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Tough Times Ahead for UK Sales Teams

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Tough Times for UK Sales Teams

A new study by Engage Management Consultants suggests that UK sales teams will face significant challenges ahead. 5 key trends conspire to make delivering sales results even harder.

Retail re-structuring puts pressure on sales teams

Most UK brands rely on supermarkets and larger hypermarkets for over 70% of their sales today. However, the rise of discounters, category specialists, convenience retail, online grocers, recipe boxes and subscriptions are rapidly eating into this core business. As a result, over the coming years, the growth of supermarkets and hypermarkets is set to stall and probably decline.

Many sales teams pin their hopes on replacing this lost growth in emerging channels. But, for most brands, this is likely to be tough. Discounters and convenience stores favour limited ranges so offer little respite for brands not already distributed there. Online sales may well seem to be the panacea for many. But successfully converting brand awareness in an online grocery store is proving to be much harder than many sales managers had imagined.

We have worked with a number of teams who are considering this shift and, on average, their brands are predicted to lose between 5 and 10 per cent of their market share if they do not make swift and significant adjustments to their strategies over time.

Changing shopper behaviour challenges sales teams

As a new cohort of shoppers enters the market en masse and as existing shoppers begin to experiment with new ways of buying, our assumptions about how people behave are being upended.

As shoppers spread their purchases across numerous retail platforms, sales teams face several challenges. For instance: When considering recipe boxes, how important is the brand within a curated meal solution? With online grocery shopping, how skilled are current sales teams in securing first-page visibility for their brands? When shoppers switch to discounters or convenience retail, can sales teams ensure brand distribution? And, if footfall declines in supermarkets, how do sales teams manage that decline?

These are all significant problems that may see lead to the further erosion of market share if not aggressively addressed.

Retail consolidation

The first two macro-trends affect a brand’s topline growth but in the UK retail consolidation is likely to hammer the bottom line too. Assuming the Sainsbury / Asda merger is concluded; over 60% of the UK’s grocery sales may be concentrated in the hands of the new group and Tesco.

Sales teams in the UK will have to manage significant challenges in trade terms negotiations; similar mergers have seen a loss of up to 1.5% of margin which is likely to hurt.

Increased financial pressure from retail

In the long term, all supermarket retailers will feel the pinch of retail restructuring and use aggressive pricing to entice shoppers back into their stores. Concurrently price pressure from discounted brands and from online retailers will increase the pressure on retail prices.

At a time of currency devaluation along with the rise in input costs, grocery brands are likely to suffer a major constriction. But this is not the only issue arising from retail. Globally retailers are destocking and cutting the number of products they hold; as well as reducing inventory. These factors may well also lead to a further decline in grocery sales. Sales teams will also almost certainly feel further pressure as retailers also seek to pay slower.

All in all, these pressures from retailers could put brands in considerable and escalating financial difficulty over the coming years.

Talent shortages

Whilst the UK boasts of its low unemployment, there is a marked shortage of knowledge workers generally. In times past, FMCG companies were attractive employers offering good working conditions, training and remuneration. However, as employers, the CPG industry has been long-eclipsed by the financial sector and the tech sector, which has drained much of the new talent from the market.

Young sales managers in the industry are impatient at the slow rate of development they perceive in consumer goods and many leave in the hope of better prospects elsewhere. This puts huge pressure on the incumbent sales teams to just look after the day-to-day delivery of targets, let alone consider the strategic development of a brand’s future. As a result, the overall capability of many consumer goods companies is in decline.

So what does this all mean for sales teams?

For many managers, these trends may seem quite abstract; the effects distant, even remote. However, collectively, they will combine to have an immediate impact on all members of customer-focused cross-functional teams in the industry, both now and over the coming years:

Finance teams will see a net decline in cash flow as retailers destock and pay slower: making ready cash flow management harder and forcing some tough decisions that are likely to be unpopular.

