What does the future look like for the supermarket industry? The answer depends on the retailer being discussed.
By Craig Levitt
Since the onset of the current economic downturn, some retailers have thrived and will likely to continue to do so. Others have not been so lucky and, barring dramatic changes to their corporate visions and operations, may experience tough sledding ahead. Even with stiffer competition, supermarkets still possess the ability to rise above the pack, remaining the logical first choice to capture America’s food dollar
To get there, grocery retailers are anxiously counting on two or three segments of the market to keep them ahead of the game. Those departments—fresh, private label and, to a lesser degree, health and wellness—are garnering more attention from grocery chains as they look to separate themselves from the competition, which now includes discount stores, drug stores, convenience stores and even dollar stores.
Most supermarket retailers understand the changing dynamics of the industry. While the center store remains the most important section, retailers are making more and more money from the perimeter departments. Making things more complicated is the fact that consumers are demanding more from their favorite food stores, including a full-service pharmacy counter, a fresh department that is big, well stocked and convenient, and a prepared food department that is easy and fast to shop.
Oh, by the way, they also want the best prices in town.
So where does that leave today’s supermarket chain? According to many industry experts, the supermarket industry, as a whole, has performed relatively well during the past three years, despite, or perhaps, because of the current harsh economic environment. Individually, some chains—usually the more innovative ones and the ones with deeper pockets—have done better than average. Other chains, faced with intense competition from within the industry as well as outside it, have not performed up to par.
“I would characterize the supermarket industry as neither in terrible shape, nor great shape as an industry,” says Jim Hertel, managing partner for Willard Bishop, a retail research and consulting firm based in Barrington, Ill. “But within that average belies the fact that the retailers that are doing well are doing better than they were before, to a fairly significant degree. The retailers who aren’t doing well are doing worse. So the spread between the winners and the losers is—to put it in sports terms—creating separation in the standings.”
How do the strong retailers keep the momentum going and how do the struggling merchants get back on their feet? There are many factors, observers say. On the cost side, rising energy and commodity prices could jeopardize the entire model, if merchants and their vendors do not develop programs that maximize price controls. One retailer noted that even a minimal increase in the price of a gallon of gas results in fewer shopping visits by the consumer and higher costs for the merchant.
When it comes to in-store promotions, retailers have to figure out the magic formula for merchandising. Private label products are becoming more popular, but cutting back on national brands could mark a retailer as out of touch with its consumers who are still more interested in the brands they grew up with than saving pennies. Additionally, the fresh section has grabbed the headlines with many shoppers, but it is the cereal, beer and baby food segments that make up the bulk of sales at a typical supermarket.
A compromise needs to be reached for obvious reasons. According to consumer research conducted by Chapel Hill, N.C.-based The Futures Co., a trends and futures consultancy, the quality of the fresh departments, including bakery, produce and meat, tops the list of attributes consumers find important when purchasing food. Peter Rose, senior vice president and director of the western region for the Futures Co., says based on consumer surveys he expects “fresh” to continue to grow as an important deciding factor on where consumers shop for their groceries.
“Almost 70% of the consumers we spoke to talked about the importance of ‘fresh,’” he says. “It’s right in line with taste and more important than a good price, and far more important than being the lowest price.”
Officials at Whole Foods can be thanked for raising consumer expectations in this market and many other retailers have jumped on the bandwagon. Industry guru Jim Wisner, president of the Wisner Marketing Group, based in Libertyville, Ill., says that even beyond Whole Foods there are enough good retail food formats and operators around that consumers see what can be done in the fresh departments and they want their local stores to do the same.
“Whole Foods has been successful, probably more so because they are damn good grocers than what they do with organic and natural,” says Wisner. “Its perishables are really attractive, really fresh. That makes the store fun to shop.”
Next comes private label. With enough consumers tightening their grocery bill belts, private label has become much more popular in supermarkets in the last five years. Realizing this, many retailers have gone to great lengths to develop near brand-equivalent products across many lines. At the same time, they understand that consumers purchase private label items because they offer a value and allow the merchant to stay competitive with the mass retailers and club stores from a price stand point.
