Emerging shopping ecosystems are forcing manufacturers to rethink their activation strategies for brands.
Manufacturer brands are under intense pressure - especially those in commoditized categories or those unable to become mega-brands. Contrary to the strong trend of an emerging middle class in developing countries, the economic divide in developed markets is broadening.
On the one hand, shoppers look for value to stretch their spending. On the other, those who shop on Amazon Prime and other paid subscription services - primarily households with an income of more than $100.000 a year - look for more, newer forms of convenience. The importance of discounters and retail brands is increasing.
The classic model of retail brands has been developed over decades and manufacturers have formed an arsenal of defense strategies to fend off these attacks, mainly on two dimensions: brand and cooperation. Through investments in brand trust and innovation -and in the interest of drawing traffic and increasing shopping basket size- manufacturers have been leading the development of categories.
Manufacturers have relied on traditional, one-directional and visual brand activation via advertising, presence, location, space, packaging, and point-of-purchase material, including flyers and coupons from retailers. All activities have been supported by an improved market knowledge and refinement of shopper and channel strategies in terms of segmentation, price optimization, and brand and product development to cover different consumer and shopper segments.
Technology and digitalization have redefined convenience and introduced new players into the shopping ecosystem. The former triangular biotope of consumer, manufacturer, and retailer is continuously changing into a full ecosystem: tech giants, aggregators, apps, influencers, and shoppers themselves. At the same time, brand activation is changing from one-directional and visual to multi-directional and prescriptive. Through search engines, smartphones and interactive voice technology, the ways consumers search and decide on products is changing. The challenge for manufacturers is how to manage a full ecosystem and how to become specialists on prescription - in addition to the focus on visual activation.
Manufacturer brands have been under attack since the introduction of retail brands. The introduction of retail brands fundamentally changed the roles between manufacturers and retailers. Retailers shifted from being an efficient distribution channel to also becoming direct competitors. With the emergence of big box retailers and discounters, manufacturer brands have been squeezed by price - as well as by the retailer’s shopper insights. The growing economic divide in developed markets is a key force of the continuous growth of the discounter and retailer brand segment. Discounters are also adapting to newer shopper needs of convenience by introducing convenience discounter formats, such as Aldi.
According to Nielsen, discounter sales have increased from 14,9% in 2001 to 22,2% in 2016. And the global value share of private labels was 16,7% in 2016, and within the developed markets of the European Union 31,4%, with Spain and the U.K. at the helm with 42% and 41%, respectively. In the first wave of brand assault, retail brands were focused on price and the economy segmentation. In the second wave, retailer brands entered the premium space of value-added brands, formerly seen as the privilege of manufacturer brands. Tesco’s Finest, the premium range of the U.K. retailer with more than 1.600 SKUs, has contributed with an uplift of 420 million pounds in sales.
Retailer brands also meet new consumer trends that are insufficiently met by manufacturer brands. In 1994, the Austrian retailer Billa, today part of the German Rewe-Group, launched the eco-friendly retail brand Ja! Natürlich. By 2010 the brand had reached sales of 290 million euros with 1.100 SKUs in Austria. Retail brands are even reaching outside their own chains, such as the German online pharmacy Doc Morris, formerly part of the Celesio group and now acquired by the Swiss Zur Rose group, which has begun to sell its branded band aids in the Austrian drugstore BIPA.
Manufacturers have developed counter-strategies to manage the threat of retailer brands. The advantage of manufacturers has been their focus on target consumers, as well as their investment to build brand awareness and trust among consumers. To fend off the threat from retailer brands, manufacturers have refined their approach to segmentation, pricing, activation, and execution. They’ve focused on determining the price premium they can charge and how to best reach different customer segments with value or fighter brands, if needed.
Additionally, manufacturers have deepened their cooperation with retailers through efficient consumer response initiatives or producing for retailers. Manufacturers are increasing the value and relevance of the category, helping to keep ahead of retailer brands and simultaneously helping retailers attract shoppers and increase the value of the shopping basket. Needless to say, the more commoditized the category, the more difficult the manufacturers’ branding strategy.
