RETAILNETGROUP STRATEGY ALERT No.
15 Issue Managing Through the Crisis
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Greetings! There is no satisfaction in further explaining the mess that we are in. While we all acknowledge the parallels to previous business cycles, it's pretty clear this is bigger than all of us. In the sprit of focusing on what you can control, it is time to recognize that in every economic (and political) cycle consumers will in total spend at least 95% of what they did pre-crisis. In other words, even as we approach 10-15% unemployment, lower available discretionary income and weaker household balance sheets, people will in total continue to buy. It will just be less and different. If you want to survive or even thrive in this market it's essential to deeply study how consumers are changing and evaluate how permanent you think these changes will be. At RNG we've spent weeks talking with industry, financial, healthcare, diplomatic and government leaders as well as academics and of course consumers. We would suggest the following assumptions about the "macro" situation and new shopper realities as a decent beginning point on your journey to managing through the crisis. Please remember that these are not intended to be exhaustive but rather as discussion starters to help you spot and explain the new retail market. As always, we are very interested in what you are hearing too. Dan O'Connor, President RetailNetGroup.com email@example.com
In This Issue
Growth of the "Informal Market" Declining "Addressable Markets" Shopping Trips Re-mix Middle 60% Experiencing the Most Change Retail Healthcare Services Demand Growth in Personal Security Transportation Dynamics Self Service Entertainment Reducing Household Expenses Family Related Costs Education
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Global Growth of the "Informal" Market
When consumers lose their steady income, they return to the most flexible markets - the informal markets, which are increasingly enabled by technology (Craigslist, Ebay, Amazon, as well as local bazaars). RNG predicts we will all see:
Rising secondary (and informal) markets growing for consumers who want/need re-cycled clothing, household and related products Bartering - Cash and near cash transactions reduce complexity on both sides of a transaction - and RNG expects increasing bartering and exchange in both the formal and informal markets. From cash to e-tokens to cell phone minutes, new bartering
mediums will arise that reduce the overall cost of trading for buyers and sellers.
Subscribers to RNG can now access our newest Retail Market Development case for Latin and Central America.
Continued expansion of and double-digit comps in Goodwill and other "not for profit" retail operators.
It is especially important to remember that the Latin American, Central European, and other developing markets rely on transfer payments as the 2nd or 3rd largest source of income. As these continue to decline at double-digit rates (see figure below), consumers leave the local chain store operator and return to the markets...which is often good for vendor brands but not for modern retailers. Mexico's Change in Remittances vs. Prior Year, USD Millions
Prior Strategy Alerts
Retail Pricing Update Sophisticated retail pricing has emerged as a key driver of long-term growth and profitability. Wal-Mart's Marketside: A Small(er) Supermarket
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RNG's visit and perspecitve on Wal-Mart's new small box format Wining in a Zero-Sum Environment RNG's forecast for total chain sales, winning (and losing) market segments, and retailers' playbooks for Q4 and beyond The Legacy Store Challenge Why retailers' #1 ROI challenge is driving growth in their existing stores, and how the leaders win Goldman Sachs Global Retailing Conference Get a quick download of RNG's thoughts after hearing and meeting with leading retailers Chain Retailing 3.0 Over the next two years, branded manufacturers and retailers will be challenged to find new ways to prosper in the fastest changing food retail environment in a generation Mature Store Activation The new new thing in retail
Flat or Declining "Addressable Markets"
The "addressable market" of shoppers for most modern retail store segments is flat or declining in both the developed and developing world. Flat population growth, slowing immigration and household formation and declining household ownership and discretionary income will shrink the number of relevant shoppers and households for most consumer goods. While most retailers have not adequately woken up to this, the mandate to re-position, market and merchandise chain stores has never been higher.
Shopping Trips Re-mix
Shopping trips to modern stores are re-mixing significantly within each addressable shopper segment. While a complete picture is difficult, there are some general patterns emerging according to retailers RNG speaks with:
Consumers across the spectrum are behaving differently the number of trips, the stores they shop, the time in store, % of store shopped and # of items purchased. Price and proximity matter - consumers are altering long time shopping patterns for price and availability. In the neighborhood, it pays to balance time and gas. Consumers at all socioeconomic levels are switching retail stores. This only happens 5-6 times in a shopper's lifetime--so when it happens it's notable! By nature, people resist change and get comfortable with their choices. This time they are giving up the familiar to find better value. Going to Aldi or Lidl for example before they go to Tesco is a well understood pattern in the UK that the US, Canadian and Lat Am retailers are just beginning to
appreciate. We suspect that Walmart's Marketside is as much a test of a small format limited assortment discount concepts like Aldi and Sav-a-Lot as a counter to Tesco's fresh and prepared offering. (Noting, of course, Marketside's emphasis on national brands.)
growth is old stores, and how to unlock their potential to reach new shoppers and drive wallet share with existing shoppers Social Networks Online social networking allows marketers to connect with new and existing customers and deepen the level of engagement Pricing Optimization Retailers are developing pricing as a strategic capability, which also raises several opportunities for CPG firms Private Label Strategic store brand programs are a significant growth strategy for retail leaders Express Stores Convenience food retailing is changing globally as consumers express their preference for healthy, fresh, and ready to go (or consume) foods
The bottom 20% is shopping much more frequently - closer to consumption and often to their homes. These households include many that are impacted early by employment challenges and will engage in social programs (WIC, Food stamps, etc) as well as the "cash economy." These are also shoppers that often have tow and sometimes three meals away from home - all single serve, grab and go foods. These products will be significantly impacted in this transition. (See below as RNG believes that these patterns will soon extend up to the bottom 35% of the population in most developed markets)
Middle 60% Experiencing the Most Change
The middle 60% of households (excluding the top 20% and bottom 20%) is perhaps in the midst of the most profound lifestyle and household management transition in several generations. Here are just some of the changes we will continue to see across the remaining 36 months of this recession:
Firm budgets - from spreadsheets to envelopes by expense type by week, households are getting back to basics and splitting payments--paying what you can this week and the rest next week before the next bill comes. Consumers tell us that they pay rent, loans and insurance first - increasingly focused on the basics versus discretionary goods. Food at and away from home - re-mixing again. Food away from home in most parts of the world is 2-5x the cost of at home. Consumers constantly move up and down the prepared food continuum based on their purchasing power outlook.
