PAY THE PRICE OR SUFFER THE CONSEQUENCES

In my previous blog we considered the pressures on many retailers to offer merchandise at increasingly lower prices to ward off competition and satisfy the ever-demanding needs and requirements of shopper. This often leads to dubious practices with respect to their sourcing of material and their relationships with their supply base.

At the end of that blog I raised a question as to the attitudes of shoppers with respect to “green” merchandise or items that are environmentally friendly. In particular are they willing to pay a premium for the privilege of purchasing such goods?

Before we consider that question it might be appropriate to examine the changing approaches of companies in general and retailers in particular to the issue of sustainability.

Prior to the beginning of this century (the noughties) the overall issue of sustainability covered a number of broad areas encompassing: ethics, social responsibility and environmental concerns. Governments and policy-makers began to introduce legislation which placed the issue of sustainability on the agenda for many organisations. Many retailers adopted what we might call a preventative approach to dealing with sustainability issues. By this I mean that they took a compliance-based approach – where they addressed areas that could not be ignored by the legislative measures that were introduced.

Other retailers saw an opportunity to generate “good news stories” and propagate some favourable publicity. In some cases of course this led to cynical practices – often referred to as “greenwashing”, which we discuss in the text-book in our chapter on sustainability.

Over the past decade or so the issue has moved on in general and features much more prominently on the overall strategic agenda of many organisations. Marks and Spencer has often been cited in the literature as a retailer that was one of the first to fully embrace to issue of sustainability into its overall retail strategy. You can read more about their approach in the text-book.

What impact has this had on the shopper? We constantly see references in the academic and business literature to the “green” shopper, the “ethical” shopper and the “environmentally-concerned” shopper. Is there any evidence to suggest that shoppers are “buying into” such concepts? Is there a danger that we make the presumption that they are? On the basis that the issue is presumptively good for society in general and individuals in particular. Like many similar debates and discussions on “climate change”, is there evidence to suggest that shoppers are cynical about such initiatives and see them as increasing the price of items and merchandise in the shops?

Before we consider some of the evidence I inject a cautionary note. Many of the studies and surveys reported in the media (I encourage you to do some browsing on the internet) are either “region or country – specific”, focus on particular categories of shoppers, for example students or internet users. As a consequence the findings and inferences cannot necessarily be fully accepted as being fully representative of shoppers in general or generalizable to the public.

McKinsey, the US consultancy firm interviewed 1,000 respondents across the USA and Europe in 2012. This indicated that seven in ten people would be prepared to pay an additional five per cent if it met the same standards and performance as a non-green alternative product. If the premium for a “green” product came in at twenty-five percent however, only ten per cent would be prepared to make such a purchase. This provides perhaps an indicator as to the attitudes of shoppers to such products and initiatives.

Another study challenged the conventional view of the demographics of “green shoppers”. The traditional view is that they tend to be young, well-educated and on middle to high incomes. A study by Deloitte challenges this and argues that there is no pattern or prescription as to the typical profile.

Recently in my classes with undergraduates (a class size of over three hundred) and postgraduates (a class of 125), I posed the following question to them. Indicate the level of interest, non-interest or whether you are neutral about green products. In the case of the undergraduate about five per cent raised their hands and said that they were interested in such products. About thirty per cent indicated that they had no interest and the remainder: about fifty-five per cent indicated that they were neutral. Similar findings emerged with my postgraduate students (around forty per cent stated that they had no interest). In this class it was almost exclusively made up of non-UK students.

I am not claiming that my “unscientific” question is in any way generalizable or applicable to society in general. However it is revealing and indicates a number of issues that are of potential interest to the stakeholders in this debate: retailers, policy-makers and shoppers.

For instance it suggests that there are potentially a large number of people for whom “green” issues are not seen as relevant or important in terms of their lifestyles or shopping behaviour.

While other studies indicate that increasingly there are more people around who are interested in learning more about green products and services, this tends in the case of the UK to come in at around twenty-five per cent. A study conducted by www.retailmenot.com suggests that four in five people view “green” products as being more expensive. Three out of five people indicated that they would consider purchasing environmentally friendly products if they cost the same or less than “non-green” products.

If you are interested in this topic, I encourage to engage in a search on the internet on the level of interest and willingness to pay for green products.

There is of course no definitive evidence that we can rely on to make an accurate judgement on the matter. The variation of views and opinions in any event is likely to be wide across different geographic regions.

However I would make the observation that a lot of work needs to be done in order to overcome the reluctance on the part of shoppers to pay more for “green” products. There is also an imperative to be more transparent about the potential benefits that are likely to accrue to shoppers. It can also be argued that it is important for manufacturers and suppliers to address the cost issue and make “green” items that are priced at, or very close to the price of non-green products.

