December 27, 2014

Trade pundits predict 2015 and beyond

Ausblick (photo: Heike_pixelio.de)
Through the glass, darkly: A guru scans the horizon in search of enlightenment
The 19th century German humorist Wilhelm Busch once said: "First things happen differently and then differently from what one would have thought."

The fact that nearly everything turns out otherwise than previously expected makes most people loath to second-guess the future. But on the positive side, the world belongs to those who can anticipate a trend.

At least the experts making a prediction on these pages have the courage of their convictions, and we salute their bravery. The opinions of these intrepid sages are given below in alphabetical order of surname.

International authorities from a broad range of trade-related fields were asked: "What do you see as the most exciting development in retailing/the fmcg industry and the most important challenge for the future?"

Sadly, this year will see no contribution from Professor Rodney Fitch, who passed away in October. Readers will miss the trenchant and often amusing comments of this kind-hearted retail visionary. A toast therefore to absent friends.


Looking Forwards


Dagmar Bottenbruch, Corporate Consultant & Angel Investor:

"The 'physical retailers' should understand that Bricks & Mortar can be great. Omnichannel is the name of the game, and it is absolutely necessary for those physical retailers to use their locations wisely – they simply have to be more fun and more engaging so that people want to go there. Does a supermarket really need to display 17 brands of toilet paper?


The big department stores in Germany – frequently in the most wonderful locations – do not use these locations well at all. Boring displays, stuffy atmosphere, and personnel who expect customers to buy instead of selling to them. Buying really can be done online…Selling is a different story!"


Professor Utho Creusen, CEO, Positive Leadership:

"Retail is lacking in creativity. Cost pressure seems to dominate all activities. New ideas are marginal and incremental. What retail needs is the courage and vision for new business models. I wish to see more initiatives like the German Retail Lab – a non-profit incubator for next generation's ideas."


Joanne Denney-Finch
, Chief Executive of food & consumer goods researchers, IGD:

"This is a time of great change in the retail industry and we are seeing the effects of this borne out across the EU market every day. Across the continent, the boundaries are blurring between different formats and channels. For example, in the UK, IGD is forecasting convenience, discount and online retailing to grow together by more than £31bn over the next five years and claim 43 per cent of the market.

And if today's trends continue, superstores and supermarkets together will account for slightly more than half of grocery sales in five years' time, down from 63 per cent today. But across the EU, trends can be disrupted and big stores can be reinvigorated.

We have identified some future-shaping areas to watch across the global food and consumer goods industry this year:

Store-to-door transformation – as online grocery sales rise in every major market, and the distinction between online and in-store shopping continues to blur, the industry will need to create new solutions for shoppers to order and receive products anytime, anywhere

When technologies collide – the number of smart connected objects worldwide could reach almost 5bn this year and 25bn by 2020 (source: Gartner Inc). This will include new technologies, such as the Mink 3D cosmetics home printer, plus a widening array of everyday products that interconnect.

For instance, Xiaomi's air purifier sends an alert to your smartphone if air quality dips or its filter needs changing. As the industry explores further how to interact with consumers in their home, on the go and in the store, we’ll see some exciting developments this year

Finger on the data pulse – as societies across much of the world wrestle with ageing populations and rising obesity, health is a universal hot topic. New breakthroughs will arise from the use of devices such as smartphone apps and wearable tech, which will help companies deliver personalised communication to help make healthier choices

Big business fights back – last year, many long-established industry giants were severely challenged by innovative and agile businesses of various shapes and sizes. In 2015, we’ll see which big businesses can react, adapt and return to form  

Custodians for customers – this year, we’ll see further big advances along the road towards total transparency as businesses seek to make the right calls on behalf of their customers to earn and maintain trust

We have a five-fold fitness regime for the future:

  • Intensify your focus with each passing year on shoppers and consumers;
  • Define your ethical values and make them golden rules to guide every decision;
  • Strengthen teamwork: within companies, between trading partners and with other allies;
  • Build as much speed and agility as you possibly can;
  • Invest in people and skills right through the business

More disruption lies ahead but nothing we can’t turn to our advantage if we adapt, stretch and execute to a higher level."


Peter Freedman, Managing Director, The Consumer Goods Forum:

"I'm excited to see how our industry will fully leverage the transformative power of the digital revolution. There is still a long way to go for us fully to embrace the opportunities it brings for growth and differentiation in the marketplace as well as for efficiency across the supply chain.

