Background
Due to a number of factors many Australians are struggling with the ‘cost of living’. Shoppers are downtrading to P/L (private label) and are increasingly buying on promotion. In the short-term high inflation has hidden some underlying challenges for manufacturers and supermarkets including declining sales volume. Many are suggesting shopper demand could decline further in FY 23/24. The fundamental challenge for manufacturers and supermarkets in this environment is exciting shoppers to increase sales volume for their brand / category at full retail price.
22/23 weakening shopper demand
In Woolworths latest results (H23) Australian Food sales increased 2.5%. This sales growth was mainly due to inflation (Q1 7.3%, Q2 7.7%). B2C (e-comX) sales did decline 7.5% as shoppers switched back to stores. Woolworths results are representative of the industry in general. Simply put the new normal is weakening shopper demand and declining volume.
Due to cost of living pressures shoppers have already changed their buying habits. Generally speaking, there is reduced demand for non-essential items, downtrading and increased purchasing on promotions. It is not all negative as some brands / categories will grow as shoppers buy affordable luxuries in a supermarket.
23/24 Australian consumer recession?
“We are concerned that the rising cost of living, fixed rate mortgage roll-offs and normalising service consumption erode consumer discretionary spending in the second half of calendar 2023,”
Source: Inside Retail, Aussie supermarkets can expect softer demand ahead, says analysts, Feb 23
Due to the amount of disruption recently (COVID, war in Europe, adverse weather, high inflation) it is difficult to accurately predict whether Australia will have a technical consumer recession next financial year. What most agree, including myself, is that shopper demand will decline in 23/24. Importantly many Australian shoppers will be moving from a fixed to variable rate mortgage later this year that will lower overall demand.
“Our view remains unchanged – the additional 50 basis points of increases earlier this year were unnecessary, and have prompted a further downgrade in Australia’s growth outlook. That downgrade is centred on our households, and a ‘consumer recession’ is now forecast in 2023, with household spending expected to finish the year below where it started.” Deloitte Access Economics Partner and report lead author, Stephen Smith
news.com.au , RBA’s ‘unnecessary’ rate rises slammed by experts as ‘consumer recession’ looms, Apr 23
There are also numerous businesses that financially are in a difficult position. Obviously Scott’s transport closed earlier this year (AFR, Out in the cold: How Scott’s came undone, Mar 23). There are regular press reports about other businesses in many industries closing. This could have a flow on effect of increasing unemployment. Luckily Australia still has a low unemployment rate today that is helping maintain retail $ sales.
‘The latest insolvency statistics released by the corporate regulator on Tuesday showed 831 businesses went under in March, a three-and-a-half-year high and 15 per cent above the pre-Covid average of 720.’
news.com.au , ‘Worse before it gets better’: Aussie business collapses surge back to pre-Covid levels, Apr 23
Will lower price generate sales growth?
In this tough trading environment many will consider lower prices / price promotions to grow sales volume. The are some key questions to answer if you considering this.
Can your entire supply chain handle increased demand? Availability is a major issue for the industry today. To achieve sales volume growth requires capacity throughout the entire supply chain from packaging suppliers to stock weight in store.
How do shoppers buy your product / category? Some categories, e.g. confectionery and cold drinks, are impulse buys and are driven by shelf space more than price. Lower prices do not always generate additional sales volume.
What is your brand position? Will short-term aggressive pricing having a negative long-term impact on what price shoppers will pay for your brand?
Will this grow category $ sales and volume or devalue the category? Simply put aggressive pricing by a brand / supermarket can devalue a category plus lead to a long-term price war between brands / supermarkets.
Will this maximise your brand / category financial results? With the increasing CODB (cost of doing business) for manufacturers and supermarkets is this pricing sustainable? If not, you risk losing shoppers / share when you increase prices in the future to ensure acceptable margin for shareholders.
Lower price – the UK example
The UK supermarket industry is renowned for price wars. This brief overview highlights hard discounters have grown share with low prices. However, they have had to operate on very low margins to achieve this sales volume.
The UK, like Australia, is also experiencing cost of living increases. Generally speaking, energy bills have doubled and in February 23 UK food inflation hit a high of 17.1%. Whilst not an identical situation to Australia the UK market is experiencing a similar shift in shopper behaviour. Hard discounters, including Aldi and Lidl, have achieved strong sales growth in this market by maintaining low prices plus investing in new DCs, stores etc to meet increased shopper demand.