I suspect there is a perception (possibly cynical) that suppliers and retailers a seen to be ripping people off by charging a premium on the basis that the target market is perceived as coming from a middle to high income bracket. As we have noted earlier however it can be a dangerous presumption to suggest that “green” shoppers follow a stereotypical pattern when it comes to demographics.

The active “green” shopper may still be relatively small, relative to the number of people who indicate that they see themselves as being interested in such products and that they make be a focus of good for society.

As legislation in the area is likely to increase over the next few years across a range of areas: from recycling to packaging through to the ingredients that go into products, stakeholders such as retailers and suppliers cannot ignore the trends. In order to speed up the growth of the active green consumer segment however they are going to have to demonstrate a stronger value proposition for the shopper. This certainly will have to revolve around the cost of producing such products and passing on savings to the shopper in the form of prices that are comparable to non-green products. Otherwise they may have to suffer the consequences.

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WILL THE SAUSAGE CONTINUE TO SIZZLE?

In January 2016 Bunnings, the dominant DIY retailer in the Australian market, cast its eyes on the UK and acquired over 260 stores that previously traded under the ownership of Homebase for around £350 million. This is a significant step and may ignite this retail sector over the coming years. It plans to replace the Homebase brand and re-brand the stores as Bunnings – a brand that is synonymous with “all things Australian” but unknown to the DIY enthusiast in the UK.

The UK DIY sector, is perhaps more accurately described as the “home improvement and garden” sector and over the past number of years, despite the prolonged recession, has shown evidence of strong growth – always an attractive but necessary feature of potential international expansion opportunities. It is estimated that it is worth under £40 billion as of 2015.

Bunnings, owned by the large Australian corporation, Wesfarmers, holds over 20 per cent of the Australian home improvement and garden sector. It has based its business model on three main platforms.

  • Every-day-low-prices
  • A very wide and deep product range – covering anything from 95 cent buckets through to hard-core building materials and outdoor garden centres
  • Strong customer services: its staff is built around ex-plumbers, builders and horticulturalists, who provide advice and guidance to its customers.

The cornerstone of its model is the “sausage sizzle”. Outside its stores, it sells sausage sandwiches, redolent of the smell of barbeques and the “great outdoors”. This reinforces the desire of Bunnings to tap into and to be seen as part of the local community. All of the sales from the stalls selling these sandwiches goes to local charities.

In terms of its retail formats, it uses an industrial, warehouse-defined image through large shed-like structures. It also operates smaller units in the inner-cities and towns. As well as carrying a wide range of merchandise, most of its larger stores contain a children’s playground, kids craft workshops and classes for adults on a number of activities that are all designed around the theme of home improvement.

It has established an online presence but interestingly does not provide the means for customers to make transactions on this retail channel. The rationale for this approach is based on the belief that the vast distances between distribution points and customers is likely to make delivery and returns an unprofitable exercise. Instead it uses its online channel as a mechanism for providing advice and guidance to its shoppers on a range of topics and activities. For instance it puts up short “how to” video clips on various aspects of home improvement activities.

The UK market, apart from its continued evidence of growth has other attractions. Perhaps the main one is that around 56 per cent of houses and apartments are over fifty years old: thus providing strong requirements for upgrading and improvement. The vagaries of UK weather patterns also ensure that houses are often damaged from storms and from general “wear and tear”.

Why Homebase as the target for acquisition?

This brand in recent years has fallen into the common trap of ending up being “stuck in the middle” and sending confused messages and signals to shoppers in this sector. Is it in the FIY or the home improvements area? In the latter case it appeared to be competing with retailers such as Habitat while in the former it was up against B&Q, the third largest DIY retailer in the world. In summary it was losing focus and its sales and profitability was suffering as a direct consequence. This was graphically evidenced by the closure of 27 stores in the UK during 2015.

However its brand perception appeared to be strong: it still received a high percentage of favourable mentions and positive conversations on the social media platforms. Its overall brand is that of a well-recognised and established brand.

The challenges?

Bunnings will have to grapple with some significant differences between the two brands as it attempts to re-brand in the UK market.

On price for instance, it operates EDLP policies while Homebase has positioned itself at the premium price points. Bunnings carries a far wider range of items while Homecare has focused on home furnishings and its own brands. Bunnings has placed a strong emphasis on customer service and staff expertise. Homecare has not emphasised this element as strongly in its overall business model. Homebase’s opening hours are more restrictive than the case of Bunnings in Australia. These are areas that will feature prominently in a re-vamp and re-branding exercise.

