Read any retail headlines over the last few months and you’ll have been painted a bleak landscape. Absent strong growth, retailers are closing stores, brands are trimming marketing budgets and ultimately, we’re seeing bankruptcies filed at a rate not seen in close to a decade. But, it’s not all doom and gloom, there are pockets of opportunity across the store where retailers and manufacturers can find new and innovative ways to stimulate growth. However, that doesn’t take away the fact that the slowness is concerning and leaves a lot of unanswered questions. So, what happened to growth?
Depending on what you read, we’re either at a tipping point, on the verge of a meltdown or facing the retail apocalypse. Regardless of your outlook, it’s undeniable that the global retail landscape is transforming faster than at any other point in modern history. And that transformation is making it harder to find growth, at least in categories that were used to seeing gains year over year.
In the U.S., the first quarter of 2017 saw close to $3 billion less (not including e-commerce sales) in fast-moving consumer goods (FMCG) spending relative to the same period a year prior. At a time when unemployment rates are declining, average incomes are on the rise and consumer confidence is strong, it’s unlikely that these dollars all vanished. But they have certainly shifted.
The question is, where did they go? We’ve identified five drivers impacting these shifts.
Likely more than any other single factor, deflationary pressures have eroded retail growth prospects. As of the first quarter this year, the dairy department alone has shed over $2 billion in sales compared to the same period last year. The vast majority of this decline – 92% – came from declines in eggs, milk and cheese, largely driven by deflation and some shifts in consumption given consumers’ growing focus on health and wellness.
So, three food categories alone account for three-quarters of the overall FMCG slowdown. What’s worse is that other food categories, particularly fresh meat and produce, were strong contributors to growth just a year ago. They too have been impacted by commodity deflation. In fact, prices across the meat department were down 4% in 2016.
The good news? As of March 2017, many of these prices are starting to rebound. And, as we’ll discuss in a bit, the push towards fresh and prepared foods is well aligned with where consumers are, by and large, headed in the foreseeable future. Will this create a sustained return to growth? Only time will tell.
INCREASED INEFFECTIVE PROMOTIONS
In the second half of 2016, retailers increased promotional efforts 2.6% as compared to the same period a year prior. And that was following a period towards the end of 2015 and into early 2016 of a decrease in promotional spending. These efforts wouldn’t necessarily contribute to the slowdown but we’re finding that these promotions have proven less effective. In fact, over the last three years, consumers have become 5% less responsive to promotions. So, retailers are simply not seeing the return on price reductions they once enjoyed.
When you compound this with the marketing budget cuts we’ve seen, this situation becomes more challenging for FMCG companies. But, if price is less of a motivator for consumers, brands and retailers need to re-imagine how they’re influencing consumers in this new environment.
MORE, SMALLER TRIPS
So are manufacturers and retailers to blame for the downturn? Absolutely not. Consumers are driving the shifts as well. After more than a decade of declines in trips to stores, consumers actually took more trips to the store in 2016 than the year prior.
However, these additional trips were worth less to retailers. As more Americans in smaller households with fewer people shift their spending to new channels like delivery services and meal kits, the average basket at the store has shrunk. In fact, 85% of these additional trips were from consumers leaving the store with smaller baskets.
Also, as more food shoppers are buying “just in time” food that’s prepared, convenient and closer to consumption, fewer shoppers are making trips to stock up their pantries. While this shift creates an opportunity for more experiential food offerings, retailers and brands need to work together to re-evaluate the productivity of the store and ultimately deliver an experience to consumers that will resonate.
SHIFTING CONSUMER PREFERENCES
As consumers, we’ve never had more choice of what, where and how we buy things. As an example, some consumers are eating out more. In 2016, only 22% of consumers said they would reduce take-out meals going forward, as compared to 35% in 2015. At the same time, more consumers are also choosing to eat at home for the experience or the perceived health benefits. So, there’s no universal truth in this area. In fact, many retailers are already bringing some of the dollars consumers might have spent dining out back into retail with growing deli prepared offerings, in-store meal kits and grocerants.
To that end, consumers are flocking to the store perimeter. In fact, since 2012, spending on fresh foods has grown more than twice as fast as within the center store. If not for deflationary pressures, this likely would have translated into a strong growth story for retailers. What’s worse is that these were strong contributors of growth previously. But, regardless of the economics, consumers are still shifting their consumption behaviors and you need to think about how those preferences impact the relationship you can and should have with your consumers.
The unaddressed elephant in the room is e-commerce. We’re still early in the development of e-commerce for FMCG. But even today, e-commerce fundamentally changes the growth story. In a category like beauty, e-commerce represents an already impressive 15% of sales and an astounding 80%+ of growth. Even within grocery, where e-commerce is less well-developed, digital channels drive 21% of growth, despite just 2% of sales today.
Look at this view of growth and it’s easy to understand why PetSmart might want to acquire Chewy. But, for brands and retailers of all stripes, the question remains: how are you reinventing your strategy to get a more solid footing in the climb up the digital retail mountain?
These are surely not the only factors impacting retailers and FMCG manufacturers right now and you should be continuing to find the answers to how and why we arrived at this moment of transformation. But, let’s also use this moment to reimagine what manufacturers and retailers can do to emerge on the right side of opportunity.
A growing class of consumers around the world are trading up and fueling the premium segment. As premium and prestige segments are already outpacing market FMCG growths across many markets around the world and this trend is expected to continue. Health and wellness trends are not only restricted to food categories as consumers expect manufacturers and retailers to partner with them in their quest for healthier lives. Across markets in the U.S., multi-cultural demand is outpacing market demand. With continued urbanization, this trend and demand fragmentation will only continue to strengthen. Demand from Millennials is outpacing and will continue to outpace FMCG demand versus older consumers. FMCG manufacturers should reorient their brand and go-to-market strategies to address the unique characteristics of millennial demand.
And finally, along with e-commerce, the direct to consumer opportunity, while challenging, provides immense headroom for FMCG growth. While many see challenging times, consider it a “glass half full” slowdown. Some drivers that affect FMCG performance are pointing in the right direction, providing tailwinds for growth.