QUICK READ: Behind what brands report to the street, behind every decline in sales, behind each drop in customer satisfaction scores, there are millions of independent decisions taken by consumers on what they want to buy and how they want to buy it. Unfortunately, most brands will miss the warning signs. Here are some findings from a Deloitte Report on changing consumers.
Amid the increasing number of products, brands, and ways to access them, another development is underway: Brand loyalty, for the most part, is falling to the wayside as consumers, inundated by products that seem increasingly commoditized, are tuning out brands.
Commoditization is having a huge impact on the retail marketplace. On one hand, commoditization of products has led to fierce price competition, creating a downward pressure on the price brands can command for their products. On the other hand, higher operational, infrastructural, and labor expenses are raising the cost of producing the very same products. Furthermore, the options through which consumers access these products continue to squeeze margins. What’s left, then, are squeezed margins, curtailed profitability, and reduced capital returns on businesses. Since 2017, there has been a 40 basis-point average decrease in operating margins across retail
In reaction to commoditization and squeezed margins, retailers such as mass merchants, grocers, and even department stores are focusing on selling their own private label brands. These brands offer 25–30% higher margins and more control in production, branding, pricing, and promotion-all at the expense of traditional branded consumer product-makers. And consumers are buying private label products in bigger numbers.
The days when consumers considered private label brands cheap, generic, and low-quality are gone. The percentage of consumers willing to pay the same or more for private labels over brand-name products rose from 34% in 2014 to 40% in 2019
There’s also been a move toward premiumization of private labels. Although discount products still represent the majority of private label sales, the share of premium private labels continues to rise, having climbed from 15.7% to 19% over the past three years. Meanwhile, retailers and consumer products companies have begun to leverage the greater control that private labels afford them to offer differentiated products that are better suited to their customers’ needs.
Digital success grows elusive as ad spend rises
Digital sales, despite comprising only about 15% of total retail sales in 2019,continues to be responsible for an outsized share of total retail sales growth-nearly 50%.However, as the base grows larger, the growth rate of digital sales is projected to decelerate. That said, the digital sales growth rate will still remain higher than brick-and-mortar sales for the foreseeable future. So, in many retail categories, if you aren’t winning in digital, you aren’t winning the battle for growth.
Within digital, a major shift is underway toward mobile. Mobile sales accounted for nearly 75% or US$54 billion of the US$72 billion incremental eCommerce growth in 2019. Also, mobile sales, which was just 19% of digital sales in 2014, rose to 45% in 2019, growing at a CAGR of roughly 36% over the last six years. This is six times greater than the growth rate of other digital channels (about 6%).
The significant shift to mobile and its influence on in-store sales have had a profoundly negative impact on traditional key business metrics. The conversion and average order value on mobile are significantly lower than desktop (1.7% vs. 4.3% and US$86 vs. US$127, respectively). Combining these metrics shows that revenue per visit on mobile is 3.8 times lower than on desktop-based e-commerce. This shift significantly reduces the return on investment needed to drive digital growth.
Meanwhile, companies are pouring money into digital advertising. The domain has grown at a CAGR of 20% over the past five years, resulting in a US$103 billion increase in digital ad spend over the past decade. But most of this created incremental total ad spend as only US$16 billion of the US$103 billion (about 15%) was offset with a corresponding reduction in non-digital ad spend. As a result, total ad spending is growing at a significantly faster rate than overall retail and consumer products industry sales..
If the growing cost of digital advertising were matched by commensurate sales growth, then higher digital ad spend would pose no problem. But the reality is quite different: While digital spending is becoming more expensive, it is generally not becoming more effective. For example,even thoughadvertisers have increased their total spending on search by 42%, the number of visits to advertisers’ websites resulting from those ads has increased by just 11%, indicating that the cost of driving traffic is increasing and further impacting margins.
To make matters more difficult, the rising variable costs of shipping and higher warehouse labor costs are putting profound pressure on overall margins. In many ways, the shift to digital commerce is a move from a higher fixed-cost model (where stores are the major fixed-cost component) to a higher variable-cost model (where each order comes with incremental shipping and fulfillment costs).
The increased demand for digital advertising is resulting in increased costs for companies to drive traffic and engage with and acquire customers. Coupled with the incremental-and rising-costs of shipping and labor in fulfillment, companies are experiencing a deterioration in already thin (or even nonexistent) margins for digital sales. The net effect is that while the allure of digital growth remains strong, the ability to profitably pursue and satisfy that growth remains under tremendous-and ever-growing-pressure.
Originally published at https://www.newmediaandmarketing.com on July 18, 2020.