In the brick-and-mortar retail industry it seems that everyone is largely self-absorbed and the focus is almost exclusively on the poor industry side, fighting for their existence, trying to prevent a meltdown due to e-commerce. Many companies nowadays are providing solutions with state-of-the-art technologies in the areas of big data, machine learning or predictive analytics to fight typical offline problems like out-of-stock situations, calculating perfect dynamic shelf prices or improve logistical processes. The reasons for this rush and focus are obvious, but the main problem is not online retail itself; in my point of view, they have lost sight of the most important factor. But more on that later.
Heaven on earth for consumers?
Let’s first have a look at the other side of the table, the consumer view. It must be heaven on earth if the grocery retail industry is wasting billions on inefficient promotions and heavy competition is driving retailers’ margins, hence shelf prices, to a minimum. All money in consumers’ pockets.
In fact, a consumer today has the choice of about 100-200 or even more special product offers per grocery retailer every week for items from nearly all categories, usually with a relatively high discount, as retailers try to outbid competitors and pull shoppers into stores. Assuming on average ten different retailers within reach distance (in urban areas), that’s up to 2,000 offers, surely enough to cover everyone’s preferences more than once. Most brand offers even come several times a year, so each household can nicely adapt to the frequency of durable discounts like coffee, pasta or detergents and stockpile until the next jackpot day comes along. Additionally, whereas in Germany the CPG coupon market is almost negligibly tiny, in the US a consumer can choose at anytime from hundreds of coupons for CPG brands, with consumers there saving a total of over $3 billion per year. But can you really call this heaven, if the consumer has to muddle through a jungle of thousands of offers every week?
Does this look like heaven?
All these offers and coupons come in the worst-targeted way possible, basically with no targeting whatsoever. While from the industry standpoint all these offers are actually supposed to cater to different marketing goals (“pull to store”, “basket increase”, “brand switching”, “trial”, “loyalization”, etc.), the consumer doesn’t know anything about this and picks their product promotions either by coincidence on the shelf or because they are the best for them – not because of the marketing goal. In academic terms you would call this adverse selection. Consumers who are already existing buyers of a brand will now buy it again, only cheaper. Consumers who go to a specific retailer every week will also go this week, but spend less on items they would buy anyway, even for higher prices.
Thus most marketing goals of the industry get vapourised more and more over the years and make the industry waste more and more budgets (already 72% of promotions do not break even in the US according to Nielsen).
As pointed out at the beginning of this post, the main reason brick-and-mortar should be nervous these days is therefore not online retail per se. It is their own incapabilities in targeting the right consumer at the right time with the right marketing goal. They don’t “get” ad targeting and how to leverage their own data to do it. The online industry, on the other hand, has learned about and utilized ad targeting and data analytics from the ground up.
Hell on earth for brick-and-mortar retail
With digitisation, consumers gained a powerful new tool, as the internet gave them unheard of access to information. In the pre-online world, merchants were the far better-informed party. That advantage is now gone. Consumers now have access to the same level of information as the merchant side. With just a few clicks they can compare hotel prices all over the world or prices for any TV.
Early on the digital commerce sector established cookies, tracking and user profiles. This allows the digital industry to precisely target users, calculate click-through-rates, customer lifetime values (CLVs) and hence their return on investments (ROIs) in order to spend their marketing budgets with extreme efficiency for each of their separate marketing goals.
Coming back to the brick-and-mortar retail world, the year 2017 must now be hell on earth for this industry. They’ve been hit by a double whammy. First, they are still using ad targeting modalities of the 90s, while online retailers vie for consumers’ dollars using state-of-the-art targeting. Second, consumers now have the internet, combined with smartphones, which put that information retrieval power right in their hands even when standing in front of an aisle of detergents.
One thing consumers can’t always check quickly is all the promotional offers being made by various retailers and manufacturers. Obviously, not too many consumers have the time and patience to flip through the above mentioned 2,000 weekly offers and thousands of coupons, especially if they are in the format of paper-based circulars for each retailer. But wait, there’s an app for that! Isn’t there? More on that in my next post...
PS: So1 is one of the driving forces of retailer digitalization. We have created a very powerful AI for retail which is capable of personalizing promotions for users in real-time and across devices. The So1 Engine sources the entire portfolio of the retailer and automatically selects the right products for each individual consumer and adjusts discounts such that revenue, profit, or consumer satisfaction are maximized.