Going for growth in grocery

by Bill Bishop

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retail growthThe bleak title of the article about the 2012 Supermarket News Analyst Roundtable was “Grim Prognosis,” but there are some “silver lining” opportunities that are worth considering by any food retailer who is serious about growing their business. The analysts provided some pointers to areas where supermarkets may be able to grow. We call out six of them, and offer a couple of ways to approach each one.

Analysts' insight:

Middle class shoppers are feeling income pressure.

1. Serve the needs of price/value shoppers more aggressively.

Llimited assortment/dollar stores do a good job of serving the needs of price/value shoppers, but even so, there is a growth opportunity in the lower end of the market. If extremely price sensitive shoppers make up 25% of the market, but the percentage served by these hard discounters is lower than that, then there’s a growth opportunity in the gap. Here are two possible ways to convert that to potential sales growth.

  • Create a limited assortment/dollar store section inside the supermarket that matches prices or is close to the value/price of these hard discounters.
  • Negotiate everyday low-cost contracts with brand manufacturers and offer these products at margins that will appeal to price/value shoppers.

Analysts' insight:

Some upscale retailers still generate strong comp sales.

2. Crack the code of successful upscale supermarkets.

Upscale supermarkets like Whole Foods and Fresh Market are growing, but other upscale retailers are losing business. How do the winners achieve that success? Partly this traces to the credit they get for quality, but there’s more to it. What are possible ways to capture some of this sales growth?

  • Aggressively market unique high quality products to create larger trade areas for your business stores, and make the store a true destination for shoppers looking for something special.
  • Use your fresh department to make unique offers that will draw shoppers to your store, and then leverage this into at least several others items while they’re there.

Analysts' insight:

Shoppers are buying more fresh.

3. Ride the growth of fresh produce.

Shoppers are showing a strong interest in fresh produce – not just at retail, but also at farmer’s markets and in their use of community supported agricultural programs (CSAs). Here are potential ways to drive growth by taking advantage of the interest in fresh produce.

  • Partner with local producers to sponsor a CSA offering in your own stores, and use your ordering and communications technology to increase the efficiency of the program.
  • Develop and promote “price lines” in your produce department that provide a clear good/better/best option to appeal to a broader range of your shoppers.

Analysts' insight:

Winning retailers have a strong value proposition.

4. Clarify and strengthen your shopper value proposition. 

It’s not easy to differentiate a traditional grocery store, but the most successful supermarkets have created shopper value propositions that dominate on one dimension, while maintaining parity on the others. Here are potential ways to drive growth by strengthening the value proposition.

  • Tap the research developed in the CCRRC study The World According to Shoppers to identify specific criteria shoppers use to evaluate stores on shopping occasions; then, improve performance on the ones you can own.
  • Use consumer shopper research to identify the major weaknesses of your competition, and focus on improving your performance in those areas.

Analysts' insight:

Millennials are still on the sidelines.

5. Connect with millennials the way they want to communicate.

Millennials, shoppers age 22 – 34, have proven to be an elusive customer for supermarkets. One reason is that they’ve been slow to create their own households; they face a bleak job market, and a larger than normal percentage still lives at home. However, they still spend. Here are potential ways to connect with millennials and establish relationships with them.

  • Make it easy for them to shop with you without having to spend a lot of time in your store. Give them a click-and-collect option so they can order online and just pick up at the store.
  • Help them see the value and convenience of purchasing prepared food from the supermarket.

Analysts' insight:

The time is right for big game changing moves.

6. Ride the wave of consolidation taking place across business by adding a new major line of business. 

Today’s market conditions are ripe for transformational initiatives. Here are potential options that supermarkets can use to transform their businesses.

  • Extend the established presence of pharmacy into other healthcare services.
  • Create a position as a local destination for pickup of products ordered online; this is increasingly appealing to shoppers.

Look to the edges

We may not be in a period of growth that’s generated by overall economic conditions, but for those who are determined to grow, there are opportunities at the edges. What opportunities do you see? It’s easy to come up with reasons why these ideas won’t drive growth, but that’s not the idea.

  • Which ones have the most potential?
  • What are examples of retailers doing some of these things?
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BlackBeltLeigh Sparks said:
Just read this after scanning today's Tesco half-year figures which basically show stagnating sales and declining profit. Their strategy involves six things:

1. Service and staff - invest in more staff in stores to give a better experience.
2. Stores and Formats - renew the staore estate and direct capex to small stores
3. Price and Value - personalising offers more via Clubcard
4. Range and Quality - new re-launch of Everyday Value retail brand.
5.Brand and Marketing - new agency brought in
6. Clicks and bricks - click and collect for grocery at 1300 stores.

