End of the Traditional Consumer Company Business Model … Thriving by Capturing Value and the role Distributed Ledger Technology can play.
Changing their go-to-market business models and reevaluating how they capture “value” is becoming a matter of survival for consumer companies around the world – Why?
The retail universe is changing and traditional partners are disappearing - The Retail Apocalypse.
Traditional go-to-market business models are no longer in-sync with the rapid Democratization of Retail and changing consumer shopping habits.
Margin value is being destroyed because of shifting retail trends – The Margin Apocalypse.
1. Changing retail universe and the retail apocalypse
The global expansion of on-line retail over the past decade is well documented with business models broadly clustered into three main types:
i) On-line retail companies and platforms: (i) On-line “market places” and “virtual shopping malls” (e.g. EBay.com, Tabbao.com, Flipkart.com); (ii) Direct “on-line eCommerce re-sellers” who stock and deliver inventory as the primary retailer (e.g. JD.com, TMall.com) – Including Corporate eCommerce on-line stores (e.g. Nike.com); or (iii) Hybrid platforms (e.g. Amazon.com).
ii) ECommerce divisions of traditional off-line brick & mortar retailers (e.g. Tesco.com, Walmart.com).
iii) Next generation e-retail models which fit none of the existing models (e.g. Wal*mart’s in-home eCommerce patented in 2017, unmanned pop-up stores, and e-vending models).
This shift has been swift and devastating to traditional brick & mortar retailers who have not evolved their business models quickly enough and has led to what has become known as the “Retail Apocalypse”. While some might be celebrating one of the better holiday shopping seasons in recent memory, stormy seas lie ahead. The retail apocalypse is still underway and a day of reckoning is coming for many.
“For many years it has been clear that brick & mortar retailers will eventually feel the heat of shopping habits shifting on-line - the time is now – the “Retail Apocalypse” is officially upon us.”
While this statement may not be a revelation, the scale of the disruption is astounding. Credit Suisse predict that one out of every four malls will close in the next five years, with the square footage of America’s already dead malls covering more land area than the City of Boston. Bloomberg projects that more than 10% of US retail (~1 Billion ft.²) may need to be closed, converted, or renegotiated in the coming years. It’s sobering to analyze the market value of the main North American retail groups over the last 10 years - 2006 to 2016 (Yahoo Finance – Peak Value in 2006 vs. Google Finance – Value for Dec. 30, 2016): SEARS market value in 2006 was $27.8B dropping to $1.1B in 2016 (a 96% decline), JCPenney $18.1B to $2.6B (an 86% decline), Nordstrom $12.4B to $8.3B (33% decline), Macy’s a 55% decline, Target -21%, BestBuy -54%, and the list goes on. The only winners have been the eCommerce players. Amazon has increased from a $17.5B market value to $355.9B, a +1,934% increase over the same 10 year period accelerating significantly in 2017. This story is playing out all over the world. No market is immune, leading to a consolidation of global retail trade into the hands of very few global eCommerce monoliths.
In short, many of the traditional go-to-market retail partners of both every day and positional (premium) consumer goods companies are in crisis or disappearing all together, and consumer expectations are changing as shopping habits shift from off-line (brick-and-mortar) to on-line (click) – From brick-to-click.
2. Democratization of retail & changing consumer shopping habits
The brick-to-click shift has resulted in the democratization of retail, with almost every consumer in the world with access to a smartphone has access to the same brands, products, prices and on-line retail experience. The digital age has transformed the way consumers shop and share their experiences. The shopping journey is been driven by websites, blogs and social platforms. By the time a consumer enters a store, on-line or off-line, they know what they want to buy and how much they want to pay. In the “good old days” of brick & mortar retail it was said that 70% - 80% of the purchase decision was made in-store at the point of purchase, today it can be said that 70% of the decision is made before the consumer enters the physical store having thoroughly researched their purchase decision on-line.
Shopping was once a comparative exercise with consumers making localized shopping choices between local retailers in a localized geographical area. With shopping now been a global comparative exercise, between retailers and products across the world, there is a high risk of margin value destruction for consumer goods companies. Many consumer companies are on the cusp of a margin apocalypse that will cripple some, and destroy existing business models that have served them so well for decades.
