Consumer products industry outlook for 2017
Challenges to the business model continue
INSIGHT ARTICLE |
There are a number of factors that are out of a company’s control including fluctuating interest rates, oil prices and the overall shifting economic environment. Having said that, there are issues consumer products companies can and should be addressing to ensure a more profitable year ahead.
An evolving business model
Consumer products companies continue to adjust their strategies to keep pace with competitive pressures. Ever-changing consumer attitudes have forced many companies to shift their priorities with respect to product assortment and distribution. There is no shortage of merchandise to buy or places at which to buy it. The internet is the big equalizer with respect to pricing and fashion. The bar is lowered due to ease of entry, however, costs to compete continue rising unabated. Traditional retailers struggle to rethink store numbers and footprint size in an attempt to better navigate the headwinds. In addition, too many consumer products companies are missing a big opportunity to truly connect with customers in a meaningful way. Even best-in-class companies are focused on new ways to drive demand and profit. The strategy has to evolve from business as usual to one of creating the need to buy rather than catering to the need to buy consumers.
Ecommerce not the golden goose
Ongoing investment, logistics and shipping costs, returns and competitive pricing have lowered potential returns. Brick and mortar stores have been able to maintain or increase market share through their omnichannel efforts, however, those measures are cutting into profitability. The consumer is being trained to buy several items online and return wrong sizes or unwanted merchandise. It is easy to click-to-buy, a little more difficult to return, but it is becoming more costly to the seller. The Hudson Bay Company recently noted that while it was pleased with the growth of its online business, it has suffered a 200-basis point reduction in its overall profitability.
Online sellers absorbing expenses of store openings
Bonobos, as an example, is aggressively opening its guide shops that do not carry inventory to sell, but enable its customers to see merchandise, select size and then order online. This effort is obviously contributing to brand building and incremental sales; although we wonder about the cost structure and whether this effort has the potential to produce incremental profits. While the company does not have the typical inventory risk most retailers face, it does face the cost of free shipping and returns, which the guide shops could minimize because of sizing and color selection. Online sellers have the issue of economies of scale with respect to their retail stores which could exert margin pressure for a number of years, although at a lesser rate as the store base grows.
Omnichannel is powerful
Having a strong physical and digital presence is critical to gaining market share for most retailers. Those companies with strong brands should gain share as their store networks leverage improved technology. Anecdotally, we find retailers that have closed stores tend to have a reduction in digital sales in those respective areas. Conversely, overall market share is lower in areas with no stores or closed stores. Understanding and catering to the target customer is important for profitable growth.
Consumers are channel agnostic
Consumers demand a truly seamless experience that allows them to shop when, where and how they want. Importantly, an omnichannel consumer spends more than a single-channel customer. For example, Walmart has said an omnichannel consumer spends approximately $2,400 a year vs. an average store-only customer who spends about $1,400 annually. Further still, a digital-only consumer spends just $200 a year. Omnichannel consumers like the convenience and flexibility, with features such as in-store pick-up or express home delivery. Some retailers are targeting stores as delivery hubs for initiatives such as ship-from-store. New strategic initiatives can provide the opportunity to drive higher sales per customer.
Enhancing the retail experience
The goal for many consumer products companies is to increase customer loyalty. Consumers are increasingly spending money and time on experiences over products, a trend particularly visible among the millennial generation. Physical and digital retailers are employing many tactics to address this preference. For example, some top brands have partnered with store retailers to open shop-in-shops, a strategy that drives newness and provides exclusivity in many cases. Best Buy is a good example of a retailer that has transformed its real estate by partnering with Apple, Google, Microsoft, Sony and Samsung. These efforts have been successful so far. Other shop-in-shops include, Nordstrom-J. Crew, J.C. Penney-Sephora, Foot Locker-House of Hoops (with Nike), and Macy’s-Finish Line. In addition, retailers are enhancing the customer experience via tablets to check inventory and process transactions, kiosks to order products that are out of stock, beacons to provide personalized marketing offers in store and interactive technology to try on apparel and accessories.
Restructuring should be a major corporate focus
There are still too many stores, especially weaker ones, in low-traffic malls, which in turn are negatively impacting stronger retailers and their suppliers. Store size has become a drag on profitability as many locations are too big for their current level of volume. Reallocation of physical space is under review. The impact on the malls and vendors could be significant, and while many have feared the possibility of this occurring, very few will likely be prepared for the event. Closings may accelerate with more companies filing for bankruptcy. There is the everlasting question of how long can Sears and Kmart survive as store traffic and volume continue to decline; in the meantime stores continue to close.
Additionally, the balance of power appears to be swinging more in the direction of retailers, if it isn’t at record levels already. Some retailers are pushing more inventory risk back to suppliers who face the ongoing dilemma of missed sales or raising the likelihood of unanticipated markdowns.
Many brands have scaled back department store distribution as promotional markdowns are negatively impacting their business model more each year. However the goal of more full-price selling faces higher direct-to-the customer costs of building out their omnichannel efforts.
While we could be looking for a recovery this year, odds are increasing of it being more muted than previous cycles and represent unanticipated challenges for many consumer products companies.