Manufacturer’s perspective

[Click here for Part 2 - Retailer's perspective]

Should store formats be a reflection of its customers’ preferences? In that case, the advent of so-called ‘no-compromise’ stores is no surprise. ‘No-compromise’ is what Hans Eysink Smeets calls a store concept offering its customers both high value as well as low prices. Eysink Smeets is an Amsterdam-based consultant who wrote the retailer’s perspective of this Elsevier Food International Special, which deals with fundamental questions on how to escape serious competition which strikes at the roots of a company’s business.
Such stores are no surprise because “[…] More and more ‘consumers’ defy simplistic socio-demographic classification as they choose both to save and to indulge.” This quote is not from Eysink Smeets, but from Jim Scholes and Peter Wilson of the consultancy Strategos. They wrote the manufacturer’s perspective of this special and here they clearly outline the no-compromise consumer. “Consumers who cannot or will not pay for that they see as superfluous marketing,” they write.
Certainly, such consumers would like to be customers of no-compromise retail formats but what assortment would these store’s shelves offer, and which kind of products? Own labels? Or innovative, branded products? These are fundamental questions on serious competition, touching the root cause of headaches in many company’s boardrooms.

Seeking uniqueness in FMCG
‘Underdog brands’ such as Ben and Jerry’s, Green & Blacks and Innocent emphasise integrity and ethics whilst growing rapidly and commanding high prices. Yet the rise of the deep discounters continues and consumers often seem unwilling to purchase what they preach.
Mid-market companies face a difficult choice. Do they follow the obvious social trends and innovation heroes to head upmarket at the risk of betting the company on a fad or of converging with all the other players seeking to operate in the affordable luxury market? Or do they follow the money and concentrate on own-labels, price competition and serving the discounters?

The unbundling of product and emotional benefits
In this discussion, an important structural change has been missed. This is the unbundling of product benefits from emotional benefits in FMCG. Manufacturers continue to make products with a wide range of tangible benefits, but the emotional benefits can be foregone altogether or added by a retailer, a celebrity chef or a specialist marketer. Traditional FMCG manufacturing companies need to make choices about what bundle of product and emotional benefits they wish to offer, before they begin to consider the detail of changing consumer tastes.
Foregoing the emotional benefit: The surprise of deep discounting has been the willingness of relatively affluent customers to embrace discount shopping and own-label. Discount shopping is no longer the preserve of the poorest. An increasing number of consumers are willing to purchase only the product benefits and are unwilling to pay the cost of branding, expensive packaging and other sources of the emotional benefits that FMCG companies would like to imbue in their products. More and more ‘consumers’ defy simplistic socio-demographic classification as they choose both to save and to indulge.
Economies of scale in providing the emotional benefit: Retailers are increasingly attaching their own brand to products at every level of the market. At discount level, consumers are willing to purchase unfamiliar brands or own label because they trust the retailer’s brand and know they will not receive shoddy or dangerous goods. At higher levels, lines like Tesco Finest and Sainsbury’s Champagne are replacing longstanding manufacturers’ premium brands. There are clear economies of scale in this – the same one-minute commercial can communicate Tesco’s quality and service across all their product range rather than simply the emotional benefits of one product.

The changing nature of competition
The harsh reality for most FMCG players is that they are business-to-business enterprises – they do not serve consumers directly; they have less access to their target consumers than the retailers do; and consequently they often have a more limited sense of the benefits that matter. In effect, the retail channel is both the customer and the most powerful competitor facing a branded FMCG company. This seems to place FMCG companies in an unsustainable position for the longer term.
Getting the message across: The whole business of advertising is in turmoil. TV advertising is in decline; advertising budgets are fragmenting and consumers are becoming more pro-active in blocking out alternative approaches such as e-mails, unwanted physical mail shots and uninvited telephone calls. Unless you have something very special to offer and your message comes across in a non-intrusive way, it looks as though attempts to reach consumers with “the message” are likely to be futile at best and counter productive at worst.
Specialising in providing the emotional benefit: Innocent outsources its manufacturing and distribution, allowing it to focus on product design and the creation of a distinctive, specialist brand. Its ailing competitor PJ’s has recently identified this as a weakness for Innocent and has started to advertise that “we make our own smoothies”, but as yet this has had little impact.

What does this mean for manufacturers?
The structural changes described here are based on fundamental industry economics rather than transient social changes. Unbundling of product features will always be attractive to consumers who cannot or will not pay for what they see as superfluous marketing. Economies of scale, proximity to the consumer and the ability to capture consumer data will make retailers a powerful and efficient force in mass marketing. And specialisation will often be more effective than integration, particularly when nimble and distinctive marketing and PR is required.
So mid-market branded manufacturers risk being squeezed between low-cost manufacturers supplemented by highly efficient retail marketing power on the one hand and highly specialised marketers on the other. To resist these challenges, is there a unique position they can adopt? Or do they need to specialise in either marketing or manufacturing, but not both?
What distinguishes manufacturers from all the other players in the market is their control over the process from beginning to end. Manufacturers often have hidden gems that would impress consumers if only they were properly communicated. Many mass-market manufacturers have in fact been using natural processes and ingredients for many years but in an absence of communication, consumers have assumed that they are chemical factories rather than recipe makers.
Manufacturers also make considerable contributions to local economies, but by default have lost the ‘feel-good’ factor to underdog brands. For example, Danone Poland has done much to strengthen the capabilities of Polish farmers and was able to communicate this in a way that reassured consumers who were worried about the effect of EU membership on local farming. However, for many years Danone had underestimated and under-communicated this hidden gem.
As we have identified, manufacturers will not be able to compete on mass marketing expenditure with retailers who can spread the benefits across a range of products, but they can compete on the detail of the manufacturing process. This requires patient communication across all channels of the unique qualities of their way of doing business, their ingredients and processes, their sources, their heritage and their economic and social contribution.
This is not necessarily to argue for a jump into organics or fair trade. These are merely rather specialist, premium manifestations of a general desire for distinctive character in business and a move against faceless multinationals. Instead, it argues for a general approach of transparency and character which could be applicable at all points in the market. As Tesco and ASDA have discovered, a distinctive approach to quality and service can be applied across FMCG products and even more widely into financial services, fashion and electronics. A manufacturer that developed a reputation for interesting, quality products and a refreshing approach to doing business may find that such a brand acts as a foundation for innovation across its sector and even outside.

Peter Wilson is a Strategos network partner specialising in multinational business operations. Formerly a member of the British Diplomatic Service he has an MBA with Distinction from INSEAD and an MPhil in Economics from Oxford University. He is the co-author of Make Poverty Business (www.makepovertybusiness.com ).