Clementine Churchill Campbell Arnotts

Joe Berry Australian Retail Industry Executive Award 2016

TOPIC 6: New Product Development and Innovation

Australian retailers are often critical of the perceived lack of innovation / NPD in our market

but they are also lacking in welcome for untried new ideas in existing categories. The

balance between the high cost of NPD and the risk of failing to find shelf space leaves

many great ideas in a laboratory.

What can manufacturers do to change this risk perception and drive real category growth

through new product development and other innovations? Should manufacturers test

products through direct marketing before retail presentations?

Entrant Number: JBA-16-0113

Contents Executive Summary…………………………………………………………..3 Introduction…………………………………………………………………….4 Solve a Consumer Problem………………………………………………….7 Identify New Occasion………………………………………………………..8 Premiumisation……………………………………………………………….10 Brand Loyalty…………………………………………………………………13 Conclusion…………………………………………………………………….14

Executive Summary

The purpose of this essay to highlight the current state of innovation in the Australian retail environment and to explore how manufacturers can successfully change retailer risk perceptions surrounding new product development. This paper will provide four key strategies in order to gain support from retailers when it comes to presenting innovation ideas;

x Solve a consumer problem x Identify a new occasion x Facilitate premiumisation x Demonstrate brand loyalty

Each strategy plays a role in creating retailer appetite for innovation and will increase the likelihood of innovation acceptance. The paper concludes that retailers and manufacturers must engage in a collaborative relationship. Organisational alignment at every level of the retailer and manufacturer conversation is imperative in making sure that the innovative vision of the manufacturer is never lost. Innovation that has obvious mutual benefits for both retailer and manufacturer is the only way forward in order to drive real category growth.

Introduction ‘Too much renovation and not enough innovation…in store offerings represent the norm

rather than the new’1 the view of Dave Lewis, CEO of the UK’s number one supermarket

Tesco, is mirrored in the Australian retail environment. Criticisms from Australian retailers

regarding the lack of innovation from suppliers are not unfounded. Many companies are

cautious and instead of creating breakthrough innovation projects they have a tendency to

fill their innovation pipelines with safe, short term incremental projects that have a very

1 Andrea Felsted, ‘Innovator supplies Tesco with new plan’, Financial Times, 15 October 2015, http://www.ft.com/.

slim chance of achieving the ambitious growth targets set.2 When it comes to innovation

many manufacturers are risk averse and resort to line extensions and tailored customer

exclusives to drive growth. As a result real category growth is rare and share shifting is the

reality.

For manufacturers innovation is easier said than done. The following Product Ranging

Principles from Coles demonstrate the key requirements in order for products to be

selected;3

i. Offer compelling value to our consumers;

ii. Have unique attributes and high customer loyalty;

iii. Are new and innovative for our customers;

iv. Are commercially sound for our business;

v. Have reliable continuity of supply; and

vi. Are aligned to our business values.

Given these demands established manufacturers are often finely honed in the skills of

execution and less so in the skills of ‘game-changing creativity’.4 In order to take the risk of

investing more in innovation manufacturers need to be confident in a reasonable rate of

return for their investment. Manufacturers need to be confident that Australian retailers will

be open minded when it comes to New Product Development (NPD).

It would be remiss to ignore the changing state of Australia’s retail environment and the

implications of this on both manufacturers’ approach to innovation and the established

duopoly of Coles and Woolworths. While total Grocery market share is still weighted

heavily in favour of Woolworths and Coles at 39% and 32% respectively the rise of the

hard discount model is having an effect.5 In the past ten years discounter Aldi has more

2 Marc de Jon, Nathan Marston & Erik Roth, ‘The eight essentials of innovation’ McKinsey Quarterly, April 2015, http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-eight-essentials-of-innovation. 3 Coles Supplier Charter, ‘Product Ranging and Shelf Allocation Principles’, https://www.supplierportal.coles.com.au/csp/wps/portal 4 Op Cit. ‘The eight essentials of innovation’ April 2015, p. 1. 5 Roy Morgan Research, ‘The ALDI effect: Australia’s changing supermarket scene’, 22 June 2015, article no. 6297, http://www.roymorgan.com/findings/6297-aldi-effect-australias-changing-supermarket-scene-201506220132.

than tripled its market share to 11.6%.6 Furthermore, the established supermarket

retailers’ insistence on high EBITDA margins has allowed Aldi to undercut prices and gain

a significant foothold in the market.7 Aldi’s success is driven by their low-price discounter

strategy, which they can offer thanks to their low labor cost structure and limited SKU

model.8 Given this highly competitive environment, manufacturers present an opportunity

for the established retailers to counteract the rise of Aldi. By openly supporting

manufacturer attempts at groundbreaking innovation Coles and Woolworths can play to

their strengths of branded range as a key to remaining the dominant.9 In order to gain trust

from retailers, manufacturers should present innovation that is built around four key pillars:

x Solve a consumer problem

x Identify a new occasion

x Facilitate premiumisation

x Demonstrate brand loyalty

Each of these strategies will be explored in the essay with the overarching theme that to

drive real category growth retailers and suppliers must engage in a strategic partnership

that will result in mutual benefits.

Solve a Consumer Problem The first tool to mitigate risk when it comes to innovation it to make sure that the product

solves a problem. Manufactures need to identify the solution to a cause of tension for the

consumer. One example is Rafferty’s Garden which launched in the Baby Food category

in 2007 and now holds a commanding 31.9% of market share.10 Rafferty’s Garden (Figure.

1) launched a product that solved a problem and offered a real functional difference.

Rafferty’s Garden identified two significant problems;

6 Ibid. 7 Andrew McLennan & Roshenka Madanayake, ‘Discounters destroy economic profits’, Equities: Supermarkets, Global Markets Research, CommSec, 11 September 2015. 8 Ibid. 9 CommSec, ‘Evolution not Revolution’, Equities: Supermarkets, 25 September 2015. 10 Jem Anning, ‘Baby Food Manufacturing in Australia’, Ibis World Industry Report, August 2015.

1) The increased participation of females in the workforce after childbirth would mean

that mothers had less time to make homemade baby food;11

2) The pack format of the category did not reflect the functional need for the product:

all products were packaged in glass jars or cans yet parents needed baby food that

they could easily transport.12

Rafferty’s Garden solved the above by creating an all-natural, preservative free premium

product that parents viewed as an acceptable alternative to homemade. Most importantly,

they created a pouch-and-spout packaging format which made their product convenient for

on-the-go use, something that no other brand was doing.13 This ground breaking

innovation has resulted in a major shift in the category and nearly all baby food brands

now offer a pouch-and-spout format.14 Manufacturers should look to Rafferty’s Garden as

an example of identifying a consumer problem and solving it. Corroborating this point,

James Ajaka former CEO of Nudie Juice identifies two key questions a manufacturer must

ask themselves when it comes to innovation, ‘will it add value to the consumer’s life? Will

the innovation add value to the retailer’s life?’15 Retailers will be more open to innovation

that legitimately presents a solution to a genuine consumer problem as it will drive people

in store.

Figure 1: Rafferty’s Garden Pouch-and-Spout product

Source: http://www.boxerandco.com.au/images/raffertygarden/RAFF_6.jpg

11 Ibid. 12 Ibid. 13 Ibid. 14 Ibid. 15 James Ajaka (personal interview, 2 February 2016).

Identify a New Occasion The second strategy that manufacturers can utilise to minimise risk when it comes to

innovation is demonstrate to the retailer that there is a new occasion for your product.

Chobani Greek Yoghurt have successfully identified new consumption occasions to drive

incremental category growth via direct marketing. Through the Chobani Cafe in New York

(Figure. 2), Chobani identified that they had the highest foot traffic between 12pm and

3pm, not the assumed time of day for consuming yoghurt.16 Chobani utilise their cafe to

identify consumer flavour preference, innovate on a seasonal basis and generate limited

batch offerings thus keeping both retailers and consumers happy with new category

news.17 Vice President of Communications at Chobani views the cafe ‘as the most

forward-leaning, forward-looking view of that brand…a lot of the prepackaged innovations

we come out with are inspired by what’s popular on that menu’.18 Through this use of

direct marketing the company launched Chobani Flips (Figure. 3) in 2013 which anchor in

the afternoon occasion, bridging the gap between lunch and dinner.19 The importance of a

new consumption occasion is key to driving category growth as Chobani’s Chief Marketing

and Brand Officer describes, ‘The Flip is 42% incremental, half of that 42% is people that

never had a yoghurt, and the other half is people that are buying a second or third yoghurt

incrementally – so they are eating yoghurt for breakfast and now they are eating one as an

afternoon snack as well’20. Chobani set out to create an entire new platform based on a

new consumption occasion: a 3pm ritual for yoghurt that would not only attract new

consumers to the yoghurt aisle but also encourage existing yoghurt consumers to buy

more.21 Their Flip platform is now worth US $350 million.22 Chobani have developed

16 Monica Watrous, ‘Q&A: Innovation insights from Chobani’, Food Business News, 25 March 2015, interview with Michael Gonda, p. 1. http://www.foodbusinessnews.net/articles/news_home/Business_News/2015/03/QA_Innovation_insights_from_Ch.aspx?ID=%7BC52B1F62-5388-45C4-BC18-8389F83F62A4%7D. 17 Ibid. 18 Ibid. 19 Ibid. 20 Elaine Watson, ‘It’s called Chobani Flip; we think it’s the future of snacking, and the next billion-dollar brand in yoghurt’, Food Navigator USA, 2 November 2015, p. 1, http://www.foodnavigator-usa.com/People/Flip-could-be-billion-dollar-brand-says-Chobani-at-Food-Vision-USA 21 Ibid. 22 Ibid.

innovation that increases both penetration and frequency. Australian manufacturers have

to think beyond the existing consumption occasions for their products when pitching NPD

to retailers.

Figure 2: Chobani Soho Cafe. Source: www.chobani.com

Figure 3.Chobani Flip Product

Source: www.breakyoumake.com

Premiumisation Manufacturers that develop innovation that commands a premium price is another

successful strategy to adopt in order to change the risk perception. A strategy of

premiumisation is mutually beneficial for both the retailer and manufacturer as both sides

experience margin accretion.23 Figure 4, a mock-up Profit & Loss statement, demonstrates

how a premium product can have superior returns for retailers and manufacturers. With a

slight volume reduction, manufacturers can create products with premium quality

ingredients and invest in CAPEX without sacrificing margin for themselves or the retailer.

Brands that focus their innovation on premiumisation allow retailers to expand their ever

important margin position. Manufacturers should look for innovation opportunities that

advance the premium nature of the category in which they compete.24 At a category level

Coffee has been very successful in creating innovation that drives value growth.

Innovation in the form of capsules has recruited over 132 000 incremental households and

delivered $29.1 million in incremental value sales in the year ending January 2015.25

Coffee capsule innovation has shifted consumers from the value driven instant coffee

segment into the premium capsule category. It appears that consumers have no issue

paying a price premium for the right offer and the demand for premium products continues

to grow.26 Thus innovation that drives value growth within categories is likely to be

welcomed by retailers due to the mutually beneficial outcome.

23 David Zehner and Melanie Saunders, ‘The new reality for grocery suppliers in Australia’, Bain & Company, 1 November 2012, http://www.bain.com/offices/australia/en_us/publications/new-reality-for-grocery-suppliers-in-australia.aspx 24 Ibid. 25 Nielsen Insights, ‘Caffeine High: Consumers Buying Coffee More often as Capsule Sales Skyrocket’, last updated 9 October 2015, http://www.nielsen.com/au/en/insights/news/2015/caffeine-high-consumers-buying-coffee-more-often-as-capsule-sales-skyrocket.html. 26 Ryan Lin, ‘Snack Food Manufacturing in Australia’, Ibis World Industry Report, September 2015.

