Big consumer brands used to be the safe bet. Loved by customers and able to command a premium, they looked likely to be able to withstand the disruption in the retail world around them. Then, last month, Kraft Heinz announced a net loss of $12.6bn for the final three months of 2018. The markets reacted by wiping a quarter off the value of the business.
Top line sales growth was modest at best, but the real pain for Kraft Heinz was taking a goodwill impairment charge of $14bn from reducing the book value of its key Kraft and Oscar Mayer brands.
The scale of this impairment charge is the clearest possible demonstration of the realities leading consumer products brands are now facing. These brands were being booked at a value which in no way reflected their real worth in today’s market.
There are clear signs that we are now beginning to see the iconic, big global brands that many of us have grown up with under intense pressure as never before. Where they were once seen as dependable and enduring, customers now see them as outdated and lacking authenticity.
Mass brands like Kraft Heinz are also struggling with the paradox that their most important retail partners are their most important competitors, who are continuing to put more emphasis on their own label programmes.
That means that, as well as competing with the mass retailers that host them, major brand owners are also being put under pressure on margins by these very same retailers.
The rise and rise of the strongly value driven and price aggressive limited assortment discounters – exemplified by Aldi and Lidl - is a structural reality of grocery retailing in most, perhaps all, of the key markets of Kraft Heinz. That is naturally leading to the incumbent major supermarkets squeezing their big suppliers even harder.
There is, however, another challenge facing the old established brands which may well prove to be the most disruptive of all. This is the emergence of ‘direct to consumer’ (DTC) products. These are highly disruptive and agile brands that have grown to prominence – if not profitability – at tremendous speed by being everything that the big brands are perceived not to be.
They are nimble, personalised, agile, authentic and close to the customer. They bypass the traditional retailers, engage directly with the end consumer, capture and leverage the data and insights this generates to sell more in more targeted ways and at higher margins than the conventional retail channels can offer.
Dollar Shave Club is, of course, the poster child for the new wave of DTC brands. It has been much hyped and achieved rapid growth and a billion-dollar valuation, all inside 10 years. And there are many others too, all adopting a substantially similar mantra. They can market themselves by saying "Think of us as a tech company that happens to sell razors/mattresses/pet foods/luggage/snack foods".
In a recent survey by PA of 150 leading consumer goods companies globally, every one of them said that they either have already developed a DTC strategy or need to as a matter of urgency.
The rationale for wanting to put much more focus on DTC channels is compelling and well-understood by most. Almost all, (92 per cent) expected their own transactional websites and online marketplaces to grow in importance as channels to market. They recognised the need to make shopping more convenient, provide a better consumer experience and get the product to consumers more quickly. In addition, they felt this created potential opportunities to develop new business models that improve consumer engagement and ‘stickiness’, especially through more personalised offerings.
These issues extend well beyond the traditional brands. The whole retail industry, across the world, is reeling from the challenge of shoppers wanting to shop for different products in very different ways, as well as the need to deal with the rise of DTC businesses. Many retailers are finding it very painful to be in the middle of all this and are finding it difficult to adjust, with resulting pain for both employees and shareholders.
Responding by embracing DTC for both defensive and growth reasons is not easy. It requires owners of established brands to do three things simultaneously.
They must reorganise their businesses around the consumer, rather than the retail customer; develop very different capabilities, especially in data, consumer engagement, logistics and fulfilment; and, finally, transform fast to deal with a very different future, without compromising the near-term business.
The extent to which the owners of global icon brands are able to navigate these transformational challenges will define their future for generations to come. The recent experiences of Kraft Heinz show just how difficult that task will be.
Alan Treadgold is a retail expert at PA Consulting, the innovation and transformation consultancy. For more information, visit www.paconsulting.com/retail
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