Some similarities so it will be interesting to see what works. In the figures despite stagnating sales, internet sales were up in the UK by 11%, which points ot the structural change underway.
Bill Bishop said:
Leigh - Thanks for sharing the overview of Tesco’s revitalization strategy. Each of the things they’re doing certainly makes sense and it seems to me that the next question may be which, if any, of these will significantly move the sales needle in a positive direction.

Seems to be a safe bet that #6; i.e. expanding “click and collect”, will drive additional sales and now it will be interesting to learn the impact on incremental profit.

It will be interesting to see if the combined impact of #3 and #4 provide the struggling middle class shopper with enough additional “value for money” to encourage households to concentrate more of their spending in Tesco stores.

As much as I believe the marketplace is and will continue to favor smaller stores, the execution of #2 will require carefully targeted investment in order to ensure an adequate ROI.

This is exactly the type of conversation I’d hope we could have in exploring real opportunities for growth.

BlackBeltLeigh Sparks said:
Bill
To continue it a little, one of the other things in the figures is that Tesco have taken a -86bp hit to their net margin (down to 5.15%) as a consequence of what they have done already. There is chatter that they have "bought" market share by voucher and couponing via Clubcard (#3), the added investment in staff (#1) comes at a price that is not reflected in sales uplift to date, and that brand switch to Value means a loss in profitability (#4). Is there an issue that when you number 1 in the market by market share you have to continue to hold that market share for other than profitability reasons - but that doing that cause a problem with the stock market?

I guess that given the lower capex - and I take the point about getting local stores right for returns - they may accept the lower return for a while?
Bill Bishop said:
Leigh – Thanks for bringing more numbers and some key questions into the conversation. The interplay you describe between different elements of Tesco’s strategy shows just how complicated it is to anticipate the impact of such a major new initiative.

It’s evident that this entire exercise is even more challenging to execute in a market that’s shrinking in size and, as a result, stretching out the time required to capture any benefits. We’re seeing retailers in the US invest in lower margins and get no appreciable bump in sales. In some instances, the lower margins only deflate sales numbers from what they would have been otherwise. Talk about unintended consequences.
Brian Woolf said:
Bill
Excellent article. Love the bullet point ideas your provided us to think about.

You probably recall from your Business Strategy studies that when an industry is growing fast (eg, food retailing 1960-90) the margins have to be generous to kick off enough cash to provide the resources for continued high growth. However, as an industry matures (ie, sales flatten) sales growth is much tougher so CEOs change their profit-building focus to cost-cutting and consolidation. That's where we are today but what is making it an even bigger challenge in the Western World is the flattening and decline in population numbers.

The US is basically flat, but the challenge my Japanese clients have is how to grow when (1) Japan's population has already started dropping from 130 million towards an expected 100 million by 2040-50, (2) which means an aging population (shrinking stomachs) and (3) the country has deflation, not inflation to hide problems.

A number of European countries (Greece, Germany, Italy, Spain) are also projecting population declines.

These population trends mean higher Govt welfare payouts and fewer Govt welfare pay-ins!

Bottom line: retailing has huge challenges ahead nearly everywhere in the Western world. Surviving, let alone thriving, in the years ahead will get back to Michael Porter's dictum: Put your efforts into being unique, not better. The suggestions you made in your article reflect that dictum.

Wow! What fun retailers have got ahead of them! Whole new playground of problems to solve!
BlackBeltFaye Sinnott said:
Excellent comments and thought provoking article. Bill, your comments here and on related articles about focusing on the customer are increasingly important. Healthier eating seems to be a very strong trend.... less sugar, more freshness, greater transparency in the ingredients and what role they play. Capitalizing on those trends, and assisting customers in easy, tasteful fully prepared and "almost prepared," (final steps at home) would be a strategy to include with some of the others mentioned. It is one that seems especially attractive with some of the younger consumers....
Bill Bishop said:
Brian - Your overview of the lifecycle of an industry reminded me of the old “wheel of retailing” that continues to turn whether we’re ready or not. Wonder if anyone else sees that parallel.

Your experience in Japan shows that retailers can survive much worse conditions than we’re facing today in the US. It also suggests that there may be some “lessons learned” from retailers in other areas of the world who are further down this path.
Bill Bishop said:
Faye – Thanks for your comment. Here’s a cut at building out another couple of growth opportunities based on the trends you identified.

