May 19, 2006

WPP boss Martin Sorrell talks retailing

Sir Martin Sorrell, CEO of WPP (photo: Tom Campbell)
Martin Sorrell: "Retail brands have to be communicated"
Given his omnipresence in the international media, an interview with WPP boss Sir Martin Sorrell is a little like déja vu.

Sorrell runs the marketing services group and world's largest advertising company by revenue (2008: €8.3bn) from WPP's headquarters in London's classy Mayfair district.

He is a driven being. Sorrell jokes that he is exactly the same height as Napoleon, and this eloquent Englishman can certainly rival the ambitious Corsican in terms of personal dynamism.
 
This 64-year-old powerhouse regularly sets himself big goals and even larger bonuses. His current potential pay package is a whopping €70m, but this isn't a soft option for bankers.

After investing €22m of his own money, Sorrell only gets the dough if he meets a specific goal: WPP must be the top performer by market capitalisation within a peer group of nine over a five or 10-year period. In between striving for his bonus, he gave his view as an international ad man of mass market retailing & the fmcg industry.

WPP must reach a level where for a five or 10-year period the company has been the top performer by market capitalisation within a peer group of nine.

In between striving for his bonus, he told Lebensmittel Zeitung how an international ad man sees mass market retailing & the fmcg industry.

INTERVIEW


Sir Martin, Wal-Mart founder Sam Walton once proclaimed that the best advertising for a retailer was to invest in low prices. Wal-Mart is now the largest retailer on the planet. Time for the Martin Sorrells of this world to retire and watch the races?


Marks & Spencer once used to say the same thing, but they have since been very successful with a campaign emphasising how quality food can make a major contribution to good diet and thus to health.

Interestingly, Wal-Mart itself has started to invest more heavily in advertising in order to upgrade its image away from low prices to one which perhaps will also be able to market merchandise in higher price bands.

But would you not concede that word-of-mouth advertising is very effective?

Of course it is, but I still believe that the two principal keys to success are innovation and brand differentiation, which has to be communicated. If you don’t explain what you are trying to do and how you are trying to do it, you will not be as successful.

So even Wal-Mart could be more successful, if they perfected a different approach.

But at the end of the day advertising remains a cost…

I don’t think that clients would spend a trillion dollars per annum world-wide, half in above-the-line advertising and half outside, unless they thought it would be an effective way to build their business.

Anyway exclusively cost-based thinking is intrinsically flawed. There is a limit to how far costs can be reduced, but there is almost no limit (apart from 100 per cent market share) to how far a company can grow revenues.

Fmcg manufacturers can invest what they like in advertising, retailers will still pressure them on terms & conditions.

In a low-inflation world with increasing overcapacity, where retailers are becoming increasingly dominant and where manufacturers have very little pricing power, I can only repeat: innovation and the communication of brand differentiation have become more important than ever.

Could you give some positive examples of effective advertising in retailing?

E. Leclerc in France has run extremely effective campaigns during the last 18 months focussing on two principal themes: the defence of the consumer’s right to price competition and the promotion of healthy products.

The quality of food and health contributions of a good diet have also been key ingredients in the effective campaigns of J. Sainsbury and Marks & Spencer in the UK.

Tesco, Boots and Target are in the vanguard of retailers who are led by a brand-centric vision as Rewe and Tengelmann begin to indicate some movements in branding strategy.

In all cases, however, a strategic marketing department is the key to executing these plans in an effective way.

How effective a marketing tool are customer loyalty cards?

Combined with intelligent direct marketing they represent an excellent way to communicate directly with specific consumer groups both at home and in-store. Tesco, Boots, Carrefour, Auchan or Dia are using them very successfully to reinforce their store brand identities.

Could you give some positive examples of effective above-the-line advertising by European brand manufacturers?

Reckitt Benckiser and Danone have some of the best campaigns. They use the basic methodology of clear communication of superior claims.

They keep consumers focussed on product efficacy through trial and testimonial. Of course, all of this is supported by great execution at the point of sale.

And below-the-line?

P&G is leading the way with the usage of below-the-line methods that engage consumers in a more meaningful way with their brands. Their efforts on the tremor website are indicative of their leading approach.

German food retailing is dominated by hard discount and has become a commodity-driven market. How can retailers market themselves to regain value-added?

If you market on the basis of price, you create commodities. If you market on the basis of brands, you create tangible and intangible reasons why consumers will pay a premium for your products and services. The net result, if you just go down the price route, is Detroit.

That is why we have the beginnings of a very dynamic premium food retailing industry in Germany. While it is small, there are multiple examples of entrepreneurs and local retailers reacting to consumer desires for better retailing.

So no hope for the German market?

In my opinion, it is not in the nature of human beings to be boring price-driven consumers. They like variety and choice and don’t like sameness or systems which only give them limited choices.

I don’t think consumers want shopping to be a grim experience like in a GUM department store in Moscow 20 years ago. Except for staples, which can be delivered over the internet, people want the shopping experience to be enjoyable.

To that end, the hard discounters, particularly Lidl and Aldi Süd, have been improving the appearance of their outlets. Even they recognize that sustaining profitable growth requires the retailing of high quality products in an attractive shopping environment.

The recent above-the-line campaign from Aldi in the UK is a very clear attempt to improve quality perception.

The German consumer doesn’t seem to mind queuing for staples at Aldi, Lidl or Penny.

