Whatever the reality behind marketing's vaunted contribution to corporate success, the large budgets it has enjoyed for decades are finally beginning to attract attention—even criticism. So much so, in fact, that doubts are surfacing about the very basis of contemporary marketing: the value of ever more costly brand advertising, which often dwells on seemingly irrelevant points of difference; of promotions, which are often just a fancy name for price cutting; and of large marketing departments, which, far from being an asset, are often a millstone around an organization's neck.
Doubts are surfacing about the very basis of contemporary marketing
These uneasy suspicions grow even more troubling in the face of the environment in which consumer goods companies are operating today. Private label, large and increasingly sophisticated retailers, and the current recession all exert pressure on their margins. Consumer loyalty to their products dwindles. Line extensions stand in for innovation, while genuinely new products—and the new markets they might create—prove hard to find. Technology, instead of enhancing product or service distinctiveness, erodes it. Value shifts away from manufacturers and toward the point of sale.
Conscious of these painful trends, many chief executives are beginning to wonder whether the higher salaries, better perks, and loftier status typically enjoyed by marketing managers—especially in consumer goods companies—are justified. In the last two decades, marketing departments have generated few new ideas. True, they have helped to execute the necessary structural changes arising from developments in globalization, information and communication technology, strategic planning, and organizational design. But when we look for new marketing frameworks, or for the fresh approaches that will help build the long-term relationships that manufacturers most need today, the examples are few.
In the ascendant
From the 1950s through most of the 1970s, the marketing function drove the rise to power of consumer goods companies. Everybody else—distributors, retailers, other functions, even consumers—was swept along as manufacturer's brand fought manufacturer's brand for dominance.
During this period, marketing drew its power from two principal sources: innovation and a company's relationship with its customers and consumers. The years from 1950 to 1975 witnessed a tremendous surge in prosperity, accompanied by the mass penetration of refrigerators, washing machines, freezers, and many other household products that most developed societies now regard as virtual necessities. Such products also drove secondary demand for consumer goods.
In parallel, the spread of television and the introduction of commercial channels allowed manufacturers to develop a new kind of relationship with consumers. At relatively low cost, television could communicate intangible benefits and cultivate trust. Not only were new products created, but brands were built—brands that have demonstrated remarkable staying power. Nearly half of the top 50 brands in the United Kingdom in 1991 originated in this period.
A function without a cause
With a history as strong as this, why does marketing lack direction today? One answer is that the environment has changed so dramatically that marketers are simply not picking up the right signals any more. Past experience is no longer a reliable guide to what today's concerns should be. Marketing has been struggling to respond to several environmental forces that have been at work since the mid-1970s. Of these, none has been more powerful than the rise of retailers.
Retailers' growing clout
In the United Kingdom, supermarket chains first developed in the post-war consumer boom, gradually pushing out the independent and cooperative grocery stores that had long been associated with the country's economic fabric. Between 1975 and 1990, the number of grocery outlets almost halved, and their average size more than doubled. In the same period, the market share of the top five retailers doubled, and the share of private label packaged food and groceries increased to more than 30 percent. Store-door sales staff have now been replaced by key account sales managers, and the bulk of products are now distributed to stores via central warehouses established by the retailers themselves—effectively keeping the manufacturer away from the consumer. Through the 1980s, the profits of UK supermarket chains grew by over 20 percent per annum, doubling average after-tax profit margins to 6 percent, although capital employed has also increased significantly.
The former "nation of shopkeepers" is fast becoming a nation of supermarkets
Thus, the former "nation of shopkeepers" is fast becoming a nation of supermarkets—but consumers shouldn't be complaining. By squeezing out distribution inefficiencies and demanding increasingly hefty price concessions from suppliers, supermarkets are forcing their costs down, and are passing on part of their savings in the form of lower prices to consumers. A further significant part of the savings has been invested in superior shopping environments, greater choice, and better-quality products. In addition, many chains, realizing that their name is an asset, have taken care to build a strong brand reputation for high-quality own-label goods.