Meet Our Analysts
Comparison shopping for complete meals - an affordable night in. Supermarkets and express stores are promoting complete meals at a price as a lower cost form of entertainment (vs. the restaurants). The best example is Marks & Spencer:
Dan W. O'Connor is the President & CEO of the RetailNet Group. He also is the Founder of Management Ventures, Inc. (MVI), a WPP Group company. Dan is a widely known industry speaker and thought leader. LinkedIn | Email
Aaron Chio is a Senior Analyst leading RNG's development of new research, insights and growth strategies in Latin America. LinkedIn | MSN | (click here to enlarge)
Consumers are buying scratch and prepared foods for out of the restaurant (presumably at home) consumption. Trading down when eating out - on two levels: 1. Most restaurants are featuring value items/meals - all hitting specific price points - Quiznos, Pizza Hut, KFC and the rest selling a complete meal at a price Consumers learning to trade down to the QSR instead of the casual dining or white table cloth restaurants Tim O'Connor is Vice President at RNG, currently responsible for RNG's Growth Strategies Curriculum and European market insights. LinkedIn |
RNG outlook for food/consumables: Consumers will re-evaluate food consumption on several levels but will return to old habits quickly as soon as the recession turns around. Also, always remember that the more people in a household the better the economics are for at home consumption.
Retail Healthcare Services Demand
The uninsured and under-insured population are sure to increase, which will lead many to seek affordable and convenient alternatives to hospitals and physicians. Clinics at CVS, Walgreens, WalMart and others are sure to boom. Other transitions: 1. 2. Splitting prescriptions - people taking one a day instead of two Reduced spending on preventive care and wellness products Keith Anderson is a Senior Analyst and responsible for RNG's North American research practice and transformational capabilities curriculum. LinkedIn | Twitter | Windows Live Messenger
Growth in Personal Security
Interest in personal security will continue to grow. In difficult economic times, personal and property security becomes a priority, especially in urban areas. Consumers are buying weapons, fireproof safes and home security video systems at record rates. Further, RNG expects that all sorts of security concerns will influence where consumers shop - perhaps even increasing spending through non-store channels at times when logically it should decrease.
Drive only when necessary - automotive and transportation cost reduction remain a top priority. Despite a recent 30% reduction in fuel prices (which exceeds the typical Fall seasonal drop), consumers tell us that recent energy costs declines have convinced most consumers that gas/oil looks like a rigged market that they would like to see changed. All are deeply interested in lower costs, less variation and better-for-the-earth alternatives. We expect carpooling, public transportation, telecommuting, etc. will rise. Products and services that enable this will be in high demand.
Self Service Making a Comeback
Do-it-myself making a coming back? Consumers will make the trade-off of time for cash to take care of a greater % of their stuff. While most consumers lease or buy cars on terms, RNG can see rising demand for affordable auto parts (brakes, hub bearings, mufflers, spark plugs, etc.). This is a particularly important opportunity as the car dealers in the US and rest of the world are "rationalized."
Like food, this is moving on a couple of levels:
• • •
Local - proximity keeps costs down. Backyard entertainment growing Free or low cost - camping, hiking, touring, biking Retro at-home entertainment - switching to high replay or reuse value (such as board games and arts and craft supplies) from more short-lived options (like movies in the theater). In Las Vegas, for example, we are hearing that museums and park traffic is up, while casino traffic is down.
Vacation - income tax refunds will define where we go and for how long
Reducing Household Expenses
Retail products are only 25% of what people buy (in the US). As with other major expenses, consumers want to get their fixed costs down:
Telecom - switching to VOIP service or eliminating land lines at home all together Heating & Cooling - shutting down entire rooms at home, using room heaters in heavy-use rooms instead of heating the whole house. Products like energy meters and light switch timers will grow in popularity. Shifting personal care service providers - going to Supercuts in order to avoid the costs of the upscale beautician/stylists
Family Related Costs
A lot of switching from pre-schools to day care and from long term care to nursing homes. Right or wrong - it's happening.
Many of the newly unemployed will seek to spend their time wisely by going back to school or acquiring new skills or certifications. As resourcefulness becomes an increasingly prized attribute to employers, for both young and old alike, skill-based training may flourish.
How to Commercialize These Changes
Following the impact on the consumer, the question of how retailers and brands can thrive in this environment is on our minds, as we are sure it is on yours. In another newsletter, we'll share how we're helping retailers and suppliers manage through the crisis and highlight some of the best ideas we've seen.
RetailNet Group is the leading insight and advisory firm focused on retail growth strategies and consumer-facing transformational capabilities. We are deeply experienced retail/consumer analysts and strategists working exclusively to help brand-led businesses and large-scale retailers grow. Sincerely, RetailNet Group
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