Addition by subtraction
Private brands provide retailers with the opportunity to add unique product to their shelves. The challenge now becomes mixing and matching these store brands with the national brands in the limited space most food retailers have. Hence, one of the biggest buzz words in the grocery industry today is SKU rationalization. Observers say retailers must be extremely careful if and when they decide to pare down their assortment.
“There is probably less opportunity to eliminate categories than to just make sure retailers are being smart and efficient in what they offer,” says Ted Taft, managing director for the Wilton, Conn.-based Meridian Consulting Group. “A retailer can’t offer too few a variety or people are going to leave the store. Walmart made that mistake when they cut back to focus on private label. They found out shoppers were saying ‘well I’m going to shop somewhere else.’ There is a fine line you need to walk. It’s kind of the ‘watch out’ factor. You need to be efficient but if you go too far you are going to lose your shopper.”
When it comes to product assortment, most observers say retailers need to simply fall back on the old adage of “knowing your customer,” while realizing that that customer is going to vary from market to market. In other words what plays in Poughkeepsie does not play in Peoria.
One of the biggest concerns for retailers when determining how to offer shoppers a more limited product assortment was negative feedback from manufacturers who usually want as much of their product on shelf as possible. However observers say that to this point retailer/manufacturer relations are not as strained as might be expected.
In fact, research conducted by Willard Bishop suggests that as long as the process is carried out in a rational, analytical way; many manufacturers are actually encouraged by the SKU rationalization concept. The reason being, say observers, is that much of the time a lot of the shelf space is being taken up by products that consumers are not buying anymore, thus taking up valuable space for manufacturers and tying up retailer dollars in product that does not sell.
“The growth of popular items is being starved of space because that space is being clogged up by dead wood,” says Hertel. “Manufacturers are basically saying ‘let’s establish the right rules for the category and the right rules for the retailer.’“
The wellness section is among the trickiest growth areas, according to industry experts. As the economy stumbled, many consumers turned away from healthy and organic products because of their higher price-points, despite more and more information that these products are better for them. Retailers who were starting to expand into this section were caught in the middle—stick with wellness-oriented products as sales stalled or minimize the section and go with better selling and less expensive merchandise?
Observers say there is a middle ground. Charles Vila, vice president, consumer and customer insights for Camden, N.J.-based Campbell USA, says that suppliers need to work with retailers to develop a system that determines which products matter most to consumers.
“As a manufacturer with multiple SKUs across several categories, we need to work closely with retailers in terms of what makes it onto the shelf,” says Vila. “One area where I believe we have been especially successful is with wellness. We know this is a priority for consumers and they are looking for support in making wellness choices. Data shows that consumers want grocery stores to make it easier to shop for healthier products. We offer more than 200 wellness products, so we strive to find the right assortment for the shelf in partnership with our customers in their markets.”
Many retailers are also thinking differently and asking different sets of questions when it comes to choosing which products to carry then in the past.
It used to be supermarkets were a destination shop and the number one place to go for food. Of course, that was when the competition was usually just one other food retailer in town. Now consumers can choose from many different types of formats and often make their shopping decisions based on the most convenient outlet on their way home.
Observers say the best retailers are determining the importance of products not based on total sales, but on the products’ ability to anchor a trip and generate more traffic down a particular aisle. “It’s an entirely different way of thinking, but that’s what retailers on the cutting edge are doing,” says Hertel. “Retailers have got to figure out how they are going to win with shoppers, and everything will fall into place when they do.”
So the $64,000 question becomes: how does a retailer win with shoppers? It seems almost too ridiculous to mention, but observers point out that first and foremost—retailers must not drive their customers elsewhere.
In order to get consumers to make a retailer top of mind, it is becoming increasingly important for retailers to differentiate themselves from competitors. However, observers stress that there is a limit to how far a retailer can go. “Whether it’s on price or quality or variety, retailers have to make sure they are not so differentiated that the customer needs to seek out a trip elsewhere,” says Wisner. “Retailers also need to create a store that people want to shop.”
Meridian Consulting Group’s Taft, says retailers need to focus more on` creating a shopper-friendly environment. He adds that can mean simple things such as clear and easy-to-read signage or the even way store circular ads are laid out so it is more consistent with the way people want to shop and think about decisions for dinner.
What retailers should not do is try to simply compete on price. Taft likens the attempt to compete on price to what car companies did a few years ago when they offered continually lower and lower interest rates.
