Channel (s)hopping – how to spread your eggs across a number of baskets

Topics: Channel / Retail, FMCG, Insights

Smart distribution in ‘alternative’ channels may just deliver you a golden egg

By Peter Huskins and Peter Huskins of ShopAbility for Retail World March 2008

In an environment where volume and value growth in grocery is increasingly difficult for grocery-dominant suppliers to achieve, some are starting to look for sources of growth from channels in which they are not currently present.

Retail consolidation in a number of channels – convenience, liquor and pharmacy included – in the Australian market means this kind of ‘evening out’ of your channel mix is becoming more difficult (a case of frying pan to fire?), but it can, and should, still be done.

In the following article we outline a way to approach it to ensure your categories will be ranged, profitably, in the channels that make most sense.

The ideal channel mix – does it exist?

The ideal distribution channel mix will differ from category to category, but like with any business, as a general rule of thumb not much more than 50% of your business’ profit should come from a particular channel or customer/client.

This is particularly the case for smaller companies and brands as they are at greater risk of being deranged in major channels.

Channel mix needs to be reviewed by both volume and profit. Profit is the more important indicator. You may have 60% of your volume, but only 40% of your profit, coming from a particular channel. This raises less of a red flag (even though clearly it is an unprofitable channel!) than the reverse, because 60% – the majority – of your profit is still coming from other channels. So if your 40% profit channel sneezes your business might catch cold, but it doesn’t necessarily lead to pneumonia.

Step 1: Where should you be?

This is about finding the balance between push and pull. Distribution doesn’t guarantee sales if shoppers in your chosen channel/s wouldn’t expect to find your category there. What you need to look at here is shopper propensity to buy your category in a given channel.

This is done by mapping your category to end consumption occasions, shopping missions, and shopper types.

For example, if your category is household cleaning, map out cleaning locations – within dwelling (eg room types and surface types) and by dwelling type (which may include offices as well as houses). Now look at who the most likely shoppers are for the category – is there likely to be a male or female shopper skew, age skew etc. Lastly look at the category type – is your category a destination category, impulse category, emergency category, always-in-the-house-just-in-case category?

Given the category type, usage occasions and the shopper types, think about what the most likely shopping missions (shopping trip types) would be as this will influence channel choice. Household cleaners for instance are more likely to be stock up, destination (single purpose) and emergency trip types.

Next, map the channels to the trip type and category type. Then look at where shoppers would logically expect to find products for your category and trip types. Often it will include specialist retail. In this example that might include Officeworks, Bunnings, kitchen and bathroom suppliers etc. Don’t limit yourself to retail outlets as there may be industrial or commercial applications for your category (assuming you have capacity to manufacture or access to a broad range of raw ingredients). For cleaning products, this could then include everything from hospitals to schools to bus depots.

Step 2: Is it worth being there?

So you’ve identified the mostly likely channels for your categories. The next job is to figure out which ones are worthy of further investigation.

For each channel, you should assess at a minimum:
* Channel size (number of outlets)
* Channel trend and dynamics – is it a growing or declining channel? What major outside factors or macro trends might affect this?
* Channel structure – how much of the channel is chains and franchises, and how much is independents? Who are the major players? Many specialist retail channels have one or two dominant players and then a whole bunch of ma and pa stores. Understanding this will greatly impact your route-to-market model.

Next, prioritise the channel opportunities – both volume and value. What is the role of each channel to your category? For instance it may be high value low volume channel due to premium pack formats, profitable single serves, large pack formats etc. You can map channel priorities on a simple size of prize/ease of execution type graph to arrive at the top 3 to 5 you should take to the next stage.

Step 3: What’s already out there?

Now that you’ve identified your top 3 to 5 new channels for the next stage, what is required now is a field audit. The purpose of this is to assess what and who is already in the channels in your category, and if/how they are performing. More often than not you’ll find that either your competitors are there, or your product is there (onselling from other channels or parallel importing).

The field audit is basically visiting outlets to assess:
* Who’s already there and what with? Range, format etc
* How did they get there – direct sell or back door leakage from other channels?
* Is it selling if it’s there, or does it have ‘dust’ on it?
* How is it being executed? Price, display, space, merchandising, promotion etc

While you’re there, take the opportunity to ask retailers how the category is working:
* If it’s there – what’s working, what’s not, what to avoid?
* If it’s not there – would it work? Would they take it? What would their ideal (margins, route to market) etc be? What would the barriers to ranging be?

Step 4: How should we play there? – Execution Strategy

So by now you not only know which channels it’s worth being in, and have some idea of what the ideal looks like, what to avoid and what the barriers are.

The final part of the development puzzle is writing the executional strategy.

This should include, at a minimum:
* Product and pack adjustments required
* Route to market – recommended sales servicing models and delivery methods
* Instore execution – space, range, layout, displays and merchandising
* Price and promotion strategy
* Role of store staff persuasion via staff incentives and training – this one often sits somewhere between important and extremely important for non-grocery channels.

Managing internal expectations

Management need to be clear that achieving distribution in alternative channels is a long term play, often an outlet-by-outlet sell, and it will take at least 12 months to see the dial shift, from the time of assessment (which normally takes somewhere from 6 to 12 weeks, depending on data availability) to getting salespeople on the ground selling.

Don’t underestimate the resource involved in setting up and servicing ‘alternative’ channels. You will need a specialist project team of people investigating and setting it up or it is likely to get lost among other internal priorities.

That said, the payoff can be large. One assessment we performed for a client revealed a new channel opportunity to the tune of $5m in the first year via mostly key accounts. So it pays to investigate!

As shoppers continue to shift in to specialty and other non-grocery channels for many day-to-day purchases, as they have done increasingly in recent years with fruit & veg shops and butchers, the opportunity to distribute your eggs in more than one basket will continue to grow.

So, assess your opportunities thoroughly to avoid rabbit holes, hatch a solid plan, and get channel hopping!