The Cost of Building a Distance Between Retailers and Consumers

Brick-and-mortar stores remain a primary meeting point for consumers with brands of manufacturers. Direct marketing channels, enhanced in the previous decade by the Internet, have allowed manufacturing brand owners to establish a direct contact with some consumer segments to buy products directly from them. Still, consumers largely continue to seek consumer goods at retail stores. Retailers are at the front of commercial activity; they are facing the shoppers and introduce them to a variety of branded and unbranded products. They have different methods for interacting with consumers available to them that manufacturers or national brand owners do not have. This should have allowed retailers, particularly the large retail chains, to get to know their customers and understand them better than they appear to do.

Over the years, manufacturers and retail chains have invaded each other’s territory: retailers introduced private labels or store-owned brands; manufacturers established online stores; and retail chains returned a fight by operating online stores on the Internet (i.e., e-tailing) in parallel to their brick-and-mortar stores. While some manufacturers have gone straight into Main Street (or mall) to open their own stores, selling their original products (e.g., Apple tech stores, Burberry fashion stores), these make the exception rather than the rule. Especially national brands of food and other grocery products (i.e., household maintenance goods) remain dependent on retailers, foremost the larger retail chains of supermarkets and other sorts of outlets.  This condition can be the source for lots of tension but also pose a potential for positive co-operation between the  manufacturers and retailers. In practice, it seems to produce complex relations between those two parties that do not necessarily hold the consumers at their centre nor benefit them.

Finding a staff member in large chain stores to ask for help in locating a needed product is often a frustrating task. It is particularly true in food chain stores — cashiers are stranded and busy at their positions and in the aisles the shoppers are usually all on their own. Not all stores work like that — for example, in a local Israeli DIY retail chain, staff members in red overall outfit walk around the floor ready to answer questions by shoppers and give consultation. The management of many chain stores have perfected the methodology of self-service, giving shoppers the feeling that the retailers’ job is just to spread the products in the store according to some logic reserved to them, and it is the duty of shoppers to find and collect the products.  But shoppers occasionally desire assistance, and not least personal attention, rather than play “hide and seek” with products around the store.

In his book “Inside the Mind of the Shopper”, Herb Sorensen identifies four sources of profits for supermarkets that come on top of margin from sales of the food and grocery products per se. As argued by Sorensen: “If shoppers are ignored, it is because they contribute the least to retailers’ bottom lines.  This may be surprising, because on the surface the entire business model of a retailer seems to be to sell products to shoppers” (p. 114, [1]).  Those four sources of profits in descending order of importance are:

  • Trade and promotional allowances from the brand suppliers — Much of the game is played between the manufacturers and retailers where the former pay rebates of various kinds to the latter for “warehousing” their merchandise in the stores and occasionally incentivize the retailers to make promotions for their brands (e.g., end-of-aisle display, discounts). Consequently, it appears that retailers gain money by buying from their brand suppliers rather than selling to shoppers.
  • Float on cash — Meaning that the store makes additional money on its sales revenue from income on bank deposit (i.e., accruing interest).
  • Real estate — Stores occupy buildings and these are assets in their own virtue. Major retail chains need to carefully choose promising locations with respect to the communities they intend to serve and less expensive property for building the store in aim to lower costs. When a chain purchases the property rather than rents a space, it may gain as an owner from its investment in the real estate itself when it decides to exit the location.
  • Margin on sales — Actually Sorensen refers to extra income from additional businesses operating in the premises of the store like a lucrative deli store, pharmacy, photo services, restaurant etc., where the store’s owner gains additional margin or collects its share from contract licensees.

I believe that these additional activities of retailers and their associated income provide some interesting clues in explaining why Israelis have become so upset in recent weeks with retailers as well as the manufacturers of many consumer products, mainly food and grocery. The protesters have difficulty in putting the blame on one party or another, but in fact both parties may be responsible. Anger has been directed from the beginning more squarely at manufacturers, but retailers also contribute to raising prices of consumer products.

Notably, the Israeli protesters are upset about the prices charged at retail chains, not the self-service approach of those stores and how it affects their shopping behaviour. However, when retailers distance themselves from the consumers, don’t understand them sufficiently and don’t care how they shop, especially because they have other side-interests, the retailers may lose sensitivity to their customers with respect to both pricing and the shopping experience.