For us at The Consumer Goods Forum (CGF) this is doubly exciting because it is such a global agenda, with no single country or region having all the answers and with retailers and manufacturers needing to work together to capture all the benefits. So the CGF will be focusing even more of our resources on digital in 2015 with unique services for the industry such as global industry standards, operational tools and practical learning opportunities.

This digital revolution is directly linked to one of the burning platforms for retailers and manufacturers alike: consumer trust. What we do, by definition affects impacts billions of people globally. And the rise of social media means that everything we do is always in the spotlight; we are more accountable to consumers than ever before. So the stakes are getting higher every day; those companies that can win and maintain high levels of consumer trust grow fast, while those that have lost trust will suffer.

The CGF sees trust as a foundation for growth and that will be the theme of our next Global Summit in New York in June 2015. The leaders of our industry from across the globe will gather for three days of debates, networking and knowledge and best practices sharing on this topic, challenged by the usual eclectic mix of industry outsiders who may not always share our way of looking at the world."


Tim Harrap, Food Export Expert & Self-Styled "Conversation Starter":

"An on-going mash-up of the economy through financial instability, political party ineffectiveness and a missed opportunity to lift the poor out of poverty ensure the FMCG markets will continue to be febrile in the immediate future.

How far away is the future? Right here, right now, or aeons away? Building authenticity through trust between all actors in a social economy will all be part of the consciousness raising of society through technological innovation. If the UK Government feels moved to establish an Ethics Committee in each of its departments, then it cannot be long before that type of ethical management falls upon the political classes themselves and the wider economy. (Unfortunately some temperaments will still be unable to live with the 21st century).

In a recent press report from Denmark it was stated: "Netto is trying to take a larger piece of a pie that is never going to get bigger." [emphasis added] Fortunately there are those with vision who capture the zeitgeist and we know it when we see it. 'Discounters' premiumisation, mainstream retailers as coffee shops – if you don't understand the spirit of theatre, then no one will come to your show."


Uwe Klenk, CEO & Founder, UK & Partners Group:

"The most exciting development in retail is the on-going transition to omni-channel retailing. A fully integrated omni-channel approach will be the norm in the future and the basis for gaining a bigger share of consumer wallets. Topics such as Category Management, open-to-buy, space allocation and GMROI will be the key financial instruments to drive and test the business."



Dan Murphy, Alvarez & Marsal Europe, Managing Director Retail:

"
A&M has 40 offices around the world, so we talk to retailers in most countries. If I think back across the various conversations I have had with them over the last year, and looking ahead to 2015 and beyond, the common theme must be operating cost. Every large retailer is focusing on costs as never before, and the winners are those who already have their cost base under strict control, and who are running simple, lean, low-cost operations.

'Yes, but retailers have always been acutely aware of costs,' you might say. Perhaps, but they have always had enough margin headroom to get away with the occasional inefficiency here and there; seasonal overstocks; failed IT implementation; or an abortive foray into new countries.
 
The new order is about price deflation and squeezed margins. Whereas in the past retailers could afford to get it wrong from time to time, today there is nowhere to hide. Supermarket retailers have a 'perfect storm' of six critical pressures, and the major players are struggling to cope:

Number 1 is price deflation. Discounters (Aldi, Lidl etc.) and macro-consumer pressures are starting to put major pressure on the big supermarkets, who are responding with massive price discounts. The problem is that the big players have much higher operating costs than the discounters and so cannot really afford to compete at these low price levels. They are forced to fudge their price discounts (say they are cutting prices, but not really doing it); pass cuts onto their suppliers (the rate of supermarket supplier bankruptcies is rocketing); or cut costs elsewhere (e.g. dividends) to pay for it.

The large supermarkets simply do not have the cost or margin headroom in their supply chains to allow them to compete in the discount price space. If they are to compete effectively (i.e. without sleight-of-hand on pricing or pushing costs upstream to the suppliers), they need to fundamentally restructure their cost models.

Number 2 is increasing operational complexity. Supermarkets are struggling with online models; IT architectures that are expanding to cope with new channels; digital channels; non-grocery formats; international footprints; and all the new implications of managing 'big data' and customer analytics. All these have resulted in bloated organisational structures leading to complexity and high costs. The different models are not effectively integrated, which means complexity in linking them together. It is now almost beyond the capability of a single business to manage these disparate operations.

