2008 with Schultz stepping back into the CEO role. It’ll be interesting to see how his passion for the brand is infused back into the stores and the operations in the coming months.
On a separate note, the classic “founder vs. professional” conundrum also comes to mind, along with the notable examples of Apple (Steve Jobs), The Body Shop (Anita Roddick) and others. (Though Howard Schultz was not strictly the founder of Starbucks – the company was founded in 1971, and Schultz bought the company in 1987 when there were less than 20 stores in the chain – he is pretty close to being one.)
The question is: for iconic brands that are more than just the physical product or service being sold, can a ‘professional CEO’ ever take the place of the founder(s), replicate their passion & vision and maintain the integrity of the brand? I believe there are examples to support both answers: ‘Yes’ and ‘No’.
What do YOU think?
Devangshu Dutta
January 18, 2008
The entertainment business suggests that nostalgia is a very powerful driver of profit.
It is quite clear that retro is “in”. The movie business worldwide is full of sequels, prequels, re-releases and remakes. The music business is ringing up the cash registers with remixes and jukebox compilations. Star Wars and Sholay still have a fan following. ABBA has leaped across three decades, Hindi film songs from 30-60 years ago have been given a skin-uplift by American hip-hop artists, while Pink Floyd is hot with Indian teens along with Akon and Rihanna.
As copyright restrictions are removed from the works of authors long-gone, the market gets flooded with several reprints of their most popular writings. Of course, we know that classic literature survives not just a few years but even thousands of years. Examples include the still widely-read 2,500-year-old Indian epic Ramayana by Valmiki, the Greek philosophers’ works that continue to be popular after two millennia and the Norse legends that have been told and re-told for over a thousand years. Spiritual and religious leaders’ writings are also recycled into the guaranteed market of their followers and possible converts for a long time after their passing away.
On the other hand, the basic premise of today’s fashion and lifestyle businesses is that silhouettes, colours and design-cues will become (or be made) obsolete within a few weeks or a few months, and will be replaced with new ones. This principle is true not just of clothing and footwear, but is applied to home furnishings, furniture, white goods, electronics, mobile phones and even cars. In fact, the fashion business (as it exists) would find it impossible to survive if customers around the world chose only classics which could be used for as long as the product lasted in usable form.
What Fashionability Means for Brands
Other than individual styles or products falling out of favour, as fashions move and as the market changes, it is evident that some brands also become less acceptable, are seen as “outdated” and may also die out as they lose their customer base.
Of course, that some brands become classics is quite apparent, especially in the luxury segment where brands such as Bulgari have survived several generations of consumers, and continue to thrive.
However, the past is of relevance to the fashion sector because, other than planned or forced obsolescence, the fashion business has also long worked on another principle – that trends are cyclical.
Skirts go up and down, ties change their width, and the colour palette moves through evolution across the years. A style formula that was popular in the summer of a year in the 1970s might be just right in another summer in the first decade of the 21st century.
So, the question that comes up is whether the same logic that is applicable to individual products, styles and trends, could also be applied to brands.
The answer to whether apparently weak, dead or dying brands could be brought back to life is provided by brands such as Burberry’s, Lee Cooper and Hush Puppies. Sometimes innovative consumers create the opportunity – as with Hush Puppies in the 1980s – while in other cases (such as Burberry’s, Volkswagen’s Beetle, or Harley Davidson), vision, concerted effort and resources can make the brand attractive again.
The question then is not whether brands can be relaunched – they can. The more important question for brand owners is: should a brand be relaunched. And using the logic of the fashion business, rather than being left to linger and then dying a painful death, could brands be consciously phased-out and later brought back into the market as the trends change?
The Brand Portfolio – Diversifying Opportunities and Risks
These questions are particularly important for large companies, or in times when market growth rates are slow, or when the market is fragmented. Organic growth can be difficult in all these scenarios, and companies begin to look at developing “portfolios” by acquiring other businesses and brands, or by launching multiple brands of their own.