If brand shares decline, budgets will be slashed or shifted to faster-growing markets. Furthermore, the pressure to justify expenditure as well as to account for ROI will intensify.

For sales teams, things will get even tougher: expect hard negotiations with customers; greater pressure on your performance in the short term; and lower bonuses in the future.

Industry leaders respond

The leading lights in the industry are rapidly taking proactive steps to mitigate risk and even prosper from the opportunities that this new environment presents. Many are currently taking steps to better understand the fast-evolving UK retail landscape, to reassess retail channel priorities as well as to redefine and crystallise future sources of revenue growth.

This is leading to a concerted multi-functional effort across commercial functions, as combined teams collectively reconsider customer priorities, build more integrated brand and customer plans and determine a vision for the ‘store of the future’.

Many are taking the opportunity to assemble real and virtual customer-focused teams with the aim of blending the best resource to deliver against cross-functional initiatives which will underpin future sustainable growth.

These businesses are well placed to weather the storm; however, they represent only a small minority of the UK’s branded manufacturers. Many of the others are struggling to identify where to start and how to engage cross-functionally to formulate a response.

Accessible solutions at hand

To support leaders and managers in the industry during these tempestuous times, Engage has partnered with a team of UK and Global industry experts in order to build a roadmap that describes the key actions that companies should be planning for the future as well as helping them to identify immediate opportunities to begin working together ever more closely as a team.

Both the roadmap and Engage’s findings are freely available to managers in the consumer goods sector. If you would like us to share these with you, please email toby@engageconsultants.com today.

UK Brands Face Financial Crisis

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Financial crisisEngage Management Consultants have recently concluded a study that suggests UK brands face a potential financial crisis in the short term. Whilst the UK manufacturing industry as a whole faces slow growth rates and rising input costs driven by currency devaluation, the UK’s consumer brands face a unique set of financial pressures arising from the actions of their retail customers. Here I look at these unique pressures and look into some of the actions that leading brands are taking to mitigate the worst effects.

For decades brands have depended on the supermarket trade for much of their sales but Engage’s study shows the supermarket industry to be in systemic decline. Supermarkets and larger hypermarkets together currently deliver over 70% of brand sales for many manufacturers, therefore, this decline is not only bad news for brand growth but it is also likely to undermine the financial health of UK brands.

UK Brands and Retailers are Poor Bedfellows

Major supermarket retailers have become effective at encouraging investment from brand manufacturers. By demonstrating the value of their shopper base and using price promotions to build this base further, they have secured greater levels of funding. This has never been an easy relationship: UK brands and retailers often have conflicting goals and retailers have driven a hard bargain. Already, many manufacturers find that, in the UK, they spend up to 15% of gross sales to support their brands in supermarkets and hypermarkets.

In today’s environment, supermarkets are seeing footfall decline as shoppers turn to new retail environments for grocery purchases and this is leading to new, more aggressive trading strategies that will erode brands’ financial performance potentially provoking a financial crisis for some UK brands.

Retail Consolidation

The UK grocery sector has long been dominated by large players however, the newly concluded merger between Tesco and Booker and the forthcoming merger of Sainsbury and Asda will make the UK grocery sector one of the most consolidated in the world, with potentially more than 60% of the market’s sales in the hands of just two players.

Mergers of this scale are bad news for sales teams. They force sales teams to renegotiate. Often historic deals that are fraught with discrepancies which teams must unpick. but also the newly-created entity demands both readjustment and recognition of its larger trading status. Recent similar mergers in other markets, for instance, Thailand, have led to a reduction of margins in the order of 1.5%, which is significant in an industry who’s average margins had fallen to just under 10% by 2015 (according to Deloitte).

Retail Price Competition Stresses UK Brands

As the supermarket industry declines and the number of players reduces, competition is set to increase. Incumbent players will seek to drive greater market share even before the Sainsbury / Asda merger goes through. Naturally, they will do this by driving retail prices down in their stores with the cost of these price reductions largely being passed on to manufacturers.

