Filling up scores of shelf space will no longer be the key driver of a brand’s success, writes Dan Williams.
For decades, the global Fast Moving Consumer Goods (FMCG) industry had enjoyed undisturbed success, having created the world’s leading consumer brands and generated impressive returns to shareholders. But the FMCG value creation model is under significant threat, both globally and in Australia.
Shelf space dominance – traditionally, the main factor behind big players’ success – is now obsolete. Two strong forces are affecting the Australian FMCG sector.
First, a widening gap between under-invested, dated in-store shopping experiences and the world-class streamlined shopping experiences offered online by digital native brands. Australia’s largest retailers are struggling to compete against best of breed and shoppers are increasingly driven to shop more online.
Second is the global trend of category fragmentation. There is an explosion of independent brands making steady inroads across all FMCG categories who are capitalising on the radical change in consumer values and expectations. The FMCG value creation model, created after the Second World War, was founded on multiple interrelated advantages that propelled companies like Procter & Gamble, Unilever and Kraft-Heinz to double revenues every decade from 1950 to 2010. Huge R&D spends, mass-market brand building, gigantic TV advertising spends, relationships with mass retailers and broad distribution and operating models designed for cost cutting, all gave FMCG conglomerates an edge that smaller players simply did not have.
In recent years, however, the organic growth of global FMCG companies is in decline. Slowingsales, falling margins and dwinding share prices are affecting multinationals such as Nestle, Unilever, Reckitt Benckiser and Beiersdorf. As McKinsey & Company noted in April 2018, companies with net revenue of more than US$8 billion grew at only 1.5% a year, while companies under $2 billion grew at twice that rate. The Financial Times recently reported that Europe’s consumer goods giants warned of a historic disruption hitting the sector. As the Economist observed in February this year: “the world changed on them – retailers changed and consumers changed.”
In the Australian market, a perfect storm is brewing: e-commerce is expected to grow by 30% this year with 45% of Australians currently purchasing from their mobile or tablet on a monthly basis; retail foot traffic is reportedly in an unprecedented fall as consumers do more browsing and buying online; savvy global players (such as Amazon and Kaufland) are entering the market and increasing competition; countless brick-and-mortar closures in the past year and retail giants like Coles and Woolworths ploughing hundreds of millions of dollars into large scale digital transformations in order to protect their market share. We are clearly seeing a dramatic shift in the Australian retail landscape where shelf space dominance is no longer a catalyst nor guarantee for success. Product innovation and digital savviness is the new battleground in this reshaped marketplace.
What has caused the old FMCG value model to crumble? Two factors have neutralised the incumbents’ traditional distribution and advertising advantages.
First, the ‘millennial effect’. In the past, bigger was better.2 Convenience and mass production equalled consumer trust and loyalty. Today, consumers align with healthy, ethical, authentic, niche consumer goods brands that leverage e-commerce to bypass traditional retail channels and connect directly with their customers (gaining valuable insights in the process). According to McKinsey & Company, consumers under 35 prefer smaller, independent brands, are four times more likely than baby boomers to avoid buying ‘big food’ products and prefer not to shop in mass channels. Consumers today want to see behind the brands they purchase and expect brands to be purposeful and align with their personal values and beliefs. The old FMCG model which focused on mass-produced, faceless, interchangeable brands is ill suited to this new retail landscape.
The second big factor is digital. In the past, FMCG giants leveraged their size and large brand portfolio to wrangle the maximum amount of shelf space and put their products in front of consumers. But technology has revolutionised how consumers discover and engage with
brands. We live in a noisy world – consumers can not only be reached on multiple TV channels. There is display advertising, search advertising, Instagram, Facebook, Twitter and other social networks and affiliates, all vying for limited consumer attention. Admittedly, it’s now harder than ever for brands to break through the noise. But digital-first brands who effectively utilise a variety of highly targeted, data driven online marketing channels (often on a shoestring budget) have rendered traditional marketing channels practically obsolete.
Additionally, the online shopping experience is simply superior to in-store in many cases, driving consumers out of the stores and into the arms of global e-commerce operators such as Amazon (who launched its Australian store in December 2017), ASOS and eBay as well as a handful of local players (like The Iconic and Appliances Online). These players have normalised ecommerce and trained Australian consumers to expect an informative, frictionless and curated online shopping experience, where customer reviews, price and feature comparison, personalisation, responsive customer service and speedy delivery are all baked into the
The future of retail is clearly in e-commerce. Consumer demand is rapidly evolving and millennials are displaying fragile brand loyalty. Category growth will increasingly be in niches and the percentage of consumers that reject or resist mass brands will increase, especially in food products. Small brands will thrive thanks to their direct relationships with consumers and pull from large retailers seeking to differentiate their offering. To stay relevant and succeed in the upcoming decade and beyond, Australian retailers need to examine how well positioned they are to address these changes. They need to ask whether their growth and innovation is rate is higher than that of their competitors, particularly niche players. They will need to focus on rapid product innovation, reducing friction at all customer touchpoints and transform physical retail shops to spaces of experience that encourage brand loyalty. As digital transformation continues, success will heavily depend on consumer insights, innovation expertise and speed.
Dan Williams is co-founder of Sprinkle Artisan Spice Blends