Standard Product NPD

RRP $3.99 $4.99

200g 150g

Manufacturer P&L

WLP $2.92 $3.48

Trade $0.85 $1.01

Trade Rate % 29.1% 29.1%

Net Sales $2.07 $2.47

COPS $1.52 $1.40

Depn

$0.35

GROSS MARGIN $0.55 $0.72

GM % Net 26.6% 29.1%

Customer P&L

Revenue $3.99 $4.99

COST $2.92 $3.48

TRADE $0.85 $1.01

PROFIT $1.92 $2.52

Profit % Rate 48.1% 50.6%

Figure 4: Mock-up P&L statement for a premium product to show superior returns for retailers & manufacturers

Brand Loyalty Brand loyalty is a powerful tool. Manufacturers can do more to emphasize the role brand

loyalty plays in purchase making decisions. The equity held in a brand name is

considerable, it can be a company’s most valuable asset.27 Atkins in the US was able to

convince skeptical retailers that their innovation would be successful due to their large and

incredibly loyal online community of five million members.28 Atkins launched a premium

offering in the frozen meal segment on the basis that Atkins adherents were not currently

buying frozen meals.29 Due to their brand loyal community the Atkins product would be

highly incremental to the category and the retailers.30 The product launch was a huge

success with US $68 million in year one sales, 40% growth in year 2 and 50% category

incrementality.31 Brand loyalty is what got this product over the line with the retailers.

Australians are particularly brand loyal and manufacturers should emphasize this in their

conversations with retailers regarding innovation. 58% of Australians prefer to buy new

products from familiar brands, they place a huge amount of trust in established brands.32

Also, 70% of Australian consumers will buy branded products over private label.33

Manufacturers need to demonstrate that they have a set of consumers who are brand

loyal. A demonstration of brand loyalty can put manufacturers in a position of a valued

strategic partner for the retailer, rather than a tertiary player with a “me-too” offering.

Conclusion Whilst the four elements explored above will go a long way to minimize potential adverse

reaction to manufacturer innovation there is still a commercial challenge in bringing the

model to life as highlighted by the Coles product ranging requirements. The way forward

from a supplier perspective is to strive for a strategic and collaborative relationship with

retailers. Manufacturers should not rely on a single interaction to sell in their innovation.34

27 Nielsen, ‘Looking to achieve new product success? Listen to your consumers’, June 2015. 28 Nielsen, ‘The Breakthrough Innovation Spotlight Series US’, June 2015. 29 Ibid. 30 Ibid. 31 Ibid. 32 Thais Gill, ‘A Taste for new things: Aussies demand innovation that offer convenience and affordability’, Nielsen Innovation Practice, 6 August 2015, http://www.nielsen.com/au/en/insights/news/2015/a-taste-for-new-things-aussies-demand-innovation-that-offers-convenience-and-is-affordable.html. 33 Roy Morgan Research, ‘Home-brand products have a way to go with grocery buyers’, 21 May 2015, article no. 6242, http://www.roymorgan.com.au/findings/6242-home-brand-products-have-way-to-go-with-grocery-buyers-201505202311. 34 Op. Cit., ‘The new reality for grocery suppliers’ (2012).

In a personal interview Les Schirato CEO of Vittoria Coffee stressed the need for

interaction at every level, ‘people underestimate the importance of relationships’.35 Share

the supplier vision at every level (Figure 5.). This means the overall vision is not lost when

it comes to execution, all parties are engaged and invested in the process. From a supplier

perspective it would be commercially naïve to expect a well-run efficient publicly listed

retailer to relax their requirements but providing a supplier with long term guarantees that

a particular avenue of innovation will find a home on shelf can go a long way to creating a

relationship of trust. A strong relationship between retailer and manufacturer can create a

continuous stream of insights that are mutually beneficial.36 When it comes to securing

support from retailers regarding true ground breaking innovation, manufacturers and

retailers should collaborate and foster trustworthy relationships, only then will true

category growth be achieved.

Figure 5. Interaction at every level between retailer and manufacturer37

35 Les Schirato (personal interview, 3 February 2016). 36 Op. Cit., ‘The new reality for grocery suppliers’ (2012). 37 Visual interpretation of manufacturer and supplier relationship from communication with Les Schirato (2016) and ‘The new reality for grocery suppliers’ (2012).

Managing Director

Managing Director

Retailer Manufacturer

Buyer Account Manager

Supply Chain

Manager

Supply Chain

Manager Marketing Manager

Marketing Manager

Sales Director

Head of

Supermarkets

Summy Chung Allied Mills

Joe Berry Australian Retail Industry Executive Awards 2016

Topic 6- New Product Development & Innovation Q. What can manufacturers do to change this risk perception and drive real category

growth through new product development and other innovations? Should manufacturers

test products through direct marketing before retail presentations?

Entrant Number: JBA-16-0081

Table of Contents Executive Summary ........................................................................................................... 14

Introduction ........................................................................................................................ 14

Innovating for the sake of innovating ................................................................................. 16

Target for Incremental Innovation ...................................................................................... 18

Understanding the ‘Why’ .................................................................................................... 20

It is not just about developing the product, but experience matters ................................... 21

Innovation ideas are everywhere ....................................................................................... 23

Conclusion ......................................................................................................................... 24

Executive Summary The Australian retail market is now operating in an ever changing environment where

there are greater signs of competition and the need to differentiate through innovation.

With major global players like ALDI and Costco established in the market, suppliers and

manufacturers are feeling the pressure more than ever to innovate and drive improved

processes to connect with the consumer.

This essay looks at the high failure rate and risks in new product development (NPD).

Consumer involvement in the NPD process is critical for manufacturers to mitigate these

risks. It also addresses how manufacturers and retailers can collaborate in order for

category growth.

Introduction Manufacturers often feel pressured to innovate in order to differentiate and maintain their

ranging, however, reality is that they are often innovating for the sake of innovating. The

ramifications of this, due to the limited shelf space in retail, are quite dire. High product

churn is never in the retailers’ best interest, nor is it for consumers.

Why is it that we can systematically manage product categories with a disciplined

approach that delivers consistent results but not innovation?

Innovation can be summarised into:

1) Renovation: developing products close to the core range, a line extension or new

variant i.e. new scent of soap bars

2) Breakthrough creations: expand existing categories or creating a new category38

i.e. a handwash that automatically dispenses without being touched

Manufacturers, to create an excitement within their existing categories, often rely on

renovation as NPD, with the aim of maintaining or increasing sales. Mintel finds 25% of all

38 Hall, T & Wengel, R, June 2015, Nielsen Breakthrough Innovation Report, US Edition, pg. 24

global chocolate launches in 2011 were for a “seasonal” positioning 39 i.e. Christmas,

Easter, Halloween themed etc. These product variants are often considered as low risk

innovation.

High costs are involved and often part of the risk factor with suppliers and manufacturers.

It becomes concerning as “85% of innovations fail and 20% of launches produce 70% of

sales with a long tail of innovation duds that fail to recoup their costs”.40 These costs often

are but not limited to, market research, CAPEX, labour in production and merchandising.

The costs involved with innovating products are not supported by retailers and the risk is,

they are often left failing without industry support.

Retailers also set hurdle rates or deletions within a set time frame. Consequently, there is

insufficient time for innovations to become known or embraced by the mass. Large

advertising spends required to achieve this awareness, limits innovation to larger

manufacturers. Their factories are often unprofitable for a smaller production run thereby

they are often less inclined to true innovations.

The rise of private label brands and importing NPD from overseas has impacted local

suppliers. They often don’t have the technology or capacity in their factories to produce

such innovations. Retailers will also lead innovation by launching competing products and

brands to the market.

Consequently, retailers are forcing margins away from manufacturers’ core products so

they can compete on price. This ultimately drives profitability out of the industry and leaves

little or no funding for true innovations. In contrast, innovations can also be breakthrough

creations, “they are products that meet a previously unmet, even unidentified need.”41

39 Mintel 2012, “Bumper year for Easter chocolate innovation reports Mintel”, accessed 21/02/2016, http://www.mintel.com/press-centre/food-and-drink/bumper-year-for-easter-chocolate-innovation-reports-mintel 40 Hall, T & Wengel, R, June 2015, Nielsen Breakthrough Innovation Report, US Edition, pg. 5 41 Heller, L, 2014, “Nielsen's Breakthrough Innovation Winners Turn Challenges Into Sales”, accessed 21/02/2016, http://www.forbes.com/sites/lauraheller/2014/05/06/nielsens-breakthrough-innovation-winners-turn-challenges-into-sales/#705255c66749

Shoppers are willing to pay a premium for these products. For example, Soap bars

trended in the 1990s, until Body-wash was created a decade later. Body-wash has outsold

soap bars since 2010.42

These creations are considered more risky and have a level of uncertainty. Manufacturers

tend to avoid it to prevent failure.

Innovating for the sake of innovating

“Innovate or perish” is now the new motto. Woolworths and Wesfarmers continue to

represent Australia in Deloitte’s 2015 Top 25 Global Retailers Ranking. 43 As global

discounters like ALDI, Costco and LIDL are anticipating growing their market share, there

is even more of a focus on innovation from large retailers. Innovation differentiates their in-

store offers and builds store loyalty.

The high focus in differentiation has led manufacturers to introduce NPD without changing

product formulations. It is less risky for manufacturers to leverage existing patents. “Many

companies who do not have robust end-to-end innovation management processes

unconsciously move towards a low-risk project strategy.” 44 For example, Coca Cola

(Figure 8) launched its colour-changing packaging this summer.

42 Ibid 43 Deloitte, 2015, “Global Powers of Retailing: Embracing Innovation”, Australian Edition, accessed 21/02/2016, http://www2.deloitte.com/content/dam/Deloitte/au/Documents/consumer-business/deloitte-au-cb-gpor-120115.pdf 44 New Product Visions, 2013, “Are Companies Becoming More Risk Averse in New Product Development (NPD) Decisions?”, accessed 27/02/2016, http://newproductvisions.com/blog/?p=258

Figure 8 – Coca Cola’s multi-million packaging45

Manufacturers desire to be Number 1 in product categories they excel in. In most

categories, there are manufacturers that have >50% market share and they often rely on

NPD to retain it. For example, Colgate’s Optic White launch in North America increased

market share by 19.3%.46 NPD is often used as a blunt weapon to stay relevant, expand

range and thereby dominate fixture space.

Manufacturers also rely heavily on NPD as a source of common ground to establish

meaningful relationships with larger retailers. There are often joint business plans with

growth targets, that the voice of the consumer is often unheard. Amidst rebates and

incentives, retailers are obliged to launch NPD. At times, these are often renovated

products, with little consumer research and validation.

As a result, this leads to many renovated products creating clutter on shelf. “82 percent of

new products on supermarket shelves won’t be there in five years’ time, while as few as

45Lowe, A., 2015, “Coca-Cola in multimillion-dollar "colour changing" packaging push”, accessed 26/02/2016, http://www.adnews.com.au/news/coca-cola-in-multimillion-dollar-colour-changing-packaging-push 46 Morgan, P., 2015, “Colgate’s Recent Brand Innovations to Drive Growth”, accessed 23/02/2016, http://finance.yahoo.com/news/colgate-recent-brand-innovations-drive-205000155.html

50 percent of all proposed packaging redesigns ever see the light of day”, according to

Terra technology.47

Target for Incremental Innovation There is very limited shelf space allocated in each category. Often, range reviews define

the tail that is easily substitutable or highly duplicated, to be deleted. This is why retailers

are strict on NPD submissions as there are criteria in place to reduce the complexity of the

category.