While these seismic shifts in the retail universe might be well know, the underlying impact on value creation and retention (value capture), the strategic implications for profitable growth and globalization, and solutions to the problem, are still to be debated and fully understood.
3. The margin apocalypse for traditional consumer companies
In the localized retail world one important source of value capture for many consumer companies came from margin value arbitrage. Additional margin value was created through the arbitrage between markets and retailers because consumers were ignorant of retail price points outside of their local area.
For many consumer companies this is (was) particularly true in new emerging markets like China, Russia or Brazil vs their home (traditional) markets. Depending on the stage of the product lifecycle, industry and category, the price consumers’ are (were) willing to pay in these new markets were much higher for the same products and driven by nothing more than the prestige and aspiration of owning premium international brands and supported by the fact that consumers were not aware of prices outside of their local market. Or at least this was the case until now.
The democratization effect of on-line retail has led to the democratization of information. Not surprisingly what the consumers’ are willing to pay significantly changes when they became aware of prices for identical (or very similar) products in other markets i.e. lower prices in one market will naturally force lower prices in another for identical products and the arbitrage advantage is lost and margins globally move to equalize with the lowest in the world. If we add to this the enhanced negotiating power of a concentrated few eCommerce giants around the world and the margin apocalypse comes to pass. Overall profitability suffers for consumer goods companies.
For companies, value comes from the margins they make. The challenge is how to maintain or increase what the consumer is willing to pay to ensure incremental margin value is created in the democratized on-line retail world. For example (below), a comparison of the total value created in the different markets shows where value comes from at different points in the value chain and the potential for margin value to be destroyed if what the consumer is willing to pay (WTP) is not somehow increased in the democratized retail world - Value Stick Analysis. Increasing the consumers WTP is one of the keys to capturing value, but relying on arbitrage through consumer ignorance as the only source of value creation is fast becoming a fool’s errand. To truly create value and increase consumers WTP consumer companies must focus on attributes that matter most to consumers.
*Value Stick Analysis adapted from work by Professor’s Frances X. Frei & Felix Oberholzer-Gee, Harvard Business School - Better Simpler Strategy, Baker Pamphlet for Faculty Harvard Business School, 2017 - Data for illustration purposes only.
Preserving Value by driving Consumer WTP
There is little to suggest that the current retail mega trends will not stay their current course. As a result consumer companies’ and their traditional retail partners (suppliers and retailers) will continue to come under margin pressure and continue to be squeezed as consumers become better informed. Global off-line retail share will continue to decline vs on-line, but traditional brick & mortar stores will not disappear altogether. Consumer companies will need to change their traditional go-to-market business models and adapt the nature of their relationships with traditional retail partners.
To thrive in this new world, protect exiting margin value and enhance value in the minds of consumers to increase their WTP, companies will need to leverage:
1. Brands and build an exceptional brand experience.
2. Traditional retailers to ensure they stay relevant. By working in collaboration with the company’s existing retail partners (off-line) to rewrite the retail go-to-market handbook, and in the process redefine the relationship with the final customer (consumers) and their retail partners.
1. Building Brands and an Exceptional Consumer Experience
The long term value of a brand and its ability to drive value through WTP comes from a combination of three dimensions Experience (Image, Service, Emotion), Function (Features, Innovation, Reliability, Quality) and Economics (Price Positioning, Investments in awareness). Brands are what drive value and WTP of consumers – The brands value is a combination of these three dimensions working together and it’s not just about Price. The brand Experience and Function are seminal. Building these dimensions together requires long-term investment in resources and expertise. Not easy to replicate and costly to do so, thus providing a competitive advantage and barrier to competition for those who can master them. The higher the associated fixed costs the higher the barrier to entry for competitors.
“A product is easy to copy, but experiences are very hard to replicate”
Prof. Clayton M. Christensen, Harvard Business School
Prior to the prominence of digital, brand equity was supported by traditional advertising – Print, TV and radio. Today, having a comprehensive digital presence is mandatory. This does not mean that off-line brand building activities should be ignored. Digital will not altogether replace, but rather augment off-line investments. The new consumer journey is a mix of on-line and off-line, the physical and virtual world experiences. The customer experience can be enhanced through digital assets.
