After having set the scene from an economic viewpoint, the following brief chapters deal with pivotal market drivers in Germany, especially in regard to the concept of the selective (hybrid) consumer. A lot has been discussed about price vs. quality - too often this turns out to be black and white thinking. Accordingly, the term "value" has often been defined too narrow in Germany. Could these even be popular fallacies?
1. "Selective" instead of "hybrid" consumers
Over the last few years, there has been a discussion revolving around the question of whether the German consumer is more price- or value-oriented. Do people put a stronger emphasis on brand products or do they prefer private labels? A popular example is the Porsche in the Aldi car park. German researchers, industry observers, retail experts and many more focused on just two categories: cheap vs. expensive, discount vs. specialty retailer, narrow vs. broad assortment, efficiency vs. innovation. The graph on the left is an example of this view. Although we consider this bipolar thinking as having facilitated the discussion, we are convinced that it will only be of limited value in the future. Our argument is that you cannot limit the German consumer to two categories. Instead, you should analyse why and how he chooses from several options. The consumer is in fact selective - not hybrid (i.e. bipolar). So how does the German consumer make his shopping decisions?
Let us use the price vs. quality dimension as an example. Underlying this concept is the assumption that inexpensive products have a lesser quality than expensive products. You could also replace this bipolar term by private label vs. brand product or discounter vs. supermarkt. But: who can really claim that discounters do not offer quality in Germany? Numerous test reports have revealed that inexpensive products are not necessarily inferior in quality. Food products bought from Aldi need not be any "worse" than those from Edeka. Jeans by P&C need not have less chemical residues than jeans offered by C&A or H&M.
If you ask an Aldi customer why he buys his groceries there, he will not necessarily say "because they are cheap" but that the price/value relationship is good.
Good, partly superior, quality at low prices - what else can the German or any other consumer ask for? This is why the price/value relationship as opposed to just a low price is assessed by consumers (although we would not disagree that there are "just cheap" products on the market). Hence, you can happily buy at discount stores and might not even miss supermarkets or brand shops.
Market driver no. 1: Today you can find quality almost everywhere in Germany. This makes discounters and private labels increasingly popular.
Let us focus on another issue that is too often interpreted the wrong way: what does "value" (as in price/value relationship) mean in Germany?
2. Value means more than functional features
In Germany, "value" is too often translated as "observable product functions", even among market professionals. This means that there is basically a technical understanding of what products do - which is somewhat anachronistic, since most products are sold emotionally (just consider cars). However, "value" means much more, e.g.:
- the technical product function (what can the product do technically?)
- the status function (how much do my neighbours envy me because of my new car?)
- the peace of mind function (does the product take any worries from me?)
- the emotional function (do I find a brand "cool"?)
- the dream quality function (which dreams or worlds are created by the product / brand / luxury item?)
- the sustainability function (how much has the natural and social environment been affected during production, use, and disposal?)
- the quality function (how long will the product last?)
- the authenticity function (e.g. has the product been produced on an assembly line or by hand?)
- the community function (does the product / brand enable me to get in contact with other owners, e.g. Apple users or Harley-Davidson bikers?)
It then becomes clear why people actually spend money on luxury items which, in traditional "product function terms", are "too expensive". They buy the brand power, the dream, the status and much more. They consider the price to be adequate for the overall value.
But why are we again and again caught in a trap when we ask the German consumer about price/value relationships? Well, a major reason is that the consumer tells us about his opinions or intentions - not about his actual behaviour. Environmental protection is a typical example: everybody would agree that it is important, but few people change their lifestyle to save the planet. It is thus advisable to use observations much more than surveys in consumer research.
Market driver no. 2: Product value is multi-faceted. Producers and retailers who emphasise more than mere functional use or meaningless emotional statements will be on the road to success.
3. The German consumer is selective - a tough time for B- and C-brands
So far we have argued that good quality is also available at discount stores. In addition, we claimed that successful products and brands communicate more than their technical features or some empty emotional statement. Even though a lot needs to be improved concerning the latter (you can read more about this in our "branding blog"), the graph on the left shows you the development of premium brands, private labels and B-/C-brands in Germany over the last few years. The data is based on more than 100 fast moving consumer goods (FMCG) categories, i.e. products with everyday or very regular use. Brand products that offer average value for average prices (so-called B- and C-brands) are now losing ground. On the other hand, premium brands and private labels are gaining market share. Why is this the case? Based on our explanations, today's consumer decision process might look like this in Germany:
- "Can I satisfy my needs (functional, emotional, status-oriented...) by buying a private label?" If so, the private label is bought - not only at discount stores, but also at supermarkets since all operators have expanded their private label assortment
- "If not, which brand product can satisfy my needs?" Can a B- or C-brand do that? Do they offer enough value? Or is their positioning too weak so that the German consumer will opt for a premium or luxury brand?
