Retail
Introduction
We'll analyze the demand side factors of retail sector. Today's customers demand much more from retailers than just products at competitive prices. They expect specific products with tailored promotions and services to satisfy their unique, individual needs. But still the key demand side drivers remain the same i.e. price, taste, substitute/complements, income and distribution of income.
Adapted from Euromonitor.
Demand side drivers
1.a. As the scope is vast, we'll concentrate more on supermarkets for convenience and for a fresh perspective we'll include developing/emerging economies where the retailing is a relatively new entrant.
Price:
An item's price is the key to purchasing decision. It is the combination of product availability and price that attracts customers. Supermarkets could offer greater variety and lower price than traditional retailers due to economies of scale in procurement.
Prices in Korea Lower in Modern outlets, 2004.
Prices in Indonesia Higher in Modern Outlets, 2003
The prices are lower in certain countries, however where modern outlets (supermarkets) are relatively new the prices may be higher due to nascent procurement system.
Tastes:
Increased health and environmental consciousness among consumers has led to a surge in organic food sales in the past few years.
Global organic food market (2007-12E)
Geographic segmentation Product segmentation
Key players in organic food market:
• Consumers are willing to pay a premium for products with health benefits. Price differential is a crucial factor. Lesser difference with conventional products will boost the demand for organic food.
• Consumers want pesticide test done before the products reach stores.
• Organic food consumers have preference for locally grown products.
Further details on organic food are given in Appendix1.
Advertising has a major impact on the retail sales. The billboards in supermarket and recent surge of outdoor advertising in supermarkets offer influence the customers at the purchase point which increases the possibility of a sale. The retailer sites also give the advertisers information on sales results and customer demographics.
Substitutes /Complements:
The major substitute of the traditional retail is discount store .As that's analyzed in latter part of essay we'll take another substitute/complement: Online Retailing.The rising popularity of the internet has resulted in online selling as a profitable retail format that's fast rising as an alternative to the conventional forms.
Global online retail sales (2007 - 12E)
Product segmentation A snapshot of online retailing in UK
List of initiatives by various retail firms to promote online sales is shown below.
• Social networking sites can be utilized by retailers to send traffic to their online retail sites as People feel more comfortable being referred to online shopping sites by acquaintance. (E.g. Lemonade.com allows users to set up kiosks on Facebook and My Space and pays them for a click.)
• Eighty percent of high-net-worth individuals in developed nations are regular online shoppers.
• Multiple channel integration is the focus area for retailers now. Retailers try to integrate the various channels already in use to cater different buying patterns. An example of a retailer that allows the customers to order on line and pick up in store is the European retailer PC World through “Collect@Store” option on the store Web site. Further details are in Appendix 2.
As the internet penetration rises customers will prefer the convenience of online shopping. Retailers around the globe will have to recognize this and be very careful as online retailing can be a double edged sword. It can be a substitute when the consumers switch to online all together but it can be turned to a complement by having strong presence in that channel.
Income and Distribution of income:
In developing economies Urbanization and entry of women into the workforce has increased the opportunity cost of women's time. This makes them seek convenience and processed foods to save cooking time. The rise of dual income families means that consumers have more disposable income but less time to shop.
Real mean per capita income grew in many developing countries during the 1990s. Also the rapid rise of the middle class and increased ownership of refrigerators meant a shift from daily shopping to weekly or monthly shopping. Accessibility to cars and public transport has also contributed to the trend.
In India, between 2004 and 2008, the personal disposable income increased by about 11.5% per year. Consumer demand has consequently increased, resulting in a similar increase in retail sales over the same period.
The easy availability of credit and high employment rate also boosted the retail sales. Due to the recession the sales were impacted but the sector is recovering. In 2008, GDP per head in India was an estimated US$1,033, but there is an unequal distribution of income between rich and poor and between urban and rural populations. This has led to two distinct segments with varied demands. Independent grocer, Mom and pop shops serve rural areas whereas department stores, retail chains (including shopping malls), supermarkets and hypermarkets prevail in urban areas. In India Grocery is the main driver of growth (two thirds of total retail sales) because of its extensively poor population.
Due to sound economic growth the average income has increased. This results in switching from inferior goods to normal goods. The normal goods are contributors to other sectors like health and beauty, consumer durables, home improvement, etc.
In many developing economies the middle class today can afford diverse consumer durables due to rise in average income. This rapidly growing segment is also becoming brand-conscious as well as price-conscious and is the target market for retail sales in India.
Price Discount During Recession
1.b. Now to evaluate the effect of a price discount in raising revenues during a recession we'll concentrate on Discount Stores. The logic being, if the Discount stores can manage to perform well during recession while others fail (which in fact was the case) we might be able to analyze the extent to which discounts are effective.
First let us look at the effects of recession on retail sector. The retail sales have plummeted as the recession deepened as shown in the s. The study is mostly done from 2007-2008 perspective when the recession started and was at its peak.
Recession And Retail Sector:
Global retail sales (2007-09E)
Retailers going bankrupt
European retail sales (2007-09E)
Overall the retail sector was impacted by recession. Macy's sales decline by 7.7 percent y-o-y. However, these factors are expected to have the opposite effect on the overall discount store sector.
