The Customer Loyalty Conundrum

In this article the author argues that the issue of falling consumer loyalty is not just driven by consumer trends, but caused by structural changes in the industry, and hence the CEO has to take charge of the problem instead of delegating it to the CMO to deal with it.

Photo credit: fabrikbrands.com

Consumer product companies worldwide are facing the challenge of falling customer loyalty. In a 2019 global study by Nielsen, only 8% of consumers considered themselves “firmly committed loyalists” who will not switch brands. Another 27% consider themselves as “lazy loyalists” who continue buying the same largely driven by habits of the past. Such loyal customers are on a decline, and the rest of the consumers drift between brands. Yet another oft-quoted 2015 study by the digital and consumer loyalty company Catalia found that 90% of the top 100 consumer brands experienced market share declines attributable to declining brand loyalty. What is driving this decline? Is this trend reversible? Is there a solution?

Do a search on Google on the topic of declining brand loyalty, and you will find that this is not a recent phenomenon. The trend has been prominent for at least two decades, and reams of internet pages have been filled with many recommended solutions and frameworks. Invariably, the reason for the decline in loyalty is attributed to changing consumer behaviour, and it is expected that companies can somehow magically address this issue with only marketing solutions. Get 5% more repeats (meaning loyalty), and earn 24–95% more profits, they say. If only this could be so easy.

They are missing the point. The days of building brands only on loyal consumers are gone. For ever. This trend is irreversible, and marketing, on its own, cannot be the solution. The solution is strategic at the business-level, and may have to be addressed through product redesign and business restructuring. And so, it is important to understand the structural changes that are driving this trend. Let us try to understand all the relevant factors starting with the most obvious, and the most talked-about.

Consumer Trends and Changing Preferences

Much has been written about the consumer trends that are driving the decline in consumer loyalty. Majority of blame goes to a generation of millennials and Gen Zs who like to have different experiences and are constantly in a state of FOMO (Fear of Missing Out). This trend is attributed to the overdose and easy access to information through the digital and social media channels, and the fact that there are now a multitude of products and brands available to satisfy their needs, wants and variety-seeking behavior.

But can the explanation be that simple? Can one say that the choices were not available before, or that the earlier generation of consumers were less adventurous? The issue with this view is that it is taken to be marketing-exclusive problem, and the solution seem to be better customer engagement through micro-segmentation, loyalty programs and aggressive digital engagement. However, the issues are more fundamental and related to structural changes in supply chains, manufacturing, regulations and access to technology and hence the solution has to be holistic, that includes but expands trans-marketing. Let us try to understand some of the other factors that have led to the loyalty conundrum.

Changes in Channel Structure

Changes in channel structure have had a significant impact on customer loyalty. In the era when global or top national brands were built, the channel was weak and unorganised. The brands used to directly communicate to the consumers and the channel used to sell what the consumer preferred because that was the way they could serve their customers and stay in business. Many things have changed in the retail landscape, of which two are important to understand that impact brand loyalty.

The first development was the shift in the retail format from the traditional mom and pop stores to larger format stores. With more retail space, more brands could now find place on retail shelves, and hence brands that could previously not reach consumers because of the competition for space now managed to. With e-commerce, the “shelf” space is now unlimited, and hence the range of brands available for consumers are many more.

The second development is the increase in bargaining power and influence of the retail channel. The mom and pop stores or even the standalone large format stores did not have much influence on the consumer choice or with the brands. However, with the growth of the retail chains (think Walmart), many retail brands became stronger than the product brands. Consumer loyalty shifted from product brands to retail brands, in effect, making the retailers have very high influence on consumer brand choice. Weakening of consumer brand loyalty also served the retailers well because it gave them better bargaining power with the brands while also helped them build white-label brands that helped capture better margins. This was the first death knell for consumer loyalty, and it will only get louder with the strengthening of e-commerce platforms (think Amazon).

Fading Economies of Scale

The emergence of ascending customer loyalty to big brands can also be associated with significant economies of scale in many facets of business including sourcing, supply chain, manufacturing, marketing, and sales and distribution. Smaller brands were unable to compete on an even keel with larger brands owing to this factor, and many competitors with excellent products continued as regional or niche brands as they were unable to cross the chasm due to the multitude of scale challenges they faced.

This limitation is now getting broken down at multiple levels. With technologies such as flexible manufacturing, flexi-printing etc., companies can be very cost competitive at significantly lower volumes. Emergence of third party logistics has made logistics and supply chain pretty much scale-neutral. With reduced information asymmetry and growth of third party manufacturing, scale economies in sourcing is no longer significant. With breakdown of traditional TV and print advertising in favor of digital, marketing can now be much more segment-focused and pretty-much scale neutral. Similarly, with consolidation of retail, which has the wherewithal to support smaller brands with distribution infrastructure on pay-per-use basis, and is also willing to pitch brands against each other, sales and distribution is not a challenge for small brands. All of these has led to more choice for the consumer unlike in the past when the large brands dominated based on their sheer size.

Stronger Regulations

Customer loyalties in many traditional brands were built on quality products that met the needs of a wide cross-section of customers. Companies that were meeting the quality standards consistently turned out to be consumers’ favourites not just because they delighted customers with good products but also because they reduced the risk of customers having bad experiences with poorly formulated or designed products. These brands were stamps of quality that the consumers could trust.

Regulations have however made sure that the consumer experience with different brands meet a threshold quality and safety standards. Customers no longer have to worry about ending up with sub-standard or unsafe products from lesser known brands. And even if they do face such issues, consumers can be assured of protection under stringent consumer protection laws. Hence the opportunity for companies to ride on loyalty based only on product quality no longer exists.

The Challenge of Catering to Micro-segments

Brands that enjoyed high loyalty in the past often achieved it with a one-size-fits-all approach. The idea was to discover the lowest common denominator in product offering that will meet the needs of a wide cross-section of consumers in a segment. The rest of the consumers in the segment ended up accepting the popular products because few brands tried to cater to their unique requirement.

With developments in digital marketing, retail, manufacturing and supply chain economies of scale, it was now imperative for brands to also cater to smaller and niche segments through differentiated products to keep them loyal. However, most brands that were used to volume business failed to make the transition thus creating the opportunity for smaller brands. New brands succeeded in catering to niche and unaddressed segments with differentiated and often also custom products even at a national scale which was previously unthinkable. To act in an agile manner for catering to smaller/niche segments require a mind-set change in which the large brands typically fail. For eg. P&G decided to trim down its portfolio of 165 brands to 65 brands in 2004–05 was because they found it difficult to manage so many small brands and sub-brands that were not scalable.

As is evident from the above, solution to falling consumer loyalty lies in understanding the changes that your industry is facing, looking also at factors beyond the immediate ambit of consumer marketing. This will require revisiting business strategy by fundamentally reassessing the way you look at the business. Changes may be required in business model including redrawing customer segmentation, product and service mix, distribution structure, manufacturing and supply chain. Thus winning back customer loyalty requires CEOs to take charge instead of delegating the same to the limited role of a CMO.

Santosh Sreedhar is a Partner with Avalon Consulting, a leading Asia-focused Strategy and Management Consulting firm. He can be reached on santosh.sreedhar@consultavalon.com

This article was originally published on linkedin.com.

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Management professional with over 20 years’ experience in strategy consulting and FMCG (CPG) marketing & sales across Asia and East Africa.

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Santosh Sreedhar

Santosh Sreedhar

Management professional with over 20 years’ experience in strategy consulting and FMCG (CPG) marketing & sales across Asia and East Africa.

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