Manufacturers within the same category often pitch similar renovated products. Buyers

often say, “My shelves are not elastic”, “One in, one out”, meaning there is limited real

estate on shelves. “Me-too” products that cannibalises the existing range are not

welcomed by retailers. Manufacturers should work towards unduplicated products and

increase in reach and frequency to drive real category growth.

Loyalty card data providers emphasize the numerous “Low Performers” launched within

the first 20 weeks. These are NPD with low incremental sales and high cannibalisation.

Figure 9 below illustrates where all future NPD should be targeted, at the top left quadrant.

47 Thomas, C., 2015, Retail World “The Dark Side of Innovation, January Ed., pg. 54

Figure 9 – Four quadrants to target NPD success

As highlighted above, only 5 SKUs were deemed “incremental” out of 21 SKUs launched.

The category had inefficient ranging additions and limited breakthrough creations. “Of over

60,000 new SKUs introduced in Europe over the last years, just over half (55%) made it to

26 weeks, and only 24% lived to reach a full year.”48 These all show that blindly rotating

NPD on shelf will not succeed as “innovation is neither magic nor random. It is a

science.”49

Poor NPD results hurt both manufacturer and retailer. It also reflects their corporate

culture, one that supports low risk renovations. These results should encourage a greater

call of action, to target future innovation in the incremental and non-cannibalising space.

A great example of targeting within the incremental space is Sunbeam energy bites

(Figure 10). With its heritage in sultanas, they have evolved their product range to cater for

an unmet need in the market, sport nutrition convenience.

48 Nielsen Global Report, 2015, “Looking to achieve new product success”, accessed 21/02/2016, http://www.nielsen.com/us/en/insights/reports/2015/looking-to-achieve-new-product-success.html 49 Hall, T & Wengel, R, June 2015, Nielsen Breakthrough Innovation Report, US Edition, pg. 5

Figure 10 – Sunbeam Energy Bites50

To change risks perceptions, innovation works well when targeting a need, or solving a

problem within a lifestyle. Catering for trends and forecasts in the communities we live in

such as ethnographic, ageing population, intelligent health, and authenticity are the key for

breakthrough creations.

Understanding the ‘Why’ The type of research done is the difference between a failed and successful NPD.

Manufacturers and retailers often fail to understand what drives a consumer to try a new

product:

x What are they receptive to

x What sources they use to know about new products

x Why they need this product

“To understand what causes a person to consume a particular product in a given

situation, we need to understand the progress the person is trying to make in that

particular circumstance”.51 Consumer research if conducted properly, take manufacturers

and retailers beyond the periphery of the problem.

50 Mintel, 2016, “2016 Food & Drink Trends Australia and New Zealand Report”, pg. 57 51 Hall, T & Wengel.R, June 2015, Nielsen Breakthrough Innovation Report, US Edition, pg. 9

Oral B invested in a lot of time and money at consumers’ houses to study their teeth

brushing behaviour. Through research, they are able to identify the problems of brushing

behaviour and target their innovations better.52

To mitigate risks of NPD failure, manufacturers should acquire new knowledge to

substantiate innovation, i.e. include consumer research at Gate 0.53 “No business can

survive long term by only relying on their existing knowledge. They have to generate new

knowledge”.54

Research methods should be explored to ensure that the NPD resonates closely to

consumer choices and reflect real-life behaviour. For example, key target consumers

invited to retailer presentations, private label product development team should also be

present.

There are opportunities for new research vehicles to substantiate innovation better and

further justify rights on shelf.

It is not just about developing the product, but experience matters NPD often fail in retail because retailing is no longer just about product, but the

experience.55 Manufacturers and retailers need to extend the life of NPD beyond just the

four walls of a physical store.

Traditional forms of direct marketing were mail, phone calls and samples, used to deliver

cost effective sales results. This has now evolved to hashtags, tweets, posts and

comments to connect with consumers. Manufacturers should continue to test products

through direct marketing in the smartphone age.

52 Domanico, A., 2015, “Oral-B interactive Bluetooth toothbrush coming to US teeth soon”, accessed 24/02/2016, http://www.cnet.com/news/oral-b-smartseries-700-bluetooth-toothbrush-coming-to-the-us-in-february/ 53 Hall, T & Wengel.R, June 2015, Nielsen Breakthrough Innovation Report, US Edition, pg. 22 54 New Product Visions, 2013, “Are Companies Becoming More Risk Averse in New Product Development (NPD) Decisions?”, accessed 27/02/2016, http://newproductvisions.com/blog/?p=258 55 Deloitte, 2015, “Global Powers of Retailing: Embracing Innovation”, Australian Edition, accessed 21/02/2016, http://www2.deloitte.com/content/dam/Deloitte/au/Documents/consumer-business/deloitte-au-cb-gpor-120115.pdf

Increase of fragmented media has made it more difficult to target consumers and initiate

trial. Manufacturers and retailers should leverage the use of data and technology to

engage, build awareness and commitment with consumers efficiently.

Oral B recently launched their first interactive electric toothbrush (Figure 11) that can be

connected to their app on smartphones. The app was developed to correct bad brushing

behaviour.56 Figure 11 – Oral B Smart Series Electric Toothbrush57

Oral B is a classic example for manufacturers to include mobile technology as part of their

NPD to ensure retailers take notice. Consumers want to be educated, emotionally

engaged and entertained when buying products. For example, interactive QR codes are

now often used to connect with consumers

Furthermore, “people don’t buy what you do, they buy why you did it”.58 Manufacturers

need to engage consumers with why the product was developed rather than stating what

the product does.

56 Ibid 57 Oral B UK, 2015, Oral B Smart Series Electric Toothbrush, accessed 24/02/2016, http://www.oralb.co.uk/en-GB/oralb-app

Mobile technology should be adopted so that the life and experience of NPD is extended

beyond the physical retail environment.

Innovative ideas are everywhere As manufacturers move away from risky breakthrough creations, it has a “knock-on impact

to other projects and the creation of tacit knowledge”.59 Staged gate processes have led to

empty efficiency and a lack of pervasive leadership.60

Innovative ideas exists with manufacturers at a smaller scale, however many fail in

knowing how to bring their ideas forward. For example, a small bakery with an innovative

product will never get the opportunity to present to large retailers. As such, there’s the risk

of an opportunity loss.

Large retailers here could allow entrepreneurial thinking to be on a stage which can

contribute to retail growth. Innovative ideas can be pitched to retailers and manufacturers

by small and medium sized businesses and or even consumers. I.e. Shark tank TV series

encourages disruptive innovation

In UK, major pharmacy retailer, Boots is already adopting this concept. A parent surprised

Boots buyers on the remedies of coconut oil in a “Dragon’s Den- style pitch to sell her

baby skincare product”. She has won “a shelf space in 200 of its shops nationwide.”61 This

is a great example to show that innovation exists anywhere and everywhere.

This pitch model consists of principles that should be emulated into innovation for retail in

Australia.

58 Simon Sinek, 2009, inspirational speaker and author of “Starting with Why: How great leaders inspire everyone to take action” 59 New Product Visions, 2013, “Are Companies Becoming More Risk Averse in New Product Development (NPD) Decisions?”, accessed 27/02/2016, http://newproductvisions.com/blog/?p=258 60 Ibid 61 Lillington, C, 2015, “Mum's Dragon's Den-style victory to sell her baby skincare in Boots stores across the country”, accessed 24/02/2016, http://www.coventrytelegraph.net/news/coventry-news/mums-dragons-den-style-victory-9938302

Conclusion High failure rates and risks associated with NPD have created a jaded retail environment.

Due to the high cost of development, a risk-averse approach is common where innovating

for the sake of innovating has become the norm.

It is evident that most NPD is renovation with little research and validation. NPD should be

targeted, delivering high incremental sales and non-cannibalisation. To achieve real

category growth, consumer involvement needs to be at the forefront of the NPD process.

Ways to improve innovation success includes leveraging mobile technology, evolved

forms of direct marketing and a Dragon’s Den pitch model. Manufacturers can invite

consumers with wild card pitches on innovative ideas.

Future innovation should be incremental breakthrough creations, invited by retailers and

manufacturers, embraced by mass consumers.

Mike Cullerne Campbell Arnotts

Joe Berry Australian Retail Industry Executive Awards 2016

Topic 6 – New Product Development and Innovation Should retailers be more open to innovation offers and be prepared to share with the

inventors the risk in a new opportunity? Where does the responsibility lie between retail sales growth and stabilized margins?

Entrant Number: JBA-16-0058

EXECUTIVE SUMMARY This essay discusses why retailers should partner with suppliers on innovation and how

they can approach this to maximise their return. It will focus on what retailers can do to

encourage their supplier base to bring to the table innovation that generates sustainable

margin and reduces their overall risk.

There are four key areas retailers can focus on to build an innovation partnership with

suppliers:

1. Create a clear framework for innovation

2. Incentivise suppliers to innovate

3. Move from idea to launch as efficiently as possible

4. Don’t limit innovation to new products

There are virtually limitless areas across the industry where innovation can provide a

competitive advantage. As Coles CEO John Durkan points out, "We should all be thinking

about how to lower prices for consumers by being more productive and innovative.62"

Sustainability, technological advances, cost recovery and systems management are all

areas that can benefit from this approach. Retailers that create a culture with suppliers that

foster this type of thinking will be at a significant advantage.

INTRODUCTION

In the ever changing Australian retail environment, it is more important than ever to focus

on innovation. Industry revenue is projected to grow by 3.8% annually63 and innovation will

be a key part of achieving this growth. With the rapid pace of change in the industry, it has

become an even bigger differentiator for retailers seeking an edge in a tough marketplace.

The newly appointed CEO of Woolworths, Brad Banducci, has ensured this is top of mind

in their business, “We are placing the customer at the start of everything we do. This

strategy will result in lower prices, more compelling offers and greater innovation.64”

62 Mitchell, S; 2015, “Coles MD John Durkan says grocery suppliers living on 'Treasure Island'” Australian Financial Review 08/12/15 http://www.afr.com/business/retail/coles-md-john-durkan-says-aussie-grocery-suppliers-living-on-treasure-island-20151207-glhyl0 63 IBISWorld, February 2016, “Supermarkets and Grocery Stores Market Research Report” 64 Cameron, N; 2015, “Woolworths details 3-year strategy to become customer centric” CMO 6/5/15 http://www.cmo.com.au/article/574302/woolworths-details-3-year-strategy-become-customer-centric/

Getting suppliers on board with such a strategy requires an integrated approach. This

includes using margin more effectively to encourage innovation and reducing the risk

involved for all parties. Investing significant time and money into projects that can’t be

commercialised by the time they get in front of retailers can no longer be afforded.

Retailers need suppliers to be putting their money against innovation that works hard for

both parties. This means proactively setting the agenda and creating the right conditions

for innovation. The next big idea is unlikely to just walk in the front door.

DEVELOPING A STRONGER SUPPLIER AGENDA ON INNOVATION Create a clear framework for innovation Creating the conditions for innovation requires strong leadership, collaboration and

accountability. With suppliers facing a large amount of uncertainty on commodities,

consumer trends and a changing retailer landscape, it is becoming harder than ever to

unlock investment to fund innovation. Simply asking suppliers to ‘be innovative’ is not

enough; they need a clear framework to line their efforts up against.