The UK market is more fragmented than in Australia. B&Q and Homebase between them hold around 15 per cent of market share. Wickes, another major player in this sector, has positioned its brand more closely to the DIY “nerds” and the trade.

The planned re-branding and re-vamp exercise will require substantial investment. If initial reports are to be believed, this will see major changes in critical areas of the retail marketing mix: such as customer service, merchandise and store design and layout. It will also take Bunnings directly into a collision with B&Q, a global giant in the sector. On this latter point at least, Bunnings has form. It has successfully fought off competitors such as Masters in the Australian market and is not afraid of direct challenges to established competitors and brands.

The UK housing market continues to stagnate: prices continue to rise and prospective house purchasers are naturally put off by this trend. It has also become increasingly harder to get affordable mortgages from financial providers. This is exacerbated by higher demands placed on the amount of money needed for deposits and the level savings required in order to be considered for loans. As against that, house owners are possibly more likely to develop existing properties rather than purchase new ones. As a result the demand for DIY-related products and services has not declined to any significant extent during this period.

Bunnings may have to consider the possibility that the “big box”, warehouse type operation that works well in Australia many have lesser impact in the UK; where customers may not require the extent of items offered by Bunnings or be prepared to make destination shopping activities, when they are only making minor adjustments or upgrades to their existing properties.

B&Q are also likely to have the patience and more critically, the resources, to engage with Bunnings on lower prices over an extended period of time.

On a more fundamental level are there differences in culture and behaviour between the Australian and UK customers in this retail sector?

Although obviously culturally similar in terms of language, it can be argued that there are fundamental difference between them in terms of behaviour and outlook. The Australian “psyche” is often portrayed as being based on the “great outdoors” and “mate ship”. Many urban dwellers own “uts” (utility vehicles) and think nothing of travelling to stores such as Bunnings and loading up with a range of home furnishing, gardening and DIY products. This is reflected in the wides spaces and aisles in the Bunnings stores, allied to large car-parking facilities and locating just off major highway junctions – to enable ease of access and convenience.

This phenomenon is less obvious in the UK, where many people live in high-density areas and do not have the same penchant for utility trucks or vehicles.

In the UK the arrival of many legal migrants has led to the availability of cheap but skilled tradespeople who are happy to do work on houses for “cash-in-hand”. Instead of home owners grappling with the challenges of DIY, many are happier to pay such workers to do the necessary. This still means that there is a demand for such products but it has the potential to dampen the enthusiasm for travelling to such “big box” units and spending time discovering the joys of DIY. Convenience and “quick fixes” are the order of the day.

Certainly Bunnings will have to give more thought and focus to the smaller, more localised retail trading format as well as creating an online channel that facilitates purchases and transactions.

In summary the Bunnings case presents us with an interesting and substantive example of a very successful retailer attempting to transfer its business model to an international market that superficially has similar cultures and the same language. However there are a number of potential obstacles and challenges it will have to overcome if it is to succeed.

Let’s watch developments over the next couple of years with interest.

FOLLOW THE YELLOW BRICK ROAD

This blog is about the issue of retailers and their approach to sustainability. One aspect of this “umbrella term” addresses the issue of sourcing material and product from suppliers and how retailers manage this process in an ethical manner with a (supposed) keen eye on being a good corporate citizen.

Since the mid 1990’s (or thereabouts) we have seen an increasing focus on sustainability. This was driven by a raft of revelations about how iconic well-known US brands such as Nike, Old Navy, Gap and so on, were able to sell merchandise at low prices. It transpired that in many cases this was due to their ability to identify “sweatshops” in parts of the world where there was little emphasis placed on issues such as worker safety and where workers were exploited or where child labour featured prominently.

The author, Naomi Klein, through her book No Logo, also flagged up the sins of many multinational companies in these areas.

This triggered protests by consumers and indirectly, it could be argued, forced retailers such as Nike, IKEA and many others, to put in place programmes to address these issues. Codes of behaviour, inspections and audits became “flavour of the month”. Ethical sourcing became the buzz word: sustainability, the Holy Grail. Through the noughties and into this decade this approach continued with ever-increasing rigour and focus. Can we therefore assume that the issue of ethical sourcing and the associated problems have been fully addressed?

Unfortunately not.

We should have been alerted to ongoing problems with the horsemeat scandal which I refer to in chapter four of Retail Marketing. The key learning outcome from this example was that supply chains can become very complex and to a large extent, uncontrollable. We witnessed situations where retailers caught up in the scandal had little or no firm mechanisms in place to trace the ultimate source of the products. Suppliers sourced from other suppliers who sourced from other suppliers across many countries in Europe. Like money that disappears into off-shore accounts through untraceable “shell” companies”, it became apparent that it was very difficult to determine the ultimate provenance of the products.

