Hong Kong Trade Development Council Presentation Final Version

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Marketing to North American Corporate Buyers

& Retail Executives

Understanding the Role Innovation Plays in SME’s

Success



Major Touchstones

• Understand the North American retail environment.

• Internalize how industry (both manufacturers and retailers) are responding.

• What the corporate buyer is looking for.– Innovation.– A Meaningful Brand.– Meet the Retailer on Their Ground.



Understand the North American Retail

Environment



A Quick Note …

In this presentation, we are going to repeatedly refer to Wal-Mart. Some of the comments are unique to Wal-

Mart; however, most broadly characterize the North American

retail market in general.



Wal-Mart Is Not the Only Game In Town!

• Many SME’s make the mistake of focusing only on the “big-box” segment-leaders.

• A successful North American strategy takes into account all segments of the retail community as well as non-traditional retail outlets such as on-line merchandisers and catalogs.



Wal-Mart’s Historical Business Model

• Known for “Everyday Low Prices”.• Purchasing model owes much to what Lopez

developed at General Motor’s (’92-’93 w/ savings of $4 billion).– Similar strategies evolved at Home Depot, Lowes and most

other retailers.• Heavy emphasis on logistical advantages.• Plays consolidation role in rural retail markets.• Has come to dominate market segments.

– Wal-Mart’s segment sales many times are equal to the total sales of the #2 – 5 segment players.

• Recent trends suggest Wal-Mart’s business model, and much of the remaining retail market, is facing diminishing returns on its “cost-only” approach.



“… the low-price message remains important, but Wal-Mart is looking to communicate broader and more complex messages through increased marketing efforts … Marketing is intent on letting customers know about the quality and fashionability of products sold at Wal-Mart …”

“War of Words Continuing Over Wal-Mart’s Salaries, Benefits”, DSN Retailing Today, January 23, 2006, page 4.



But Wal-Mart Is Having to Change



“ ... ‘We want to encourage Wal-Mart customers whodon’t usually come to us for apparel to cross the aisleand see what we have to offer … Fashionable, trend-conscious women represent an important segment of

our customer base’ …”

DSNRetailing Today, October 24, 2005, “Wal-MartLaunches Metro 7 to Add to Fashion Flair”

Quote from Claire Watts, Wal-Mart ExecutiveVice President of Apparel and Home



Wal-Mart’s Struggle as Part of Larger Changes• Wal-Mart’s political problems

are unique to its size; however,• Its broader problems are

related to its business model – specifically two things:– Its resistance to OEMs who have

strong brand names,– Its low-cost emphasis has stripped

many organizations of their ability to develop new products as a consequence to lowered overhead structures.



Likely Character of North American Retail Market Over

18-36 Months• Expect strategy of proprietary branding to wear off (the

Home Depot Ridgid model).• Market stratification will intensify between commodity

products and products w/ brand value or innovative features.

• Retailers will be very hungry for innovation – new ideas, new brands, new sections of the market that have gone un-noticed.

• Additional industrial consolidation (excess capacity which needs to move out of the market).

• Consumers are close to a trifecta: record household debt levels, apathy about “new” products that are not really that new, and over-inflated home sales.– The North American consumer may stop buying, but they

never stop shopping: it’s the manufacturer’s job to give them something they want to buy!



Deflation’s Aftermath• Retailers have gained a significant price advantage

through the benefits of globalization.• The cost to vendors who have not used this to their

advantage has been increasingly lower prices retailers are willing to pay.

• The underlying premise from the retailer is that lower prices will induce the consumer to buy; however,– This premise has a flaw: namely, it will not last

forever. At some point the consumer market will mature and consumers will need new products to begin buying again.

• As can be seen in the Home Depot/TTI/Ridgid/Ryobi deal, the problem is that when the market finally deflates, the vendors who remain are so financially and organizationally distressed they have lost the ability to innovate and brand.



What This Feels Like for a SME



Brand Equity & Changing Strategy

Exposure Time to the North American Market

Introductory StageRetail PartnershipStage

Autonomy Stage Parity Stage

Sale

s G

row

th

Characterized by:•Enthusiastic Retail Partners.•Lower-Price Product.•Competitors do not view as threat.•Product features at market’s minimum expectations.•No brand equity.

Characterized by:•Retailers Test: Additional SKUs Added.•Competitors Acknowledge Presence.•Small product distinctions.•Initial brand equity.