Tom Daunt, CEO of ALDI Australia, points out that Australian retailers “can all be

successful but we will ultimately have differentiated business models and differentiated

offers.65” Retailers that can clearly articulate their specific approach to innovation will get

the most traction. It ensures suppliers are tuned into the channel and/or customer

opportunity so they can invest with confidence.

Within an innovation framework, retailers need to:

x Set clear goals and articulate measurable KPI’s to drive accountability

x Ensure it is specific for a supplier and/or category

x Explain how they want to differentiate for their channel/customers

x Agree on how margin will be managed and failed ventures exited

x Set clear expectations on exclusivity and non-disclosure agreements

65 Korporaal, G; 2015, “Aldi to expand its footprint but ‘no threat’ to Coles, Woolies” The Australian 21/01/15 http://www.theaustralian.com.au/business/companies/aldi-to-expand-its-footprint-but-no-threat-to-coles-woolies/news-story/b21d3d44e0e269aadf5a05dd3c013f17

By putting a framework in place, suppliers will clearly understand what they need to do to

partner with a specific retailer. It creates a consistent approach and ensures suppliers are

working towards a common set of goals before they have spent a single cent. This will

reduce wasted investment and remove the risk of finding out too late in the process that an

idea or product simply won’t work for a particular retailer. ‘What is the problem we are

trying to solve?’ should be the first question both parties ask themselves when they sit

down to create an innovation plan.

95% of new products fail66. Being able to quickly take the learnings and ‘pay them forward’

is critical. Retailers should not be punishing suppliers for taking risks that are grounded in

trying to drive their top and bottom line. Innovation failure should be looked at as a benefit

rather than a cost. If a retailer can communicate the learnings of such a failure across their

organisation, it could save them making that same mistake 100 times over in other

categories/departments. The biggest failure retailers can make is not allowing suppliers to

be innovative and take risks for fear of it costing them further time and money. Creating a

strong framework for both parties to work within will give both parties confidence that the

risks taken are worthwhile in the long run.

Incentivise suppliers to innovate Building the desire for suppliers to innovate could be argued as unnecessary by many

retailers. ‘Surely if suppliers bring new products to market they stand to benefit as much as

anyone’ is a common position. However, in many cases there is an expectation that all

innovation is above category/supermarket averages and/or comes at discounted prices for

an extended period. This can quickly erode any potential upside for the supplier and

discourage their efforts.

Recently, Malcolm Turnbull set about tackling this problem at a national level by creating

policies that drive an “Ideas Boom67”. Retailers have the opportunity to set a similar set of

incentives with suppliers to encourage them to up-weight their efforts. This involves

66 Schlossberg, H; 1990, “Fear of failure stifles product development”, Marketing News, Vol. 24 No. 10, pp. 1-16. 67 Borrello, E & Keany, F; 2015, “PM Malcolm Turnbull calls for 'ideas boom' as he unveils $1b vision for Australia's future” ABC 08/12/15 http://www.abc.net.au/news/2015-12-07/pm-malcolm-turnbull-unveils-$1-billion-innovation-program/7006952

thinking differently about the total margin mix generated by a supplier in a way that

encourages them to put investment against innovation. Three ways to do this are:

1. Balancing margin expectations depending on the type of innovation

2. Scaling margin across a new products life cycle

3. Focus evolutionary innovation on pack, price and promotion

There are different types of innovation and retailers should balance the margin generated

across these.

Figure 1: Four quadrants highlighting the types of innovation68

Retailers need to take a holistic approach and work with suppliers on what innovation is

possible in the medium to long term. Ultimately, all retailers want revolutionary innovation

from suppliers. However, this generally comes at the greatest cost and with the biggest

risk. Therefore suppliers should receive relief on margin on these types of products in

exchange for additional margin against incremental and evolutionary products.

Incremental ideas such as flavour rotations are easier to bring to market and can often

provide a halo effect to the existing range if executed well. These should be margin

accretive to the retailer and help to offset the additional funding required for the

development revolutionary products.

68 Richards, J; 2012, “What is Innovation?” 01/01/12 Catalyst Strategies http://catalyststrategies.com/2012/what-is-innovation/

In the case of revolutionary innovation, the scaling of margin across a new product’s life

cycle would involve reducing margins on new products in year one with an agreement to

increase them in year two and three. It would also encourage retailers to hold onto these

products longer and work with the supplier to optimise the offer rather than just deleting

them at the first sign of non-performance. This concept requires a significant amount of

planning and alignment through the innovation framework.

In regards to new products there should be a clear push by retailers for either

revolutionary (high value) or incremental (low cost) innovation. With the third and final type

of innovation, evolutionary, there is a specific focus on either engaging new customers

with existing products or creating new offers for existing customers69. Innovating through

pack size, price and promotion is the most effective way to do this as it creates margin

opportunities for both supplier and retailer. Coca-Cola recently launched a smaller pack

size at a fixed shelf price as a way of creating margin for itself and its convenience

retailers70. Evolutionary ideas require a strong understanding of common goals between

retailer and supplier.

Move from idea to launch as efficiently as possible Suppliers have limited time and money to spend on innovation. Therefore it is important

retailers work closely with them to ensure every dollar spent is worthwhile. This will

increase margin for both sides and reduce financial risk. This process will be different

depending on the type of new product being launched (incremental vs. revolutionary).

Typically a new product goes through the following stages:

1. Idea generation

2. Building the business case

3. Product development

4. Testing/validation

5. Launch

69 Richards, J; 2012, “What is Innovation?” 01/01/12 Catalyst Strategies http://catalyststrategies.com/2012/what-is-innovation/ 70 Mitchell, S; 2014 “Coca-Cola Amatil downsizes cans to increase sales” Sydney Morning Herald 25/09/14 http://www.smh.com.au/business/retail/cocacola-amatil-downsizes-cans-to-increase-sales-20140925-10lxi0.html

Often, idea generation takes place well before any supplier/retailer conversations have

begun. It is not uncommon for ideas to be at stage four before they are even revealed to

retailers. This is because suppliers are nervous sharing ideas early due to competitive

concerns (leaks to competitors or impacts on private label development). To overcome

this, both businesses must demonstrate a high level of trust and the terms of engagement

should be set out in the innovation framework. Earlier conversations on new products

enable a stronger business case especially if alignment is found early on aspects like

price.

One of the biggest challenges for suppliers understanding actual customer behaviour.

Customer data from companies such as Quantium provide suppliers a great opportunity to

benchmark customer behavior against consumer insights. Often the two can be different

as evidenced by the re-launch of ‘Easy Mac’ by Mondelez in 2013 where discussions with

customers identified the desire for a healthier product. However, when the product hit

shelves, their reaction was quite different to what was indicated in the insights that led to

the product being developed71. Connecting what customers say and what they do is a

powerful combination.

While we are in a data rich, insight-led environment, there is still no better way to

understand an idea’s potential than by putting it in front of customers on mass. However, a

hunger for simplicity creates challenges for manufacturers in testing ideas in live stores.

For retailers, in-store pilots can create just as much work a full national launches. This is

compounded by the fact that there is no coordinated approach to executing pilots in most

retailers. To overcome this, retailers should set up a specific market they use to specially

run pilots for all suppliers. This might be a specific state, city or even country where

innovation can be consistently sold and tested before a full scale launch.

71 Benchmark Sensory Strategy & Research; 2015, “How to Avoid a FMCG Reformulation Disaster” http://benchmarksensory.com.au/product-optimisation/how-to-avoid-a-fmcg-reformulation-disaster/

Once a product is ready to go to market, it is important that the retailer executes the best

possible launch strategy. While this will include advertising and communication investment

from the supplier, the retailer often has as much impact on the marketing of a new product.

When the new product baton is passed to the customer front-line, the right mix of activity is

crucial. Clear customer messages, strong availability and first class merchandising can

make a huge impact.

Retailers should be doing everything they can to be engaged early in the innovation

process. It will make if far more likely the final product will deliver what their customers

want. They can also catch ‘potential failures’ early in the process, saving valuable time and

money. While one can always learn from failure, if it can be avoided, it should be!

Don’t limit innovation to new products Development of new products is not the be all and end all for innovation. Retailers should

be cautious to not disproportionately invest against new products. There needs to be the

same level of focus on how one can innovate to reduce cost within the core business.

Retailers should be holding suppliers accountable to this same thinking. Suppliers often

perceive that investment in innovation is at odds with retailers strategies to reduce prices.

In Australia this is heightened by the recent entry of discounters into the market, which has

put price front and centre. ALDI have been extremely successful in being perceived as

having the ‘cheapest’ prices with customers.

Figure 2: ALDI is perceived as cheapest across most categories72

While a focus on being the ‘cheapest’ is easy to measure, it is extremely costly and can

significantly compromise operation margins. Retailers need the support of suppliers to

assist in being as competitive as possible. Suppliers can bring specific expertise to unlock

changes and improvements that benefit both the top and bottom line. Working together,

there are a number of ways to reduce costs but it is important to ensure cost is removed

from the total end-to-end ‘cost chain’. Shifting cost from the retailer to the supplier (or vice

versa) will not create a sustainable business relationship. Instead, both parties must look

to uncover ways to mutually take cost out. An extreme example of this is the movement to

centralise warehousing by major retailers. This has been further refined with the

introduction of primary freight, collaborative forecasting and electronic ordering. The

overall cost of getting product to stores was reduced, which improved margins (that could

be invested in reducing prices).

It is important to include both approaches in a retailer’s innovation strategy but in which

proportion may differ depending on the supplier.

72 Zehner, D & Sanders, M; 2012, “The new reality for grocery suppliers in Australia” Bain Brief 1/12/12

CONCLUSION The opportunity to innovate in Australian retail is not new. Creating a path to partner with

suppliers is a clear chance for retailers to differentiate themselves from their competitors. It

enables both parties to reduce risk whilst expanding margins that can be used to fuel

further innovation or reduce prices.

Developing a clear framework for suppliers, giving clear incentives to invest, unlocking an

efficient innovation process and partnering to innovate at every opportunity are four clear

actions retailers can take. Building a culture of innovative thinking will have benefits across

the business relationship and this should not be limited to only new product development.

The thirst from customers for new products, lower prices and better solutions is not easily

quenched. Creating a climate for an ongoing innovation discussion with all suppliers will

pay dividends long into the future and make willing retailers a real partner of choice.

Devinka Senerviratne Metcash

Joe Berry Australia Retail Industry Executive Awards 2016

Topic 5 Brand Future Proofing

Question: What should brand manufacturers do to accelerate value-adding and brand growth in traditional markets? What are the ramifications of moving to new channels

versus maintaining the status-quo and should branded suppliers also manufacture private labels? Can a supplier balance the needs of their brand equity with aggressive pricing

activity between major retailers?

Topic 5 – Brand Future Proofing JBA-16-0010

Table of Contents

Executive Summary ......................................................................................................... 1

Introduction ...................................................................................................................... 2

The State of Private Label in Australia ............................................................................. 3

Value Adding and Brand Growth in Traditional Environments ......................................... 4

Speed to Market ........................................................................................................... 4

Continuous Innovation ................................................................................................. 6

Ethical needs that shape market demand .................................................................... 6

Challenges of utilizing new channels vs. carrying on BAU. Should suppliers produce private label? ..................................................................................................... 7

A merit or downfall to produce private label? ............................................................... 8

Balancing the needs of brand equity vs. aggressive pricing activity .............................. 10

Conclusion ..................................................................................................................... 11

Executive Summary

This essay investigates why the change in consumer perception of product value,

large supermarket concentration and the shift to catering to generation Y (Gen Y),

has led to the increase in demand for private label products, which in turn, has many

suppliers re-examining their current strategies.