Aldi UK Margin
‘Preserving our price discount and rewarding our people will always be more important to us than short-term profit’
Aldi GB CEO Giles Hurley
Reuters, Aldi UK’s trading accelerates as shoppers seek savings, Sept 22
As reported by Reuters (Aldi UK’s trading accelerates as shoppers seek savings, Sept 22) Aldi UK’s operating profit dropped to £60.2M in FY21 vs £287.7M in FY20. The profit decline was due to maintaining low prices, higher CODB and COVID-19 related expenses. This profit was achieved on sales £13.645B (0.4% margin).
Lidl GB Margin
For the year ending February 22, Lidl GB sales rose 1.5% to £7.8B to generate £41.1M profit (0.5% margin). This was a 319% increase in profit vs the previous year. The low profit % was partly due to continued expansion, £653M spent on 50 new stores and 3 DCs. (The Gaurdian, Lidl profits quadruple as cash-strapped British shoppers look for bargains, Nov 22.)
This very brief overview of the UK market has highlighted lower prices could increase sales in a tough trading environment. The short-term challenge will be justifying the investment required to meet increased shopper demand for a low margin sale. The long-term challenge will be maintaining shoppers / share whilst increasing prices to ensure the business generates acceptable long-term margin for shareholders and importantly is financially sustainable.
What drives increased sales volume?
I am going to use the recent example of Prime drinks launch in Woolworths to help highlight factors other than price that could increase sales volume.
Value
Much has already been written highlighting shoppers want value. As explained in my blog, Value in FMCG , value can be described as a shoppers’ perception of the overall shopping experience for a brand or basket of goods vs alternatives.
Psychographics is an important tool to understand why shoppers value your offer vs alternatives. It is more than the physical attributes of the product or the price point vs alternatives. There are numerous factors including activities, attitudes, behaviours, interests, lifestyle, opinions, personality and values that could be part of psychographic market segmentation. Importantly by understanding shopper psychographics brands / categories can increase sales volume. Personally, I suggest psychographics explains why people buy a particular brand or category.
There are many drivers other than price for increased volume based on psychographics. Some general opportunities for brands / categories include:
Convenience – many shoppers are time poor and prefer convenient options.
Health – many shoppers have stated their plan to increase consumption of healthy foods. This could be a general healthy product, preferably with 3.5+ HSR (health star rating) or a product with a specific claim such as gluten free.
Sustainability – many shoppers are supporting brands / categories that are improving the sustainability of their range. For example, Mars Wrigley are transitioning to a new paper-based packaging that can be recycled for Australian made confectionery bars (Mars, Snickers, Milky Way).
Prime Value
Prime drinks is endorsed by YouTube sensations Logan Paul and KSI. There are also part owners. Plus, the brand sponsors Arsenal in the EPL and UFC. Due to the popularity of these YouTube sensations lots of teenagers wanted to buy Prime drinks. I must stress shopper demand was driven more by shoppers’ interests in these personalities than the physical product or price. This is recent example of influencer marketing that highlights price alone does not drive sales volume.
Path to purchase
Path to purchase is the journey that shoppers undertake to discover and purchase a brand / category. There are numerous models highlighting various steps supermarket shoppers can take. Personally, I use the very simple path as 1 out of store, 2 in-store, 3 consumption. I suggest path to purchase explains how people buy a particular brand or category.
Out of store
Historically out of store focused on traditional media (outdoor, print, radio, TV) and retailer media (brochures). Due to the internet, there is now a plethora of ways shoppers can discover a brand / category. Today shoppers can use various digital platforms (apps, social media, websites) to discover / research a brand / category. Plus, new technology has evolved some traditional media options. For example, outdoor media has evolved from static billboards to TV’s in shopping centres (outside actual supermarket) displaying ads.
Prime out of store
Logically with Prime drinks being endorsed by YouTube sensations Logan Paul and KSI out of home was key to driving sales volume. Logan Paul and KSI combined have over 40 million YouTube followers. Importantly this example highlights the increasing power of digital / out of store to sales volume.
IMHO (in my humble opinion) too many people in FMCG still focus on traditional mechanisms, e.g. price promos, off locations, brochures etc to drive sales volume. The way supermarket shoppers’ shop has dramatically changed during the last 20 years and out of store, especially digital, is an opportunity for many brands / categories to increase sales volume. Some will even argue to out of store is becoming the key driver of sales volume as the influence of digital on purchase decisions continues to grow.
