The headlines are full of the changes at retail and retail channel dynamics. Walmart buying Indian online retailer Flipkart: Asda and Sainsbury merging: Walmart withdrawing from South Korea, Tesco and Carrefour commencing on a ‘strategic alliance’ (whatever that means!) It is hard to avoid the conclusion that the world of retail and retail channels is beginning to show signs of the strain. Signs of strain driven by massive shifts in shopping behavior. Yet beneath the big-name stories which grab the headlines are more subtle, low profile changes. And these changes, no matter how low profile for now, are set to have a dramatic impact on retailers, on the manufacturers that supply them, and on the shoppers who visit their stores. Let’s look at a recent example – hybrid retail channels.
Retail channels are shifting and morphing
We’re seeing a number of cases of channel-shifts – where retailers are jumping into new retail channels. We’ve seen big-box retailers such as Walmart or Tesco go decidedly small-box with minimart and convenience store openings. We’ve seen hypermarket retailers experimenting with van sales. And now we see channel merging to form hybrid retail channels: in this example a convenience store combined with a pharmacy.
Hybrid retail channels?
I’m not sure how common this is globally, but I’ve traveled a fair bit and have only rarely seen it. I did see Grocery/Pharmacy stores in India a couple of years ago, but otherwise not at all. Pharmacy chains have traditionally resisted selling groceries. This is because pharmacies have thrived on differentiation, a focus on health, and high margins. Stocking groceries that everyone else stocks is hard to fit in that strategy. But now, in Bangkok, Thailand, as in India, we’re seeing convenience stores/pharmacy hybrid retail channels – new retail channels are coming!
Is this a new retail channel?
Before we go any further, is this a new retail channel? Well, channel definition isn’t an exact science. Most effective channel definitions and strategies look first to shopper behavior. Would this potential new retail channel attract different shoppers or different shopper missions? In this case, I would argue, yes! There will be pharmacy-led missions that would not normally take a shopper anywhere near a convenience store. Pharmacies attract specific shoppers – particularly older people, or young parents. That might mean that the convenience store offer would need to be different, in order to optimize it for this different shopper mix.
What drives the creation of hybrid retail channels?
What has changed? Two simple things: two business models. One which is struggling to find new growth opportunities, and the other which is struggling for survival.
Retailers struggling to discover new growth will explore new and hybrid retail channels
Convenience stores in many markets have multiplied at an extraordinary rate. In many Asian cities it appears every other shop is a convenience store (I live in Bangkok and can easily walk to fifteen convenience stores within five minutes of my apartment!) At some point store concentration must start cannibalizing existing stores – so how to keep up the frenetic pace of growth? Entering new channels – and therefore the creation of the convenience/pharmacy hybrid retail channel.
Crushing pressure from online forces other retailers to adapt and create new retail channels
And what of pharmacies? Why are they now bed-fellows with convenience stores? Simply put, changes in shopping behavior are hitting pharmacies hard. Not because of the core business. Medicines often need to be sold by a qualified pharmacist, so that part of the pharmacist business is, to some extent, immunized against retail disruption. But in most parts of the world, pharmacies have been bolstering their core business with other personal care products. Many, pursuing their exclusive/differentiation strategy, have chosen to stock upmarket, health-focused products: skin care for sensitive skin, for example. They’ve branched out into categories such as vitamins and minerals, because they had strategic value. They were a perfect fit with the pharmacy positioning, and their shoppers were loyal. Once a shopper is locked into an exclusive brand, there is a good chance that they will return.
Online has a disproportionate impact on some retail channels
The trouble is, all that has changed. The categories that pharmacies chose to focus on are also some of the first categories to go online. Expensive, long life products which require a separate shopping trip, such as skincare products, are ideal for the online shopping trip. Shoppers are loyal to the brand, not the retailer, and once a brand has been chosen, the retailer adds little value beyond stocking the product. Once the brand is available online, the shopper has no need to visit the store. Pharmacies still drive trial, but trial isn’t very profitable. The big money lies in repeat, and from a shopper’s point of view, online wins that race hands down.
So, two channels find that commercially and strategically, there is a need to change and adapt to the new retail reality and create a hybrid retail channel. What of manufacturers?
Manufacturers need to understand the threat and opportunity that disruption to retail channels represents
Manufacturers will increasingly find massive challenges to their brands very existence. Yet when I speak with companies, their digital efforts and energies are focused on consumer marketing: how to reach consumers in this social media world. Very little energy or effort is being put into creating shopper marketing, trade marketing and sales strategies to cope with such significant shifts. New retail channels, new customers, closing stores, mergers, acquisitions. All of this challenges a consumer goods industry (and a pharmaceutical one) that has never seen this level of disruption – ever.
Too many manufacturers are simply not prepared for disruption to retail channels
I presented recently at a pharmaceutical OTC conference and stunned the audience by predicting that there would be fewer pharmacies in the future. I explained using the rationale above. None of them were prepared for a significant shift in the number of outlets: the lost sales, the lost competitive advantage of having good relationships with pharmacists. No strategies to deliver competitive advantage and shopper value through new emerging channels.
Take action to plan for the disruption of retail channels now
How ready are you? How good is your team at predicting the future? How robust is your business to cope with significant shifts in the customer base or in the behavior of your core customers? How well equipped is your team to manage the inevitable upheaval? What should you do next?
Do something. Get in touch and let’s help understand your readiness for the disruption to retail channels of the coming years. Or book me to come and run a session with your team, or present at your next conference. It’s time to act, before the real pain begins.