On the Continent, discounting is at work. Companies such as Germany's Aldi are opening up small street-corner shops, running them with minimal numbers of staff (thus avoiding the heavy overheads associated with supermarkets), selling only the fastest-moving items (often straight out of their delivery boxes), and offering a range of private label items that are exempt from the high added costs involved in advertising, transporting, and stocking branded goods.
Having spread their concept across continental Europe, these discounters are now setting their sights on the United Kingdom, where they are beginning to dent the market grip of the supermarket chains. These "hard" discounters, which offer prices 20 to 25 percent below those of the traditional supermarkets, are expected to command up to 15 percent of the UK market within the next few years. The discounters already hold shares of between 10 and 15 percent in Belgium, Austria, Denmark, and Norway, and over 20 percent in Germany (Exhibit 1).
In the United States, massive consolidation has produced retail giants that rule the marketplace: Home Depot, Kmart, Toys "R" Us, and Wal-Mart. "Power retailers" like these are not shy about dictating to manufacturers what products they want made, when they expect them to be delivered, and even what prices they are prepared to pay. By flexing their muscles, they are forcing manufacturers to rid themselves of inefficiencies in their organizational and operational structures. Again, savings are passed on to consumers. Not only that: better utilization of IT innovations is allowing retailers to track purchasing behavior and ensure that consumers get precisely what they want when they want it—not when manufacturers prefer to make it available.
Another US trend, that of the warehouse clubs, is also beginning to encroach on traditional retailing channels—with perhaps even greater impact. A recent study* found that by keeping operating costs down (Exhibit 2), these clubs can offer prices that are on average 26 percent lower than those of regular supermarkets. Having wrested channel power from high street stores, the clubs are expanding their share in almost all product categories. Some are even exporting the concept, particularly to Europe.
Reacting to change
The response to many of these developments has been to create a trade marketing function, which has helped manufacturers understand the evolution of the retail trade. However, manufacturers' growth in profits—an average of 10 to 15 percent annually between 1975 and 1990—has been driven mainly by functions other than marketing.
In manufacturing, for example, tools and techniques borrowed from upstream industry—manufacturing resource planning, benchmarking, and just-in-time delivery—have been deployed to wring costs out of core processes. In logistics, distribution and warehousing practices have been simplified and integrated as parts of a single unified network. Logistics professionals from a manufacturer sometimes operate at a retailer's site to ensure that things run smoothly. Sales teams, retrained to sell in the new environment, are armed with personal computers that run models for shelf-space management and product profitability.
Stand and stare
Companies may have tightened up their manufacturing operations, improved logistical support and flexibility, weeded out unprofitable businesses, invested in new information and communications technologies, and trimmed organizational fat. But the response of their marketing departments has been unimaginative. In fact, marketers largely exploited the extraordinary spending spree of the 1980s by raising prices ahead of inflation, while at the same time their colleagues in other functions focused on reducing costs. Marketing professionals took what was theirs for the taking—cleanly and effectively exploiting market conditions. But there was nothing really new, nothing really creative or innovative, in what they did. They had the old game down pat, and there seemed little need for breaking new ground.
Found wanting
When marketing's contribution is examined in the light of classic performance measures, its record, in general, is less than inspiring.
Innovation
Marketing departments have become tremendously averse to risk. Despite the accelerating rate of product launches, few genuinely new products are emerging. Of the top 50 brands in the United Kingdom, for example, only nine have been introduced in the past 18 years (Exhibit 3). In most categories, the top 10 brands include no more than two or three that have been introduced since 1975; in others, such as confectionery, there are none at all.
This lack of product in class="ArticleHSubText"novation is not confined to the United Kingdom. Marketing managers in continental Europe and the United States alike have shown much the same reluctance to try out anything that has not been fully tested, preferring instead to ring the variations on currently successful products by means of line extensions. What innovation there has been in consumer goods has come largely from packaging suppliers and grocery retailers.