The car industry worldwide has lived with brand portfolio management for long. Even as companies have merged with and acquired each other, the various marques have been retained and sometimes even dead ones have been revived. The companies generally focus the brands in their portfolio on distinct customer segments and needs (such as Ford’s ownership of “Ford”, “Volvo” and “Jaguar”, or General Motors with its multiple brands), and then further play with models and product variants within those. When things go right portfolio strategies can be quite profitable, but the mistakes are especially expensive. Sensible and sensitive management of the portfolio is absolutely critical.
In the fashion and lifestyle sector, the players who already follow a portfolio strategy are as diverse as the luxury group LVMH, mainstream fashion groups like Liz Claiborne (with brands in its portfolio including Liz Claiborne, Mexx, Juicy Couture, Lucky Brand Jeans) and LimitedBrands (Limited, Victoria’s Secret, La Senza etc.), retailers such as Marks & Spencer (with its original St. Michael’s brand having given way to “Your M&S”, and also Per Una) and Chico’s (Chico’s, White House | Black Market, and Soma Intimates) who wish to capture new customer segments or re-capture lost customers. Some of these companies have launched new brands, some have relaunched their own brands, and some have even acquired competing brands.
The issue is also relevant to the Indian market, whether we consider Reliance’s revival of Vimal, the new brand ambassador for Mayur Suitings, or the PE-funded take over of Weekender. As the market begins evolving into significantly large differentiated segments, branding opportunities grow, and so will activity related to existing or old brands being resurrected and refreshed. An additional twist is provided by Indian corporate groups such as Reliance, Future (Pantaloons) and Arvind that are looking to partner international and Indian brands, or grow private labels to gain additional sales and margin.
The issue also concerns those companies whose management is attached to one or more brands owned by them which may not have been performing well in the recent past, but due to historical or sentimental reasons the management may not like to close down or sell them.
It is equally critical for potential buyers who would like to take over and turn brands around into sustainable profits. This is a real possibility in this era of private-equity funds and leveraged buyouts, where a company or a financial investor might find it cheaper and more profitable to take over an existing brand and turn it around, rather than building a new brand. This is already happening in the Indian market. More interestingly, Indian companies have also already acquired businesses in the USA and Europe, and the potential revival or relaunch of brands is certainly relevant for these companies as well.
When to Recycle and Reuse
Relaunch or acquisition of an existing active or dormant brand can be an attractive option when building a portfolio, or when a company is getting into a new market.
For the company, acquiring an existing brand is often a lower cost way to reach the customers, and also faster to roll-out the business. The company may assess that the brand already has an existing share of positive customer awareness that is active or dormant, and that the effort and resources (including money) needed to build a business from that awareness will be much less than that to create a new brand.
The risk of failure may also be lower for a relaunched brand than for a new brand.
This is because the softer aspects, the hidden psychological and emotional hooks, are already pre-designed. This provides a ready platform from which to re-launch and grow the brand.
From the customer’s point of view, there is the confidence from previous experience and usage, and possibly also nostalgia and comfort of the ‘known’.
‘Age’ or vintage is respectable and trustworthy. This is especially powerful during volatile times or in rapidly changing environments when there is uncertainty about what lies in the future, and makes an existing brand a powerful vehicle for sustaining and growing the business.
On the Downside
However, when handling brands it is also wise to keep in mind the cautionary note that mutual funds issue: “past performance is no indicator of the future”.
In re-launching active or dormant brands, there is also a downside risk. While the brand may have been strong and relevant in its last avatar, it may be totally out of place in the current market scenario. The competitive landscape would have shifted, consumers would have changed – new consumers entering the market, old consumers evolving or moving out – and the economic scenario itself may now be unfriendly to the brand.
