Articles

Commoditisation Kills Brands.

Imagine for a moment a retail business that has a wonderful halo of prestige around it. A business very focused on top line sales growth that – on the surface at least – it had achieved consistently over a number of years in a boom economy. Increasingly it uses discounting to drive top line sales growth. It establishes a network of clearance outlets. The division that now runs these outlets starts to talk up how profitable they are and the business begins creating stock to fuel these stores beyond merely clearance. It falls for a wonderful pitch from an online retail monolith to become its clearing-house.

The seasonal sales start to become blunter so discounting goes deeper. We now have a business that is heading down the track of manufacturing product for physical and virtual ‘clearance outlets’ and washing the results into a top line growth story. The market gets a bit tough. They convince themselves that – based on analysis of finished price-points – the consumer wants to pay less money. They begin to put massive pressure on their suppliers to re-engineer the product to hit lower price points in a world where supply costs are increasing. The result is a dramatic decrease in quality of goods and a dramatic decrease in margin dollars.

As a result the business has to cut its cost base. Advertising is cut. Staff costs are cut. Fit-outs are postponed or downscaled. Top line sales growth starts to decline and the response from the business is to do more of the same more aggressively. Fear starts to take hold of the business and survival mode becomes the order of the day.

This is not a work of fiction. This is what we are witnessing at the moment on a daily basis from real retailers commoditizing their once seemingly powerful businesses into oblivion. Perhaps many of them never were powerful brands. They were just businesses taking advantage of a 5 year extraordinary period of growth in Australian retail.

Maybe we need many of these businesses to fail in order for the new order to emerge. But one thing is certain. Commoditization kills brands. When everything becomes maniacally focused on cheap price and volume, brands fail. Price is the ultimate in rational attributes. It is provable to the point that it is governed by law. One player is all that can be the best price. And even the cheapest does not necessarily make the most money. Apple is the most profitable consumer information technology business in the world and it is not the cheapest.

Too many retailers think they are Wal-Mart when there can only be one. Social trend in the 21st century is polarizing between consumer classified commodity purchases and high engagement premiums. Brands live in high engagement. In order to survive they need margin dollars to invest in advertising, innovation, quality, customer experience and all the critical attributes that prove relevance to their consumers.

If you want to have a brand do not allow your business to get sucked down the plughole of commoditization. If you want to embrace cheap price and all it means then you better be as big and as efficient as Wal-Mart in your space or you will kill the business.