Retail environments around the world are changing. The change is structural and irreversible, and it’s based on a shift to value as a purchasing goal. Retailers that offer what the consumer perceives as value will come out on top; those that can’t compete in this sector will lose.
Consumers used to shop at their preferred outlets for whatever category they needed. Electrical appliances, clothing, sporting goods and toys — each category had its own specialist retailers. The big discounters such as Wal-Mart and Target were used for stocking-up with basics, but no longer.
Now consumers of all ages and most segments of the market have made the shift to value. Each week they go to a large retailer that cuts across all categories and pick up whatever they need. Specialist retailers are fading out and with them go the strip shopping precincts of metropolitan areas.
No Sacrifices to Save
“Gone to value” describes consumers that know they can get lower prices without sacrificing quality, providing they give up their favored retailers and go to large retail outlets that dominate the landscape outside the traditional downtown shopping districts.
It’s said that consumers have switched from shopping for “good” to accepting “good enough”, but in truth they’re getting better deals on most things they buy by making the shift to value. The “value players” have raised their game to offer competitive levels of price, quality and service. They even have their own house brands that widen the choice for shoppers while offering the chance for additional savings.
No category is safe from the encroachments of the value retailers. From groceries to fashion, the value players work to offer a pleasant shopping environment. Price may be their biggest appeal but they’ve recognized the need to offer more than just discounts.
The resulting shift in shopping preferences has given the value players massive profits and consequently the ability to give their customers even more in the way of variety and low prices, together with service offerings that increasingly match or exceed those of the more traditional retailers.
The Expanding Reach of Value Players
The momentum of the value players, growing exponentially since the move began in the 1970s, continues to increase. They buy better, sell for less and deliver a satisfactory level of service to their customers. They are placing huge pressures on more traditional retailers to compete.
Investors in companies conducting retail operations are the same as those in resources or manufacturing — they want returns on their invested capital. Of all companies in the marketplace the ones most likely to deliver good returns are the value players. They can amass capital for expansion while still paying a satisfactory level of dividends.
It’s estimated that only about one-third of America’s retailers have felt the full impact of the value players. Aggressive growth by the newcomers will see the situation turning against the other two-thirds of traditional retailing firms before long.
Even the large chains of retailers — those that operate under traditional principles and jealously guard their well-established brands, will be under pressure in their local markets. They will have no option but to adopt the principles of their recently introduced competitors or find some other way of competing.
As for independent retailers of consumer goods — those shoe stores, toy stores and drugstores out there; they’ll simply have to reinvent themselves. They can work to cut costs and improve service, but that won’t be enough. They will have no option but to study the value players and do what they do only to do it better.
The Way Back for Independent Retailers
Eventually those traditional retailers that learn new ways of competing will be exceptional at doing what they do. They will be expert at everything from buying to marketing, and their operational systems will give them an unprecedented expertise in running their businesses at the peak level of performance.
The value players will someday peak at their share of market and level of profitability. The “squeeze” from their investors for ever-greater returns will force economies that are not yet required, giving a further opportunity to the traditional retailers that have become so adept at running competitive businesses.
Running lean and mean, the surviving traditional retailers will continue to improve their businesses while the giants go into a slow but steady decline. Consumers will opt for better levels of service that the big players no longer deliver. Smaller businesses will become so good at knowing their customers and delivering good experiences at every touchpoint that erosion of customers will be a problem for the megastores.
A small retailer’s fantasy? Perhaps. No signs of the above recovery of the traditional retailers are yet in sight. At present, and certainly for the next few years the value players will increase their market power and smaller outlets will feel the pain.
History teaches us to believe in cycles, and although right now the Wal-Marts of the world are on top, this cycle of dominance by the value players won’t last forever. The Internet was once going to kill off “bricks and mortar” retailers but look at the situation today. The “consumer shift to value” is on right now, but for how long is anybody’s guess.
Copyright 2005, RAN ONE Inc. All rights reserved. Reprinted with permission from www.ranone.com.