Consumer Convenience and the Death of Retail Segmentation

It used to be that if consumers wanted high-end, brand-name products, they were forced by circumstance to shop at high-end, specialty retailers. Conversely, when people shopped a mass-market retailer, they could expect to see not only less-expensive merchandise, but also fewer recognizable brand names. It was in many ways a comforting world in which everybody (and every product) knew their place.

But as consumers grew smarter and more demanding, retailers and manufacturers grew savvier. They began to realize that product differentiation across the gamut of shopping channels was the key to increasing brand awareness – and to propping up the bottom line. To achieve a greater share of the consumer’s dollar, they had to find ways to bring high-end brands into the milieu of the price-conscious consumer.

Specialty retailers began to up the ante by selling more affordable, brand-name products, in addition to their more expensive counterparts. In short, they had to break down what had become an entrenched brand class structure, in order to maximize sales – independent of the particular store or retail channel.

"In the past, brands were defined by the channel they sold in, thereby segmenting the market by mass versus class, direct sell versus online and so on," said Timra Carlson, president, NPD Beauty. "Historically, retail channels have attracted specific customers as consumers had fairly homogenous purchase drivers and motivators. All that has changed."

Today there is a wider availability of brands and products across different channels than ever before. For consumers this means the opportunity now exists to purchase quality, brand-name products at affordable prices, even if they are not exactly the same products they’d find in specialty stores or prestige retailers. When formerly high-end brand names -- such as clothing and accessories designed by fashion designer Isaac Mizrahi -- can be found at Target, one immediately notices just how different the retail environment is today, compared to just a few years ago.

“As shopping patterns continue to shift and consumers trade allegiances from traditional shopping locations for new shopping experiences, brands will follow suit,” Carlson said. “In the future, there will be less channel segmentation as brands are sold across and within all channels of distribution. Brand image, equity and reputation will drive loyalty and repeat purchases, no matter where the brand is sold.”

Improving image and grabbing share

According to NPD Houseworld Vice President and General Manager Peter Greene, “For retailers, the expansion of brands and products into their respective distribution channels means more consumers choosing to shop and make purchases in their stores. Promoting brands traditionally associated with specialty or high-end retailers enhances the image of the mass-market retailer.”

There have also been downsides to this new retail paradigm, among them: price wars. The rise of brand names at mass merchants often bodes ill for specialty stores, because mass merchant competitors can more easily reduce prices on merchandise and use them as loss leaders. Mass merchants are therefore able to bring more customers into their stores to boost sales of other product categories – a trick that can’t easily be mimicked by specialty stores. This situation was especially difficult for specialty toy retailers to work against last year.

“Prices were drastically reduced by mass merchants on many key toy products as early as October to lure more customers into their stores,” said Michael Redmond of NPD Funworld. “Most of the recent problems experienced by specialty retailers in the toy industry, including the bankruptcy of FAO Schwarz, were driven by the price wars that took hold early in the 2003 holiday shopping season and continued through the remainder of the year.”

Justifying price

“It’s vital for premium-priced sellers to justify their added value in the face of lower prices for brand-name goods, but that’s becoming increasingly difficult,” said NPD Techworld Director of Industry Analysis Stephen Baker. In the past, a knowledgeable salesperson, a long and deep product selection or highly specific product knowledge proved valuable to consumers. Today, shoppers can easily research products on the Web before they leave the house to go shopping. The net result of this situation is that consumers are becoming more self-reliant,” Baker said.

It’s clear that even retailers in mature industries are not immune to this rapid and revolutionary shift of companies away from stark segmentation in the retail environment. Even the food industry has noted an increasing melding of the high- and low-end. When a growth trend is identified, all food marketers try to determine if they can satisfy consumers’ needs, even if they are not primarily known as a source. Said NPD Vice President Harry Balzer, “whether it’s salads being sold at hamburger places, or take-out food offered at high-end restaurants, the food and beverage industry will always find the latest growth area in a slow-growth market.”

“With consumers these days, low-price and convenience are key criteria,” Balzer continued. “When all is said and done, shoppers are looking for bargains wherever they shop. This is probably why, as recent data from NPD Foodworld shows, more people now call Wal*Mart their primary grocery store than any other store.”

So… who’s thirsty?

The consumer demand for increased convenience has also affected the products available in the automotive aftermarket. The blurring of lines in the traditional retail channel has retailers looking for any merchandise category in which offering convenience to customers can lead to a competitive edge. “Many auto parts retailers now wisely feature snacks and beverages very near the point of sale to satisfy the needs of do-it-yourself mechanics who need a refreshment break when working on their cars,” said David Portalatin, NPD Automotive senior account manager.

Additionally, auto parts stores now offer many product categories that have limited automotive applications. Examples include paper towels, cleaning products, non-automotive batteries – even soft drinks. “Any retailer with thirsty customers might want to investigate selling cold beverages to those customers,” Portalatin suggested.