Recession And Discount Store:
Global top discount store sales (net) in US $ billion (2006-08)
The top discount retailers since 2006 are Germany-based Aldi and Lidl & Schwartz, followed by Carrefour and the Rewe Group.
These hard-discount stores differ from bargain stores like Wal-Mart and Kmart. They are minimally decorated generally selling foodstuff s and household goods. They have an effective supply chain, are about one-tenth of a Wal-Mart's size with lower staffing, and are usually present in low-rent areas. The comparison of international prices has shown that Aldi can give the lowest price possible. Today Aldi is behind only Siemens and BMW among Germany's most respected corporate brands.
Europe
Recession has led to a rise in the discount sector in Europe. Aldi and Lidl (in the UK) have eaten into market share of large supermarket groups. In 2008 sales at Aldi were up 14.8 percent over 2007, rising to £2.15 billion (US$4 billion). Also Aldi and Lidl are expanding into key European and now into US markets (Aldi has about 1,000 stores in 29 states and added 41 stores across the UK and Ireland in 2008).
Even France, not a traditional market for discount retail, has seen consumers making the switch. Lidl encouraged by this trend has opened a new store in a affluent area. In 2008 Carrefour sales at Dia(Spanish operation) had risen 11.9 percent and Germany-based Rewe Group 40 percent sales increase at Billa(Czech operation).
United States
According to Thomson Reuters estimates, US discount store sales rose by 2.9 percent y-o-y in February 2009. In contrast, department stores' sales dipped by 9 percent, children's retailers' by 8.1 percent and apparel chains' by 5.6 percent. Overall, the US retail industry witnessed a 0.7 percent increase in sales in February.
However, this positive was almost entirely attributed to the 5.1 percent increase at Wal-Mart. According to Retail Metrics, but for the Wal-Mart s, industry sales would have dropped by over 4 percent.
Retailers React to Discount Trend:
In the UK, as customers switch to discount stores, many other retailers have been forced to cut prices to remain competitive.
Traditional retailers have resorted to launch own private labels or produce cheaper versions to retain market share .In September 2008 Tesco (fourth largest retailer) launched a private discount label, Discount Brands, and even compared prices with Aldi in its advertising. Following this in June 2009 France's Carrefour (second largest retailer) launched Carrefour. Manufacturers of brands also need to refrain from raising prices or even reduce prices to remain competitive. Procter & Gamble had to cut the prices of Always sanitary napkins and Pampers diapers in Germany to ward off competition from Aldi's private labels.
But still according to Harvard Business review estimate the success of hard discounters(with annual revenues of more than $250 billion) is responsible for destroying between a quarter and a half trillion dollars in mainstream brand sales annually.
Future of Discount:
Sales of top ten hard discounters as shown in table below is predicted to raise by an estimated 50% over the next five years. Harvard business review study estimated that Aldi will top $100 billion in sales by 2013, and Lidl by 2014. Major consumer packaged goods companies have been impacted by the hard discounters' success. They underestimated the threat to their revenues and market share and are now waking up to a hard reality.
Source: Planet Retail(2008,2009);Gfk(2009)
Conclusion
So we have analyzed from a different perspective that price discount can be very effective. Simply put, instead of the seeing price discount as an entity attracting consumers we have fixed the entity (discount store) which has a price discount and seen it attract the customers.
But is the price discount alone sufficient? Contrary to one's expectation Cadburys, Nestle, Unilever, Del Monteand others have increased their prices. Actually across the CPG (consumer packed goods) multi price point strategy is being adopted to combat recession, to increase both profits and revenues. Profits rise along with revenues because when price sensitive consumers have already switched you are left with only loyal customers who are price insensitive.
P&G and Nestle for example have a mix of both premium brands (for loyal customers) and value brands (for cost conscious customers). They increase product lines while keeping loyal customers.
So effectively a mix of changing price strategies, pushing private label products, focusing on tertiary brands, adopting innovative strategies, turning to technology can be used to combat recession rather than depending on price discount alone.
References
Source: The Wall Street Journal (online), June 7, 2002. New Billboards at Supermarkets Help to Lift Advertising Slump, by Erin White. The Wall Street Journal, June 12, 2002. Shopping for Ads? Supermarkets Sprout Billboards, by Erin White, p. B4D.
Appendices
APPENDIX 1
The global organic foods industry generated revenues of US$43.5 billion in 2007, registering a compound annual growth rate (CAGR) of 12.8 percent during 2003 - 07. The growth was fuelled by a trend of increased health consciousness among consumers. Buyers are willing to pay a premium for the enhanced nutritional values that these products promise. How-ever, the recent economic slowdown, coupled with the global rise in food prices, has led to a slowdown in the sales of these products.
