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CONSUMER GOODS & RETAIL

by EOS Intelligence EOS Intelligence No Comments

It’s Good the Crisis Happened – How Private Labels Benefit from Global Economic Turmoil

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Stagnating or declining consumption, falling sales, lower financial stability – the economic crisis is in full swing in many geographies. But it is not a bad thing for everyone. Across markets, private labels have witnessed strong growth over the past five years, the upward trend coinciding with the onset of the economic turmoil in 2008. Cash-strapped consumers, worried about their financial security, turn to cheaper options during their everyday shopping, providing the retailers’ own labels with unprecedented opportunity to win consumers’ hearts.

Since the very beginning of the private labels story, retailer-owned products have been typically associated with low quality (to some extent quite rightly as the first private label products were clearly inferior). These concerns over quality made it difficult for the private label market to take off, making it cater predominantly to the least demanding or poor group of consumers. Several retailers started to realize that while many consumers are indeed price-driven, what most of them actually look for is value for money – so value matters to most of them. While changing the private-labelled product quality was relatively easy to do, changing the consumer bias and conviction of these products’ low quality was a more difficult task.

Quality improved, but it was the onset of the economic crisis in 2008 that made many consumers develop a ‘crisis mindset’ that led them to actually try out private labels for the first time. It appears that the crisis gave private labels a unique chance to enter homes of a group of consumers who were very unlikely to try them out before, mainly due to the consumers’ loyalty to branded products, strong unverified perception of poor quality of private labels and lack of financial pressure to even consider cheaper options. With search for cost savings and brand loyalty in decline, many consumers have found private label products quality to be on a par with market leading brands across segments, but at considerably lower price (even up to 40% cheaper than branded equivalents, depending on product category).

Private Label Market Share in Europe - 2012Private labels market has been growing across several countries (most of Asia still has a relatively low penetration of modern retail formats thus presence of own labels is largely limited there), but the increased acceptance of private labels is particularly visible in Europe. According to a AC Nielsen report “The Power of Private Label in Europe”, already in 2010, a considerable group of consumers associated private labels with good value – between 82% and 87% of consumers across Spain, France, Belgium, Ireland, the Netherlands, UK and Germany believed that supermarket own brands offer extremely good value for money. This is a significant change of mindset, considering the long period of inferior quality associations. Such opinions have played an integral role in boosting the growth of the European private label segment, and in 2012, the average value share of private label across European markets was estimated at 30%.

Clearly, private labels will continue to benefit from the overall deterioration of the economic climate, not only now (even though private labels are gaining higher share of retailer sales, the overall consumption expenditures are all in all lower), but also after the crisis, when consumption will start to grow again. This will be possible provided that retailers use the current situation to build some sort of loyalty amongst customers. This is the time for retailers to prove to their customers that private label products are not half as bad as generally regarded, and to convince the consumers to stick to private label products even after the crisis.
It is not all nice and easy for private labels yet, as they are faced with a range of challenges, which might question their ability to win customers’ loyalty that would last even in the post-crisis era. Obviously, producers of branded products have also reacted to the deteriorated financial capabilities of their customers, and introduced a range of offers or launched product lines in cheaper segments.

Additionally, we have already seen an increase in private-labelled product prices, resulting in lower cost benefit over reduced-price branded products. Growth in the private label segment is linked to improved product quality and the retailers’ attempts to offset the decline in overall sales as consumption stagnates. This increase might eventually lead the consumers to realizing that they can get an old, beloved brand, that reminds them of pre-crisis security, at just marginally higher cost, especially with branded products now available at discounted rates and in promotional offers.

So, the question really is, whether the private label growth story is just a temporary affair, and most consumers will hop back to the branded cart the minute crisis is over?

by EOS Intelligence EOS Intelligence No Comments

So What’s the Deal with Groupon? 8 Things for Groupon to Work On in Order to Survive

Over the past few years, Groupon has managed to build a recognizable brand, and currently claims to have attracted 250,000 merchants and over 200 million subscribers globally, with some 40 million active customers (as of November 2012). Undoubtedly, these are valuable assets and such considerable customer and merchant base offers great potential, yet the company’s market cap fell by about 80% since its IPO, from US$16.7 billion in November 2011 down to US$2.8 billion in December 2012. Is Groupon’s heyday over for good?

Recently, there has been discussion around Groupon’s future, triggered by the rather consistent decline in the company’s shares price (from around US$26 on Groupon’s IPO down to US$4.5 in December 2012), increased discontentment on the customer side, and disappointment on the merchant side. Given its declining market cap linked to slowdown in revenue growth, fall in sales volume to existing customers and shrinking sales force, clearly, Groupon is currently not the best target for potential takeovers.

