Posted by: Chris Radford, partner, Differentiate.
We know that "things are going to be tough" this year and maybe "even tougher" next year. What should we do about it? Opinions seem to range from predictions of doom to a rather cosy feeling that maybe we will see it through and it will not be so bad.
In this article we try to apply our fundamental principles to analyse the situation. This adheres to three principles.
• Stop worrying about the future, but do beware of the unexpected (See
Black Swan blog entry). What this means is avoid expert predictions of what will happen and instead concentrate on strengthening your ability to compete and the withstand future unexpected shocks.
• Actively seek and acquire empirical evidence to understand what is actually happening. Again try and avoid the expert opinions. They tend to offer qualitative observations and are tempted to make predictions. Instead concentrate on evidence of things that are actually changing. In particular look to gain insights about things that directly affect your business.
• Avoid "interesting" and focus on "actionable" insights. That means start with the decisions you need to take and then go after the insights that will help you make them.
We have been reviewing some evidence, observations and opinion about how consumers and customers will react to higher prices and lower disposable incomes. I have grouped them into expert opinions, hard empirical evidence, insights and conclusions.
Example predictions/observations from experts
• The cumulative effect of numerous cost increases has now reached a tipping point. Consumers are really starting to feel more vulnerable and this has become more pronounced in the past 6 weeks.
• With pressure on personal finances people will be less willing to pay a premium for "nice to have" things like more local food and food provenance; sustainable foods, organic and fair trade.
• There will be a back to basics trend, grow your own food, more family cooking, use basic ingredients rather than ready meals and less willingness to pay for convenience.
• Under financial and moral pressure consumers will find ways to reduce food waste (30% of food bought currently ends up thrown away).
• People will switch more of their shopping to discount outlets and local shops reducing both prices and transport costs.
• People will eat out less and consumers will switch to more take outs
• Concern over climate change will affect what people buy.
A lot of these statements make sense and some may well happen, but remember they are either subjective or a prediction. Remember that experts may well understand what is going on but their predictions are usually unreliable. Take a look at our Black Swan blog post to see the potential pitfalls of listening to expert predictions. We recommend you look at the empirical evidence and come to your own view about how this will affect your business.
Empirical evidence of what is actually happening now (data to May 2008)
• The polarisation of markets continues whereby the strongest growth is happening at the top and bottom of markets. The highest growth rates are in premium added value and low price segments whilst the middle gets squeezed.
• In Grocery the strongest growth % rates are in discounter stores (Lidl, Netto) and internet grocery deliveries. The biggest absolute cash growth is happening in megastores situated out of town. However, this is not a feature of the downturn. These trends are long term and have not yet changed in 2008.
• What has changed in the downturn is lower sales in eating out, clothing, household appliances and furniture. Other sectors including holidays remain resilient.
• OL share of total grocery has not increased for 5 years and as yet there is no sustained trend for own label to increase its share.
• The % of volume that is offered on promotion has gone up sharply and this is more about multi-buys than price reductions except in Tesco who focus more on price reductions.
• In 2008 consumers are making fewer big shopping trips, shoppers spend per basket is down and there is less promiscuity between retailers.
• Consumers are claiming to be influenced more by a number of ethical issues, CSR, environment, fair trade, food provenance etc. Anecdotal evidence of sales growth in products with these claims suggests this is true.
What insights can we translate from this (whilst avoiding predictions)
• Consumers are under financial pressure and are adjusting spending behaviour, but they are choosing carefully where to make the changes. Indulgences and treats remain important, but consumers selecting which ones matter most (quality food and holidays seem to be doing well).
• The fundamentals of what consumers want (the power drivers of choice) remain the same in slowdown or boom. The mega trends of health, convenience, naturalness/food provenance and ethical concerns remain in force and continue to be the main sources of growth in markets.
• There is no sign of a flight from quality. There is some smart shopping to get and be able to afford the quality (seeking promotions, visiting discounters, local sourcing).
Translating insights into action
Reducing waste is an insight that could offer opportunities. We know consumers are making more frequent shopping trips. This could correlate with reducing wasted food. The other area of waste that is an environmental issue is packaging. May be helping consumers reduce waste could offer opportunities for innovation.
Nielsen recently quoted a survey stating that the top 20 innovations have all been about packaging, format and convenience. As marketers are we smart enough to come up with packaging formats that reduce waste and have less environmental impact whilst still delivering the merchandising impact and consumer convenience? It must be worth a try.