INTERVIEW with Dr. Joachim Zentes: Innovation is the Key to Success

Courage and a talent for being innovative are entrepreneurial qualities that are essential for companies to succeed in today’s fiercely competitive retail markets, according to Professor Joachim Zentes, a well-known retail expert in Europe and the director of the Institute for Trade and International Marketing at the University of Saarland in Germany.

Mergers, acquisitions and expansion: The retail trade has encountered some tremendous turbulence.
Indeed, we’re currently experiencing a wave of mergers and acquisitions, especially in the food and near-food area, after a phase of relative stability. This development is leading to fundamental changes in competition; good examples are the drug store and discount markets. The development is also spreading to department stores and specialty shops as well as to mail-order companies.

Is this a new phase of globalization?
Yes, in view of the rising discontinuities and turbulences. Global Players are establishing new business formats around the world and are tapping new markets. At the same time, they’re retreating from others because of changed priorities or failed efforts to achieve a competitive position; two classic examples are Wal Mart and Carrefour.

The tasks of managers are becoming increasingly challenging in this highly turbulent environment.
Indeed. This turbulence has led to traditional concepts of corporate management, based on stability and predictability, losing traction. The analysis of corporate and market-related historical and current data, based more or less on linear extrapolation, is no longer sufficient. Sensitivity, creativity and fantasy are in demand. Successful companies are able to detect new developments at an early phase, explore them and create something. The winners in the retail sector are those that are willing to be innovative and have the drive to pursue success.

What types of innovation do you mean?
Innovative product lines, for instance. After a phase of price dominance, food retailers are currently restructuring their store-branded portfolio of goods in a massive way. They’re developing filigree, finely tiered concepts. They’re increasingly entering into the premium categories and partially attacking the top manufacturer markets. “Tesco’s Finest” is one of many examples of this development.

A golden future for private labels?
Private labels will continue to grow strongly but not as explosively as in the past whenthey entered price-sensitive entry markets and me-to-markets at the B level. Today, many of these brands have a very innovative character of their own. They’re a new category of brands, which serve as an expression of the new self-consciousness and emancipation in the retail trade.

And the industry is responding with increased direct sales?
Consumer goods producers will continue to grow in vertical markets. The trend toward mono-market stores continues to gain momentum, whereby it’s largely a non-food phenomenon, as seen in examples such as Sony, Nike, Villeroy & Boch. But some food companies, such as Nestle, are also exploring this area. Although customers can buy coffee machines in consumer electronics stores, they can only purchase the necessary coffee “pods” directly from Nestle. Retailers are thus totally eliminated from the “software” distribution.

So the balance of power is shifting between retail and manufacturing?
An equal cooperation between the two in optimizing product lines – the buzzword is Electronic Consumer Response (ECR) – has proven to be wishful thinking. While ECR isn’t losing any of its importance, it is finding itself sandwiched between the store brands of retailers on the one side and the powerful brands of manufacturers on the other.

Back to production innovation: What roles do bio and fair-trade articles play?
To act according to social, ethnic and ecological criteria – once a sub-culture development – is now a powerful trend. Today, biobrand products are no longer sold exclusively in specialty stores but in large supermarkets as well. Consumers now find more bio products and even fair-trade merchandise at discount grocery chains such as Aldi and Lidl – and with prices noticeably above the normal price level of these discounters. That means, when discounters embrace such a development, then it’s no longer a marginal phenomenon.

And what about the topic of convenience?
The store brand concepts of retailers are generally focused on adapting products to the needs of customers more effectively and developing a value-added strategy that benefits both parties. Convenience plays a key role at both the format and product levels. The aging population and the stress that many consumers feel in their daily lives support all the ready-to-go, ready-to-eat and ready-to-cook concepts. All these various trends overlap each other; numerous convenience products, for instance, are increasingly becoming eco products.

And with similar prices?
In the future, value-added product concepts will succeed over price-focused strategies. Although the willingness of customers to pay a premium isn’t astronomically high, it exists and is growing.

What innovation has emerged at the format level?
We’ve seen the successful relaunch of supermarkets, which have picked up on various new trends. They have turned themselves into pure fresh-product markets and are integrating attractive in-store consumption concepts. They are cult and culture-oriented and, in many ways, are emulating the KaDeWe style, with Sushi bars, in-store breweries and more. A further innovative dimension is convenience shopping. In Germany, we see this development largely at filling stations. In other countries, stand-alone units have emerged, such as Tesco express, Albert Heyn to go, coop pronto and the classic form of 7-Eleven. The focus of these new retail types is on food, which changes twice a day: readyto- eat during the day and ready-to-cook in the evening.

What innovation potential do discounters have to offer?
At the product level, discounters are experimenting with bio and convenience products. But they are in a dead-end of sorts, albeit at a very high level; their non-food rotation business has reached its limits. Consequently, numerous discounters are now testing the waters with “category migration” by offering financial, travel and insurance services. The trend is to move away from goods, whereby I’m skeptical whether these concepts will be sustainable for discounters.

Will discounters soon be offering pharmaceuticals?
Germany remains an island when it comes to pharmaceutical sales channels. This could change following a decision by the European Court expected later this year aimed at opening the €50 billion ($70 billion) pharmaceutical distribution market to greater competition. While we will unlikely find pharmacy sections in discount food chains, we can expect them in supermarkets and drug stores. This is already the case in numerous other countries. In Germany, we’re now seeing some early examples of this development. National drugstore retailers such as dm and regional chains such as Bünting have already introduced pharmaceutical pick-up centers in collaboration with mail-order chains.

What about a comeback of middle-tier retailers?
From one of our recent studies, we’ve noticed a comeback of medium-size retailers – but not a comeback of every type of retailer that the middle-tier used to encompass. The traditional middle-tier retailer came to be viewed by many consumers as mediocrity. Subsequently, companies and products positioned in this sector permanently lost market share.

So who represents the “new middle” today?
In the textile sector, we have a few examples: H&M, Mango and Zara. These retailers have secured a position in this market segment with affordable, quality, lifestyle products. Their magic formula is to sell products that customers are able to afford and provide added value at the same time. This is a benchmark of innovation for department stores and specialty retailers in all branches.

How important is technical innovation?
Because retailers will continue to change in the coming years, so too will retail technology, such as self-service systems at checkout points, mobile shopping, cashless payment and in-store digital media. Retailers that deploy these new systems can quickly establish a modern image. But such innovation, of course, must offer customers real benefits.

What customers will embrace such innovation?
Customers aren’t interested in technology per se; they’re interested in greater convenience. They want faster, easier shopping; in other words, less stress and definitely shorter waiting lines. They seek a “sense of convenience.”

What do you mean by sense of convenience?
Here’s an example: Customers travel 20 minutes to a do-it-yourself store, spend lots of time roaming aisles and shelves looking for products, wait for some advice but then get mad when two people are standing in front of them in the checkout line. The actual time they spend waiting in line is marginal, compared to the time they spent traveling to the store, looking for products and receiving advice. Because they don’t want to wait, they appreciate the time saved through a quick self-service checkout.

What advice can you give companies planning to make retail IT investment decisions?
Retailers need to judge the efficiency of technology. Their decisions are therefore driven by technology and return on investment. But they should also look at the marketing perspective of investing in new technology: What is the added value for customers?