It becomes obvious that a lot of B- and C-brands are not chosen as a result of these deliberations. Even if this decision process is very simplified - the panel data gives us clear results.
Market driver no. 3: Clear messages count. Both private labels and premium brands have such a message. B- and C-brands face challenges due to unclear value positions.
Recently, a few producers have claimed that they do good business by concentrating on the middle market even though this segment is under pressure. Belonging to this middle-price segment does not mean that such a company will automatically lose money or market share. If its value proposition to the customer is clear, then it can do great business. If it is not, however, (and this is the case for many B- and C-brands in Germany) it might stumble and eventually fall.
4. Manufacturers are taking control of distribution channels
Manufacturers that own strong brands at the top or premium end of the German market are becoming increasingly aware that they need to take more control of distribution and retail channels. They do so for two reasons: first, the higher the concentration rate in German retail, the more difficult it becomes to get listed in any retailer's assortment. Second, they do so to maintain and ensure the strength of their brands which could be easily damaged in a sub-optimal sales environment. Strategies for a higher control might entail the selection of special distribution partners as well as opening own brand stores in Germany. Another advantage is the ability to learn from consumer interaction which can be relevant for brand positioning or enhancing product value. Opening own stores or online shops have become popular options, as well as taking more control of what is happening in the stores of a retail partner (e.g. category management in food retail or concessions in clothing retail), along with vertical structures.
Market driver no. 4: Producers and suppliers take distribution functions in their own hands. However, this does not generally threaten the existence of German retailers.
The existence of retailers is generally not jeopardised since most producers cannot mirror the breadth of any retail assortment by their own product range. In addition, completely taking over distribution functions requires large investments, especially if a strong nationwide market presence is intended. Notwithstanding these limitations, an increasing distribution control by producers is realistic since the internet provides all necessary functions to get in direct contact with customers.
5. The concentration process in the German retail industry has led to standardisation and more sales space
A strong development towards market concentration could be observed in Germany over the past few years. In food retail, for example, the top 5 players already represent 70 percent of the market segment. This has generally turned out to be an advantage for the German consumer since food prices are among the lowest in Western Europe. Conversely, however, more and more shopping malls and city centres begin to look very much alike, with big retail chains having a strong presence in almost all shopping locations. Due to fierce competition between such major retailers, growth has only been achievable by adding more sales space. The average annual retail sales growth between 1998 and 2008 thus only amounted to 0.7 percent. Total retail space is now stagnating at a high level of almost 120 million square metres of which 100 million sqm are located in the old federal states (ex Western Germany). Due to the increase in sales space, productivity per square metre has dropped below € 3,000. Small retailers have disappeared from the market - the number of small food retail stores has dropped from 46,000 in the year 2000 to 27,000 in 2008. In the clothing segment, even medium-sized retailers such as Sinn Leffers and Wehmeyer have gone bankrupt.
Market driver no. 5: Standardisation leads to economies of scale, making retail more efficient. In Germany, smaller and medium-sized retailers are coming under pressure.
6. Davids and Goliaths - innovation and specialisation
There are basically two market structures that offer chances for innovative and specialised retailers: atomistic markets without a clear market leader and oligopoly markets which tend to lose contact to specific customer needs. Companies such as IKEA, Fressnapf, or Trinkgut have given their markets new innovative impulses - what IKEA did for furniture retailing, Fressnapf did for pet shops, and Trinkgut for beverage shops. Retailer "Globetrotter" specialises in outdoor products and has opened stores with a much larger sales area than traditional niche shops.
Large retailers in Germany are becoming aware that specialisation can be a useful approach. However, it is not always easy to communicate this "new competence" to consumers since their image of a generalist retailer can remain in customers' heads for quite some time. Typical examples of this challenge are universal mail-order companies that recently recognised that they would have to make their assortments more specific. By this time, many specialised e-commerce retailers had already secured large market shares.
Market driver no. 6: The German retail sector is highly dynamic - innovative and specialised companies, particularly e-commerce retailers, give traditional retailers a tough time
The next chapters deal with four core segments in the German consumer products and retail market (food, clothing / apparel, (consumer) electronics, and home improvement / DIY).