In the long run, however, line extensions are not sustainable as a means of differentiation. Consumers inevitably tire of them, which further accelerates the growth of private label. Only those companies capable of consistently developing new products with staying power will outmaneuver their rivals in current markets, and stake out new ones—a vital necessity as existing markets contract. Some leading consumer goods companies, realizing the importance of product innovation, are starting to develop new measures of marketing performance—measures concerned less with the assessment of advertising, sales, and promotions, and more with the evaluation of innovation.
Brand share
As many as 30 percent of all cigarettes sold in the United States today are private label
The recent and much-publicized decision by Philip Morris to slash its prices on such premium cigarette brands as Marlboro has coincided with steps by many other leading consumer goods companies to cut the prices of their brands, or at least to defer planned price increases in response to market share pressures. The inroads made by private labels have been staggering. As many as 30 percent of all cigarettes sold in the United States today are private label—up from almost zero a dozen years ago. In many countries, moreover, private labels have become brands in their own right, often with a record of quality and innovation that brand manufacturers might envy. In many categories, private labels have emerged as number 2 to the leading brand.*
Growth
Though the 1980s saw record growth in consumer spending, consumer goods companies were unable to capture much of it; the greatest portion went to retailers. Supermarket retail space expanded—and continues to do so. (If they keep up current levels of growth, the UK grocery superstores will add 40 percent more space in the next three years.) Forced to concede larger discounts to retailers, and increasingly losing their traditional quality edge over retailer brands, manufacturers lost out.
Changes in demographics and eating habits pose a further threat to the market growth of consumer goods companies. In 1982, for example, branded consumer goods represented a "share of stomach" of about 52 percent. Today, the growth of eating out has eroded grocery sales to less than 80 percent of food consumption, of which fresh produce and private label products command a rising proportion. This confines branded consumer foods to a 33 percent "share of stomach"—a fall of about one-third in less than a decade (Exhibit 4).
Advertising and promotion
The effectiveness of advertising and promotional spend is another measure of marketing's value. But assessing advertising effectiveness is a murky business. Measuring increases in sales against a specific campaign is virtually impossible, and may be beside the point.
In an increasingly fragmented communications environment, ads themselves are getting less effective at their job: building awareness about a company or brand, or registering the benefits and distinctiveness of a product. And CEOs are frequently discovering that cutting back on their advertising spend seems to have little impact, at least in the short term.
In many categories, promotions are so focused on retailers that virtually nothing is left for the consumer
In addition, many marketers are being forced by retailers toward promotions. This can be even more debilitating. In many categories, promotions are so focused on retailers that virtually nothing is left for the consumer.
Admittedly, in some parts of the world, such as the United States, where retailers often sell their electronic point-of-sale data, marketers are developing techniques to improve their measures of advertising and, especially, promotional spend. However, in other regions, such as Europe, EPOS data are harder to obtain.
A new role
Fairly or unfairly, many consumer goods CEOs are beginning to think that marketing is no longer delivering. Moreover, with the current recession, changes in consumer behavior, and upheavals in retailing, rising to the marketing challenge can only get harder. Marketing departments need to establish a new role for themselves.
Broader
In the old days, marketing concentrated on the consumer; today, its attention is on the trade. Consumer goods companies spend large chunks of their marketing budgets on providing trade promotions and doing trade deals. Overlooked in this process, the consumer is often shortchanged.
Tomorrow's marketers will identify and support the linkages between consumers and retail outlets, and attend to the whole shopping experience
Tomorrow's marketers will be known for their focus on both parties, as they identify and support the linkages between consumers and retail outlets, and attend to the whole shopping experience. Equally important will be their ability to interpret consumer and retailer needs, and to keep tabs on how—and how far—their products meet those needs.
A simple example of a (currently missing) link between consumers and retail channels is in chilled foods. A retailer might go to great lengths to keep products chilled. But if consumers leave them, as they often do, in the back of their cars for several hours, the result will eventually be spoiled food. If manufacturers were to construct a "total system" for chilled food, delivering goods directly to a consumer's door, they could ensure that people actually get what they have paid for: edible food.
Such an approach would mean thinking about much more than manufacturing and distributing to retailers. It would encompass the design of products to meet both retailers' needs and the delivery of products to the customer's table. Where manufacturers have taken a "total system" view, the rewards have been considerable. Eismann, by providing a home delivery service for frozen food, has—together with its emulators—captured over a third of the German frozen food market.