Number 3 is online. Home delivery loses money due to the very high cost of 'last mile delivery' to customers' homes. These costs cannot be recouped by charging customers the true costs, as they would be in excess of £20 per delivery. The online picking and logistics operations are inefficient and need to be improved. Many supermarkets are now realizing that the costs are unsustainable, but they between a rock and a hard place – they have to grow their home delivery operations, and the losses that come with that.

Number 4 is real estate. Supermarkets currently have massive real estate portfolios on their balance sheets. One UK CEO described it as having 'A 21st century business with 75 per cent of our balance sheet tied up in 20th century assets'. The return on space is declining, and the costs are growing. Goldman Sachs estimates that supermarkets need to close 20 per cent of their stores. But how to achieve this? What are the true valuations? What else can they do with all this space? Who wants to buy it? How do they recover their return on assets in order to continue delivering EV growth for their shareholders?

Number 5 are supply chain inefficiencies. The adversarial relationships between supermarkets and their key suppliers have been driving significant stock and cost inefficiencies into their supply chains for years. Suppliers load their costs because they know the supermarkets will ask them for additional funding for promotions (or to fill gaps in profitability) at some future date. The costs are not transparent and have been estimated as high as 20 per cent of total supply chain costs. This represents an unrealized 'Supply Chain Dividend'. Until retailers and suppliers develop a more transparent and collaborative operating model, these huge costs will remain embedded in the supply chain and will prevent retailers from restructuring their total cost base.

Number 6 is inventory. Retailers still struggle with overstocks and excess working capital. The reasons are legion, but they stem from a combination of poor stock systems; operating practices; and inefficiencies in the retailer/supplier communications. If retailers are to restructure their cost models, these inefficiencies must be addressed.

And finally, shareholders. They are becoming increasingly concerned at the declining return on assets, and are considering the level of investment they currently hold in supermarket shares. This is a burning platform which must force some fundamental review of cost bases."


Ben Policella, International Food Sales & Marketing Consultant:

"The last year has seen discounters in the UK raising their game to include a greater range of premium products, many of which regularly come top in consumer tests. It will be interesting to see whether this trend spreads to discounters across Europe and how the major retailers react. We are also seeing continuous  growth in truly authentic artisanal products, consumers are finally learning to recognise the difference.


The challenges for the future are closely related to the on-going economic crisis which means that food poverty is now a reality in many European countries and throughout the Western world – governments, manufacturers and retailers need to urgently address this issue whilst maintaining quality and integrity throughout the food chain and guarding against food fraud."


Matt Truman, CEO, True Capital Partners:

"Two themes for me: one sectoral, one consumer-facing. The first is retrenchment and focus, going back to what you are good at, resisting the urge to grow for growth's sake and building teams that actively focus on returns for shareholders.

The second theme is personalisation. In the age of omni-channel, everyone is trying to understand the personal customer journey to get as close to a bespoke personalised service as possible. This involves a greater granularity of analytics, a level of monitoring as yet unexplored and a level of real-time dynamism most retailers don't yet have."

Yihaodian advertises Alibaba's Singles Day (copyright: Yihaodian)
Online shopping event: Yihaodian advertises for Alibaba's Singles' Day


Bill Webb
, Senior Lecturer, Retail Management, University of the Arts London, Honorary Member Ebeltoft Group of Global Retail Experts:

"As I see it, the key challenge for 2015 is to reinstitute humanity as the central core of the retail marketing mix."


Julian Wild, Partner, Corporate Finance for Rollits:

"I'm not sure everyone would describe it as 'exciting', but the startling progress by the discount retailers (not just Aldi and Lidl, but others such as Farm Foods and Heron) at the expense of the major multiples, most notably Tesco, Sainsbury's and Morrisons, has been a huge catalyst for change in the UK market. It has influenced the outlook of producers, retailers, distributors and consumers alike.

The most important challenge is how the major multiples, with huge property portfolios, respond to the big 'threat' of online and the arrival of players like Amazon on the grocery scene."


Clive Woodger, Chairman, SCG London, Strategic Consulting Group:

"Most exciting and challenging for retail? ... Wondering what Amazon and Alibaba will still not be able to offer and influence globally in the future between them!"


Statements collated and edited by Mike Dawson, International Desk, Lebensmittel Zeitung



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