I was reminded of this case when I read a recent article posted on the internet. (Hobbes, Michael. The Myth of the Ethical Shopper. Huffington Post, 2015).

In this article, the author paints a pessimistic picture of the way in which companies source their material and product. The cynic in me believes that many of his observations have merit. He reserves particular criticism for the tendency of many retailers to wrap themselves around the psychological “comfort zone” of inspections, audits and traceability reports.

By checking paperwork, many retailers are convinced that suppliers are complying with the standards laid down and are therefore behaving in an ethical and responsible manner. Hobbes suggests that rather than relying on quantitative, paper-driven evidence, retailers can learn a lot more from a more subtle, qualitative approach. He cites the example of Nike who used a combination of both methods. Not surprisingly they found that most suppliers “ticked the boxes” when it came to the paper trail. However in-depth interviews with workers revealed that in many cases working conditions in factories had not improved, and in some cases actually worsened.

In many ways this example mirrors the flaws associated with quality management programmes such as the much criticised ISO900 model. In this case, many companies have successfully completed the paperwork to be certified. However it can be argued that the real skill is to provide the requisite and required paperwork, tick the boxes and thereby get certification. It does not necessarily mean that the organisation is fully practicing quality management principles and procedures in an effective manner.

Hobbes argues that the realities (in the case of the retail fashion and clothing sector) of fast fashion and the need to generate new designs and merchandise in a rapid manner to satiate the needs of consumers, means that supply chains become even more complex. This raises questions of traceability, transparency and accountability across the supply chain. It fosters an environment where “short-cuts” are taken by members of the supply chain in order to meet the ever-pressing and demanding requirements of retailers in terms of price, cost-cutting and speed. As an indicator of the changing face of fashion retailing, factories in such supply chains are churning out as many as four hundred different products for a range of customers at any one time.

Let us explore this issue further.

How many of us have heard of a company called Li & Fung? I thought not.

Li & Fung produces a range of products for a bewildering and diverse range of retailers: from Wal-Mart to Disney. It deals with over 15,000 supplier factories in over 40 countries. It has an estimated revenue of nearly $20 billion – more than the combined total of Ralph Lauren, Armani and Tommy Hilfiger. Yet it does not own or operate any of these suppliers. It is essentially a mega-coordinator or middleman that links together suppliers in areas such as cotton supply, textile mills, stitching and sewing houses.

To be fair, it has policies and procedures in place to monitor and audit its supplier base. It feeds back the results of its auditing too many of the buyers. However, given the opaque nature of its relationships and the complexity of the networks, it is almost impossible to eliminate ethical concerns and issues. In recent years it has had to deal with the death of 29 workers in one of its supplier’s factories in Bangladesh. In Cambodia, nearly 300 workers fainted as a result of malnutrition.

As retailers place ever-increasing demands on suppliers, there is in fact no guarantee that orders will be met by the same supplier on consecutive occasions.

Hobbes cites the case of Wal-Mart and its relationship with a company called Tazreen. This company had a major fire in 2014 which killed over 120 workers. The cause of the fire and the inability of many to escape (when the firm alarm went off, they were allegedly ordered to return to their work) due to unsafe stacking of material led to world-wide condemnation.

Subsequent investigations revealed that Wal-Mart was responsible for over 60 per cent of the products being produced at Tazreen. However deeper probing revealed that the global retailer had never placed an order with the company. It used a mega-supplier to meet the orders – a company called Success Apparel. It in turn hired a company called Simco who also sub-contracted a percentage of the order to another supplier who in turn used another one. You get the picture!

The net consequence of this practice is that in many cases retailers can (legitimately?) exculpate themselves from responsibility for any shoddy, unethical or downright dangerous practices or procedures that may or may not happen.

Wal-Mart has subsequently in some cases reverted back to “in-sourcing” in an attempt to retain greater control over its supply chain. However the practice of using “mega-coordinators / coordinators / suppliers” is still prevalent.

What can we learn from this experience?

Firstly it would be naïve to assume that issues such as ethical sourcing and corporate social responsibility have largely replaced the “bad” practices of the 1990’s and noughties.

The complexity of supply chains, allied to the ever-increasing demands on retailers to promulgate the “fast-fashion” era means that it is difficult to trace the provenance of products in the supply chain.

It is also difficult to fully monitor the practices and procedures of this bewildering array of geographically diverse spread of suppliers, sub-suppliers, and sub – sub suppliers and so on.

It begs the question as to whether shoppers are aware or even care about such practices. That is a discussion point for another blog. Watch this space. In the meantime we will continue down the yellow brick road!