“Customer experience is the next competitive battleground. It’s where business is going to be won or lost.”
Digital channels have transformed the way consumers shop and share their experiences. The two “moments of truth” when a consumer interacts with a brand or product to form an impression and use the product, popularized by A.G. Lafley (Chairman, President & CEO of Procter & Gamble), are no longer just at the point of purchase or when they get home and use the product. The moments of truth can be at any moment along the consumer journey. Leading to the later introduction of the third and zero moments of truth. The truth is that we are not talking about moments at all but rather a journey.
Once the sale is closed, the websites, blogs and social platforms that helped facilitate the purchase decision and supported the consumer purchase decision allow consumers to join forces publically. They are able to either “shame or fame” those that “disappoint or delight”. These channels open up opportunities for a company to stand out from the rest (good or bad), and to create new or destroy existing value by increasing or diminishing consumers WTP. The digital amplification effect is a megaphone for consumers. Positive messages from delighted consumers boost a company’s reputation for good service and excellent products, amplifying the brands value. This kind of digital ‘word of mouth’ marketing delivers a much more powerful message than any traditional mass marketing campaign could before. Excellence in after sales service e.g. multi-channel customer support (e.g. Live-chat, SMS, Web-Self Service, Live Streaming), extended warranties, effortless service commitment, timely and efficient product repair and replacement, can become value drivers to increase consumer WTP and another area of competitive advantage. In the democratized digital age, excellence in these areas directly translates to positive messaging and consumer experience. How companies monitor and manage this message will determine the Consumers brand perception in a particular market.
(ii) Increasing WTP through more Relevant Products
Not only does after sales service directly affect brand intangibles like equity, customer loyalty and satisfaction, it can also augment know-how, consumer understanding and innovation. IoT, AI, big data applications and other technologies can help consumer companies better understand the consumer experiences connected to owning, operating and maintaining products and then take this into account in designing the consumer journey and future product innovation. The objective is to drive consumer acquisition, retention and loyalty through service. Marketing departments need to evolve into customer care and service organizations. They must take a central role in customer engagement while integrating processes across all front-line teams to deliver a consistent and effective customer journey.
(iii) Reacquiring the Consumers
In the current go-to-market approach of many consumer companies, contact is lost with the final customer (consumer) at the point of purchase i.e. the customer was handed over to the retailer to make the final sale. Typically the companies contact with the consumer is lost forever unless the consumer initiates re-engagement when the products fails and needs repair, or through social sharing of their after sales experience. Either way this is a passive process driven by the consumer.
To create (retain) value through higher WTP, consumer companies will need to create a consumer experience that is exceptional, focusing on the entire consumer journey. By leveraging new technologies consumer companies can actively maintain a direct relationship with the final customer (consumer) throughout their lifetime without any interruption to their journey.
Maintaining engagement with the consumer at every step of the journey from the first moment of contact with the brand through to the purchase decision and after the sale is made, means that consumer companies can embrace the concept of Customer Lifetime Value (CLV) i.e. The present value of current and future profits generated from the customer over their life with the company (Sunil Gupta & Donland Lehmann, Managing Customers as Investments, Wharton School Publishing, 2005).
(iv) Increasing WTP through the Service Experience
By been recognized as exceptional on this one thing, Service, the consumers WTP will increase translating to higher prices paid by consumers and new margin value been created. Consumer companies will need to invest in engaging wider audiences through on-line digital channels. They must vigorously defend against negative consumer experiences through exceptional service. As an extension to this, the current trends towards service based go-to-market business models (e.g. subscriptions models and the like), and the shift from selling products to providing services is another key to future proofing business models and value capture.
In the interest of creating and retaining value, companies need to seek and nurture enduring relationships with the final customers (consumer) – a relationship that goes far beyond the sale of a product. Increasing WTP through service models is a way of creating new barriers to entry. It will create a competitive advantage and block the entry of competitors. If a consumer has a long term service or subscription agreement in place with a consumer company, they have an ongoing relationship and competition is blocked from accessing that consumer during the life of the service agreement.
