Retail Consumers - a Moving Target; Changing, Transient and Unpredictable

In 2001 McDonald’s was struggling to increase sales. All its strategies, and it tried many
options like diversifying products, and cuisines, proved inadequate. Wendy’s, on the
other hand with far fewer outlets, was showing robust sales increases every quarter.
McDonald’s was a case of an industry leader missing the signs of the changing consumer.
McDonald’s reversed the downturn by following Wendy’s, and launching a range of low
calorie meals and salads. Marks & Spenser nearly became a take over target as it
struggled to keep up with fashion sensitive consumers. Levi’s is still struggling to regain
its iconic status with younger consumers. Coke has struggled over the past few years
against Pepsi. The later diversified its product range a little earlier to meet the emerging
needs of consumers. One of the challenges of business is that consumer behavior changes
very slowly. And we often miss the signs of change. Understanding the changing
behavior of mass-market consumers and their motivations lies at the heart of how
retailers compete. In this article I attempt to understand what this means to us in our
region and what I think we need to do to stay ahead of the curve.

A bit of introspection to better understand consumer behavior today.

• We as consumers are not only driven by price today. We demand better value
for money. Price is just one variable in the decision process. Other product
and service characteristics have gained relevance, and often become a basis of
differentiation.
• We are more skeptical of marketing. And even news which is increasingly a
tool of PR. Trust in the source of communication is an important unstated but
implicit influence in our buying decisions.
• We have access to a lot of information, are often challenged to deal with it.
We are always looking for means of simplifying the processing of this
information to help decision making. Here is where the human touch becomes
important.
• We want help but want control over the selection / choice process. We want
help in making a choice but don’t want people to sell to us.
• We are short of time and looking for convenience.
• We are difficult to predict as consumers. We often concurrently exhibit
different buying characteristics depending upon the products being purchased.
We may shop at Carrefour and Hugo Boss on the same day.

If we reflect a bit, we have changed as consumers over the past five years in terms of
what we buy, how we buy, and what we expect from retailers. It is also not unreasonable
to expect that this change is constant. What does this change mean for an operating
manager?

Need to change the way we think about market segmentation

I believe that we need to re-orient the way we think about marketing; a paradigm shift of
sorts. Many of us went to a marketing class in school and emerged with a “bell-curve”
oriented thinking embedded in our subconscious. A target market is like a “bell curve” of
homogeneous consumers; a large number of similar consumers in the middle (Figure 1)
whom we target using the 4Ps of marketing. Homogeneity may be relevant for selling
soap, shampoo and detergent. In retail we rarely market to a homogenous market.
Retailers, once location and size is fixed, maximize business opportunity by meeting the
needs of diverse customers. The new consumer is forcing us to abandon the dominant
paradigm. The “well curve” or inverted bell curve (Figure 1) is the new emerging
dominant model where consumers have polarized towards two ends. They are “trading
down” to low-cost commodities on one end and “trading up” to high-value, premium
brands and companies on the other.

Figure 1 - The “bell curve” and the “well curve”

What are the underlying phenomenon driving this polarization? All across the world
today, and we are no exception, shifts in age, increasing wealth, increasing diversity of
society, changes in family structure, and the emergence of new value systems are making
consumers harder to define, categorize and understand. Structural and readily measurable
/ visible variables like demographics, age, wealth / income, and family status are weak
indicators of consumer behavior. The traditional value equation based on price, quality,
and product features and convenience also appears inadequate in understanding purchase
behavior. The contemporary consumers use shopping and products as a means to express
their identities. Purchase behavior is an interplay of value-based buying (traditional cost-
benefit analysis), and the individual consumers personal beliefs or need of self-
expression. As consumers seek to express their identities, they may trade up and trade
down within the same product category. For products or services where consumers
perceive no unique personal value, they are trading down to mass-value products and
retailers that offer “good enough” quality at rock-bottom prices – the growth of the
hypermarkets, warehouse clubs, and category killers. Whereas in categories that matter
more to them personally, customers are trading up to “new luxury” products and
specialized retailers, paying significant premiums for offerings that satisfy their personal
wants and needs.
We still need to refine the above model for use in our region. In my view increased
fragmentation of customers in our markets is better explained by figure 2. Consumers in
our retail markets exhibit a high level of micro-segmentation based upon high ethnic,
social and cultural diversity (I have experienced an organization with 250 employees of
over 40 nationalities), specialized requirements of every segment (Deira souk in Dubai
has a supermarket exclusively for the Chinese), and the large transient tourist consumer.