Also, the “awareness” or “share of mind” may only be a perception in the mind of the person who is looking to re-launch the brand, and the consumer may actually not care about the brand at all. There are instances where the management of the company has been so caught up in their own perception of the brand that they have not bothered to carry out first-hand research with the target segment to check whether there is actually an unaided recall, or at worst, aided-recall of the brand. They are imagining potential strengths, when the brand has none.
It is also possible that, during its last stint in the market, the brand may have gathered negative connotations – consumers may remember it for poor products or wrong pricing, the trade may remember it for late deliveries, vendors may remember it for delayed payments…the list goes on. In such a scenario, it may be a relaunch may be a disaster.
So how does one know whether to resurrect a brand, or to reincarnate it in another form, and when to just let it die? The answers to that lie in answering the question: what is a brand? And then, what is this brand?
A Critical Question: What is a Brand?
Even in these enlightened marketing times, many people believe that the brand is the name. They believe that once you advertise a name widely and loudly enough, a brand can be created. Nothing could be further from the truth. High-decibel advertising only informs customers of the name, it cannot create a brand.
If we put ourselves in the customer’s shoes, a brand is an image, comprising of a bundle of promises on the company’s part and expectations on the customer’s part, which have been met. When promises are delivered, when expectations are met, the brand develops an attribute that it is defined by.
The promise may be of edgy design (think Apple), and the customer expects that – when the brand delivers on the promise and meets the expectation the brand image gets re-affirmed and strengthened. However, these attributes are not always necessarily all “positive” in the traditional sense. For instance, a company’s promise may be to be low-cost and low-service (think Ikea, or “low-cost airlines”), and the customer may expect that and be happy with that when the company delivers on that promise. The promise may be products with a conscience (think The Body Shop), which may strike a chord with the consumer.
What that brand actually stands for can only be created experientially. Creating this image, creation of the brand, is a complex and step-by-step process that takes place over time and over many transactions. Repetition of the same kind of experience strengthens the brand.
The brand touches everything that defines the customer’s experience – the product design and packaging, the retail store it is sold in, the service it is sold with, the after-sales interaction – all have a role to play in the creation of the brand.
For instance, to some it may sound silly that market research or how supply chain practices can help define a brand, but that is exactly how the state of affairs is for Zara. Changeovers and new fashions being quickly available are what that brand is about, and it would be impossible for Zara to deliver on that promise without leading edge supply chains, or a wide variety of trend research.
Similarly, it may sound clichéd that your salesperson defines the brand to the consumer, but even with the best products, extensive advertising, and swanky stores, for service-oriented retailers everything would fall apart if the salesperson is not up to the mark. This is indeed a sad reality faced by so many of the so-called premium and luxury brands.
Of course, brand images can be changed or updated, but the new image also needs to be reinforced through repeated action, a process just like the first time the brand was created.
Reviving a Brand: the New-Old Seesaw
Given that a brand is created over multiple interactions and repetitive delivery of certain attributes, it is only natural that the older the brand, the more potential advantage it would have over a new brand. Just the sheer time it would have spent in the market would give an old brand an edge.
An old brand can appear to be proven, experienced and secure, while a new brand could be seen as untested, raw and risky. An old brand may have had a positive relationship with the consumer, but may have been dormant due to strategic or operational reasons. In this case, reviving the brand is clearly a good idea. There is already an existing awareness of an older brand, which can act as a ready platform for launching the same or a new set of products or services. Often, there may be a connection with the consumer’s past positive experience of the brand.
On the other hand, a new brand may appear to be fresh, more up-to-date and relevant, and vigorous, compared to an old one that may be seen as outdated and tired. Certainly, if nostalgia had been all that brands needed to thrive, then old brands would never die and it would be difficult to create new brands.
Clearly, there is no single answer to whether it is a good idea to re-launch an existing or old brand. If you are considering whether it would be a good idea to revive an old brand, or to acquire and turn an existing brand around, ask yourself this:
If the answer is “No” to any of these questions, then one needs to think again. However, if the answers are all “Yes”, then a resuscitation is just what the doctor might have ordered.
