Lessons from the supermarket giants – part 1
Fixed stores evolved naturally out of markets. Following that, several key changes occurred in a few decades; the introduction of self service, growth of chains (geo-scaling), and then the explosion in size for stores (and concomitantly the increase in range). Parallel to this was the ever increasing focus on price.
This historical development reveals that an important driver in the evolution of the supermarket is that the distribution channel was extremely inefficient. (To understand the strategic role that the inefficiencies and friction plays read this piece.)
The low volume purchases of these small traders led to high costs and sizable mark ups. Traders purchased supplies from a wide range middle men who rorted the system, adding additional costs to an already expensive distribution system.
Supermarkets dominate the one end of the barbell (convenience and price) and specialty stores dominate the other (service, depth, and knowledge).
Graphically it can be illustrated as below:
Here are some lessons to be learned from the evolution of supermarkets:
Lesson 1: Price
Saving money is big driver of purchase behaviour. Customers generally would avoid the supermarket, but the price/convenience factor is compelling.
The basic business models behind both the supermarket formats dates back many decades, and the anti-chain sentiment (in the US) of the 1930s was at least as strong as the movement against big box stores that we see today.
Focus on price will commoditise your business. Once you are commoditised, there is no escape. When you are locked into a price-based strategy, you better focus on costs relentlessly.
But price is not the only strategic competitive advantage. It feels like it is the easiest to pursue, because you can simply go to a shelf or a unit of merchandise, or log on to a computer and change the process. It feels like you have done something, and you have. But not necessarily in a good way. Once you start sliding down the slippery slope, it is very hard to climb back up.
I am not suggesting that price differentiation is a bad strategy, just that it requires all the other parts of the business model to be aligned with it, and a specialty shop will achieve that alignment with great difficulty because of structural constraints.
Lesson 2: Brand
Customers don’t buy brands, at best ‘brand’ is a heuristic. I cannot write it any better than the inimitable Bob Hoffman, “A lot of people have shaky jobs. And many have unstable families. Some have illnesses. All have debts. Lots have washing machines that are broken, and cars that need a tune up, and funny things growing on their backs, and boyfriends that are always getting high, and socks that have holes, and hair that is falling out, and toilets that are unreliable, and 10 pounds of extra stomach, and kids that are unhappy, and teeth that hurt, and rent to pay, and…a lot of things to care about.
“One thing you can be pretty sure they don’t care about is your brand. Yes, I know you’ve been told that people love brands, and want to engage with them, and co-create with them and be all social with them. But stop and think about it for a minute. Do you really believe this? Does it even pass the giggle test?
“If you’re a marketer and you believe people care about your brand just because they buy it, you’re headed for trouble. What we blithely call ‘brand loyalty’ is mostly just habit, convenience, mild satisfaction, or easy availability.”
Housebrand is a strategy that is about channel power as much (or even more than) it is about margin, and least of all about giving the consumer value.
Customers don’t buy a housebrand because they trust the house, it is because they want it cheap and believe that it comes from the same factory anyway.
Tabloid researchers and gurus on Today Tonight will tell you that people love the Aldi house brands more than Coles or Woolworths. Not true. Consumers are simply more likely buy it when they don’t recognise the brand (as in Aldi) and they don’t know they are buying homebrands.
I am not suggesting that branding is not important, but rather that the role it plays in the consumer decision making process is different to what people think.
Next week I will cover the final, strategic lessons to be learned from studying the big boys.
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