The term “organic” refers not only to the food itself but also to the ingredients and processes used to produce it. These products are grown and processed using organic farming methods that recycle resources and promote biodiversity. Organic crops are grown without using synthetic pesticides, bioengineered genes, petroleum-based fertilizers and sewage sludge-based fertilizers. Similarly organic livestock is allowed outdoors and is not given antibiotics or growth hormones. While the discussions around whether organic foods are safer, healthier and more nutritious continue, they have already occupied large amounts of shelf space in retail outlets worldwide particularly in the developed countries such as Australia, Germany, Japan, UK and US.
Products,
In 2007, a total of 2,095 new organic food products were launched globally, an increase of 25 percent over the preceding year. 2007 also witnessed the launch of more than 400 new organic beverage products.
Fruits and vegetables accounted for 21 percent of the organic food sales in 2007, making it the single largest segment within organic foods. Total sales of organic beverages were approximately US$1.5 billion in 2007; approximately 58 percent of this was accounted for by non-dairy beverages, with dairy beverages such as milk and yoghurt making up the rest.
Geographic segmentation,
In 2007, Europe and the US accounted for approximately 92 percent of the global organic foods market. The US market grew to US$19.7 billion at a CAGR of 10.4 percent during 2003-07, representing 41 percent of the global market. During the same period, the European market grew at a CAGR of 14.8 percent to reach a value of US$22.3 billion, accounting for 51 percent of the global market. Within Europe, the UK and Germany are expected to be the major growth markets for organic foods. In the UK, organic foods are forecast to comprise 30 percent of the total foods market by 2010.Traditionally; emerging markets have been slow in the uptake of organic products. However, with the increase in the number of affluent individuals in these regions, this trend is expected to change; for instance, the Chinese organic foods market value is predicted to grow by 30 percent annually, until 2010.
APPENDIX 2
“Shopping online takes less time than going to a store physically, so in the end it can help productivity”- Miguel Gamiño Jr., President and CEO, Varay Systems, El Paso Technology Services Company.”
The internet is growing at a rapid pace and encompassing people from all walks of life. In 2008, almost 1.5 billion people will be online and one-third of them will have access to a high-speed internet connection. The big business of online retail selling is affecting traditional retail sales. The most significant advantage of online retailing is the ability to reach customers regardless of constraints such as language, time zones and geographies. In 2007, the global online retail sector rev-enues grew to US$260.1 billion, which translated into a compound annual growth rate (CAGR) of 27.4 percent, during 2003 - 07.
Factors influencing online retail sales,
The following are the factors that influence online retail sales:
• Convenience - Convenience is the single most important factor contributing to the growth of online retail. Consumers shopping online can save not only the time it takes to go to a store but also on incidental expenses such as fuel costs.
• Demographics - The rapidly aging population in America, Europe, Japan and Russia can be an attractive market for retailers. Many of these people have assets and good credit histories. Retailers can benefit from implementing targeted marketing campaigns that highlight the convenience aspect of online shopping.
• Economic factors - - By going online, a local retail store can expand its reach to an international base of customers. It helps in maintaining a large customer base and also adding new customers. Further, the online retail sales format requires fewer overheads to maintain inventory and lead-time. Expenditure is reduced, as manpower and space requirements are lower.
• Seasonal factors - Weather conditions can also affect online retail sales. For instance, in the UK, poor weather and difficult trading conditions in July 2007 led to an 85 percent increase in online spending on clothing, footwear and accessories, during the week of 16 July.
Product Segmentation:
• Sales of electrical and electronic products accounted for 21.7 percent of the total online retail market in 2007, with sales of approximately US$56.4 billion.
• Other dominant product categories included household goods, food and drink, and apparel, with US$33.3 billion, US$31.5 billion and US$27.1 billion in sales, respectively.
Geographic segmentation:
• United States - US online sales grew 19 percent to more than US$136 billion in 2007, which represented approximately 52 percent of the total global online market- Retailers such as Wal-Mart, JC Penney, J Crew Group, Macy's and Limited Brands, who have a large online presence, benefitted the most. - JC Penny saw its online sales grow by 15 percent in the fiscal year 2007. However, consumer expectations from online retail sites are rising. In a survey by e-commerce solutions provider Allurent, 67 percent of the respondents said that their expectations from online shopping have increased from 2006. Anticipated improvements included features such as a perpetual shopping-cart, one-page checkout and availability of live help.
• Europe - Europe accounted for 31 percent of the global market, with sales of approximately US$80.6 billion. In October 2007, online retail sites recorded traffic of more than 160 million, which is a 5 percent increase over October 2006. UK and France both witnessed 11 percent year-on-year growth in online retail traffic from 2006.
• Asia Pacific - In 2007, the region had total online retail sales of US$43.2 billion. According to a survey conducted by Nielsen among internet users, South Korea with 99 percent has the highest percentage of internet users engaging in online shopping, followed by Japan with 97 percent.
Japan has the largest online travel retail market, followed by South Korea.
China represents a big opportunity for online book retail. In 2007, the top two players, Dangdang.com and Joyo.com, accounted for approximately 40 percent of the market. The rest of the market, however, is severely fragmented.
In India, the travel and tourism sector is booming. The country is predicted to be the fastest growing market for online travel retail in Asia by 2010, with sales exceeding US$2 billion.