The essay deduces on four main activities suppliers need to implement in order to

mitigate depreciating margin and brand equity:

x Speed to market,

x Continuous innovation,

x Provision of ethical products,

x Benefit bundling.

Furthermore, by remaining in existing channels, manufacturers take on the risk of

losing brand relevance in today’s digital environment, and the benefits of

participatory shopper advocates. It recommends suppliers take on these initiatives to

regain control of their brand value and reignite the relationship with their consumers.

Introduction

Over 90% of Australia’s supermarket industry is controlled by Coles, Woolworths,

ALDI and IGA - mainly condensed within the duopoly of Coles and Woolworths. This

concentration of a handful of retailers has placed enormous pressure on suppliers,

as they now no longer negotiate against ‘mom and pop shops’ but large

conglomerates that negotiate for an entire state and/or country benefit.

Additionally, the transformation in consumer buying habits, turning them from brand-

conscious shoppers to smart-shoppers, has turned the tables on the influence brand

names have previously exercised on consumers.

Hence, this essay will examine fighting cost pressures, revitalizing the consumer

relationship that national brands have and regaining control of their brands over

store brands.

The State of Private Label in Australia The past decade has seen phenomenal change in the perception of private label

products in Australia. Australia’s dollar share of private label spending is at 21%,

which is the highest in the Asia-Pacific region.73 The stigma baby-boomers held

against the quality of such products are being overshadowed by Gen-Y’s buying

habits. Gen-Y, who hold no recollection of the previous poor quality of private label,

now form the new working class and purchasing private label part of their buying

repertoire.74

Furthermore, plain packaging that was synonymous with low quality has seen an

overhaul through retailers segregating their brands according to price points (e.g.

Woolworths Select vs. Gold or Coles Smart Buy vs. Finest). According to a recent

Nielsen report “Long gone are the days of no-frills packaging intended only for those

on a tight budget – store brands, are no longer viewed simply as low-cost

alternatives to name brands; they’re increasingly high-quality products that fulfill

consumer needs across a variety of price points”75.

Many of the changes that have occurred in private label can be linked to ALDI’s entry

into the Australian market in 200176. Through consumers discovering the quality of

its products as being on par with national brands,77 ALDI drove positive consumer

perception towards store brands. Thus, tripling its market share from 3.1% to 11.6%

73 “The state of private label around the world”, viewed 28/12/2015 http://www.nielsen.com/content/dam/nielsenglobal/kr/docs/global- report/2014/Nielsen%20Global%20Private%20Label%20Report%20November%202014.pdf 74 Mitchell. S; Dec 2014, “Private label grocery sales rise 6.6pc, outpacing other brands” Sydney Morning Herald, viewed 28/12/2015 - http://www.smh.com.au/business/retail/private-label-grocery-sales-rise-66pc-outpacing-other-brands-20141210-124azj.html 75 “The state of private label around the world”, viewed 28/12/2015 http://www.nielsen.com/content/dam/nielsenglobal/kr/docs/global-report/2014/Nielsen%20Global%20Private%20Label%20Report%20November%202014.pdf 76 Prendergast. T; July 2014, “Look at the Market for Private Label in Australia and New Zealand”, Global Retail Brands, viewed 4/01/2016 http://globalretailmag.com/index.php/look-market-private-label-australia-new-zealand/#sthash.vTuNh8cj.dpbs 77 Prendergast. T; July 2014, “Look at the Market for Private Label in Australia and New Zealand”, Global Retail Brands, viewed 4/01/2016 http://globalretailmag.com/index.php/look-market-private-label-australia-new-zealand/#sthash.vTuNh8cj.dpbs

over 10 years, while heavy weights like Woolworths and Coles witnessed a decrease

in their market shares.78

Figure 1: Market share over time: supermarket grocery market dollars79

Value Adding and Brand Growth in Traditional Environments

Speed to Market Private label has made strides on imitation. The only way to stay ahead is by

continuous, frequent innovation to product attributes aligned with sheer speed

through rigorous stage-gate scheduling that includes ROI numbers showing the likely

gain from speed.80

78 “The ALDI effect: Australia’s changing supermarket scene”, Roy Morgan Research, viewed 28/12/2015 http://www.roymorgan.com/findings/6297-aldi-effect-australias-changing-supermarket-scene-201506220132 79 “The ALDI effect: Australia’s changing supermarket scene”, Roy Morgan Research, viewed 28/12/2015 http://www.roymorgan.com/findings/6297-aldi-effect-australias-changing-supermarket-scene-201506220132 80 “How fast moving consumer goods companies use speed as a competitive weapon”, viewed 15/1/16 https://www.bcgperspectives.com/content/articles/consumer_products_go_to_market_strategy_speed_to_win/

Figure 2: Time-to-Market 81

A 30% increase in speed to market has allowed for additional 60% first-year

innovation sales.82 For example, Proctor and Gamble, successfully fought off attacks

by private-label in the US diaper segment by launching continuous waves of

technically superior products as often as every six months83, which increased the

number of users and made the brand more attractive to retailers. The speed to

market also portrays a national brand’s commitment to its consumer. Along with the

full use of big data analytics like Aztec, suppliers can now stay tuned to customers’

changing habits than never before.

81 “How fast moving consumer goods companies use speed as a competitive weapon” - https://www.bcgperspectives.com/content/articles/consumer_products_go_to_market_strategy_speed_to_win/?chapter=2 82 “How fast moving consumer goods companies use speed as a competitive weapon” -https://www.bcgperspectives.com/content/articles/consumer_products_go_to_market_strategy_speed_to_win/?chapter=2 83 “How fast moving consumer goods companies use speed as a competitive weapon” - https://www.bcgperspectives.com/content/articles/consumer_products_go_to_market_strategy_speed_to_win/?chapter=2

Continuous Innovation Australian consumers have come to expect continuously evolving products and

services. For example Nespresso’s limited edition coffee capsule84, has been an

effective tool for countering declining customer loyalty through increased usage

occasion per person from ALDI’s Espressi coffee capsules85. Nespresso’s ability to

be a ‘high road player’, constantly trading consumers taste up, focusing on growing

the category rather than battling private label, has inadvertently led to a market

advantage.

Ethical needs that shape market demand Traditionally, shoppers have mainly been influenced by set factors like value for

money, product safety, nostalgia, convenience, etc. However, 2015 saw gravitation

towards brands that promote a social awareness, healthy lifestyle, organic

ingredients, provenance and environmental stewardship.86 Customers under this

buying group are often willing to pay a premium to support such causes.

Hence, suppliers should tailor their brand campaigns to the new status currency of

these consumers. As Amy Fenton (Global Leader of Public Development and

Sustainability, Nielson) states, “consumers around the world are saying loud and

clear that brand’s social purpose is among the factors that influence purchase

decisions”87. This reflects why socially responsible brands are strongest in Asia-

Pacific at 64%.88

84 Nespresso website, viewed 30/12/2015 https://www.nespresso.com/au/en/home;jsessionid=9FE03DB4B71D4238B23D3EFA60E39BA8 85 Matzler, Bailom, Eichen and Kohler; (2013), “Business model for innovation: coffee triumphs for Nespresso”, Journal of Business Strategy, VOL 34, No.2 - http://www.impconsulting.com/neu/editor/upload/file/Matzler%20et%20al_%20BMI%20JBS%202013.pdf 86 Joseph.A; Feb 2015, “The future for socially conscious grocery shoppers” - https://www.marketingmag.com.au/hubs-c/future-socially-conscious-grocery-shoppers/ 87 “Global consumers are willing to put their money where their heart is when it comes to goods and services from companies committed to social responsibility”, Nielsen, viewed 15/01/2016 http://www.nielsen.com/ca/en/press-room/2014/global-consumers-are-willing-to-put-their-money-where-their-heart-is.html 88 “Global consumers are willing to put their money where their heart is when it comes to goods and services from companies committed to social responsibility”, Nielsen, viewed 15/01/2016 http://www.nielsen.com/ca/en/press-room/2014/global-consumers-are-willing-to-put-their-money-where-their-heart-is.html

Benefit Bundle Instead of selling an individual product, suppliers should start package selling, which

blurs the line between private label and its cost benefit. This method is already being

utilized by the travel industry that provides hotel, car and flight deals, if purchased

together. For example, by collaborating with produce providers, salad dressing and

sauce manufacturers could recommend the best vegetables or meats for their

marinade. A shared agreement could reap the reward through cross category

awareness, focus marketing and the fight against home brand sauces.

Challenges of utilizing new channels vs. carrying on BAU. Should suppliers produce private label? In recent times, marketing and sales environments have changed immensely. Two of

the main challenges faced by suppliers are slow growth in people’s income and

changing attitudes towards products and brands. In response, companies must

dramatically shift the route to reaching customers in terms of product distribution and

communication89. The main drivers of change in communication have been the

inverse correlation of buying an audience on demand and our broadband usage,

which has fragmented and advanced how we run our daily lives. Due to the

popularity of Facebook, Youtube, Instagram, Twitter, etc., companies must now

utilize cross-channel marketing strategies to effectively interact with consumers.

Gone are the days when one could rely on a more transactional model that simply

considered the functional and emotional benefit of the product in relation to price.

Instead, today’s market includes a participation benefit that adds more to price90. For

example, the one-to-many anachronistic marketing and consumption concept has

transformed to co-creators, as consumers wish to be part of the campaign instead of

belonging to the target market91. Therefore, to survive, surpassing merely being a

89 Shriram. K.B; “2015 Consumer Goods Trends”, viewed 21/02/2016 - http://www.strategyand.pwc.com/perspectives/2015-consumer-goods-trends 90 Gardner. J; “Entering the Participation age of branding”, viewed 30/01/2016 http://www.brandingmagazine.com/2013/10/29/entering-participation-age-branding/ 91 “Millennials aren’t consumers, they’re (co)creators”, last viewed 27/02/2016 http://timezoneone.com/2015/09/millennials-consumers-content-creators/

product at a price point, brands must represent the value system of today’s

consumers.

Despite reaching a wider audience, the manufacturer’s ability to service goods to

such a market is a detriment to this advance cross-channel environment. The older

distribution routes that focused on large supermarket chains with a high

concentration of consumers in the region, have changed into more fragmented

selling towns. Hence, a more agile distribution system, with the ability to adapt to ad

hoc demands, is required. An inability to support this structure and guarantee the

provision of goods could backfire in terms of negative viral publicity.

Managing these channels requires the organization’s internal structure to change

accordingly. Companies operating with a ‘business as usual’ attitude risk failure, if

functional departments continue to work in their silo segment. In terms of marketing

channels, the focus now is on an amalgam of paid, owned and earned media for any

particular brand campaign and most importantly, a relationship with the consumer,

for brand loyalty to ensue.

If FMCG companies maintain the distributing and communicating status quo with

their consumers, enormous costs can emanate due to millennials losing interest and

switching basket items. If a supplier continues to treat consumers according to the

transactional model, rather than as a participator,92 they will not only lose brand

loyalty, but may gain an avid advocate for their competitor. Hence, to survive,

brands must create products that not only look at price points but also represent the

consumer’s value systems and allows consumers to co-create.

A merit or downfall to produce private label? Perforating the category further and minimizing idle capacity whilst gaining

economies of scale, drive certain manufacturers’ decisions to produce home brand.