At a time of increased cost pressure and growing uncertainty about the impact of Brexit this will also inevitably lead to lower trading margins for brands in the UK, both this year and within 2019. But price competition and changes in shopper behaviour are also likely to impinge on the return on capital employed that retailers enjoy which means they will take further action that will impact on their suppliers.

Retail business model restructuring

Retailers depend on returning high levels of cash to underpin the low operating margins they make. This high level of liquidity enables supermarket retailers to deliver attractive returns on capital to their investors. Engage’s research has uncovered that major global players like Tesco and WalMart have seen a consistent decline in their returns over the last five years. As a result, both retailers have taken two significant steps to address this.

Firstly retailers are reducing the inventory they hold by cutting the number of brands they stock and by holding lower inventory of the remaining brands on their shelves. As a result the total sales that a brand enjoys from retailers taking such action reduce, on average, by close to 2%.

Secondly, retailers are simply paying more slowly. In Tesco’s case bills are paid 10 days slower on average than they were 5 years ago, reducing some UK brands’ ready cash flow by over 3% per annum.

Tough choice to avert a financial crisis

All this means that Finance teams in the UK are now making tough calls on their businesses. In our conversations with functional heads across Sales, Marketing, Insights, and HR, we are consistently hearing that budgets are being slashed. This means that bonuses are smaller and harder to come by, above and below-the-line activity budgets are being reduced or ring-fenced, research plans are being pared back or canceled and employee development initiatives are being shelved.

Industry leaders respond

The leading lights in the industry are doing just this: rapidly taking proactive steps to mitigate risk and even prosper from the countless opportunities that this new environment presents. Many of the largest players are currently taking steps to better understand the fast-evolving UK retail landscape, to reassess retail channel priorities as well as to redefine and crystallise future sources of brand growth.

This is leading to a concerted multi-functional effort across consumer marketing, customer marketing, and sales, as these combined teams collectively reconsider customer priorities, build more integrated brand and customer plans and determine a vision for the ‘store of the future’. Many of these leaders are taking the opportunity to assemble real and virtual customer-focused teams across all relevant commercial, financial, operational as well human capital development functions, with the aim of blending the best resource to deliver against cross-functional initiatives which will underpin future sustainable growth.

These businesses are well placed to weather the storm, however, they represent only a small minority of the UK’s branded manufacturers. Many of the others are struggling to identify where to start and how to engage cross-functionally to formulate a response.

There are accessible resources available

To support leaders and managers in the industry during these tempestuous times, Engage has partnered with a team of UK and Global industry experts in order to build a roadmap that describes the key actions that companies should be planning for the future as well as helping them to identify immediate opportunities to begin working together ever more closely as a team.

Both the roadmap and Engage’s findings are freely available to managers in the consumer goods sector. If you would like our experts to share these with you as well as taking the opportunity to discuss some of the specific issues that you face, then please get in touch.

UK grocery brands face sales collapse

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UK grocery brandsA new study by Engage Management Consultants suggests many UK grocery brands will face a major shortfall in growth. Already hit by reduced consumer confidence, sluggish economic growth and rising input costs, UK grocery brands are also facing strong headwinds as the UK retail sector goes through major upheaval.

UK Grocery brands under pressure as supermarkets decline

For decades, a buoyant supermarket sector has underpinned the growth of grocery brands. But since the financial crisis, the UK retail sector has experienced historic low rates of growth. Today the supermarket sector is not only threatened by macroeconomic trends, but also by changes in shopper behavior. Large grocery stores are currently experiencing significant declines in footfall as shoppers look to emerging retail formats and platforms for their groceries.