Figure 2 – Micro-segmentation of our markets

So how does one tackle the changing, transient, and unpredictable customer? And stay
relevant in micro-segmented world? To succeed in this dynamic environment, retailers
need to re-examine how to position and differentiate from competitors, continue to be
relevant and responsive to consumer needs, and create appropriate internal organizational
processes to manage change. Table 1 summarizes the key thoughts on positioning and
differentiation in the dynamic micro-segmented environment. The dimensions of
identifying distinctive niches in the competitive landscape will not be based on what we
sell (products) or what needs the product fulfills versus competitive products, but on
consumer experience while buying, experience during use or consumption, and the
meaning the consumers derive from the use or consumption. Four distinct positioning
options emerge – mass value, buying experience, solutions and services, and luxury. For
each positioning strategy that an organization chooses it will need to need to emphasize
and develop specific organizational capabilities to deliver the customer experience. The
selling proposition must align with consumer experience. I have also identified domestic
retailers that broadly fall into the different positioning options.
 Table 1 – Strategies to re-examine positioning and differentiation 1
What shoppers seek
when they go How shoppers purchase products? How products are sold?
shopping?
Solutions and services
Mass Value
Services and solutions around
Products as products
products
Differentiators – one-stop shopping,
Differentiators – Retailers offer
value for money, convenience
solutions / services bundled with
the products
Fulfill basic needs Examples – Supermarkets and
Hypermarkets. In the Gulf we don’t
Examples - Ace Hardware,
have warehouse clubs or hard
pharmacies, music stores like
discounters but have the wholesale
Bose, Bang & Olafsen, etc.
markets
Organizational capabilities – staff
Organizational capabilities –
have strong domain knowledge to
merchandising, and sourcing
deliver high quality service
Luxury, Lifestyle, and Image
Buying experience
High quality of individualized
Purchasing products as an experience service

Differentiators – In-store experience Differentiators – Sell prestigious

Examples – All the specialty retailers
Shopping as self
e.g. The One, Ikea, Zara, Nayomi, etc.
expression
Organizational capabilities – assessing
trends, quick response time, and
inventory management
products in an individualized
setting by helping customers select
products that help them express
themselves
Examples – Saks, Villa Moda,
Louis Vuitton, Cartier, etc.

Organizational capabilities – deep

rooted service culture, IT based
CRM, strong HR

Many domestic retailers have crafted differentiated positioning with an identity in the
minds of consumers. Some other retailers are showing signs of change. Supermarkets are
generally believed to be categorized on an ethnic basis e.g. Union Coop is for UAE
nationals, Spinneys for European expatriates, and Lu Lu for South Asians. The actual
visits to these stores suggests otherwise. Nearly 50% of shoppers of Union Coop are
expatriates of diverse nationalities, Spinneys is better known for fresh products (its
clientele is distorted because of its Pork sales), and Lu Lu could not have emerged as the
largest chain in the region without a more broad-based positioning. A visit to its Oman
stores will confirm how well it has understood and implemented micro-segmentation.
1
Adapted from The retail divide: Leadership in a world of extremes http://www-1.ibm.com/services/us/index.wss/xs/imc/a1002881?
cntxtId=a1000063
Electronic stores (Plug Ins, Jumbo, Sharaf Digital, Jacky’s, and Better Life) follow a
brand-centric, approach to an extent unable to break the shackles of monopoly
distribution. Try finding a solution to your appliance, cell phone, or computer needs. Ace
hardware in its new scale (both large and small format) is trying to graduate to the
solutions quadrant. The One over the years has metamorphosed to give customers a
buying experience. It sells relatively high priced furniture, and low priced tableware and
linen in a lifestyle ambience. Nayomi, arguably the largest intimate apparel store in the
Gulf, has a well defined positioning based upon sensitivity to regional needs. Landmark
group, which has four well defined retail concepts (Shoe Mart, Splash, Baby Shop, and
Home Center) is attempting to reposition itself as Center Point, and runs the risk of
becoming a department store. The jewelry retail business is seeing a dramatic resurge of
branding. I often ask myself a question whether customers have a brand in mind when
they go buy jewelry. Or for high value individualized purchase like jewelry design
overrides branding?