However, as they belong under the store banner, brands producing private label do

not have any ownership of these products. Thus, decisions to produce private label,

92 Gardner. J; “Entering the Participation age of branding”, viewed 30/01/2016 http://www.brandingmagazine.com/2013/10/29/entering-participation-age-branding/

may result in branded products being cannibalized or suppliers losing plant capacity

to the very store-brand products they manufacture.

Over the years, an interesting correlation to the increased demand in private label

has been that it thrives during periods of economic downturn.93 Yet, when looking at

the current economic situation in Australia, especially the unemployment rate which

has been the lowest in three quarters at 5.8%94, the capacity for individuals to revert

to increasing their discretionary spending is promising. This is likely to assist

branded products gain an increased fighting chance.

Figure 3: Australian Jobless Rate 95

Exploring high margin options, similar to the opportunity and capacity Bega Cheese

obtained to produce infant milk after losing the contract to produce Cole’s home

brand cheese96, is another strategy not to ignore.

93 Harding. D, Quelch. J; (1996), “Brands vs. Private Label: Fighting to Win”, last viewed 27/02/2016 https://hbr.org/1996/01/brands-versus-private-labels-fighting-to-win 94 Cauchi. S; (2016), “Unemployment rate steady at 5.8pc in December”, viewed 21/02/2016 http://www.smh.com.au/business/the-economy/unemployment-rate-steady-at-58-in-december-20160113-gm5in7.html 95 Cauchi. S; (2016), “Unemployment rate steady at 5.8pc in December”, viewed 21/02/2016 http://www.smh.com.au/business/the-economy/unemployment-rate-steady-at-58-in-december-20160113-gm5in7.html

National brands can explore producing private label provided they have reasonably

long-term agreements that offer operational benefit and decisive market share

opportunity over margin. Yet, due to its demand uncertainty and low supplier

recognition, brands should do their utmost to explore other, higher margin avenues

such as producing or expanding products through joint ventures, market

development or differentiating and upping consumer taste habits to grow the

category. This is most likely to bring in a greater margin opportunity and brand value.

Balancing the needs of brand equity vs. aggressive pricing activity Retailers are constantly looking at opportunities to maximize profit per square metre.

Hence, with the increased negotiation power that retailers have gained over the

years, supplier influence has dwindled, resulting in a constant challenge to obtain

reasonable RRP and winning shelf space.

Price-driven promotions have long existed and can be extremely effective in

increasing incremental sales for the supplier. Yet, “over the past few years in

particular, retailers’ frenzied price changes have conditioned customers to think that

the ticket price is not real, and cynical customers have become numbed to typical

discounts, requiring even deeper price cuts to stimulate an increase in demand”97.

This in turn has further eroded suppliers’ margins and brand equity.

When considering brand equity, the product’s point of difference as perceived by

consumers, plays an imperative role. For instance, a consumer may choose Coca

Cola over a home brand cola due to its perceived superiority, credibility and quality.

96 Lynch. J; (2016), “Why Bega Cheese is better off without Coles contract”, viewed 19/02/2016 http://www.smh.com.au/business/why-bega-cheese-is-better-off-without-coles-contract-20160202-gmjvd4.html 97 “Beyond Discounts and Deals: Achieving balance in pricing and promotion strategy”, viewed 25/02/2016 http://www.kurtsalmon.com/zh-hk/Retail/vertical-insight/239/Beyond-Discounts-and-Deals%3A-Achieving-Balance-in-Pricing-and-Promotion-Strategy

It is possible for suppliers to balance between the two spectrums of aggressive

pricing activity and brand equity. However, the methods used will depend on how

well positioned the product is in the category. A product ranked 2nd or 3rd in the

category will have to consider its customer’s perceived value. Simply cost cutting for

short-term incremental sales will fail to create actual sales and long-term brand

value. Hence, suppliers should attempt to renegotiate beneficial trade discount to the

retailer or in instance of heavy discounting periods, an agreement with retailers to

sell a certain level of volume, to gain significant market share. This could result in

either, a better price point at shelf or assist the national brands to penetrate greater

awareness through basket numbers.

National brands that are category leaders should push for more mutually beneficial

agreements with retailers. This could be through retailer-funded programs, ensuring

retailers minimise overlapping product offerings and most importantly, not eroding

the value of the entire category by discounting below its competitors. In the short-

term, category leaders may lose a certain level of market share. Yet, in the long-

term, when competitors realise the detriment of continued price cuts, it will provide

confidence for these brands to push for renegotiation based on a mutually beneficial

model endorsed by the category leader - thus, resulting in an increase in brand value

over time.

Another initiative during heavy discounting periods, is brands to pursue more

aggressive campaigns to increase product awareness through in-store engagement,

social media, online chats, etc. Thereby, providing greater flow to the respective isle

or store that provides the greatest opportunity for the consumer.

Conclusion In conclusion, it is apparent that suppliers are facing pressures from all angles. This

makes the ability to survive and maintain brand equity an arduous task. In order to

prosper, suppliers should continuously innovate, increase speed to market, produce

ethically conscious products and bundle product benefits to provide the greatest

value to the consumer, which will differentiate its brand from private label. To gain

the greatest momentum, these activities must be conducted through embracing new

channels of communication, distribution and consumer participation - thereby

allowing suppliers to take control and be at the forefront of not only meeting

customer demands but also moulding their habits to where the brand sees its future.

Rita Pong Woolworths – Pinnacle

Joe Berry Australian Retail Industry Executive Awards 2016

Topic 5: Brand Future-Proofing

Q. How do retailers balance the needs of their private label expansion without losing

the highly valued trading terms support from suppliers? Does private label equity fit

with aggressive brand pricing activity between major retailers?

Entrant Number: JBA-16-0033

Executive Summary Private label products were once low-cost alternatives to branded products in a

supermarket aisle. Nowadays, private label brands are growing and forming tiers to

fulfil a customer’s needs across budget, mainstream and premium segments.

Private label growth in the Australian supermarket industry has increased rapidly

over the last decade, leading to questions over the future of private label and how

this fits in with aggressive brand pricing strategies between major retailers.

With the future showing a continued private label diversification, retailers must

ensure growth is monitored in conjunction with supplier relationships. Suppliers

should utilise their assets/capabilities to keep competitive with private labels. These

include the investigation of manufacturing contracts, exclusive product agreements,

leveraging distribution and production capabilities, creating innovations and

promotional lines and investigating convenience channels. Retailers can also

support each of these supplier capabilities by operating in silo work-functions and

sharing data.

With all of those retailer and supplier actions in place, private label equity can

continue to increase and co-exist with branded products.

Introduction Private label started in 1869 at Sainsbury’s as budget option for consumers.98

Designed as a low-cost alternative, private label worked in partnership with branded

product pricing to avoid the devaluation branded products. Private label created a

cost efficient way of increasing a retailer’s competitiveness, exclusivity and provided

an alternate revenue stream.

Since then, private label has only gone from strength to strength with the emergence

of tiered offerings, improved quality and increased marketing spends. Growth has

been rapid, with equity in Australia jumping from 18% to 21% in just two years.99

98 Collins, K. and Bone, D.(November 2008). Private label shopping trends in food and non-alcoholic beverages: Effectively targeting value conscious shoppers and understanding consumers’ attachment to food and drink brands. Datamonitor, New Consumer Insight Series 99 Nielson (November 2014). The state of private label around the world. Nielsen Global Private label Report November 2014

This growth will continue due to the economic climate, the expansion of Aldi and

aggressive brand pricing activity between traditional retailers.

Factors influencing private label growth The growth of private label has largely been driven by the two factors; market

dynamics and consumer trends. These two factors will also help determine the future

of private label.

Market Dynamics

Over the last few years, the economic environment and traditional supermarket

duopoly has led to a discount price war, conditioning consumers to expect constant

discounts and low prices. This expectation has driven retailers to lower standard-

shelf prices and increase promotions on branded products.

Retailers who are wary of devaluing branded products and risking supplier

relationships have combatted aggressive brand product discounting by increasing

their private label range. Private label has since become a key strategy for retailers

to ensure they remain competitive. Figure1 shows the drastic private label price cuts

that have allowed brands to retain their value.

FIGURE 1:100

Private label success has traditionally been strongest in commodity driven, highly

elastic and high-frequency-purchase categories where customers perceive little

differentiation; these items have been termed “known value items” and include

products like bread and paper towels. 101

100 Low, C. (October 2015). Supermarkets slash private label to drive sales. Sydney Morning Herald, 8th October 2015 101 Conomos, K. “Our Penchant for Private label”. Nielsen Insights 22nd December 2014.

Retailers have moved from only pushing known value items and are delivering

equivalent or better quality products than branded competitors.

This trend is spurred on by the expansion of discount retailers, who have helped the

Australian consumer acclimatise to private label. The stigma around private label has

decreased dramatically in the last decade.102

After reviewing the successful history of private label in Australia, it leads to the

question of its future within retailers’ strategies and how its growth will play alongside

brand names. With the upcoming election causing political instability and weakness

in financial markets and global economies; consumer spending will continue to

soften. 2016 has seen consumer confidence fall to 4.4% showing the worst start to a

year since the 2008 GFC.103

FIGURE 2104

102 Mitchell, S. (December 2014). Private label brands lose their stigma. Australian Financial Review, 11th December 2014. 103 Scutt, D. (February 2016). Australian consumer confidence just had its worst start to a year since 2008. Business Insider Australia. Money and Markets. 2nd February 2016. 104 Berger-Thomson, L. and Wang J.C. (December 2015). Consumer Sentiment Surveys: Bulletin December Quarter 2015. Reserve Bank of Australia.

This will undoubtedly see the increase of private label sales; however suppliers can

take comfort in knowing that private label is not and cannot be the retailer’s only

solution to remain competitive.

Traditional retailers have been using lower standard prices in private label teamed

with deep promotions in branded products. While the current pricing strategy is an

effective way to maintain market share, if used for too long, traditional retailers face

diluting their Customer Value Proposition, driving industry profit down and lowering

product quality in order to compete in the price war.

Discounters have also proved that private label is not the only solution to grow

market share. Due to its stronghold in discount private label, Aldi is now focusing on

expanding their range and market share, stocking more brand-name items and

investing in marketing activities.105

It is evident that success requires a retailer to price match with precision and caution,

establish a short-term strategy to mitigate losses, and long-term strategy that will

ensure market share growth. In the short-term this will be the continuation of private

label expansion and deep promotions on branded products. In the long-term

strategies will need to have points of differentiation aside from price.

Consumer The customer is key; and retailers need to understand their perceptions of private

label. Australian customers’ still want comparisons and choice, with “product range”

ranking high on reasons for supermarket choice.106 Retailers need to be careful on

replacing too many branded products as customers will simply shop at their

competitors.

Branded products dominate the majority of supermarket sales, accounting for 89% of

sales. Branded products still have a strong role to play within private label, as

consumers still use brand names as a benchmark for measuring private labels. This

is especially true in high involvement categories such as health, beauty, baby and

105 Dring, G. “Discount Discovery. How Australians have embraced Aldi”. Nielsen 28th November 2014. 106 Roy Morgan Research (April 2015). What makes supermarkets super? Roy Morgan, 13th April 2015.

indulgence where customers will pay premiums and remain brand loyal. As private

label doesn’t perform well in these areas, retailers will not invest much into

expanding their foothold.

There are multiple factors that drive a customer’s purchase. Private label growth has

historically been driven by customers’ value on price and while it plays a strong

factor in the current economic climate, it’s not the only factor. Psychological needs

such as brand values and quality perception can affect private label performance.

Future of private label Private label still has room to grow in the Australian market alongside branded

products. There will undoubtedly be a tipping point where the negative effects on

customers and limitations of the private label model will stop further growth.