These manufacturer strategies - brand-building, collaboration, and execution - have been developed for the classic retail landscape, constituted mainly by producer, retailer, and shopper. With the introduction of the modern retailer in the 1920s in the U.S., the brand and how it was presented superseded the importance of prescription from the store clerk to the shopper. The role of advertising through some key media during prime time -in-store presentation, placement, point-of-purchase, packaging, retail fliers, and coupons - became the prime brand-builders. It was a one-way conversation directed from the manufacturer to the consumer during the relatively simple and short customer journey. The strategies to counter-strike the assault on brands through economy and premium retail brands has been, as far as possible, perfected.
Digitalization and technology have shaped a new consumer ecosystem that is giving rise to a new wave of assault on brands, an assault on how brands are activated and who the leader of the ecosystem surrounding consumers and shoppers is. The new assault on manufacturer brands is about the hegemony of prescription and activation along the customer journey and about more personalized offers better meeting consumer needs. It entails more protagonists striving for ecosystem dominance, foremost the big four technology companies: Google, Amazon, Facebook, and Apple.
Customer journeys have undergone radical changes. Today, 90% use three or more touchpoints on their journey, compared with just a few years ago when 70% used two or fewer touchpoints. Research from Nielsen shows that 66% of respondents believe electronic interaction will replace face-to-face interaction. In this new ecosystem environment, one-directional awareness-building is being replaced by information-seeking, conversations, and peer-to-peer prescription across the internet, apps, and social media platforms.
Additionally, how to activate consumers is changing, and thereby reducing the traditional arsenal of manufacturer brands to build preference. The big four technology companies in particular are changing the rules and moving the triangle of manufacturers, retailers, and consumers into a multi-stakeholder ecosystem. Technology and digitalization expand the connection with products from mainly visual to more prescription-driven activation. Such prescription-driven activation started with search machines, followed by incorporated ratings and now shifting to voice ordering. Shopping has become about checking in rather than checking out. Shoppers are also connected in the brick-and-mortar world and prescription activities can supersede classic visual activation in the store.
The tech giants are planning to spend more than $1 trillion in voice-based shopping solutions. Already, shoppers asking Amazon’s Alexa to buy batteries only get one option: Amazon Basics. About 70% of word searches done on Amazon’s browsers are for generic goods and not for specific brands. Tests done by Bain & Co. for unbranded searches found 55% of first recommendations were Amazon choice products. RBC capital markets predicts that, by 2020, 128 million Echo devices will be installed in households. Amazon‘s top 10 private labels get the lion’s share of the exposure that the e-tailer’s private brands receive from customers, accounting for a resounding 81% of all the customer reviews left for Amazon private labels, according to a study by Marketplace Pulse. Google has also entered the race and has incorporated food ordering features into its mobile apps.
Amazon Go has already shown that the future of brick-and-mortar is about checking in, not about checking out. In Stockholm, Nordic Tech House just received permission to install facial recognition equipment in stores to facilitate the shopper check-in. Knowing who the shopper is means that personalized information and promotions can be sent to their smart phone, changing the activation game in-store as well. The shopping ecosystem is expanding not only through the tech giants and providers of check-ins and other store technology, but also by apps for digital shopping, food aggregators, meal kits, and delivery service providers.
As eating out increasingly becomes eating in, manufacturers selling products for these channels are not only selling into the channel, but they need to activate their brands through these providers and their apps. Morgan Stanley research suggests that by 2022, digital food delivery may comprise 11% of the total market, versus 6% today.
The growth of the importance of retailers, and especially discounters, changed the way manufacturers had to work in terms of refining their methods of segmentation, pricing, branding, and activation. They had to introduce key account approaches and new ways of collaboration, most notably ECR. In the new reality, manufacturers need to develop tools and structures of advanced marketing analytics, ecosystem management and more prescription-driven activation.
About the author:
Georg Krentzel is partner at Globalpraxis.
American Marketing Association, Marketing News (3 July 2019).