December 3, 2008
SCDigest: Get Ready for the Real Value Chain
Commentary
by Dan Gilmore
Through
a special arrangement, presented here for discussion is an excerpt of
a current article from Supply Chain Digest.
For almost 10 years there
has been some debate about terms – a number of pundits and consultants
have argued the term “supply chain” was too limited; “value
chain” or “demand chain” were the most commonly suggested
alternatives.
Well, I think right now
that “value chain” is about right – but for very different
reasons.
I’m pretty confident
that even when we come out of the economic downturn, with maybe the start
of that recovery soon and better news by mid-2009, that for many years
the product economy will have changed.
Much of what seemed like
great stuff to consumers will for several years, I predict, seem like excess.
Let’s face it – we had a period of unprecedented affluence, in many
cases fueled by equally unprecedented debt levels (home equity loans, credit
cards, bond sales to China, etc.), and the good times were rolling.
I think that a certain
soberness will return, even after the economy recovers. This current meltdown
painfully makes us aware there were excesses everywhere, and we will remember
that and pull back from anything that feels like excess for a long time.
So, I would not want
to be a luxury goods maker for awhile, unless you can make luxury goods
feel more like a good value than an indulgence. It also says, unfortunately,
that driving out supply chain costs will be more important than ever, even
as the economy recovers, as there will be a strong and persistent consumer
and business bias towards value.
Discussion Questions:
Are the days of excess spending over for the time being? Do you also
perceive a
“certain soberness” around consumer spending will remain even after
the economy recovers? What are the ramifications for the supply chain?
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A couple of observations: First, the trend rewarding retailers who offer better value with more market share has been happening for years. (The current economic distress has simply accelerated the process.) Think about how “share of wallet” has migrated over the past twenty years from traditional department stores toward discounters, value-oriented retailers (like Kohl’s) and category killers like Best Buy who can offer dominant assortments at competitive prices.
Second, the country seems to be in a chastened mood right now and may continue to operate in a more money-conscious manner long after we have turned the corner past the current recession. So the retailers who expect to thrive long-term need to consider how to add more value to their competitive strategy, and how to avoid being overly “aspirational” in their positioning when it doesn’t feel right.
In the past 12 months, the DOW has ranged from a low of almost 7300 to a high of close to 14000. Many people have lost half their savings. Good economy or bad, it all trickles down and everyone feels the effects. There are and will always be “wealthy” people, but to think that they don’t control their spending when times are tough is to be ignorant. They may choose to fly to Miami for vacation rather than to take the family to Europe, but to them, that is controlling their spending.
The fact is that the wealthy have lost the most this past year. If you had $5 million in the market and now you are down to $2.5 million, you are not feeling very comfortable. Most people have expenses that align with their incomes. People who have been responsible with their spending and have money invested, have lost many years of savings. The older you are, the less comfortable you are with figuring out how to regain those losses. And with the job market hitting white collar jobs as hard as blue collar jobs, many people have little hope of regaining their losses.
I believe this will and should be a long term lesson for buyers and I think companies catering to the luxury buyers are in serious trouble for years to come. I just hope our creditors also learn a lesson from this situation.
Value is one of those very subjective terms. Value means something different to just about everyone. That’s why each consumer has their own distinct shopping and purchasing habits.
Value can be denominated in dollars, but it can also be denominated in quality, service, convenience and shopping experience. Yes, there is a renewed focus on price/value, but the other denominations of value are important. Successful retailers will understand precisely the value they offer their customers, and be sure that they are continually adding even more value.
I agree that consumers are skittish and have observed that even the most lavish spenders are thinking and re-thinking their purchases right now. I do think however that spending will pick up as the economy starts to rebound (or the media begins to position it that way).
That being said, I am not sure I would want to be in the luxury goods business now or anytime in the near future. Reason being is that I am quite amazed by the goods low cost retailers are producing these days and the prices they are selling these goods for. Designer lines at stores like Target and Walmart are hot, and why pay more for something trendy if you don’t have to?
The low-cost retailers are often a lot more efficient when it comes to supply chain processes, so they can profit even with goods at low price points. I think we are going to see luxury goods retailers attempt to get much more competitive by taking a closer look at their supply chains in the coming year.
