Collaboration between retailers and manufacturers is more critical today than ever. Consumer preferences are changing at a more rapid rate due to increasing ethnic diversification, the desire and expectation of personalization, rising healthcare costs, challenging economic conditions, and many other factors.
Many of us grew up in an environment where our neighbors lived a life similar to our own with similar shopping behaviors and preferences. That is no longer true today. The heritage, lifestyles and preferences of our neighbors may be quite different from our own and because these factors influence behavior, it's critical to understand specific changes instead of guessing or assuming that all customers will react similarly.
Collaboration between retailers and manufacturers shouldn't be exclusive to a new product launch, promotion or supply chain initiative. True success comes when thinking is shifted from how both parties can win individually, sometimes at the detriment of the other, to how the retailer and manufacturer can win together with the customer.
Retailers and manufacturers face similar issues:
- They must generate short-term and long-term positive cash flow and provide an acceptable return on investment to their shareholders.
- They operate in competitive environments where excess capacity exists lowering the barriers to entry.
- They both serve a customer with many choices and with needs that are changing at an ever-increasing rate.
A disconnect between the two parties develops when the retailer or manufacturer believes they can only maximize their own position at the expense of the other. This misconception limits thinking about what the improved outcome could be and how by working together, both can win and achieve something that neither could accomplish alone.
It starts with understanding the customer
Retailers and manufacturers both talk about better serving customers and fully meeting their needs. CEOs and senior executives commonly describe their organizations as customer-centric. That discussion often quickly transitions to traditional methods of measuring success like sales, cases sold, gross margin rates, turnover, etc. These metrics are all inward focused rather than concentrating on the group (customers) they say they are interested in better serving.
Let's start with basic myths that must be discarded:
Myth #1: Retailers and manufacturers are capturing most or all of the sales available from the customers shopping their stores or their brands.
Fact: Even among their best customers, uncaptured sales potential is two-times current levels or even higher and this upside is with their very best customers. Lower levels of customer loyalty have even more positive upside.
Myth #2: The secret to success is developing strategies to acquiring new customers.
Fact: This approach risks alienating a company's already established, loyal customer base. Through our own research at dunnhumby, we understand that it takes 12 to 20 new customers to make up for the loss of just one highly committed customer. With that knowledge, it is important to create the right balance between rewarding loyalty while pinpointing only the relevant acquisition targets.
Myth #3: Data are insights.
Fact: Data are metrics that answer "what." Insights start with the data and build a level of understanding to go from "what" to "why" and "what actions must I take to change the situation?" and "what was the effect after I took the action?" At dunnhumby, data is used to create insights and we work side-by-side with our clients to turn insights into actions and actions into positive results.
Myth #4: Customer research, including qualitative and quantitative surveys, are the basis of rich customer insights.
Fact: What customers say and what they do is often different. Customer research can provide rich contextual data to help interpret customer behavior. A real understanding of the customer starts with what they buy, when they buy it and how often they shop. If needed, we can then talk to the same customers to understand the needs and motivations that led to the specific behavior to influence future behavior.
One size does not fit all and understanding how customer segments react differently is the starting point to a better connection with shoppers. It is easier to give customers what they want when you know what that is. A fact-based approach will help the retailer and/or the manufacturer individually make better decisions and the most meaningful achievement comes when they collaborate together.
Collaboration begins with a new common language
Collaboration between the retailer and manufacturer starts with creating a new common language to describe the business. Discussions between the retailer and manufacturer should start with: How many customers are shopping in stores or buying a category? How often are they shopping? When do they shop? How many units do they buy each time they shop? How does this differ for customers who are more price-sensitive as compared to those that are less price sensitive? How are these metrics changing over time?
These measures describe customer behavior – these are the data. Collaboration begins with a common understanding of this data, layering in customer research, store and sales force feedback, and other insights and then working together to map out the strategy and actions to win more of the best customers' baskets. What actions must the retailer and the manufacturer jointly take so they both do a better job of engaging more of the best customers?
Collaboration between the retail and manufacturer means:
- We measure promotions by the number of customers they engage rather than only the number of cases sold or incremental sales created.
- We make assortment decisions to ensure that we offer products that appeal to the most loyal customers that shop with us rather than focusing on carrying the products that comprise the most sales.
- We understand how products within a category are cross-shopped so we understand which products are complementary vs. which are substitutes for one another.
- We measure category and department success by understanding if we're growing the number of customers who buy our categories over time and how much customers are spending with us.
Sales or profits are not bad words. Long term sales and profits are the positive outcomes you achieve when the starting goal is to win with the customer.
Collaboration among the retailer and two or more manufacturers
This next level of collaboration is a more advanced step on the customer-centric journey and it involves defining customer and category strategies that are manufacturer agnostic. Individual manufacturers then define the actions they must make to support this broader customer category plan. The objective must be about increasing how customers engage in the category vs. how individual brands or products perform.
Challenging times are just that – challenging. This disruption in the status quo means we must also change. There are tremendous benefits when we embrace change and look for a new approach that is more effective. Customers will guide the way, we just have to be good students, do our homework and act. That level of understanding can occur sooner and actions can be developed, tested and deployed faster when the retailer and manufacturers are more focused on working together in a changing environment to win with the customer vs. using that same energy to maintain their positions with one another.
Collaboration and customer-centered decision making may be the "right" things to do. A more pragmatic view is that collaboration around the customer is the only sustainable way for a financial win-win for the retailer and manufacturer in the long run.
Saundra Linn is Vice President, Client Leadership at dunnhumbyUSA where she leads team engagement for The Kroger Co., responsible for advancing both the development and execution of customer-based solutions. Haluk Nural is Senior Vice President, Manufacturer Client Leadership at dunnhumbyUSA, responsible for building relationships with consumer packaged goods companies to develop long-term customer-centric strategies. (Photo by wonderferret.)