The consumer-segmenting headache

This is according to Derek Engelbrecht, Retail and Consumer Products Director at Ernst & Young Inc. He believes that marketing tools like Living Standards Measurement (LSM) are outdated, and retailers must adapt to consumer needs. He states that some retailers opt to target niche markets to gain additional revenue, despite the debate on whether niche markets are more lucrative than broader markets.

He notes that retailers generate huge amounts of data yet few really leverage it effectively to support improved commercial decision-making. “Developing a detailed understanding of consumer behaviour and buying patterns lies at the heart of any successful pricing strategy,” he adds.

“Some retailers are changing their marketing approach and instead of targeting broader markets to utilise their goods or services, they are narrowing down to a more specific target market. There is a global trend towards social diversity and fragmentation, which leads to an increase in the number of niche markets. The danger of targeting exclusive customers is that it excludes the broader market and therefore might hurt the retailer's margins. In spite of this danger, some retailers would rather lose volumes and margins by targeting a specific market with the strategic objective of gaining margins in the long run,” he says.

Engelbrecht feels the problem for business lies in the fact that data for segmenting the niche markets cannot always be easily obtained. In France, for example, initial market research aimed at finding out more about ethnic minorities was criticised for having racist overtones. Despite this, when a brand is successfully tailored for a specific target market, its brand value increases dramatically.

Different firms for different niches

Engelbrecht acknowledges that targeting niche markets can be time-consuming and expensive for business as creating brands for different market segments increases advertising costs. It also could involve hiring different marketing and communications firms for each niche segment.

“Some retailers prefer to target broader markets and avoid losing or incurring costs of trying to build different brands for different segments. For example, American retail giant, Wal-Mart, embarked on a promotion that would see it having sales promotions every day rather than every weekend. They have clearly opted to earn their margins through the movement of large volumes and through concessions from suppliers,” he says.

Engelbrecht says that because consumers are inherently different, retailers try to cater for everyone's needs. “Similar to our American counterparts, the trend of one-stop retailer shops seems to be taking off in South Africa. Malls have become a very popular phenomenon amongst South African consumers as we are increasingly becoming ‘convenience' shoppers,” he adds

He says this is illustrated by the rise of the ‘stores within stores' concept and by retailers who extend their services beyond their core services to capture more revenue from their existing customers. An example of this would be food and clothing retailers incorporating pharmacies into their stores.

“Five years ago an organic food customer would have to look for a specialist store, but now most supermarkets have an organic section which makes them a one-stop shop for that consumer. The same applies with clothing brands. Retailers are noticing the need to provide their consumers with multiple choices so as to make sure they spend money in their stores,” he adds.

Engelbrecht concludes, “It is debatable whether targeting niche markets can provide more lucrative margins than broader markets, but what remains is that consumers are no longer easy to read and in order to gain maximum margins, retailers must respond by adapting to their consumers' needs and change with the times”.