Two observations. First, to say that the “product economy will have changed” is out of touch with what the new “value chain” has meant over the past 10 years. The companies moving to a value chain or consumer-centric model knew that the product economy had already changed. Maybe the current economic situation will force more companies to wake up.
Second, to say that consumers are going to have new spending habits is also out of touch. There are some wealthy consumers who will continue to be wealthy through this whole economic crisis and they are likely to continue buying luxury goods. That market will not disappear. Many more consumers will be struggling and what they had been purchasing as luxuries for themselves will be eliminated from their list of purchases. Many consumers will become more interested in the environment and will continue to purchase “green” products. There is no one consumer group changing its habits as one group. That hasn’t been true for quite some time and will continue to be true going forward.
There are other trends at play that impact the whole luxury vs. value debate. For example, the role that ‘experience’ plays in consumption. That it’s not so much about the product as it the experience the product enables. While this has been true forever, only in this decade have retailers really caught on to the role that they can play in enabling the experience part–and thus sell more products. Value and luxury retailers alike have opportunities to tap into that kind of trend to stave off consumer frugality.
That’s not necessarily a supply chain question, though it does entail thinking about your supply chain differently. It means thinking about the service component of supply chain–and the role that supply chain can play in becoming a part of the “service” that a retailer delivers. In that regard, I agree that value chain is a better term to use–but not because retailers need to abandon any kind of luxury positioning. Even in down times, indulgences have value.
There will continue to be a major shift in spending habits as consumers shop for better value. The purchase decision has always been driven by the consumers perception of value. The definition of perceived value will continue to change as shoppers face difficult economic realities, becoming more thoughtful in their purchase behavior.
One of the best models has been Jim Pinto’s Well Curve; the inverted bell curve that shows behavior in the times of change will be hardest for those operating in the middle. Growth will be greater for marketers and retailers on the left side who differentiate themselves with a better value for money proposition, or those on the right side who provide “affordable” luxuries that comfort and cheer us in trying times.
Implications for the value chain? Shoppers are more savvy then ever, understanding the cost/benefits for retail products with all the media at their fingertips. There must be more “added value” as products and services move through the chain. Time to think again about what people want in their daily living: healthier, sustainable, safer, better tasting and quality, convenient to use products, and more–at a well considered prices.
Well, what is excess spending? Right now, buying a car would seem to be excess spending. The fact is the economy cannot survive without excess spending if it is defined as spending beyond necessity. Our entire economy is built on excess.
Spending on convenience products can only be justified if they actually present a better value to the consumer. Flour may be a necessity, but cake mix might provide a better value. A new car might be out of the question, but a used car might present enough of a value to be a possibility.
Our current economic situation is partially the result of consumer fear. Almost everyone has lost something in this crash. It has forced people to reexamine their priorities and many have concluded that many wants can be postponed or eliminated. When the economy is destabilized, confidence flies out the window. With no real confidence in a recovery, people are holding on to what they have left. If confidence improves and people feel like the fruits of their labor will increase, prosperity will return but no program that discourages the creation of wealth will do anything but decrease consumer confidence and extend this misery.
Nothing here you turn on and off like a faucet. Changes always come more slowly than what we might expect if we pay attention to the headlines. But luxury sales will continue to slow down. Many highly paid people are now out of work, and many of them will likely end up taking less well-paid jobs. Finally, lots of Boomers are retiring, and with their 401-Ks gone to hell, they’re going to spend less on luxuries. Sure, there will be a segment that will still be unaffected, but a good part of the core market for frivolous luxuries is diminished.
Just to comment on my own piece, I think the discussion above in a couple of places gets to the heart of what I am suggesting: Will memories of this current time be long, as it clearly was for those who lived through the great Depression (I had a friend whose older Dad used to re-use the plastic bags he used to pack his sandwiches for work in from the lasting imperative on the need for thrift from his days as a child in that era), or will the memory of these events be short-lived, as another poster suggests?
I am saying somewhere in between. Of course people are skittish now, and a lot more are without a job than a short while ago. But that economy will mend, maybe even sooner rather than later. I do believe though that this event, especially because it was so tied to various “bubbles” bursting, in everything from housing to oil to even ocean shipping rates, will leave a mark that will last for several years in how people behave.