Figures from the IGD suggest that, in the coming years, discounters, convenience retailers and online grocers will surge ahead of supermarkets in terms of growth. Significantly, these figures do not even consider the potential threats posed by or the rapid expansion of recipe box purveyors like Gousto and Hello Fresh. Nor do they recognise the impact of home delivery services like Deliveroo or Uber Eats. Lastly, the probable expansion of Amazon’s fresh and grocery offer nationwide is also yet to be accounted for.

UK grocery brands will be disadvantaged by shopper and channel changes

All this is bad news for many UK grocery brands. Most UK grocery brands rely on supermarkets and larger hypermarkets for over 70% of their sales today. The wide ranges displayed on supermarket shelves help brands to encourage shoppers to try new variants, tempt shoppers to sample new products and give marketers the opportunity to entice shoppers to switch brands. Indeed, most large brand owners invest up to 15% of their UK sales value in marketing to shoppers in these environments.

Manufacturer brands tend to perform less well in discount stores which, for the most part, shun major brands. These brands can also struggle to break through in convenience stores where limited ranges lead to a focus on only the biggest of brand names. Online, many brands are battling to secure cut through; whilst an infinite range might appear to be a panacea, few shoppers venture beyond a single page of products and many rely on predefined shopping lists to drive their weekly shop. This means that, all in all, growth in these emerging retail environments is not necessarily reflected in growth for these UK grocery brands.

UK brands could face a sales collapse within the next three years

Engage’s study examines the possibility that for many brands this could lead to a major collapse in growth this year, in 2019 and beyond. The study also suggests that, on average, a brand in the UK could see market share decline by 5 percentage points in the coming years with smaller brands coming off much worse in the future.

Numerous brands have already cut growth forecasts for the UK over the next 5 years, with even some of the largest brand names planning on a decline. This has led to a reduction in brand budgets with many brand managers and insights teams finding their investment plans curtailed or even cut altogether.

Leading UK grocery brands are beginning to respond

The leading lights in the industry are not taking this lying down. Many are rapidly taking proactive steps to mitigate risk and even prosper from the opportunities that this new environment presents. Many of the largest players are currently taking steps to better understand the fast-evolving UK retail landscape, to reassess retail channel priorities as well as to redefine and crystallise future sources of brand growth.

This is leading to a concerted multi-functional effort across consumer marketing, customer marketing and sales, as these combined teams collectively reconsider customer priorities, build more integrated brand and customer plans and determine a vision for the ‘store of the future’. Many of these leaders are taking the opportunity to assemble real and virtual customer-focused teams across all relevant commercial, financial, operational as well human capital development functions, with the aim of blending the best resource to deliver against cross functional initiatives which will underpin future sustainable growth.

These businesses are better placed to weather the storm. However, they represent only a small minority of the UK’s branded manufacturers. Many of the others are struggling to identify where to start and how to engage cross-functionally to formulate a response.

There are accessible solutions to the UK Brand problem

To support leaders and managers in the industry during these tempestuous times, Engage has partnered with a team of UK and Global industry experts in order to build a roadmap that describes the key actions that companies should be planning for the future as well as helping them to identify immediate opportunities to begin working together ever more closely as a team.

Both the roadmap and Engage’s findings are freely available to managers in the consumer goods sector. If you would like our experts to share these with you as well as taking the opportunity to discuss some of the specific issues that you face, then please don’t hesitate to book an appointment to meet us by contacting me today.

Online Grocery Shopping – Why it’s not working

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Online grocery shopping

China arguably leads the world in online grocery shopping with some categories seeing more than 40% of sales online. When asked why this might be, a small group of Chinese online grocery shoppers offered a number of opinions: “It’s convenient,” said one, “I don’t have to drive to the store, I shop before I leave work and groceries are delivered soon after”. “It’s easier to get what I want,” said another, “in regular shops I often can’t find the right product”. A third said. “I hate going to regular stores, they’re dirty and uncomfortable, my mum used to shop in a market for us when we were kids, but that’s not for me”. For these shoppers, online grocery shopping offers a significantly better experience than they get in the real world.