Examples of this were discussed above with both the market dynamics and

consumer trends showing a limit to private label acceptance.

Nielsen data predicts that the tipping point for private label is 50%, based on UK and

Switzerland’s 10 year stagnant 45% private label share. The 45% mark is far from

Australia’s current 21% private label equity, allowing for plenty of room to grow.

Nielsen predicts growth to reach 25% in the next 5 years.107

To maximise sales, lower costs and maintain supplier relationships, retailers need to

choose the right private label products at the right time and the right price. For

retailers’ it’s about ensuring they have the right private label assortment, not the

largest.

Suppliers on the other hand need to work on their key capabilities and differentiators

to ensure they can handle the increase in private label products.

It can be concluded that retailers’ private label expansion strategies definitely provide

an alternative to aggressive brand pricing however suppliers can take comfort in

knowing that private label is not the only strategy in improving a retailer’s

107 Nielson (November 2014). The state of private label around the world. Nielsen Global Private label Report November 2014

competitiveness. A mix of private label and branded product pricing will be used by

retailers in the future and both products can definitely work side-by-side.

Supplier Capabilities Below outlines actions that can be taken by suppliers to balance out private label

expansion. The key actions/resources and competencies that can be utilised by

suppliers include the exploration of manufacturing capabilities, exclusive product

contracts, leveraging international production capabilities and innovations /

promotional lines. All of these assets help suppliers in maintaining a strong-hold in

the growing private label environment but also allow for growth and a point of

differentiation.

Manufacturer Contracts Suppliers should investigate setting up private label manufacturing contracts which

will increase their production capabilities and sales without the cost of brand

investment. The improved economies-of-scale will allow more cost-efficient

processes and investment back into the production process or marketing for their

national brands.

Private label contracts will also allow suppliers to expand their ability to influence the

category by having greater ability to review the price gap, promotional activity and

shelf-space allocation between national brands and private labels.

Suppliers can also take advantage of retailer trends and reduce production costs or

waste as certain contracts can create demand for different quality products. The

“Odd Bunch” range from Woolworths sells “imperfect” fruit/vegetables that may have

visual faults but taste the same. This campaign was designed to improve

Woolworths’ image of the “fresh food people” but has also had a mutual benefit for

suppliers who are able to sell more crop that may have previously been discarded.108

108 McAloon, C. (December, 2014). Growers welcome supermarket initiative to sell imperfect fruit and vegetables at discount

prices. ABC Rural News

Exclusives Suppliers can offer products that are exclusive to each retailer allowing for a stable

contract and revenue. This is beneficial to the retailer as brand-loyal customers will

want to shop at a particular retailer that stocks their favourite products. Retailers who

want exclusives will allow for higher trading-terms and support suppliers in joint

promotional activity.

An example of this is DeBortoli wines offering an exclusive Prosecco for Aldi. As a

high-involvement fragmented market, having a brand name wine can be very

beneficial to retailers. DeBortoli customers will shop at Aldi to purchase the exclusive

wine and may also have a changed perception of Aldi quality. DeBortoli has also

benefited as they have negotiated better trading-terms with Aldi and avoided

devaluing their other wines.

Leverage distribution networks and research Suppliers can access international brand portfolios, logistics networks, research

innovations and production capabilities to help compete with private label. This

applies to promotional activities as well as NPD. For example, Coca-Cola’s “share

with” Australian marketing campaign produced bottles with personalised names.

Since then, the campaign has been rolled out to 80 countries by leveraging this

Australian strategy.109

Innovations and promotional lines

An organisation’s market strategy, existing portfolio and the resources dedicated to innovation have a large effect on its NPD success.110 Research indicates that high are the most innovation products financially rewarding. Consistent investment in product improvements will increase product superiority, allowing a premium to be charged.111

109 Herbison, M. (September 2014). ‘Share a Coke’ campaign increased US sales for the first time in a decade. Marketing

Mag, 30th September 2014.

110 Francis, M. (September 2009). Private label NPD Process Improvement in the UK Fast Moving Consumer Goods Industry.

International Journal of Innovation Management. Vol 13, No. 3 (September 2009) pp. 47-499. 111 Cooper, RG and SJ Edgett (2005). Lean, Rapid and Profitable New Product Development. Canada: Product Development

Institute.

Promotional lines are a great point of differentiation and entice customers to try

something new. They drive sales which means retailers are happy to back these

branded products by ensuring adequate ranging, allocating shelf-space, off-shelf

locations and promotional activities.

These launches are large investments making it difficult for private label to compete.

A successful promotional line case is the Malteser “Malteaster” bunny chocolate

bought out for Easter. This NPD still maintains strong year-on-year growth and has

become a Malteser bar sold as a standard line.112

Convenience and owned-retail channels

The online channel is not utilised strongly by suppliers due to lack of distribution

networks and setup costs; however this channel is worthwhile exploring if suppliers

can build demand. The case study of an online Kit-Kat service in Japan showed

Nestle’s ability to build a unique relationship between their brands and the customer.

Kit-Kat’s Japanese translation into “surely luck” opened an opportunity to leverage

off the tradition of sending good luck gifts to students during exams. Nestle teamed

up with the postal service and created “Kit-Kat Mail” that could be ordered online or

sold at post-offices allowing personalised luck messages to be sent to students. The

large uplift in sales and brand awareness is a great example of a supplier using their

brand to leverage new channels.113

Supplier brands can even be strong enough to build brick-and-mortar retail fronts

and grow brand equity and sales. Notably, Magnum ice-cream and Kit-Kat have

created “design your own” shop where customers can customise their own products.

Retailer Support Supplier capabilities can be supported by retailers in two ways; silo work-functions

and data/technology.

112 Brandhouse, Kinneir Dufort, Matter Studio (June 2014). MaltEaster Bunny Easter Treat. Effective Design UK. 27th June 2014 113 Madden, N. (March 2010). Soy-Sauce-Flavored Kit Kats? In Japan, They're No. 1. Ad Age.

Silo functions Retailers can support suppliers by splitting role functions and restructuring

commercial teams. The Pinnacle (private label) division of Woolworths operate

separately from the liquor retailers (BWS and Dan Murphy's) and compete with

external suppliers for shelf-space. This structure allows for sensitivity of information

and impartial judgement on private label outside of branded label discussions.

Suppliers talk to Pinnacle when talking about private label manufacturing contracts

and the retailers when negotiating branded products.

This model is also successful for the retailer as Pinnacle will focus solely on

delivering best outcomes for private label and retailers can then focus on overall

sales targets.

Data and technology

Retailers and their technological advancements are helping suppliers; as seen

through the intricate tracking systems which allow scan data to be recorded and

instantly fed back to the system; making planning, forecasting, tracking and inventory

organisation much easier for both the retailer and the supplier.114

Retailers can also provide in-store sales figures and rewards-card data to show

category insights and purchasing habits, allowing for better promotional planning and

marketing spend. By sharing data, retailers help suppliers to identify new trends and

gaps in the market.

Conclusion Successful management of private label to the same level as supplier brands have

allowed private label to grow 2% in the last two years. However private label growth

is limited by its nature of minimal product differentiation, high price sensitivity, high

purchase frequency and low innovation rates. By its nature, private label is not a

strategy that is predestined to continuously grow; private label forms part of a larger

retailer strategy to remain competitive. Ultimately retailers need to decide on the right

assortment rather than a bigger assortment.

114Adams, M. (December 2005). How to resist the private label threat in 2006: Strategies for retaining consumer loyalty to

famous brands. Datamonitor, New Consumer Insight Series

With supplier strategies in place and strong retailer support, private label can have a

strong equity alongside aggressive brand pricing. Europe is a prime example of a

successful private label strategy and an ecosystem between private label and

branded products. The European strategy has driven strong brand equity in private

label, leading it to be a strong competitor to its branded equivalents.

A brand is no longer what we tell consumers, it’s what they tell us. If consumers are

telling us they want private label, then private label belongs on the shelf just as much

as branded products do.

Todd Graham 3M Australia

Joe Berry Retail Industry Executive Awards 2016

Topic 5 – Brand Future-Proofing

Q. What should brand manufacturers do to accelerate value-adding and brand

growth in traditional markets? What are the ramifications of moving to new channels

versus maintaining the status-quo and should branded suppliers also manufacture

private labels? Can a supplier balance the needs of their brand equity with

aggressive pricing activity between major retailers?

Entrant Number: JBA-16-0277

Index

Executive Summary 4 Introduction 4 Brand Future-Proofing 6

Accelerating Value-adding & Brand Growth in Traditional Markets 8

Private Label Viability 10

Moving into New Channels vs Maintaining the Status-quo 13

Balancing Brand Equity with Aggressive Pricing Activities 14

Conclusion 17

Executive Summary The Australian retail market is one of the most competitive in the world. Our current

retail space is made up of an eclectic mix of stores who are often overshadowed by

large chains who dictate the market with their influence and control whilst driving

consumer purchasing behavior in a cycle of promotional activities. We only need to

look to our grocery industry to find the continuous price wars based on high-low

promotions, EDLP’s and private label branding which are all on the increase. In this

hyper-competitive retail environment manufacturers are needing to look through the

long-term business lens to ‘future-proof’ their brands.

Introduction

The speed of technological advancements, innovation cycles and customer trends

are meaning that companies’ life expectancies are on the decline. The market is

more volatile than ever meaning that brands, products and services can become

irrelevant almost overnight.115 It is therefore imperative for a brand to develop

strategies to ensure consumer loyalty is maintained through continuously meeting

needs and looking to the future to anticipate changes in the market and plan for

when they arise. Whilst often expensive it requires a brand to invest in innovation to

meet future demands, lead movements to meet customers impending demands and

adopt disruptive initiatives to ensure the brands longevity.1 In this retail space one

cannot simply rest on their laurels.

115 Snällfot, J. (2015). LynxEye. Retrieved from LynxEye Brand Consultants:

http://www.lynxeye.com/how-to-future-proof-your-brand/

Figure 1: The Importance of Brand Foresight1

Brand Foresight as seen by LynxEye Brand Consultants1

Brand Future-Proofing

In recent years there have been numerous examples of brands who have failed to

future-proof. Nokia failing to foresee Apple’s success, Polaroid failing to identify the

rise of digital photography, or even Netscape failing to identify the threat of Microsoft

Internet Explorer. Few however have been as surprising as the demise of Kodak.

‘Kodak management’s inability to see digital photography as a disruptive technology,

even as its researchers extended the boundaries of the technology,’116 made it

116 Mui, C. (2012, January 18). How Kodak Failed. Retrieved from Forbes:

http://www.forbes.com/sites/chunkamui/2012/01/18/how-kodak-failed/#4fc5ee60bd6a

difficult for many to fathom. Kodak believed that with the introduction of digital

photography there was a significant threat that this technology would in the future

make much of their product redundant. They conducted significant research which

concluded that there was a rough 10 year time period until digital photography would

be at a place to be a threat to their current business model. ‘The problem is that,

during its 10-year window of opportunity, Kodak did little to prepare for the later

disruption.’2 Kodak failed to identify that they required further innovation to meet the

future demands of the digital consumer and failed to invest in disruptive technologies

to ensure that digital would not overthrow their current business model.