The first source, promotional allowances from the brand suppliers, chiefly suggests that retailers and manufacturers share responsibility in losing sight of the consumers. These allowances are strongly engrained in the business relations between retailers and their brand suppliers. For the latter it has become a necessary tool to influence the presence of the brand in the store. However, retailers and manufacturers may become so focused on those dealings, they fail to see their effects on the end consumers. The responsibility falls more hardly in this case on the retail chains because the manufacturers are using this method to push their way through to the shoppers for the benefit of the retailers. However, relations between the two parties are more complex than that, each trying to exert influence on the other (e.g., strong brand suppliers who demand that their own staff organize their products on store shelves), and therefore are both responsible for any effects of their battles behind the backs of the consumers.

Making money by gaining interest on cash or return on real estate is by itself a legitimate and fair way for increasing income for the retailers. The problems start when retailers become more occupied with financial and real estate investments than caring for the needs of their shoppers-customers. These profit-generating activities have a negative effect for consumers to the extent that they divert food retail chains from their core business or raison-d’être.

Greater reliance on extra sources of profits can particularly help explain the lower sensitivity of retail chains to the needs and concerns of the consumers. It is a matter of shifting their target of focus. Hence more research of shopper behaviour in-store may allow retailers to learn how to make the experience of shoppers in their stores more enjoyable, and their shopping trip more effective (i.e., how they fill their basket / cart) while producing higher value to the retailers. Research related to pricing issues should reveal the degree of shoppers’  willingness-to-pay for different product types and the maximum price they wish or can afford to pay at any given period of time. Further, better interaction with shoppers in different modes should provide effective signals of any right or wrong doing of retailers in time.

Nevertheless, having additional sources of profit cannot sufficiently explain why prices in food chains in Israel have risen so high over the past five years. That is, if retailers have those additional sources of profit, why should they need to offer products at high margins, making them more expensive than similar products sold in other countries like the US, UK and in the European continent? It may happen because retailers in Israel do not  receive income from such extra sources as much as abroad, they do not perform sufficient research (or the appropriate kind of research) to provide the relevant information, or they may have become complacent and over-confident due to lack of complaint from consumers as they pursue greater profits. They have raised prices excessively even for necessary products such as basic dairy products. The inner-dealings of retailers and manufacturers are the most likely suspects in blinding both parties to consumers.

There are some serious questions to address in resolving the consumer crisis:

  • How is the chain of value of over-priced consumer products built up? (e.g., if a litre of milk is sold by dairy farmers to the producers at about 2.50 NIS [~€0.50], how is value added up to reach a price as high as 8.00 NIS [~€1.60] for a 250g(!) of cottage cheese at the retail chain?)
  • Why should the price of food and grocery products be much higher than in other developed countries  (e.g., Tesco in the UK offered its own brand 300g cup of cottage cheese in June for £0.75 [2] compared with 8.00 NIS or £1.45 for a 250g cup of cottage by Tnuva, a national brand in Israel.)
  • What does it suggest to us when retailers are able to lower prices in a short time to a more reasonable price level when put under pressure? (e.g., after a few days of effective campaign in Israeli media, the price of cottage cheese dropped to 7.00 NIS / ~€1.40)
  • A government report recommended to allow import of selected dairy products to Israel and press dairy farmers to lower their price of milk to producers. Is it right and just to squeeze farmers in an industry that is already suffering greater difficulties to sustain itself, when there is a much wider space for maneuvering by manufacturers and retailers?
  • One may also question, if retailers save on keeping a minimum level of service in supermarkets, shouldn’t that allow them to offer products at lower prices? (Possibly retailers in Israel have not employed sufficiently additional discretionary services in their premises to increase profits.)

The cost of building a distance between retailers and consumers is a loss in customer trust, resentment, and increase in tackling of staff with grumbling shoppers. Chain retailers in Israel, mainly food and grocery chains, have crossed a line in distancing themselves from consumers thus evoking a public roar and protest. While national brand suppliers have also allowed it, it should have been the prime responsibility of the retailers who are facing the consumers to identify troubles in time, using research and customer feedback, and to act upon, including warning and advising business partners that are also concerned. But retailers may not be able to act effectively without the co-operation of their business partners, specifically brand suppliers, and the support of the government where necessary.

Ron Ventura, Ph.D. (Marketing)

[1] “Inside the Mind of the Shopper: The Science of Retailing,” Herb Sorensen (Ph.D.), 2009, NJ: Pearson Education (Prentice-Hill).

[2] Retrieved from www.mysupermarket.co.uk in June 2011

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