Elsewhere though shoppers clearly don’t seem to agree. Rumor has it for instance that when Tesco launched online shopping in Malaysia, they only managed to secure 35 transactions a week. Even in the UK, arguably the world’s most developed e-commerce market, only 5% of grocery sales are online. Why is this? Not having completed an in-depth survey, I can only offer hypotheses, but I can suggest three reasons why I think many shoppers still prefer to buy groceries in the real world.

Online Grocery Shopping is not intuitive

Online sales have taken off in the entertainment industry because the product is so simple; if you like a song or a movie, you search for it, and there it is. There may be a few versions knocking around but it only takes a few seconds to find the one you’re looking for. Grocery products aren’t like that, categories might include hundreds of individual products, categorized into different segments, differentiated by brands and then further broken down into variants, pack types and pack sizes.

In the physical world, grocery shoppers have developed intuitive coping strategies to deal with this, filtering out the extraneous and focusing in on just the product they’re looking for. When the precise product isn’t there, they switch to a substitute. Equally shoppers in the real world are rarely as specific about what they want as they need to be in the online world: How often have you found yourself putting ‘beef’ or ‘veggies’ on your list knowing that you’ll choose what looks good when you get there?

Online grocery shopping is different, you’re required to know what you want and all but a few search systems are intuitive enough to help a lost shopper. As a result many shoppers may prefer to stay with the store they habitually visit rather than change.

Online grocery shopping is not trustworthy

I suspect that online grocery shoppers hold web-stores to a far higher standard than they do regular ones. In the real world, it’s not uncommon to find lines out-of-stock; one audit of Asda we did in the UK found 12% of lines off-sale. Real-world shoppers have learnt in many cases to cope with this reality and to substitute or go elsewhere.

However, I believe that online grocery shoppers have an automatic assumption of availability. I’m guessing this is born largely out of their experience of shopping for other products online: When you buy a track in ITunes, it’s delivered immediately; if you buy a book at Amazon, it’s dispatched in days. I’m guessing that since many online grocery shoppers’ first experience online was like this, they feel let down when the product they want isn’t available in the online grocery store.

Further, when grocery products that have been ordered online don’t turn up, shoppers get even more frustrated. I’m pretty sure that for many this sort of experience leads them back to doing things the old way.

Online grocery shopping isn’t ‘social’

My third hypothesis is that that many offline grocery shoppers who don’t make the switch online, choose to continue shopping in stores because ‘it gets them out of the house’. For many, going out to shop is a social occasion which can’t be easily replaced online.

In research we’ve done, shoppers often rate the availability of help and information third only to convenience and range when it comes to selecting a grocery store. For many shoppers, the absence of a personal contact, may frustrate those seeking a hard-to-find product let alone those seeking input or advice.

Making online grocery shopping work better

If any of these hypotheses were proven true, this would give some valuable insights to the grocery trade on how to elevate the performance of their online stores. Such insight might lead to more personalized and better curated online environments which satisfy the needs of shoppers better. Equally this might enable web-stores to improve their product availability in more targeted ways (and enhance their forecasting capability). Lastly, learning what turns shoppers off online grocery environments would help create more engaging customer service experiences.

It occurs to me, however that very little of this insight exists today, and if it does exist, it’s not being published. So perhaps it’s time we addressed this. If you have information that might shed light on why so few shoppers go online, or would like to share other hypotheses, please get in touch.

Image from Wikipedia.

 

Can big retail win shoppers in the future?


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big retailIt’s been an interesting week in the UK retail market. Just as February retail figures showed food discounts were dragging value from the market; Morrison’s a major British supermarket chain announced record losses. In the same week, Phil Clarke, the boss of the now-ailing Tesco, declared that future success is as simple as “putting the customers back at the heart of your business”. But is it that simple? I wonder, has the financial model of big retailers taken them too far away from the shopper?

