Constructive Tension through Insights
May 31, 2013 3 Comments
If you are anything like me, I learn best from real life examples. This morning, I was reflecting on a conversation I had with a major retailer a number of years ago, that not only got them to think differently, but caused them to adjust their whole strategy. Below is an abbreviated transcript of that conversation.
Background:
A major retailer saw themselves as ‘The Headquarters’ for our type of products and as such, having a broad assortment was a key part of their strategy. Regardless of how they perceived themselves, their sales in the category continued to decline. They had the wrong strategy, and it was costing them sales and market share.
Following is an excerpt of my conversation with them:
Me: As I understand it, your corporate strategy for [X] category is to provide a broad assortment of brands and give a fair representation of each brand’s line. Is this still a key part of your strategy?
Buyer: Absolutely. Customers have depended upon us as their HQ for years.
Me: I would imagine carrying the top 3 brands in this category is important too…
Buyer: Definitely, it’s critical.
Me: Do you know who is #1 in market share for this category?
Buyer: If you are asking, I am sure it is you.
Me: You caught me, how about #2?
Buyer: (The buyer and Division leader make 3 incorrect guesses, naming our competitors)
Me: I’m afraid not. The three you just named only make up 8% of the market combined. #2 on the list is X [private] and they only sell through their own stores, so as you know, you aren’t able to carry their products. Any guesses on who #3 is in market share?
Buyer: Not if it is someone different from who we already mentioned.
Me: It is. The 3rd largest segment in the market is WYO (an industry-specific term), which rules you out altogether of carrying two of the top three that you said was critical to your strategy.
Buyer: Hmmm.
Me: Do you know what your $/Kit sold is for the other product lines?
Buyer: Do you mean how much in kits we sold?
Me: No. I mean how much ancillary product you sell for every kit sold.
Buyer: No, we don’t track that.
Me: Hmmm. That’s important to know. The reason is that with each of the other lines you carry, the purchase of the kit is all you will make of that sale since they don’t offer ancillaries. Were you aware that for every one of our kits sold, the typical sales on ancillaries are 9 times greater than the kit alone? In fact, that’s what is lost every time you sell another brand. Let’s multiply that by # of kits sold per store times number of stores.
[Figure calculated and presented]
Buyer: Wow! I had no idea. We hadn’t looked at it that way before.
Me: Can you name another category in your stores that achieves this same level of revenue and profitability during this same season?
Buyer: Nothing comes close. The other categories are down when you guys hit your peak.
[Light-bulb moment for the customer with new insights and discovery]
Me: Exactly right.
[The President enters the conversation]
President: What should we do?
Me: You currently have a strategy focused on promoting breadth and fairness to ALL brands. Research shows that 54% of consumers have predetermined the brand they will use before purchasing…
President: Is that your brand?
Me: …It is, and another 34% will compare with only 1 to 2 other brands. You carry 16. In just 2 months time, your strategy of ‘brand breadth and fairness’ cost your stores $xM in sales & $xM in profit. Even worse is that you have lost 7 points of market share. So, in answer to your question, I recommend a strategy change if you want to remain in this category, or otherwise allow us to help you successfully exit the business altogether.
[President pauses and is now at the crossroads with the Status Quo]
The President, after dismissing the buyer and division leader, asked how quickly we could reset the category and serve as category captains.
Doing so would require concessions, if they were serious. He assured me he was. We ended up getting key placement and dedicated signage in the stores, along with many other things that they offered to help them earn back market share and profitability. That following year, they had grown their business with us nearly 30%.
On a related note, we took this same approach with two other major players in the market who achieved even better results that year – One achieving 71% category growth, and the other in triple digits. They remain the market leaders today in their categories.
Summary
The questions I asked revealed that they did not know the answers to key questions. They were looking at things the wrong way. The questions helped to prepare them for a series of commercial insights that created a rich environment to hear a hard truth…that their key strategy was amiss, costing them market share, sales and profitability.
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