Characterized by:•Needs Shift To:• building greater brand equity, •finding innovative product offerings, and•beginning to educate the consumer.•Competitors Forced to Respond (low-price offerings w/ small innovations).

Characterized by:•Perception of Product & Technology Parity.•High Brand equity.•Innovations Increasingly Sophisticated.•Corporate image marketing activities become emphasized.



Marketing to the NA Retailer




Sale

s G

row

th

Opening Price Point (OPP)) Products Emphasized

Mid-Price Point (MPP)) Products Emphasized

Premium Price Point (PPP)Products Emphasized



Many SMEs Today




Sale

s G

row

th

TRANSITIONING

The Copy-to-CreateParadigm



Adapt … Evolve … Change!

• Managing beyond initial success within the North American retail market requires adaptations:– Copy to Create– Captive to Passive– Manufacturer to Brand-Builder



Internalize How Industry (Both Manufacturers and Retailers) are Responding



Industry’s Response• Chasing the Commodities

– Existing volume is the easiest to identify, the most painful to lose and as a consequence of both, the hardest fought for.

– Companies which chase this buy into the deflationary spiral which inevitably impacts the balance of their business.

• Giving Up Their Brand– As retailers ask for captive brands, the manufacturer’s

value is in capacity utilization, not brand building or relating their product to a consumer.

• Incremental Innovation– This has value, and should not be overlooked – the

toothbrush model can sustain many product life cycles and, in some cases, may entirely re-invigorate them!



The Toothbrush Model

An existing product can be revitalized by emphasizing new features and enhanced functionality – the toothbrush shows this best!$0.99 $6.79 $3.50



What This Model Suggests• If someone went into a toothbrush company in the

mid-90’s and suggested the response to Wal-Mart’s price pressure was to go from a $0.99 to a $6.79 toothbrush, they would have been laughed at.

• And yet this is precisely what Wal-Mart wants – it is in their interests to have consumers driven to a $6.79 unit purchase versus a $0.99 purchase.

• BOTTOM LINE: What retailers may say they want (cost-only advantage) is in fact not what they really need. What they need is innovation, items which drive consumers to buy either an existing need @ a higher price, or an entirely new want @ an undefined price.



As a SME, The Reminder Needs to Be …

• Go back to what you do best – stick with a product you know, a market you enjoy and force innovation!

• Many times this innovation is wholly related to advances in process engineering.



Building Block #1

INNOVATION



“Around the world, Samsung’s brand message was fragmented, and its logo and presentation were inconsistent.

Marketing budgets controlled by product managers, tended to be

allocated to ‘below-the-line’ price promotions designed to meet short-term sales targets, rather than to long-term

‘above-the-line’ brand building.”

“Samsung Electronics Company: Global Marketing Operations”, Harvard Business School, by John Quelch and Anna Harrington,

February 17, 2005





Marketing to the NA Retailer




Sale

s G

row

th

Opening Price Point (OPP)) Products Emphasized

Mid-Price Point (MPP)) Products Emphasized

Premium Price Point (PPP)Products Emphasized

Captive Manufacturing,No Brand Equity

Brand Matters – Initial Differentiation

Lifestyle Branding



Building Block #2

INNOVATION OWN YOUR BRAND

Why does owning your own brand matter? Because if your position is as a captive supplier to a retailer, and not valued on its own by the consumer, the retailer’s cultural position and political fate are going to be your own.



The Corporate-Retail Buyer• What he really wants:

– May not be what he thinks you can provide.

– May not be what he thinks you have (don’t assume he knows your capabilities).

– May not even be what he is asking you for.

• But when he sees something really innovative, he goes from box “A” he has you in, and moves you into box “B” … all based on INNOVATION!



Building Block #3

INNOVATION OWN YOUR BRANDMEET THE RETAILER

ON HIS GROUND

Once you have an innovative product and you know what you want your brand to mean to the consumer, meeting the retailer on his ground reinforces the message that you are not a captive producer – you are an innovator, you can help them build their business.



“On the other hand, the world is filled with one-strategy wonders – industry revolutionaries that were capable of changing an industry, but have yet to demonstrate that they are capable of changing themselves. Even the most brilliant strategy loses its economic

effectiveness over time – this is the process of strategy decay. Any company that can’t

uncouple its long-term sense of identity from its initial strategy will end up as an industry

footnote.”

Gary Hamel, Leading the Revolution, page 211 – emphasis not in the original

Documents

Hong Kong Trade Development Council Presentation Final Version