Price comparisons between markets in the democratized retail world become very difficult if not impossible when a service model is in play. Bundling products into a package of services on some kind of subscription bases make direct comparison between products much more difficult. Added value for consumers comes not just from the product itself but from the ancillary services and total experience provided. This experience can be enhanced by leveraging digital platforms. Over time margin value for companies can be improved through the services offered and not just through the products features.
(v) Focusing on the “Job-to-be-Done”
Focusing on experience and service instead of product features means that consumer companies are more likely to focus on what Professor Clayton Christensen from Harvard Business School calls the Job-to-be-Done. As a result companies are less likely to get caught in the endless loop of incremental sustaining innovation which inevitably leads to SKU proliferation, performance value surpluses (i.e. overshooting what customers can use and are willing to pay for), and opportunities for new competitors to enter markets and disrupt incumbents (Clayton M. Christensen, The Innovator’s Dilemma: When new technologies cause great firms to fail, Harvard Business Review Press, 1997). The job-to-be-done focuses on what causes customers to buy a product - what the customer hopes to accomplish in a given circumstance. The question to be asked is - What is the job customers are hiring the products to do? By definition an experience and services oriented business model will focus precisely on answering this question.
With the focus on the job-to-be-done and less emphasis on product features alone, consumer companies can focus on fewer SKU’s, instead driving value creation through added services and experience. Fewer SKU’s means less complexity to be managed in the manufacturing process and supply chain, and ultimately lower costs for companies thereby creating value.
2. Making Traditional Retailers Relevant again
While there are aspects of the on-line eCommerce model that can enhance the shopper experience (e.g. engagement, convenience, comparison, range of products, information, and personalization), the overall experience is not perfect i.e. no physical store presence to supplement the on-line shopper experience. Physical stores that remain after the retail apocalypse might be fewer in number but the role they play will evolve. When the experience is 100% on-line, consumers miss the ability to touch and feel products. They will play an important role for those consumers who want to touch and feel products to supplement the on-line experience. Off-line traditional brick & mortar retailers are able to provide access to this experience through their physical store presence. Recent acquisitions by on-line player like Amazon, Alibaba Group and JD.com of traditional brick & mortar retail chains is a clue to where they see weakness in their own business models and the potential added value traditional retail formats can bring.
Off-line brick & mortar retailers can bring and create value in the digital world, but these physical store networks come with high fixed and operating costs i.e. cost of managing inventory, cost of logistics, and high capital requirements. These high costs must be financed from the margins of the retailers which are been squeezed in the current retail environment. The composite net profit margin of the top 250 global retailers is around 3% (according to Deloitte Touche Tohmatsu Ltd, Global Powers of Retailing 2017, report). This might vary by retailer type and product mix, but the average numbers remains very low and in most cases with average returns on assets <5%.
Consumer companies must redefine the relationship with their retail partners by taking advantage of the shift in consumers shopping habits to improve the final customers experience and increase their WTP. If they can do this while at the same time increasing off-line retailer foot traffic to stores and increasing their profitability (through lower costs), it will be a win : win : win scenario for consumer goods companies, consumers and off-line / brick & mortar retailers. Distributed ledger technology can provide a solution.
Enhancing traditional retail partnerships through Distributed Ledger technology
While the first part of the relationship with the consumer is enhanced through the on-line digital experience, there is always a moment where a consumer decides to purchase a product. At that moment there are two possibilities: 1. Consumers buy on-line through one of the on-line eCommerce companies or corporate eCommerce store; or 2. They enter a physically store to touch and feel the product before making their final purchase decision. Consumer companies can now provide consumers with the convenience of on-line shopping and the added value experience of in-store contact with a product.
Technology now allows brand owners to send on-line consumers, who want to touch and interact with products, to a physical store or brand experience center without losing forever their connection to the end consumer. Allowing consumer on-line experience to be enhanced and the company’s existing retail partners become engaged through their partnership, while still maintaining control of the consumer journey from beginning to end. Utilization of distributed ledger technology can provide a mechanism for doing this.