Execution at the heart of differentiation

Each positioning quadrant has a unique set of strategic and operational requirements.

Impact of micro-segmentation on retail buying strategies - A much more specifically

operational requirement emerges from the concept of micro-segmentation; how buyers
seek to provide a width of product offerings within a brand concept or a range to meet the
requirements of as many customers as possible without distorting the overall identity. It is
for this reason most lifestyle brands will carry a core range that defines the brand (e.g.
offerings of Next will be basic and classical colors and designs) but also carry some items
that are more of fashionable. Or a store like TableArt that sells tableware, gifts, and silver
will carry heritage, classical, modern and post-modern designs.

Access consumer trends to adapt – Organizations need to develop mechanisms to capture

and use the knowledge of consumer trends and behavior that lies embedded within the
organization, especially the frontline store staff. Note that every sale or every lost sale has
knowledge, knowledge that lies embedded in frontline staff – what the customers want,
how they buy, which feature they like / dislike, which marketing / promotional strategy
works, etc.

Customer centricity as the focus of all retail – Strong emphasis on the customer as the
focus of all retail activities at the store level - buying, merchandising, pricing and store
operations. This requires an organizational agility to be developed. Retailers need to
continuously review any misalignment of the offering and service for correction. This
feedback loop is important since we are challenged by a multifaceted consumer
marketplace defined by diversity and divergence, and an unpredictable consumer driven
more by individualism and search for identity and meaning.

Overcome wary / skeptical consumers – The new consumer is overwhelmed with choice,
has less time to shop, but is still careful while shopping; the wariness a consequence of
skepticism about marketing and sales staff. They seek personalized attention / service
during the buying experience but only want assistance while buying to help them make
their own choices. They want retail sales staff to not sell them what they have but
understand what they need. It is important to connect with shoppers at the store level. The
store interaction is very important to manage the new consumers. Sales interactions need
to be structured to understand needs, communicate options, emphasize the use of the
products etc. to enable customers develop ‘trust’ in the staff.

Access to information - Customers are becoming “super shoppers,” empowered by the

ability to access information where, when and how they want it. The net is an important
source of information about products for an increasing number of buying decisions. In
addition we in the region are dealing with a highly mobile population who has an
increased exposure to brands and products. Often customers know more about the
products than sales staff. Retailers need to deal with knowledgeable customers by staying
a step ahead in the awareness game through training and re-training. Retailers need to
enable store employees to address the needs of both well-informed and less
knowledgeable customers.

Conclusion

Tackling the dynamic and unpredictable new consumer, who is difficult to classify into a
well defined categories, requires a new approach to managing the core functions of
retailing with a strong emphasis upon customer centricity. To succeed organizations need
identify a customer-based positioning using three variables - consumer experience while
buying, experience during use or consumption, and the meaning the consumers derive
from the use or consumption. Organizations need to have internal processes to capture
frontline data about consumer needs and behavior to feed the merchandising process.
Successful implementation of strategy requires managing the store level customer
interaction. Winning consumer trust is the tipping point of success when dealing with the
new consumer.

© Manoj Nakra June 2006