Consumer and retail companies need to look to their own markets, and at their existing customer base, to find new and innovative ways to drive growth and make their companies more distinctive, says Richard Rawlinson, global Consumer & Retail specialist and Partner at Strategy&, part of the PwC network of firms.
“Faced with increased economic uncertainty in the current markets that drive economic growth, consumer and retail companies need to refocus on the markets in which they operate and the way in which they make strategic decisions, in particular thinking beyond the traditional retail business model.”
Globally, the retail industry is facing a challenging time with a significant decline in consumer spending power. Between 2009 and 2012, even as revenues fell in the wake of the financial crisis, many companies continued to post strong earnings and recorded positive market performance. This was largely due to extensive cost cutting measures.
“Today, however, this strategy has run out of steam. There is minimal opportunity to maintain bottom line growth through cost-cutting initiatives. Companies have to look to the top line to maintain bottom line growth,” Rawlinson said.
The result is that disposable income growth has moved to a much lower level, in particular in the US and Europe. In developing countries it is more variable, with China holding up. In South Africa, recent figures suggest a move from rates comparable to the best developing countries to those now typical of developed economies.
Rawlinson points out that that there is also another development in consumer markets - the ‘Great Fragmentation’. Mass markets have crumbled and become fragmented. A greater variety of products have been used to address consumer needs in a more segmented way. There are many reasons for this, both on the demand and supply side. These include a diversity of lifestyles in the population, and improvements in flexibility of supply chains.
Rawlinson says smaller competitors are taking advantage of this by entering the market more easily through new channels. Consumers tend to respond well to their more individual value propositions. Furthermore, many consumer packaged goods are extending their portfolios to cover more segmented customer needs and compete with these smaller players.
Fragmentation also applies to retail channels. There is a rise of both discounters and premium retailers in developed markets. Consumers are also engaging across a variety of media platforms, with an increasing trend toward the online platform. The retail industry is competing for consumers’ attention by making use of advertising across a number of technological devices, such as smartphones, tablets, television, consoles, and newspapers. Increasingly consumers are making use of multiple devices and within these platforms there is even greater fragmentation.
This has left companies with a significant challenge – they need to find new ways to grow in this difficult environment. “The growth trap lies in the need for top line growth now that cost-cutting initiatives are exhausted and consumer markets are increasingly fragmented,” says Rawlinson.
Market growth has slowed, lower entry barriers have opened up the playing field and companies find themselves pitched against both local and international players for an increasingly segmented consumer base. “Growth is difficult in the cold climate and needs to be at the lowest possible cost. There are challenges for both the market and business strategy.”
For many companies, growth opportunities are hidden – but finding and seizing them doesn’t always require significant new investment. Company executives should look at the products within their own company’s current portfolio and determine whether they can be redeployed to increase scope across the market, suggests Rawlinson. He points to a number of examples where companies have paid careful attention to consumer interests and gaps in consumer needs, and have had much success in developing variants of products by leveraging their marketing capabilities.
Digital technologies also hold immense benefits for revitalising the retail and consumer products industries. They bring consumers and retailers closer, reduce costs, and enable a variety of new services and marketing tools.
Rawlinson says that companies need to define their capabilities. “By identifying your differentiating capabilities, you can develop unprecedented value for your company. Your company will be able to focus its investment and reduce the costs of growth. Ultimately, the return on investment is higher.”
Successful growth in a cold economic climate can be broken down into six components: recognising variety, and managing a business efficiently against variety; modernising marketing; thinking creatively about new markets for the same products; segmenting the value system in order to obtain scale and variety where possible; deciding which few capabilities to build a company on, as well as focusing investment on these capabilities; and using distinctive capabilities to select and enter new businesses.
“If a company looks across these six components and successfully executes some of them, it will find the key to unlocking the growth trap,” concludes Rawlinson.