Analysts’ Insight:
Consumers are looking for ways to eat healthier without giving up the flavor, convenience, and need to get “value for money”.

7. Sales of healthier foods are growing faster than the total store, but they need merchandising support to reach full potential.
More consumers are making the connection between food and health and trying to eat healthier, particularly as they get older.
•Partner with dieticians to develop, explain, and promote the benefits of ready to eat, ready to heat, and ready to cook healthy meal solutions.
•Work with produce suppliers to promote and explain the health benefits of a diet that includes more fruits and vegetables.

Are there other trends or data points we should try to convert to growth opportunities?
BlackBeltMichael Sansolo said:
This is an extremely important article and well handled by Bill (no surprise there). The simple truth is that the changes currently facing the retail world are staggering and every company needs to consider the points outlined here to determine a focused path to the future.

Yet I propose we add a few more key bullet points. 1. Variety management is more essential than ever. There are simply too many products and choices for consumers to consider aisle by aisle. The success of limited assortment offerings ranging from Aldi to Costco must be weighed. We may be at the time when retailers need to limit wide variety to only a few specifically selected categories that make a difference to their shoppers.

2. Supply chain focus is essential. Without cost elimination in the areas that are invisible to shoppers, you cannot possibly make gains in the areas outlined by Bill. Companies cannot achieve endless efficiency, but no one is near that level yet.

The clock is ticking and everyone won't survive. The winner will consider all these very challenging questions.
Bill Bishop said:
Michael – as always, you bring fresh new perspective to the conversation. Here’s a cut at putting your point on supply chain improvement into the standard template.

Analyst Insight:
Any meaningful change at retail must be accompanied by a significant improvement in supply chain for it to have a substantial impact on performance.

8. LOOK BEYOND THE STORE FOR BIG IMPROVEMENTS IN RETAIL PERFORMANCE.
Many changes at the shelf only tinker with performance improvement, but linking store and supply chain innovation can create step change increases in performance.

Think about the innovation that helped create Save-A-Lot; i.e. the only survivor from the first generation of Aldi imitators. Save-A-Lot may not have matched the efficiency of Aldi, but they did make big changes in their supply chain; e.g. they introduced long term purchase contracts with dead net pricing that took a lot of costs out of the system. This allowed them to be a much more effective competitor.

At that time, these changes represented big ideas and I think Michael is challenging retailers to come up with something similar today. Here are two starter concepts:

1.Build a store that provides several branded manufacturers with shopper marketing platforms that are big enough to justify their staffing by the brands. These stores will be unique and appealing and, more importantly, will be able to operate at a much lower labor cost because of the additional manufacturer support.
2.Design larger stores that can receive the majority of their product “directly from the manufacturer”. This would reduce inbound transportation costs and also help to lower store operating costs because it would be necessary to reduce SKUs in order to make the concept work.

These short descriptions provide a look at just “the tip of the iceberg”, but I suspect you’ll find a lot more to think about when you go below the water line. Thanks Michael for the push.
BlackBeltFaye Sinnott said:
Another "value added service" opportunity that may also reduce the demands on variety is to unbundle some of those alternatives, and feature the seasonings or extra toppings and flavors that "created those varieties" from a narrower item base. Great opportunity for getting closer to the customer and setting up teachable opportunities on the websites, social media, or in store. Another emerging trend - as food waste is a problem for everyone - is sharing some strategies for extending the life of items, or "pot luck" or stock-make-and-freeze options that customers can use in their homes. It used to be that grandmothers taught these skills, but with our mobile generations, this probably hasn't happened, creating another value-add and image opportunity for retailers.
BlackBeltLeigh Sparks said:
Picking up on a couple of strands here:

1. Supply chain - I absolutely agree that supply chain performance is critical to food retail (see my books and articles on this) but there does come a point where the pursuit of logistics gains is counter-productive to the retail end of the operation. Running stores "too hot" (as one of our leading retailers has it) may be as damaging as not doing supply chain fully in the first place. Is supply chain in food retail a "U" curve when some retaielrs thought it was a straight ine?
2. Healthy Living - I have a direct stake in this having been diagnosed with various things and told to change my diet (and I thought I was eating healthily). it was tough - not mentally (do this or die is a motivator) but practically (how much of what is in that food item?). Main stream retailers who sort this out and make it easy for consumers will be winners. The UK news yesterday of an agreed labelling system by the big retailers is a step forward - the manufacturers are still dragging their feet and it can not be compulsory due to European Union rules! But retailers are now getting it.

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