Private ledgers could be set-up using a trusted third party to lightly administer the distributed ledger. In cases where public distributed ledgers are used, blockchain technology can help facilitate this process as a shared immutable ledger of the history of transactions in the chain, listing every transaction executed in the chain tracking the consumer journey from the first moment to last with the added consensus layer on top - the blockchain.
The traditional retail model is linier. Each step in the retail chain on-sells its products to the next step in the chain – more or less, component suppliers sell to manufacturers, manufacturers sell to brand owners, brand owners sell to retailers, and retailers sell to consumer. Margins are made at each step in the chain and costs of business incurred, with many costs duplicated along the way. For example, inventory management costs, logistics costs, administration costs are all duplicated many times along the linier chain. Distributed ledger technologies also have the potential to drive significant efficiencies in this long linier chain
Creation of Value through Network Effects with Distributed Ledger Technology: Using distributed ledger technology (or blockchain) means that a consumers’ interaction at one step (when they enter a physical store to touch and “experience” a product) can be associated with that specific consumer as a block in the chain. Once each step of the chain and each contributor to value creation can be identified in the chain, it allows for the creation of network effects through a selling network. For example, a consumer passed onto a retailer (physical store) who started their journey at the company website or some other initial point of contact, can be passed back to consumer company to complete the purchase transaction on-line and still be associated in the blockchain to the retailer who provided the in-store experience. This allows for partial credit for the sale to be given to any retailer or entity that meaningfully contributed to the consumer experience in the chain and helped to close the sale. In this example a retailer provided an opportunity for the consumer to touch and feel the product or see it demonstrated but the experience could equally be associated to an advocate as a peer-to-peer word of mouth recommendation or some other point of reference (e.g. blogger, communities or social media recommendation, advocate recommendation, etc), allowing for the creation of “ecosystems” that support the product / brand experience. This system allows for every product advocate to be recognized and rewarded for their contribution to the final sale.
Distributed ledger technology allows consumer companies to maintain ownership of the journey for the full life of a consumer and pass the consumer onto various parties who can add value throughout the consumer journey. Once that party adds its value to the journey, the consumer can be passed back to the company and then passed on to another step with each step of the chain and the associated added value recorded. Ultimately each party who added value can be remunerated for that value making each entity a partner in the value chain, while the consumer companies maintain the full control of the consumer journey at all times and control of the consumer lifetime value (CLV). The companies contact with the consumer and their journey no longer has to end when the sale is made.
Cash Conversion Cycle, Cash Flow and Value Capture: The other advantage is that retailers (or advocates) do not have to carry inventory to service the customer, this is managed directly by consumer companies, thereby significantly improving working capital and reducing supply chain costs. These are amongst the highest costs in the retailer business model. By reducing or eliminating these significant costs means that value can be created and shared between consumer companies and their partners. According to Harvard Business School finance professor Mihir Desai, the key metric of a company’s cash-generating prowess is the cash conversion cycle.
The other numerable advantage of this process is that the cash conversion cycle for consumer companies can be significantly reduced. Today the cash conversion cycle of many consumer goods companies can be very long due to the long payment terms required by traditional retail partners. Cycles of 90 to 120 days are not uncommon in the consumer goods world. Dealing directly with consumers through eCommerce means that any consumers who purchase on-line directly from the company pay via credit card reducing days sales outstanding. By reducing inventory / increasing inventory turn rates and days sales outstanding, the cash conversion cycle can be improved by weeks or months.
“The future always comes, and markets are always right”.
Jeff Immelt, former CEO and Chairmen of GE
To conclude, the future is already here, the markets have already changed and consumers have already spoken whether we like it or not. To not just survive but to thrive, consumer companies, brands and retailers will have to adapt and change how they engage with end customers and each other. While it could once be said that “doing what you have always done will get you more of what you already got”, in the new world, doing what they have always done will no longer get companies more of what they have. Doing what they have always done is the apocalyptic path to bankruptcy and oblivion. They need to adapt or die!
Copyright © Paul F Accornero 2018
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