Retail used to be governed by a relatively simple model – increase sales by enhancing shopper loyalty and seek to maximise operational efficiency, reducing cost. The net-outcome was a shopper-centric business that delivered profitable grow.

Todays’ big retailers seem to be working a different business model. Today’s mega-retailers have huge balance sheets, with assets that include huge amounts of property and inventory. With so much capital at stake seeking optimum returns on this capital seems to have become an overwhelming priority.

You might conclude that big retail is no longer in business to sell stuff to shoppers but rather to make money from real estate and stock.

Four ways to win in big retail

If increasing returns on capital employed is your key outcome as a retailer, then operationally your goals become much more focussed on generating cash and your strategies become more structured around optimising returns on inventory. There are practical four ways to achieve this:

  1. Drive bigger margins – The first sure-fire strategy to win in big retail is to secure a bigger margin. If margins can be consistently increased, even standing still in sales terms can deliver yield improved return so big retail constantly seeks ways of enhancing margins.
  2. Pay slower – The second way to drive better returns on inventory is to hang on to cash for longer. Slower payment terms keep cash in the business, covering short-term costs and creating the potential for investment income.
  3. Buy less inventory – The third way to enhance returns is to invest less in the key component of retail working capital. Whilst this might lead to greater efficiency it can also lead to reduced availability which actually works against customer service
  4. Sell faster – The fourth but most risky way of driving returns is to drive sales. Encouraging greater numbers of shoppers to the store, more often and getting them to buy more was at the core of most retailers’ strategies in the 90’s. But today’s hyper competitive environments make this harder and more risky. Its perhaps because of this that price has become so important. There’s an overarching big retail belief that lower prices drive traffic and sales. Since most suppliers will pay for discounts, this is a cheap way of securing better returns.

None of these levers requires the retailer to be more “shopper centric” and perhaps, this is why so many big retailers are struggling.

Online retailers win shoppers because they use simpler model.

As traditional retail is coming under pressure from online, it’s worth noting that online retailers do hold to a simpler, more profit-led model: drive shopper loyalty and keep costs to a minimum. For example Amazon’s found Jeff Bezo’s has been quoted as saying, “We’ve had three big ideas at Amazon that we’ve stuck with for 18 years, and they’re the reason we’re successful: Put the customer first. Invent. And be patient.” Much of big retailer’s woes are now tied up in the difficulties they have in competing with this model and many are failing.

Can big retail win shoppers again?

Possibly yes, but, there has been a tendency over the last few years to put more emphasis on tried and tested financial strategies rather than to innovate in the shopper space. These retailers need to have more faith in their shoppers and more understanding about what they want. They also have to believe in themselves a little more. There’s plenty of talk about enhancing customer experience, and precious little investment against this in either retail stores or retail brands.

Big retail continues to try to be all things to everyone in a big box, when more agile competitors are winning by being more specifically targeted. Too many retailers are ignoring the opportunity to sell-down some real-estate in favour of having a leaner more shopper-centric models and, despite the talk of multi-channel, too many retail managers would have their cake and it by maintaining physical stores which are now surplus to shopper requirement.

Future success will therefore require some major re-engineering.

What does this mean for manufacturers?

In a nutshell, retail is at a turning point. It would appear that no retailer is too big to fail and a number of global players have stumbled in the past years. This is an opportunity for brands: as the way we shop changes, the structure of retail will follow. Manufacturers should be thinking ahead to how and where their future shoppers will interact with their brands. Phil Clark is right in his conclusion that the shopper-centric retailers will win so manufacturers need to identify these retailers and work proactively with them. This creates the opportunity to re-balance customer portfolios and to restructure investment and support accordingly.

Taking steps now to learn about changes in shopper behaviour and the potential growth customers of the future is likely to reap rewards. We specialise in supporting companies going through this process and would be happy to offer support. Please get in touch with me if you need help.