Groupon’s service novelty status that drove the company’s success in the first place, seems to be wearing off for its customers, especially as competition is intensifying, with similar daily-deal websites proliferating thanks to low entry barriers. Nevertheless, Groupon seems to be keeping its head high, trying to introduce more or less successful measures to drive customer interest and retain merchants (e.g. the moderately successful Groupon NOW drive offering nearby deals on demand for use on the same day).

While some of the initiatives might allow Groupon to marginally rebound, it does not seem they will bring the company back to its glory days. Groupon’s executives should revamp several aspects of their business (perhaps previously missed or underestimated) – aspects that currently appear critical for Groupon to survive:

  1. Revisit Groupon’s model key selling points – perhaps Groupon got it a bit wrong in the beginning and conveyed it incorrectly to merchants, luring them with the idea of super-cheap offers turning masses of first-time-consumers into masses of regulars. Some customers will establish long lasting relationship with certain merchants, but such conversions proved to hold only a small share in overall purchases. Therefore, this should not be the main selling proposition to merchants, as this leads to disappointment and merchant expectations are not met.

  2. Understand your customers – consumers are always looking for discounts, but many purchases via Groupon come from customer willingness to try something new once – something that they would typically not be able to afford at full price. For such customers, the assumption of them turning into regular customers after trying a product is flawed, as they are unlikely to continue purchasing at full price. The only conversion rate that might occur here, is the conversion from trying-how-Groupon-works-for-me customer into Groupon-regular customer, which does not bring any benefit to merchants, thus fails to justify merchant’s relationship with Groupon.

  3. Re-orient merchants’ approach and re-shape their expectations – offering mass deals at very slim or zero margin is not going to work for merchants at all, given that only small fraction of customers MIGHT turn into regular customers. Groupon must make sure that merchants see real value in the relationship with Groupon, not just a vague promise of potentially (read: maybe, maybe not) expanding customers base as a way to organically grow merchant’s business.

  4. Indicate the real value proposition to merchants – merchants should be clear about the tangible benefits of working with Groupon:

    • For product merchants, Groupon can be a great tool for selling excess or old capacity e.g. during low demand season (discounted winter sports equipment in summer, unsold end-of-line products) or getting rid of old stock before restocking for anticipated rush periods with products that could be sold off-Groupon-route at higher margin. Whatever the reason, merchants must ensure the products offered are original product quality and without defects.

    • For service merchants, Groupon can be ideal for filling in off-peak times through discounted restaurant vouchers for weekdays or morning spa sessions. Customers are likely to understand the link between discount and non-peak time, provided that the service level is consistently high with the service they would receive during peak time. This can allow to maintain continuity of orders and utilize the merchant’s resources in times when they are largely idle and generate nothing but costs.

    • Regardless of merchant’s business orientation, Groupon can be positioned as a tool for getting quick cash by merchant at times when improving cash liquidity takes priority over generating profits due to temporary operational circumstances.

    • Groupon can be used to fuel new product trial for newly launched or novelty products and services, especially expensive ones, where the high full price and unfamiliarity with the offering would normally deter customers from trying the product or service.

  5. Control the number of groupons released on a single product or service at once – with large numbers of vouchers released, the merchant is flooded with more orders than that can be processed without delay or with dozens of consumers wanting to use the service over short span of time right after groupons’ release. Experience shows that this often leads to delays in delivery, giving the first-time-customer wrong impression of the overall level of service, causing disappointment, and reducing the likelihood of first-time-customers converting into regular customers even further.

  6. Ensure that Groupon customers are treated as normal customers by merchants – treating the customer with groupons in their hand as a worse sort of customer is a common sin of merchants (service merchants in particular). They tend to forget that serving such customers is their only chance to showcase the excellence of service and customer care, and create memorably great experience. Instead, customers are reminded that they are getting less as they paid less, which lowers the chance of customers returning to purchase the service at a full price.

  7. Ensure that Groupon deals are real deals – consumers are smart and given the easy access to online tools allowing for price comparison, they are likely to wise up to the so-called original price being inflated, and the discounted price being the actual price. Such discovery by the consumer leads them to feeling tricked, and they lose trust and interest, probably for good.

  8. Keep it clear and play fair – do not discourage consumers with unclear, confusing or hidden statements on limitations in using the groupons. Including such conditions in small grey print at the bottom of the page is not enough. Customers often discover these limitations only after purchasing the groupon, finding themselves feeling disappointed and deceived. The conversion rate for such customers is obviously close to none, with some of them also creating negative word of mouth for such a merchant.

by EOS Intelligence EOS Intelligence No Comments

Will Retailers’ Cash Registers Ring This Holiday Season?

