It has become commonplace that polarisation in retail is accelerating. In grocery, shoppers are migrating to hard discounters and premium chains such as Waitrose and M&S.
It has become commonplace that polarisation in retail is accelerating. In grocery, shoppers are migrating to hard discounters and premium chains such as Waitrose and M&S. In fashion, Primark and luxury brands are growing fastest. In general merchandise, it is B&M or Dunelm at the value end and John Lewis at the other. The same is true of hotels, airlines, leisure clubs and so on.
“When competition increases, a tipping point is reached beyond which the winning strategy is to segment and differentiate”
Michael Jary, Partner, OC&C Strategy Consultants
The middle market is a tough place to be. But the reasons are less frequently understood, as are the possible ways in which a mid-market player can respond.
One sure reason is an increasing sophistication and confidence on the part of customers to match their choice of fascia with the needs of the occasion. Loyalty (as measured by share of wallet of main customers) is generally falling for all retailers.
But a more important reason is intensification of competitive dynamics. Total retail space has increased by about a fifth in the past decade, and a similar effective dilution has been introduced by online. The customer has seen a step-change in choice, both of stores within handy driving distance and the growth of ecommerce.
When few competitors play, the winning strategy is to occupy the middle ground. All major players converge to the same strategy: to serve the masses. That is still true in industries with high entry barriers such as retail banking, mobile networks or energy providers.
But when competition increases, a tipping point is reached beyond which the winning strategy is to segment and differentiate. Know who you target, and who you do not. Be distinctive. What Waitrose and Primark have in common is that they saw their industries were reaching this tipping point and understood this basic plank of strategy.
This does not mean that mid-market competitors need to get ‘stuck in the middle’. Next (understanding and sticking to its younger customer) or Sainsbury’s (consistently maintaining an edge on quality and service) prove that distinctiveness is still possible without being either premium or discount. Being stuck in the middle is not a problem per se. Being stuck with an indistinct position and unable to decide which customers to love and which to lose, is.
The dimensions of possible distinctiveness have also narrowed. Location is rendered irrelevant by the internet. Range can be infinitely extended online. Price is transparent and being taken out of the equation. Capex on stores can be replicated, and even technological advantage becomes tomorrow’s legacy problem.
Arguably only three things are left as real underpinnings of sustainable differentiation. The first could be a truly advantaged cost model such as that of the hard discounters. The second is people – authentic culture and values which inspire colleagues to deliver a superior customer experience. The third is deep customer insight – understanding and anticipating needs better than the competition.
In a crowded marketplace, retailers had better have at least one of these to underpin their unique position. Many of today’s strugglers do not.