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Increasingly, the largest retailers in markets across the country are employing sophisticated personalized marketing and thereby becoming the primary shopping destination for a growing number of consumers. Meanwhile, other retailers in those markets, once vigorous competitors for those loyalties, are being relegated to the role of convenience stores.

In this war for customers, the ammunition is data — and lots of it. It began with transaction data and shopper data, which remain central. Now, however, they are being augmented by demographic data, in-store video monitoring, mobile-based location data from inside and outside the store, real-time social media feeds, third-party data appends, weather, and more. Retail has entered the era of Big Data.

Virtually every retailer recognizes the advantages that come with better customer intelligence. A McKinsey study released in May 2011 stated that, by using Big Data to the fullest, retailers stood to increase their operating margins by up to 60% — this, in an industry where net profit margins are often less than 2%. The biggest retailers are investing accordingly. dunnhumby, the analytics consultancy partnered with Kroger in the US market, employs upwards of 120 data analysts focused on Kroger alone.

Not every retailer, however, has the resources to keep up with sophisticated use of data. As large retailers convert secondary, lower-value shoppers into loyal, high-value shoppers, the growth in revenue is coming at the expense of competing retailers — all too often, independent and mid-market retailers. This part of the retail sector, representing an estimated third of total supermarkets, has long provided rich diversity in communities across the United States. But it is fast becoming cannon fodder.

Within the industry, the term used for this new form of advantage is shopper marketing, loosely defined as using strategic insights into shopper behavior to influence individual customers on their paths to purchase — and it is an advantage being bankrolled by consumer goods manufacturers’ marketing funds. A recently released study [pdf] by the Grocery Manufacturers Association (GMA) estimates annual industry spending on shopper marketing at over $50 billion, and growing.

The growth in shopper marketing budgets comes as manufacturers are reducing the spending on traditional trade promotion that has historically powered independent retail marketing. Past retail battles were fought with mass promotions that caused widespread collateral damage, often at expense to the retailer’s own margins. Today’s data sophistication enables surgical strikes aimed at specific shoppers and specific product purchases. A customer-intelligent retailer can mine its data searching for shoppers who have purchasing “gaps of opportunity,” such as the regular shopper who is not purchasing paper products, and targeting such customers with specific promotions to encourage them to add those items to their baskets next time they’re in the store.

A 2012 study by Kantar Retail shows manufacturer spending on trade promotion, measured as a percentage of gross sales, at the lowest level since 1999. But even this does not tell the whole story; it is the changing mix of manufacturer marketing expenditures that shows what is occurring. Trade promotion accounted for 44% of total marketing expenditures by manufacturers in 2011, lower than any other year in the past decade. This decrease is driven by a corresponding increase in shopper marketing expenditures.

As shopper marketing budgets have exploded, the perception has taken hold within the industry that a disproportionately large share of that funding is directed to the very largest retailers. That’s not surprising when you consider what Matthew Boyle of CNN Money reported recently. He noted that the partnership of Kroger and and dunnhumby “is generating millions in revenue by selling Kroger’s shopper data to consumer goods giants … 60 clients in all, 40% of which are Fortune 500 firms.” It is widely understood that Kroger is realizing over $100 million annually in incremental revenue from these efforts.

The Kantar Retail report goes on to say:

Manufacturers anticipate that changes in the next three years will revolve around continued trade integration with Shopper Marketing to maximize value in the face of continued margin demands. Manufacturers, in particular, expect to allocate trade funds more strategically in the future, as they shift to a “pay for performance” approach and more closely measure program and retailer performance.

The same report calls out that the future success model will involve deeper and more extensive collaboration between the retailer and brand, with focus on clear objectives and performance accountability. What needs to be recognized is that this manufacturer business model skews heavily to the capabilities of the largest retailers. It’s simply much easier for the brands to execute by deploying entire teams of people against a Safeway or Target or Walmart. It is much harder to interact with hundreds or thousands of independent retailers. Manufacturers’ past model of reaching independent retailers via wholesalers, who aggregated smaller merchants for marketing purposes, worked well in an age of mass promotion but not in an age of shopper-specific marketing. Wholesalers do not have shopper data, and do not have sophisticated technologies or expertise in mining the data. Meanwhile, they have a challenging record of promotion compliance, and in many cases lack the requisite scale for deep collaboration with brands.

Personalized marketing is proving to be a powerful tool, driving increased basket size, increased shopping visits, and increased retention over time. And if you’re one of the largest retailers, you get all these benefits paid for by CPG shopper marketing funds. But for everyone but those very large retailers, the present state of affairs is unsatisfactory. Independent retailers are keenly aware of the competitive threat and desperately want to engage, but they have not had the tools or scale to do so. The brand manufacturers are frustrated by increasing dependence on the very largest retailers even as they cave in to their inability to effectively and efficiently collaborate with a significant portion of the retail industry.

It would seem that the brand manufacturers’ traditional business model for marketing interaction with the independent retail sector is ripe for disruption. Growing consumer expectation for relevant marketing, the potential for gain if customer intelligence could be brought to the independent sector, and desire to mitigate the growing power of the largest retailers all provide powerful incentive to brand manufacturers. Independent retailers are savvy operators and are eager to join the fray if given the opportunity. Conversely, maintaining the status quo means the largest retailers continue to leverage personalized marketing to outpace smaller retailers, threatening the very diversity of the retail industry.

http://blogs.hbr.org/cs/2012/09/will_big_data_kill_all_but_the.html