Forget the ultra rich, although there is already evidence they are cutting back even though they could easily afford not to. I am talking about the middle class/upper middle class. While of course there will be differences in different consumer segments, on balance I think for several years “indulgent” purchases, such as the $1500 GPS system in the new car, will be relatively shunned, even if the purchaser could easily afford it, or rather, he/she wouldn’t have much thought about borrowing the extra dough as they had been until just recently.
You never know, but it is hard not to believe that this worst economic meltdown since the great Depression will have some real and lasting impact on consumer (and business) perceptions and decision making. Whatever trends have been going on in the last 10 years, this will be an inflection point. Many, including me, will think more about the benefits of saving versus spending for a long time.
No doubt consumers are skittish. You can see it in the numbers. But they also have short memories. I’m not saying that we’re going to see the excesses of the 80s and 90s, but people will loosen their purse strings when they feel a bit more secure in their jobs or the potential for an economic rebound.
However, conspicuous spending is out. Value is the key–not necessarily cheaply priced goods but giving consumers value for their dollar. As to how this relates to supply chain issues? Think and apply value from farm to fork and all places in between. Time to revisit or sharpen the focus on lean production or efficient consumer response. But this time let’s not forget about the consumer.
When you badly burn your hand, face, arm or leg, it takes a good while for you to forget the pain and suffering–and what occasioned it. A diminished economy has a similar impact on one’s mindset.
Children of the great depression are less lavish spenders than their baby boomer children because they experienced a great depression and its deprivations and suffering. The economic world will stop tilting badly some day but the longer it stays slanted the longer it’ll take to restore customers exuberance–at least for most folks. In the meantime, the remaining “gots” will continue to do their luxury-type spending but that won’t raise many of the millions of boats in the economic bay.
Value vs. indulgence is pivotal where premium consumer products are concerned, now and even for a gradual time after the recession gives way to better times with more jobs and greater spending.
Even now, not all pricey consumer goods are off limits because in some cases, they are becoming the lesser affordable luxuries, and in many instances they are replacing more expensive and costly needs and services not previously answered by goods purchased in a retail store. For example, in the field of oral health, many consumers are no longer able to afford to go to the dentist for teeth whitening. Instead, she is purchasing a product in a chain drug retail store or supermarket.
The trend of trading up versus down has happened for some time certainly prior to the economic situation. In fact, the economy is more about trading off than trading down. I also think that the trade up and down occurrence exists regardless of income demographic.
As consumers, we make choice on everything based on what products require certain attributes and how important these things are to us. This is all based on need states and the higher the emotional attachment to us the higher the likeliness for a trade up situation.
This phenomenon will continue past the economic situation. What might be more interesting is to see what the trade-off situation will look like during the economic recovery.
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A couple of observations: First, the trend rewarding retailers who offer better value with more market share has been happening for years. (The current economic distress has simply accelerated the process.) Think about how “share of wallet” has migrated over the past twenty years from traditional department stores toward discounters, value-oriented retailers (like Kohl’s) and category killers like Best Buy who can offer dominant assortments at competitive prices.
Second, the country seems to be in a chastened mood right now and may continue to operate in a more money-conscious manner long after we have turned the corner past the current recession. So the retailers who expect to thrive long-term need to consider how to add more value to their competitive strategy, and how to avoid being overly “aspirational” in their positioning when it doesn’t feel right.
In the past 12 months, the DOW has ranged from a low of almost 7300 to a high of close to 14000. Many people have lost half their savings. Good economy or bad, it all trickles down and everyone feels the effects. There are and will always be “wealthy” people, but to think that they don’t control their spending when times are tough is to be ignorant. They may choose to fly to Miami for vacation rather than to take the family to Europe, but to them, that is controlling their spending.
The fact is that the wealthy have lost the most this past year. If you had $5 million in the market and now you are down to $2.5 million, you are not feeling very comfortable. Most people have expenses that align with their incomes. People who have been responsible with their spending and have money invested, have lost many years of savings. The older you are, the less comfortable you are with figuring out how to regain those losses. And with the job market hitting white collar jobs as hard as blue collar jobs, many people have little hope of regaining their losses.