Deeper
Marketers need also to develop a deeper understanding of the details of the consumer goods value chain. This involves purchasing, logistics, and key features of the buying process, where new technologies (such as EPOS systems) and new market research techniques (such as product attribute tradeoff analysis) can be used to great effect. In future, what will matter will be the ability to understand the behavior of consumers both at the moment of purchase and during consumption; the flexibility to make tradeoffs within a company's business system; and the determination to make a proactive response to retailers' strategies.
Understand buying and consumption behavior. As many as two-thirds of all product choices are made in a matter of seconds as consumers stand in front of supermarket shelves (Exhibit 5). Marketers need to understand how customer choice is influenced by the surrounding fixtures, shelf position, and packaging design, as well as by price and mental images. Realizing that such factors were too important to be left to retailers, Mars has designed its own dedicated fixtures and has trained merchandisers to advise corner shop outlets about confectionery display and product positioning.
Marketing professionals also need to appreciate not only the need that a product satisfies, but the event during which it is consumed. Why do people, for example, often eat snacks? If it is to satisfy hunger, then a return to wholesome, filling meals would present a threat to snacks. But if it, in fact, answers a need to take a break from work, then the snack trade could profit from the decline in smoking.
Understanding consumer habits at such a level can confer two distinct advantages: first, the ability to design product and delivery packages better and price them appropriately; and, eventually, the possibility of shaping consumer habits.
There may come a point when it makes more sense to serve fragmented market segments with targeted brands
Make tradeoffs within the business system. Ubiquitous blockbuster brands clearly yield enormous benefits of scale. But there may come a point when it makes more sense to serve fragmented market segments with targeted brands. The trick is to benefit from such fragmentation while retaining some of the scale economies of concentration. Understanding precisely where the cut-off point comes can also help in defining the segments in which private labels are likely to succeed.
Respond proactively to retailer economics and strategies. Understanding retailers' outlooks and operations helps manufacturers to design products and packages that they will want to stock. One major snack producer has organized itself into distinct supermarket and corner shop divisions in some European countries so as to serve each channel with tailored products and services. If manufacturers can come to understand retailer strategies and identify which brands fit them and which do not, they may even discover that their best means of reaching consumers with some brands is represented by a different delivery channel altogether.
Marketers must learn how to use an analytical zoom lens, focusing in on the tiniest detail of consumer behavior one minute and then pulling back to a long shot of the big picture the next. Indeed, understanding the consumer is no longer enough; they must understand the buying event too. Why does the same consumer buy cheese at an expensive neighborhood delicatessen, and beans at a discount store? Old marketing theories based on traditional customer segmentation will not supply the answer.
A new organization
It is clear that many of today's marketers may not make it. In some companies, CEOs are already reorganizing marketing to reflect the increasing priority of product innovation. Elida Gibbs, Unilever UK's personal care division, is testing a new approach: marketing directors no longer have advertising, sales, and promotion as their primary responsibilities. Innovation and product improvement take precedence instead. In fact, there will not be a marketing director in future. The reformulated role will carry the title of brand development director.
Among others, Procter & Gamble has introduced the concept of category management, which combines the management of all brands in the same segment to ensure greater coherence in strategy. In the era of marketing now emerging, new divisions may be needed to separate tactical from strategic activities, just as there is likely to be a rethink about which aspects of marketing are best handled from the center, and which on a devolved or local basis.
Some marketing practices are certain to need reform. One approach is to treat marketing as a process, rather than as a department. Here the organization is not divided by function—into marketing, sales, and production—but by its core processes, such as brand development and delivery system fulfillment. Under this structure, key issues can be tackled wherever they occur, rather than being stalled between functional boundaries.
Executing a marketing transformation will not be easy. It cannot be achieved by a simple one-off structural reorganization, the hiring of some new talent, or the definition of a few new management processes. One thing, however, is clear. In order to emerge from its mid-life crisis, marketing will need to take the lead in engineering its own future. 