One only has to look at what the Germans spend on cars or holidays, for example, to see that they are prepared to pay for quality, if it is marketed professionally. What usually happens in such environments is that the consumer tires of it and goes the other way.

The situation in Germany is not new and has happened before.

Where else?

Even Japanese consumers haven’t lost their liking for brands after many years of price depreciation. In the UK, Tesco’s philosophy in the 70’s used to be pile-it-high and sell-it-cheap, but it is a very different brand today.

What do you think will be the catalyst for change on the German market?

The change will come as consumers grow increasingly worried about obesity, diabetes etc. and much more concerned about their lifestyle, health, exercise and longevity.

They will pay very significant premia for food which they think is fresh, organically grown and contamination-free in order to live a more healthy life. Germany is already the source of one of the fastest-growing natural supermarket channels in the world.

Whoever presents these foods well will create a niche, and the number of such niches will increase until the whole retail culture is transformed.

What will be the consequences of this mind shift for food suppliers?

Those manufacturers focussed on commodity foods and/or obese and unhealthy foods will be the ones who will have to change the most dramatically.

What will be the consequences of the constant growth of German hard discounters in Europe for the marketing of brands?

Brand manufacturers will increasingly sell to the discounters. At the same time, they will have to sharpen their innovation efforts including marketing to remain relevant in the market place.

How do you view the concentration in international retailing?

In an increasingly globalized world with maturing populations consolidation is inevitable in any industry where there is significant overcapacity.

If, however, a merger is ineffective, and the statistics show that 70 to 80 per cent of acquisitions don’t work, the market will sort it out.

Shouldn’t major retailers such as Wal-Mart, Tesco, Carrefour or Metro worry about a consumer backlash against their sheer size?

I am not convinced that big is bad, but the challenges of running a large company become increasingly demanding. In general people don’t like big things. They don’t like big government or big companies.

How then do you view Rewe’s Big Bang which rebranded its retail channels under just one logo in order advertising and marketing costs and to increase efficiencies?

Some believe that there can be diseconomies of scale through having just one brand. This is the case in our business, except in media buying where we need size, so our brands are run separately.

So are Rewe wrong or right?

The jury is still out. However, I am sure that in five years’ time we might have a conversation where Rewe have decided that they went too far down the efficiency road and want to return to individual branding again. Fads and fashions shift.

Also, for every Rewe, there will be an example of someone else who feels that they have become too consolidated and conglomeratised and that they need to reverse the process.

What consequences will retail concentration have for own label and private label?

Even a leading retailer like Sainsbury has found that the expansion of own label beyond a certain level created customer dissatisfaction. The diminution of choice for the shopper caused by restricting the number of brands hurt their sales so they had to reduce own label.

How should the retailer market an effective own label or private label programme?

By using effective below-the-line marketing as well as by emphasising packaging and product quality. These efforts should be supported by increasingly aggressive campaigns in-store to encourage consumer trial.

There was a great example of this when the first “Asda Essentials” opened in Northampton, UK.

How should brand manufacturers react to the increase in the size and quality of own/private label?

They must be very vigilant. They must accelerate the pace of product innovation and aim for bigger category premiums.

At the same time, they should focus volume into fewer and bigger master brands which provide broad-based platforms for category development and aggressive media support.

How can smaller retailers compensate for their inability to match the giant above-the-line budgets of, for instance, Aldi, Lidl or Media-Saturn?

They will need to find ways to use below-the-line campaigns and in-store shopping experience in order to increase their share of voice.

Brand manufacturers increasingly complain that the cost-per-thousand on network TV is rising faster than the rate of inflation as advertising media become more and more fragmented. Where can they get the biggest bang for their buck?

It’s difficult in terms of reach because the supply of World Cups, Olympic Games, Academy Awards or Super Bowls is limited, and the amount of money chasing them has remained relatively stable.

So, as the number of opportunities has declined, the price has increased. For instance, the price of a Super Bowl commercial has now risen to $2.5m per 30 seconds.

Isn’t this a wonderful chance for Google, Yahoo!, amazon.com and eBay?

The internet is seductive and sexy due to its very low cost. So fmcg manufacturers can save considerably compared with advertising on TV or in the national press.

However, I’m not convinced yet that we have the measurement systems to demonstrate that it is as effective as some people may think it is.

Would you then advise your fmcg clients not to use the internet at all?

It is very attractive to experiment with, particularly in B2B, but it is still not demonstrably effective in fmcg. If I’m a brand manager and behind budget and need to generate sales, TV is still the right medium.

Should retailers be particularly worried about the internet because they have invested so many billions in bricks & mortar?

They will have to juggle with both sales channels. The challenge is to capitalise on the new and to get out of the old. Google’s great advantage is that they started with nothing and had no legacy.

Must all retailers become home shopping operators?

If retailers continue to market in the same old way, inevitably they will die. The question is how quickly all this is going to happen.

I think ordering staples over the web and having them delivered effectively, as Tesco does in the UK, is a very attractive way of shopping for people who are cash-rich and time-poor. But I don’t think that applies to all forms of retailing.

What do you see as the most significant demographic trend world-wide?

All the demographics and statistics demonstrate that the world’s population is ageing. If we are all going to live until we are 100 or beyond, we shall become much more concerned about exercise, diet and health, particularly during the last 20 or 30 years of our life.

In this context there is a serious side to one of Berlusconi’s many humorous election campaign statements that it was the “duty” of every Italian man or woman to be as young and as beautiful as possible!

 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 20, 19.05.2006


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