I believe this will and should be a long term lesson for buyers and I think companies catering to the luxury buyers are in serious trouble for years to come. I just hope our creditors also learn a lesson from this situation.
Value is one of those very subjective terms. Value means something different to just about everyone. That’s why each consumer has their own distinct shopping and purchasing habits.
Value can be denominated in dollars, but it can also be denominated in quality, service, convenience and shopping experience. Yes, there is a renewed focus on price/value, but the other denominations of value are important. Successful retailers will understand precisely the value they offer their customers, and be sure that they are continually adding even more value.
I agree that consumers are skittish and have observed that even the most lavish spenders are thinking and re-thinking their purchases right now. I do think however that spending will pick up as the economy starts to rebound (or the media begins to position it that way).
That being said, I am not sure I would want to be in the luxury goods business now or anytime in the near future. Reason being is that I am quite amazed by the goods low cost retailers are producing these days and the prices they are selling these goods for. Designer lines at stores like Target and Walmart are hot, and why pay more for something trendy if you don’t have to?
The low-cost retailers are often a lot more efficient when it comes to supply chain processes, so they can profit even with goods at low price points. I think we are going to see luxury goods retailers attempt to get much more competitive by taking a closer look at their supply chains in the coming year.
Two observations. First, to say that the “product economy will have changed” is out of touch with what the new “value chain” has meant over the past 10 years. The companies moving to a value chain or consumer-centric model knew that the product economy had already changed. Maybe the current economic situation will force more companies to wake up.
Second, to say that consumers are going to have new spending habits is also out of touch. There are some wealthy consumers who will continue to be wealthy through this whole economic crisis and they are likely to continue buying luxury goods. That market will not disappear. Many more consumers will be struggling and what they had been purchasing as luxuries for themselves will be eliminated from their list of purchases. Many consumers will become more interested in the environment and will continue to purchase “green” products. There is no one consumer group changing its habits as one group. That hasn’t been true for quite some time and will continue to be true going forward.
There are other trends at play that impact the whole luxury vs. value debate. For example, the role that ‘experience’ plays in consumption. That it’s not so much about the product as it the experience the product enables. While this has been true forever, only in this decade have retailers really caught on to the role that they can play in enabling the experience part–and thus sell more products. Value and luxury retailers alike have opportunities to tap into that kind of trend to stave off consumer frugality.
That’s not necessarily a supply chain question, though it does entail thinking about your supply chain differently. It means thinking about the service component of supply chain–and the role that supply chain can play in becoming a part of the “service” that a retailer delivers. In that regard, I agree that value chain is a better term to use–but not because retailers need to abandon any kind of luxury positioning. Even in down times, indulgences have value.
There will continue to be a major shift in spending habits as consumers shop for better value. The purchase decision has always been driven by the consumers perception of value. The definition of perceived value will continue to change as shoppers face difficult economic realities, becoming more thoughtful in their purchase behavior.
One of the best models has been Jim Pinto’s Well Curve; the inverted bell curve that shows behavior in the times of change will be hardest for those operating in the middle. Growth will be greater for marketers and retailers on the left side who differentiate themselves with a better value for money proposition, or those on the right side who provide “affordable” luxuries that comfort and cheer us in trying times.
Implications for the value chain? Shoppers are more savvy then ever, understanding the cost/benefits for retail products with all the media at their fingertips. There must be more “added value” as products and services move through the chain. Time to think again about what people want in their daily living: healthier, sustainable, safer, better tasting and quality, convenient to use products, and more–at a well considered prices.
Well, what is excess spending? Right now, buying a car would seem to be excess spending. The fact is the economy cannot survive without excess spending if it is defined as spending beyond necessity. Our entire economy is built on excess.
Spending on convenience products can only be justified if they actually present a better value to the consumer. Flour may be a necessity, but cake mix might provide a better value. A new car might be out of the question, but a used car might present enough of a value to be a possibility.
