Adopting a consumer goods outlook

In an earlier column I noted the success of retail executives with backgrounds in FMCG and the growing tendency of retailers to act more like FMCG businesses when managing their brands and in understanding customers.

This reflection of best consumer goods practice by major retailers can also extend to how they structure their organisations or would like to be perceived. When announcing his retirement, Sir Terry Leahy remarked the consequent restructuring at Tesco would “make it more like a consumer goods company”. This is no real surprise. The significance of Tesco’s international operations has clear parallels in many FMCG companies, whose multinational status has long overshadowed their often domestically constrained retail customers.

Conversely, as far as Walmart is concerned, despite international revenues above $100bn, it believes that the sheer scale (three times larger) of its domestic operations is what makes it more like an FMCG company. Market share, Walmart maintains, is a more relevant measure of its performance than the ‘same store comps’ with which the retail sector is obsessed.

Smaller retailers too can aspire to emulate suppliers: in a recent Financial Times interview Waitrose managing director Mark Price said: “I’d like to see us maximising our potential in terms of launching a big, fast-moving consumer goods brand.”

Private label, of course, has been the primary route for retail incursions into consumer goods territory and is something that ex-FMCG retail chief executives, such Lars Olofsson, the Nestlé veteran now at the helm of Carrefour, focus on in particular.

Retailers could adopt the growing FMCG trend of using external R&D to drive product innovation. The chief executive of Sanofi-Aventis declared recently he would be outsourcing 50% of his company’s R&D to reduce fixed costs. Retailers, typically, also outsource 100% of the production of their private labels but this is not universally the case. Much of Morrisons’ USP derives from its vertical ownership of important production facilities and Waitrose, too, has invested wholly or jointly in African farms as well as Duchy Originals.

However, retail and consumer goods companies remain different animals and the latter have many attributes that their retail customers will never want, or rarely be able to match. L’Oréal, for example, spends more than 30% of revenues on advertising and promotions. It also achieves an operating margin of about 15%.

As in so many domains, traditional boundaries in the supply chain are being erased by the internet. This is enabling consumer goods companies to return the imitative compliment and operate like retailers themselves. Brand-owners going direct to end-users is no new phenomenon but it is spreading into new pastures.

The Japanese virtual mall Rakuten (64 million members) houses a number of distributors whose revenues exceed $1m per month. These include a specialist in fresh eggs. Rakuten has also just acquired PriceMinister, the leading ecommerce business in France for e200m. As the French often say: ‘On ne peut pas faire d’omelette sans casser des oeufs’. Looks like they found a new supplier.