Pressure on manufacturers in an age of assortment consolidation

In an upcoming age of assortment consolidation can food manufacturers still command shelf space and attract new generations of shoppers? Christoph Knoke, managing director Germany, IRI, reports.
 
Is retail shelf space expandable? We posed this question recently in Germany where until recently we’ve seen continuous growth in assortment for so many years that we felt it had to end at some point. During challenging economic times, it’s fair to say that there are more opportunities to throw different products on shelves to give the consumer more and more choice and to see what they buy.
 
But times are changing, especially here in Germany where the economy overall is healthy with moderate but steady growth in GDP (+1.5%), low unemployment (6.1%), low interest rates and low inflation.
 
According to a recent IRI study, all the signs are pointing towards the German market entering a new phase of assortment consolidation. The figures indicate that while in 2016 all food and drink categories grew in assortment size, 2017 is looking different, with half of all categories shrinking (based on the analysis of MAT June 2017 vs. year ago). We are still seeing overall average growth of 1.2%, but down sharply from the 3% figure in 2016.
 
Germany is following a familiar pattern in other markets across Europe, particularly in the UK where we’ve seen major cuts to assortment over the last two years (accumulated -10.5%) to help reduce costs and drive profits. France and Italy are also seeing reductions across some categories, however others are still growing.
 
So as assortment is likely to shrink in these markets in the next years, the pressure is on manufacturers (and retailers) to attract both existing customers in-store, along with a new generation of shoppers with quite different buying habits and purchasing criteria. 
 
Categories that are still growing in item numbers tend to indicate particular buying trends or opportunities for manufacturers to either grow in that category or associated categories.
 
For example, we are seeing continuous growth in chilled food (+3.3% vs +7.8% in 2016), which is being triggered by demand for greater convenience, or even ‘ultra convenience’ in the case of younger consumers, as well as new flavours and a move towards healthier food choices.
 
Trends like health and sustainability are key drivers among younger shoppers in particular. An IRI shopper study last year revealed that Generation Y or Millennials are more interested in purchasing natural foods than functional items. Sustainability is also important – more than a quarter of Millennials said they favoured ethical and sustainable products, with 28% saying that the on-pack claims regarding sustainability were important to them. Nearly half said they would pay a premium for products that they considered ethical and sustainable.
 
However, in practice – something that is common across all demographics – people often say they want to or will buy ethically, but then don’t. Another challenge with addressing Millennials as a group is that individuality, freedom and flexibility are important values to them.
 
In this case, manufacturers could look to a category like non-alcoholic beverages, which according to our recent study is also growing in assortment size (+3.2% vs +6.2% in 2016) and where there are opportunities to push new flavours, offer convenience with ready mixes (smoothies or breakfast drinks) and premium products, such as hybrids of fruit drinks.
 
But there is also a level of risk for manufacturers in testing new and broader assortments on different generations of shoppers – with different behaviours and attitudes – in a bid to stay relevant on supermarket shelves.
 
On the one hand retailers look favourably on new products, but on the other, the products need to prove their relevance and contribution. Moreover, even when trends become popular and niches grow, retailers will then assess whether there is enough potential for private labels to enter the category. Very often this leads to a replacement of smaller or niche brands on the shelf with own label – and ultimately to greater assortment consolidation.
 
On the subject of private label, it’s important to note that while branded goods are still growing in terms of number of items – with 0.4% vs +2,8% in 2016 – ten out of 18 categories are shrinking in number of items. Private label, on the other hand is conquering some of that shelf space. In fact, 14 out of the 18 categories are expanding their presence.
 
One category under pressure, due to available chilled shelf space, is dairy, yet private label is still growing by 5% versus shrinkage of branded items by -2.7%. There’s a similar picture in ready to eat meals, sauces and canned food, while chilled food’s main contribution is from private label (+5.8% vs. +0.5% for brands).
 
In summary, manufacturers and retailers need to better understand assortment complexity in this new age of consolidation. It seems obvious that focusing on range and reducing assortments need to be done wisely. Traditional lists of so-called ‘top and flop items’ and simple decisions to cut long tails in assortment ranges could potentially put revenue and shopper frequency at risk, since they do not take product interactions and reasons for shopping trips and store selection into account.
 
Instead they should be looking at things like the incrementality of products, whether shoppers are switching to other products, or even stopping buying when products are not on the shelf. This will enable them to build scenarios for assortment changes and fully understand the impact these changes have on revenue, volume and even on profitability.