Figure 2 – The Declining Market Kodak Failed to Acknowledge117

117 Ebersole, P. (2012). Kodak and the Rochester mentality. Retrieved from Phil Ebersole's Blog - thoughts about politics and the passing scene: https://philebersole.wordpress.com/2012/01/21/kodak-and-the-rochester-mentality/

It appears that Kodak took the wrong direction by failing to look at the future trend of

digital photography as a strategic opportunity. It failed to develop strategy to maintain

customer loyalty and ultimately retail ranging. Successful brands must instead look

to the future and embrace such changes. It is these disruptive technologies that fuel

business growth and opportunity in our current retail space.

Accelerating Value-adding & Brand Growth in Traditional Markets

In stark contrast to Kodak is one of the modern days future-proofing success stories

– Nestle – playing in the highly competitive coffee market with their Nescafe brand.

Nescafe was one of the first (1938) and most widely available instant coffee brands

on the market. Nestle was able to identify the growing trend and demand for

consumers to try fresh and quality coffee over the instant alternative they had in their

Nescafe brand. With this future foresight Nestle developed a strategic direction and

innovative business model which gave rise to the Nespresso and Nescafe Dolce

Gusto brands. Nestle identified this trend and were able to capitalize by not only

developing pods to provide the espresso shots but also widen their product portfolio

into Nespresso machines which only allow for Nespresso pods to be used - further

increasing their stamp on the market. ‘The appeal is obvious –they're consistent,

cheaper than hiring a barista and take up less space than a traditional espresso

machine.’118

For Nestle a strategic direction to maintain customer loyalty meant innovative ideas

could be worked upon to identify needs that consumers didn’t even know they had

yet. This is the perfect example of future-proofing ones brand whilst also highlighting

the need for innovation by brand manufacturers in order to accelerate value-adding

and brand growth in a traditional market. It is the disruptive technology that Nestle

was able to identify and adopt that has led to its growth in what was otherwise a

stagnant traditional market. Today ‘Nespresso is Nestlé’s fastest-growing brand, with

annual growth better than 30% per annum from 2005-2010. Nespresso outsells rival

Lavazza in Italy, "the cradle of espresso," and sells more servings of coffee every

year than Starbucks.’119

Figure 3 – The success of Nespresso in USA – reaching $US300m sales in 2013120

118 Salter, K. (2013, April 10). The rise of the coffee pod machines. Retrieved from The Guardian: http://www.theguardian.com/lifeandstyle/wordofmouth/2013/apr/10/rise-coffee-pod-machines-nespresso 119 Slywotzky, A. (2011, October 3). Triggering Demand: How Coffee Maker Nespresso Turned Drips Into Gushers. Retrieved from Fast Company: http://www.fastcompany.com/1781304/triggering-demand-how-coffee-maker-nespresso-turned-drips-gushers

120 Cornu, C. (2014, June 3). A new coffee for the USA from Nestlé Nespresso. Retrieved from Slideshare: http://www.slideshare.net/Nestle_IR/nespresso-35442357

The innovation doesn’t stop there. With consumer trends pointing to sustainable

living and preferences for recyclable products Nestle have now also identified a

means to recycle their espresso pods. ‘Nestlé’s Nescafe Dolce Gusto team says

consumers can now recycle used coffee capsules thanks to its new partnership with

global recycling and upcycling company TerraCycle. TerraCycle will recycle the

capsules into two streams: organic material such as residual coffee grounds will be

separated and sent to an industrial composting facility, and the plastic capsules will

be melted down and made into new products.’121 This highlights the need for

companies to forever be looking forward to investigate what can be done for a brand

and what issues might affect consumers in the long term that can be addressed

today.

Private Label Viability

It is important to note that whilst companies such as Nestle can invest in innovation

and develop new and exciting products to meet future consumer demand, this does

not make them immune from the issues of retail high-low promotions, EDLP or the

threat of private label.

As an example Aldi has revolutionized the Australian grocery market and taken its

fight to Coles and Woolworths in an unlikely manner. The Aldi business model is

based on low cost exclusive brands or private label products with an emphasis on ‘its

rapport with suppliers and its disregard of brand power.’122 Aldi now sells its very

own coffee capsules under the Expressi brand –as well as their own branded K-fee

espresso pod machines. This is a prime example of how retailers can pick up a well-

established and future proofed brand and turn it into their own private label gold

121 Business, Food & Drink. (2014, October 24). Nestle hatches capsule recycling plan. Retrieved from Food & Drink Business: http://www.foodanddrinkbusiness.com.au/news/nestle-hatches-capsule-recycling-plan

122 Kohler, A. (2015, September 2). Aldi’s love affair with suppliers is killing Coles and Woolies. Retrieved from Business Spectator: http://www.businessspectator.com.au/article/2015/9/2/retail/aldis-love-affair-suppliers-killing-coles-and-woolies

mine. In the process Aldi are continuing to disrupt the market and take share from

the big supermarket chains.

Figure 4: The ever-changing Supermarket battle ground123

It is these learnings from Aldi that have highlighted the need for manufacturers to

future proof their brands alongside a carefully crafted private label business. It’s clear

that private label is not going anywhere. ‘The days of modest and cheap private label

products have passed and consumer support for store brands is increasing both

globally and locally. In Australia, private label volume share sits at 21%, up from 18%

in 2012. Store-brand growth (6.6%) is also outpacing total retail growth (2.4%)

significantly.’ ‘It is clear that Gen Y is a key driver of acceptance and growth as

questionable quality private label goods simply don’t exist in their memory, meaning

there is no stigma associated with a store brand product – and for good reason.

Retailers are driving this phenomenon through three key tactics; premiumisation,

price promotions and innovation. Consumers are responding, with almost half (49%)

saying they would buy more store brand products if they become available across

more categories.’124

123 Potts, D. (2015, July 28). Winners and losers in trolley wars. Retrieved from Sydney Morning Herald: http://www.smh.com.au/money/saving/winners-and-losers-in-trolley-wars-20150720-gigcsj.html 124 Conomos, K. (2014, December 22). Our Penchant For Private Label. Retrieved from Nielsen: http://www.nielsen.com/au/en/insights/news/2014/our-penchant-for-private-label.html

It is clear that manufacturers must heed this information and in turn develop private

label products to sit alongside their future-proofed branded products. In this day and

age one cannot simply sit back and future-proof a brand – they must diversify and

spread the risk to tap into new channels and avoid being pigeon holed in the status

quo. Today customers no longer disassociate with private label. It offers a level

playing field for retailers and manufacturers and consumers expect it.

Figure 5: The Growth of Private Label in ANZ125

Figure 6: Attitudes Toward Private Label in Australia & New Zealand12

125 Nielsen. (2014). The State of Private Label Around the World. New York: Nielsen.

Consumer loyalty is a large issue for the grocery giants with ‘70% of Australians

having no preference in grocery store, and the ‘promiscuous shopper’ reaching

market saturation. The promiscuous shopper is in fact the vast majority; 91% of

Australians shop at both Woolworths at Coles. Private label products also

unsurprisingly show lower levels of loyalty than brands.’126 Failing to recognize the

need for a private label could be a fatal move by a brand.

Moving into New Channels vs Maintaining the Status-quo Further means of diversification can involve moving into new channels. Maintaining

the status-quo and focusing on a brand’s established markets in our ever evolving

and volatile business environment can hinder the diversification of risk and can also

mean that a brand is not effectively future-proofing. Failing to identify these

opportunities or viewing these as a threat as opposed to an opportunity can lead to

an all too familiar ‘Kodak moment’ for a brand. The rise of pure play has further

reinforced this ideology. ‘Pure-players are nimble, able to swiftly and effectively

adapt to the ever-evolving e-commerce environment, placing them in an enviable

position’127

Pure play has evolved from the global rise of e-commerce with social media

becoming prevalent in many purchasing decisions and online retailers becoming the

easy alternative to physically purchasing from a retailer. In our current environment

manufacturers must look to Pure-play retailers and change the way products are

made available to end consumers. Brands can now tap into online channels outside

of their suite of retailers to deliver products to consumers in a number of other

channels. Kogan.com.au allows consumers to purchase anything from Electronics,

Stationery, Groceries or Travel Deals – all opportunities for manufacturers outside of

their traditional channels which can be capitalized on (e.g. Bing Lee, Officeworks,

Coles and Flight Centre). It is important for manufacturers to take risks and manage

channel conflicts so as to allow for the movement into advantageous new channels

such as these. 126 Conomos, K. (2014, December 22). Our Penchant For Private Label. Retrieved from Nielsen: http://www.nielsen.com/au/en/insights/news/2014/our-penchant-for-private-label.html 127 Sillitoe, B. (2013, October 15). Comment: Pure-play and traditional retail channels blurring. Retrieved from Essential Retail: http://www.essentialretail.com/essential-ecommerce/article/525d1c29d2622-comment-pure-play-and-traditional-retail-channels-blurring

Figure 7: Growth in Online Retail vs. ABS Retail Sales (monthly %)128

Balancing Brand Equity with Aggressive Pricing Activities Future-proofing a brand also requires a clear focus on brand equity – particularly in a

highly competitive retail market which can jeopardize ones brand through aggressive

price wars between major retailers. This can be exacerbated through unrealistic

margin expectations, pricing strategies, trading term agreements and different cost

structures of new entrants to the market e.g. Costco. This is highly prevalent in the

Australian retail market – where brands need to balance the need for EDLP’s or

price promotions demanded by retailers and consumers with the need to protect

brand reputation. It is a practice amongst Coles and Woolworths which is all too

familiar. Each major supermarket chain will act to provide a different offer to the 128 Oster, A. (2015). NAB Online Retail Sales Index - January 2015. Sydney: NAB.

other to entice shoppers and play on the fact that 91% of consumers shop at both

Coles and Woolworths.12 ‘This can encourage consumers to change where they do

their grocery shopping, generating greater benefits to the grocery retailer.’129

Figure 6: Importance of Promotion amongst Supermarket Retailers130

Promotions can ‘provide benefits to suppliers, by encouraging consumers to buy the

promoted brand over other brands. This increases sales for the duration of the

promotion and also has the potential to create longer term benefits to suppliers if

consumers are enticed to switch brands on a more permanent basis. 15 It is the long

term strategy that must be managed by the supplier as more often than not the

promotion is also partially or wholly funded by the supplier. This can not only be

costly if repeated regularly but can also lead to the damaging of a brands goodwill

and decreases in sales. With brands continuously on special consumers can often

adopt a view that the product is of sub-standard quality or may be viewed as ‘cheap.’

Such promotions can also lead to consumers holding out on purchase by way of the

regular promotion cycle. Such actions are not sustainable for a brand long term and

clear calendar promotional timings need to be set to overcome such issues. Avoiding

all year round promotions will assist in maintaining brand equity and avoid such

129 ACCC. (2008). Report of the ACCC inquiry into the competitiveness of retail prices for standard groceries. Canberra: ACCC. 130 Clemons, R. (2015, June 4). Want to spend less at the checkout? Retrieved from Choice: https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/cheapest-groceries-australia

costly issues. Promotional activity amongst major supermarket chains is not

something that is looking to come to an end particularly now with EDLP strategists

such as Aldi entering the market – as such a brand must look to maintain its brand

equity in order to successfully future proof long term.

Conclusion It is clear that in our current market there exists immense pressure on brands to

succeed in a retail space that is highly competitive, based on an increasing

emphasis on high-low promotions, EDLP strategies and a spike in private label

activity. It is imperative that brands balance all of these challenges with a carefully

crafted strategic direction to ensure for future brand success. Without such a plan

there is no way to identify future demands and trends which can spell disaster for

even the largest of companies. Anticipating internal and external change is the key to

success for a future proofed brand and implementing the strategic direction to

overcome such changes and use them to one’s advantage is what will separate the

mediocre from the exceptional.