It’s a big moment for retailers as we enter the holiday season, which traditionally has been known to generate sales higher than in any other quarter during the year. But this year again, retailers cannot afford to sit back to enjoy the sweet sound of their cash registers ring. Despite the rebounding US economy and some European economies showing first signs of recovery, the ‘economic crisis’ phrase is still being heard in dozens of languages.

At the outset, the US retail holiday season outlook seems relatively optimistic, with National Retail Federation’s projections indicating a 4.1% increase in 2012 holiday retail sales over the 2011 season, to reach a healthy $586 billion this year. Though moderate, there is a visible increase in optimism compared with 2011, resulting in higher consumer confidence in economic recovery, employment stability, as well as individual and household finances, all of which should bring American retailers a sense of relief and may result in a brighter fiscal year-end.

Online shopping and mobile apps are expected to play an important role during this season in the American market. This, paradoxically, might mean a mixed bag of good and bad news for retailers. Well-informed consumers, empowered by easy access to online tools allowing for quick, on-the-spot price and offer comparisons, are bound to make retailers’ and marketers’ job harder. But, by now, any sane retailer should have realized the world of opportunities lying here, and only these retailers will be able to bite a bigger share of consumer’s holiday budget. Increased penetration of smartphones, in tandem with mobile apps, online shopping and social media, have opened several platforms for retailers to interact with consumers, leading to an increase in conversion rate of consumers from ‘online researchers’ to ‘actual buyers’. According to Deloitte’s research, shoppers using mobile apps are expected to spend 72% more than non-users this year, with the conversion rate for shoppers using dedicated mobile applications being 21% higher than shoppers not using such tools.

Although this data pertains to the American market, it offers a good learning for European retailers too, as for them, the 2012 holiday season outlook appears gloomier than for their American counterparts. They seem to be very much aware of what is at stake, especially remembering 2011, which was hoped to be the turning year for the European economy, but actually witnessed worsening of the retail sector across several European countries. Poor consumer confidence was reinforced with recurring news: “Italy Xmas sales seen down”, “Greece sales plunge”, “Retailers slash prices to clear stocks, hurting margins”. There were some instances of retail sales growth, mainly in Russia, Poland, Romania, and to some extent in the UK, which witnessed faster clearance of holiday stock, but, apart from Russia and Poland, it was far from the good old days of record sales.

Christmas shoppers brought little relief to Europe’s retailers last year, with online sales increasingly cannibalizing in-store purchases. Till date, 2012 has not been much better than 2011 in terms of hinting at better consumer confidence, with most Europeans constrained by lower disposable incomes, higher-than-average inflation, wage cuts, high unemployment and dwindling social benefits, all of which do not promise a very fruitful 2012 holiday season for retailers across Europe. Several European retailers, just like their American fellows, are also turning their eyes to online and mobile-app shopping, especially as 2012 has shown that online retail and mail order are relatively immune to economic volatility and falling consumer confidence (though online sales penetration varies considerably across EU states).

So can European retailers do anything or should they simply wait and watch the holiday season fare badly? While there are no magical solutions, some obvious aspects might help improve retail sales numbers a bit this year:

  • Christmas is the best time to play on emotions, but this alone will not charm consumers into opening their wallets during these difficult times. Retailers must offer great sale prices and monetary incentives to buy. As the gloomy outlook prolongs, consumers tend to be more perceptive to price cuts than Santa’s friendly image.

  • Price cuts, discounts and special holidays offers are a decent but rather ancient invention. Any retailer thinking of this being the sole instrument of gaining consumers will have to compete with the sea of price cuts available everywhere. Creating a sense of urgency and exclusivity allows one to stand out and force consumers to decide quickly, such as by offering sharp discounts but for a very short period.

  • It has never been more important for retailers to stay on their ones toes with excellent customer service. With a battle for consumer’s every euro and dollar, retailers just cannot afford unhappy customers, who are very likely to spread the news about their bad experience.

  • Offering a delayed payment option might not make the retailer excited, but it might be the best option to secure sales from those consumers who are worried about their liquidity and spending too much now. There might be a willingness to buy gifts, so a delayed payment option might help consumers make some purchase rather than nothing at all.

  • Retailers, even those who do not offer online shopping options, must make themselves visible online – this is not the right time to neglect social media (but is it ever?).

While the economic situation is slowly improving, consumers will undoubtedly remain cautious, and the 2012 holiday season is unlikely to break any sales record. With this rather mixed outlook, the good old basket of retailer tricks including Christmas special offers, jolly atmosphere and in-store decorations will turn out to be too weak to counterbalance the pressure on the consumer’s wallet and weak confidence. But perhaps the only thing that the European retailers CAN do is to pick from the old tricks basket as smartly as they can, wait out the worst times and just hope for the best.

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