Innovators Dilemma + The Thermopylae of Trade

Below article is an adaptation from the novel "(Not So) Corporate Raj"

Developed markets are a real-life example of Clayton Christensen’s “Innovator’s Dilemma”. The industry is fairly consolidated, with a few large players who have healthy profit margins and a large sales base. However, year on year their share of the market is declining, due to the advent of private labels and cheaper brands marketed by smaller companies.

When I moved to UK, the phenomenon of private labels in particular struck me the hardest. It upturned all brand architecture theories I had studied at uni. I now saw that a “house of brands”, in which each brand stands on its own, fairly independently of the manufacturer’s master brand, is not necessarily the only ideal architecture for consumer-packaged goods, as I had previously been educated to believe. A branded house approach, in which there are only sub-brands, can be equally effective. Indeed, a big retailer brand with an adherence to quality provides enough credentials to the sub-brands to keep consumers satisfied. It is fascinating.

To stem the decline of sales and loss of shoppers, the big companies are stuck in a Catch-22 situation. They need to re-enter the marketplace with a series of low price point products in each category of play, but that entails them severely diluting their bottom-line profit in percentage terms. The latter is not an option, as shareholders are breathing down their necks. The city does not react well to reduced profit margin. But in this strange world, this is the only way to survive.

The other challenge in following this approach is that running a brand portfolio of cheaper products requires a different operating model altogether, since the levers to drive sales are different. The marketing mix is different, as running advertisements on TV is not an option with such low margins; guerrilla tactics are more relevant. The supply chain becomes more complex, as these are at higher volumes than the core business but lower value. It requires managing scale at a different level. And yet, this is the only way to survive. Resisting it, which the industry seems to be doing, means becoming extinct eventually. Indeed, the very business model that had made these big consumer goods companies successful could now lead to their demise.

One channel in which big FMCGs can sustainably grow share in is convenience, which is a “winner takes all” channel. Due to limited physical space in-store, retailers tend to remove challenger brands to make space for new need states instead. Market leaders thus benefit from shoppers of delisted competitor brands switching over.

In contrast to convenience, the ecomm space is referred to as the great equalizer. With virtually unlimited shelf space, the channel has the tendency to demonstrate author Chris Anderson’s “Long Tail” phenomenon: in the digital world, the bulk of sales in a category are from an aggregate of many products with miniscule shares. Each brand can have its own little niche. Smaller players can match digital advertising spends of bigger competitors, directing the consumer to online stores where they can win the purchase through clear communication and search optimization.

It's akin to the ancient battle of Thermopylae, we saw in the movie 300, in which a handful of Spartans nearly held off the mighty Persian army, which at the time was the world’s biggest. The narrowness of the coastal pass at which they intercepted the Persian forces made the size of the enemy irrelevant. The online channel is the Thermopylae of trade.