“[Car loan rates] started at 6%, dropped to 5% then 4%, everybody had to undercut everybody else and all of a sudden everybody is at 0%, and you can’t make any money that way,” says Taft. “So there is a tendency with retailers, because they know price really well, to just focus on price, price, price. One or two guys will survive like that, but the guys who are less efficient or who operate at a higher fixed cost—that puts them in a tremendous bind.”
Price points still remain vital and many retailers appear focused on offering the best deal in town. But even more important than low prices is providing consumers with value for their dollar. It is that value for dollar concept that Robert Passikoff, president of New York City-based Brand Keys, says some supermarkets still have not grasped yet.
Going forward, retailers must become better at the pricing game if they want to grab market share. That does not mean always offering low prices across the board. For example, a typical store may have 50,000 items and of those, shoppers may only know the price of 5% of them. Retailers should focus on offering low prices where they are going to do the most good, as it relates to enhancing a store’s price image. That also means being savvy as to where prices can be a little higher therefore generating profit dollars and offsetting the investment retailers have to make.
“There is a lot of opportunity to be smarter about pricing,” says Willard Bishop’s Hertel. “Value is a piece of it, and there are some items that do come down to price. We call them value items. It might be a gallon of milk, a pound of butter or a 96-ounce jug of laundry detergent. Retailers have to be dead on with the best pricers in town for these items.”
Hertel says another 5% of the products in the store are items consumers buy frequently enough that they know where the price should be. He says retailers do not have to have the lowest price on these products, but must be close enough so that shoppers don’t pass on making a purchase.
“That leaves 90% of the products in the store that retailers have more leeway on,” says Hertel. “Retailers just have to be smart. They can’t just say ‘we are going to be at 30% margin.’ Shoppers today are a lot sharper than that so they need to be a lot sharper than that too.”
Gazing into a crystal ball
The lines of retail continue to blur. Retailers such as dollar stores and drug stores—not to mention mass merchants and club stores—are challenging supermarkets for America’s food dollar, forcing grocers to take a closer look at how they operate and what they want to be for consumers in the years ahead.
Based on research done over the past 12 months, executives at The Futures Co., a trends and futures consultancy based in Chapel Hill, N.C., predict the top trends grocers should pay close attention to in the coming year:
Prediction 1: Get Fresh With Me
Fresh products will continue to grow in importance as a key deciding factor on where to shop for groceries. According to Peter Rose, senior vice president director, western region, consumers continue to try and manage and minimize risk, and they equate fresh and fresher as the route to minimizing risk at the supermarket. Research also suggests that consumers perceive fresh fruits and vegetables as more important and healthier than all-natural or organic.
“Given some of the health scares we have seen over the past few years, many consumers also equate fresher to safer,” says Rose.
Prediction 2: Be My Health Partner
According to research, 71% of consumers agree with the statement, “I wish grocery stores would make it easier to determine what foods are healthier than others.” Rose expects consumers will be looking to grocery stores more and more to demystify confusion around healthier versus less healthy choices.
Prediction 3: Stock Boys Will Need to do More Than Reach the High Shelves
In deciding where to shop, 73% of consumers say outstanding customer service is important and 67% say employees who can answer questions and handle problems without talking to a supervisor is important. Rose says that grocery stores can be a difference maker because of their people, responsiveness, degree of courtesy and friendliness and helpfulness.
“To tighten that bond with a consumer, at a time when you just don’t see that with many institutions anymore, they stick out like a sore thumb—in a very good way,” adds Rose. “That’s worth its weight in gold when consumers are looking to be treated fairly.”
Prediction 4: Downloading is the New Clipping
Research suggests that 40% of consumers download coupons at least once a week from their computers or mobile phones. Rose expects even more consumers to embrace digital couponing as a way of life in the next year as grocery stores expand programs to enable consumers to more easily download and take advantage of offers on smart phones.
Prediction 5: Energy Check Aisle 5!
According to research, 69% of consumers say that “provides more energy” is an important factor in determining which products to purchase. With energy now just as valuable resource as time, grocery stores are expected to begin implementing monitoring systems that enable customers to check energy levels, much like blood pressure monitors that were introduced near grocery pharmacies.