Our current economic situation is partially the result of consumer fear. Almost everyone has lost something in this crash. It has forced people to reexamine their priorities and many have concluded that many wants can be postponed or eliminated. When the economy is destabilized, confidence flies out the window. With no real confidence in a recovery, people are holding on to what they have left. If confidence improves and people feel like the fruits of their labor will increase, prosperity will return but no program that discourages the creation of wealth will do anything but decrease consumer confidence and extend this misery.
Nothing here you turn on and off like a faucet. Changes always come more slowly than what we might expect if we pay attention to the headlines. But luxury sales will continue to slow down. Many highly paid people are now out of work, and many of them will likely end up taking less well-paid jobs. Finally, lots of Boomers are retiring, and with their 401-Ks gone to hell, they’re going to spend less on luxuries. Sure, there will be a segment that will still be unaffected, but a good part of the core market for frivolous luxuries is diminished.
Just to comment on my own piece, I think the discussion above in a couple of places gets to the heart of what I am suggesting: Will memories of this current time be long, as it clearly was for those who lived through the great Depression (I had a friend whose older Dad used to re-use the plastic bags he used to pack his sandwiches for work in from the lasting imperative on the need for thrift from his days as a child in that era), or will the memory of these events be short-lived, as another poster suggests?
I am saying somewhere in between. Of course people are skittish now, and a lot more are without a job than a short while ago. But that economy will mend, maybe even sooner rather than later. I do believe though that this event, especially because it was so tied to various “bubbles” bursting, in everything from housing to oil to even ocean shipping rates, will leave a mark that will last for several years in how people behave.
Forget the ultra rich, although there is already evidence they are cutting back even though they could easily afford not to. I am talking about the middle class/upper middle class. While of course there will be differences in different consumer segments, on balance I think for several years “indulgent” purchases, such as the $1500 GPS system in the new car, will be relatively shunned, even if the purchaser could easily afford it, or rather, he/she wouldn’t have much thought about borrowing the extra dough as they had been until just recently.
You never know, but it is hard not to believe that this worst economic meltdown since the great Depression will have some real and lasting impact on consumer (and business) perceptions and decision making. Whatever trends have been going on in the last 10 years, this will be an inflection point. Many, including me, will think more about the benefits of saving versus spending for a long time.
No doubt consumers are skittish. You can see it in the numbers. But they also have short memories. I’m not saying that we’re going to see the excesses of the 80s and 90s, but people will loosen their purse strings when they feel a bit more secure in their jobs or the potential for an economic rebound.
However, conspicuous spending is out. Value is the key–not necessarily cheaply priced goods but giving consumers value for their dollar. As to how this relates to supply chain issues? Think and apply value from farm to fork and all places in between. Time to revisit or sharpen the focus on lean production or efficient consumer response. But this time let’s not forget about the consumer.
When you badly burn your hand, face, arm or leg, it takes a good while for you to forget the pain and suffering–and what occasioned it. A diminished economy has a similar impact on one’s mindset.
Children of the great depression are less lavish spenders than their baby boomer children because they experienced a great depression and its deprivations and suffering. The economic world will stop tilting badly some day but the longer it stays slanted the longer it’ll take to restore customers exuberance–at least for most folks. In the meantime, the remaining “gots” will continue to do their luxury-type spending but that won’t raise many of the millions of boats in the economic bay.
Value vs. indulgence is pivotal where premium consumer products are concerned, now and even for a gradual time after the recession gives way to better times with more jobs and greater spending.
Even now, not all pricey consumer goods are off limits because in some cases, they are becoming the lesser affordable luxuries, and in many instances they are replacing more expensive and costly needs and services not previously answered by goods purchased in a retail store. For example, in the field of oral health, many consumers are no longer able to afford to go to the dentist for teeth whitening. Instead, she is purchasing a product in a chain drug retail store or supermarket.
The trend of trading up versus down has happened for some time certainly prior to the economic situation. In fact, the economy is more about trading off than trading down. I also think that the trade up and down occurrence exists regardless of income demographic.
As consumers, we make choice on everything based on what products require certain attributes and how important these things are to us. This is all based on need states and the higher the emotional attachment to us the higher the likeliness for a trade up situation.
This phenomenon will continue past the economic situation. What might be more interesting is to see what the trade-off situation will look like during the economic recovery.