In-store
Controversially I define ‘in-store’ as shoppers shopping whether they are in a physical or virtual store. Most others believe in-store only occurs in a physical store. IMHO in the modern world it does not matter if a shopper decides to shop in a physical or virtual store, buy in-store, do click and collect or e-commerce (home delivery) they are still shopping in a store. Others will suggest the physical and virtual stores should now be one seamless experience, normally labelled omni-channel. There are other terms such as phygital (PWC, Consumers seek frictionless experiences in a world of disruptions, Feb 23).
Source: PWC, Consumers seek frictionless experiences in a world of disruptions, Feb 23
Survey of 9,180 customers in 25 countries
Importantly in-store offers brands / categories more opportunities to increase sales volume. A plethora of historic research suggests 70% or more of decisions are made in store. With shoppers today actively seeking price promotions some will suggest in-store, including promotional POS tickets, is becoming more important in the shoppers’ purchase decision. In addition to traditional options such as POS and in-store sampling supermarkets are developing numerous other online promotional mechanics to drive sales. For example, it is normal for supermarkets to offer meal ideas / recipes and then shoppers can add the items to their shopping basket. Very importantly these actions occur whilst the shopper is actually shopping i.e. decision making stage.
Prime in-store
As reported by yahoo (Woolworths slammed for response to Prime drink ‘hysteria’, Mar 23) Woolworths stores were unable to meet shopper demand for Prime drinks. Woolworth did have a limit to try to ensure more shoppers could purchase the product. A similar situation occurred in the UK last year. As reported by The Guardian (Customers queue at Aldi at dawn for YouTubers’ Prime Hydration drink, Dec 22) a Twitter account (prime_tracker) reported Aldi UK had sold out by 9am. As reported by the BBC (Prime drink: How KSI and Logan Paul made it so popular, Apr 23) some may argue limited availability was a marketing tactic (scarcity marketing, FOMO). From a category management perspective out of stocks lead to a negative experience for shoppers.
Unfortunately, Prime in-store highlights an on-going major issue for the FMCG industry – limited availability vs shopper demand. Due to a number of reasons including COVID, staffing shortages and adverse weather, manufacturers and supermarkets have struggled to meet shopper demand for years now. In extreme cases this has even led to physical fights in-store over toilet rolls. Improved in-store availability should be a goal for the entire industry.
Consumption
An often missed opportunity to drive sales volume is consumption. Unfortunately, many in FMCG think their job is to drive sales not consumption. The simple logic is if shoppers have a positive experience consuming a brand / category today, then they will buy it again tomorrow. This creates long-term sales volume.
By understanding what limits shoppers consuming more and offering solutions to this problem brands / categories could increase sales volume. An obvious example is Coca Cola offering Diet Coke to lapsed shoppers that would no longer buy a full sugar soft drink. Similarly, if drinkers want to consume less alcohol offer them low/no alcohol drinks etc. The key message here is that every shopper, including lapsed shoppers, could potentially consume more of your brand / category.
IMHO packaging is often designed to drive sales in store, not consumption at home. There are numerous options, such as QR codes linking to meal ideas, to increase consumption. Also, with an ageing population having packaging that is easy to open, close, resealable etc should be considered. How many products have been bought in a supermarket and not consumed once taken home? Was packaging the cause? This includes fresh products going bad shortly after purchase. Shoppers then perceive this brand / category as a waste of money and long-term sales volume can decrease.
Prime consumption
‘Many of those buying Prime aren’t even planning on drinking it; some use the bottles in order to show them off on social media.’
news.com.au (Wild scenes as kids storm Woolworths to buy Prime drink, Mar 23)
Interestingly, Prime shoppers used their bottles as status symbols. By showing their purchases in person, online etc this continued to generate interest and additional sales volume for the brand. IMHO word of mouth marketing is still the most powerful form of marketing. Digital marketing is definitely becoming more important to grow sales volume.
Summation
Disruption is the new normal for FMCG. The next challenge is weakening shopper demand for brands / categories. The fundamental challenge now is exciting shoppers to buy more volume for your brand / category, preferably at full retail price to ensure sustainable margins for manufacturers and supermarkets.
This simple blog has highlighted sales volume growth can be achieved in todays’ market of weak shopper demand. There are numerous opportunities out of store, in-store and even in consumption to drive sales volume. As per usual to achieve sales growth will require an understanding of why and how shoppers buy your brand / category and also why not.
Good luck with increasing sales volume in the coming year.
The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation. Contact Details .
