Supermarkets will offer more “everyday fair pricing” in the years ahead, as part of a hybrid-EDLP model; will continue to shutter underperforming stores, leading to consolidation of food retailers; and will increasingly offer payment and other solutions for consumers through mobile devices.
In addition, Wal-Mart’s expansion into urban areas will force the retailer to refine its approach to these markets with a tailored assortment and unique services, among other adjustments to meet the needs forced upon it by consumers and the operating environment.
These are among the topics discussed on the following pages as industry experts expound upon trends in a special outlook issue. Thomas D. Murphy, a former IT executive at Kroger Co., describes a business upheaval he calls “the consumerization of retail,” driven in part by the transparency that modern technology affords.
SN’s Fresh Market section examines the increasing demand for transparency in the industry, the importance of food safety for the produce industry, nutrition trends, and customers’ increasing demand for local and artisan product.
The Center Store section examines the outlook for private-label packaging, the impact of health care reform on community pharmacy, the increasing demand for sustainability in CPG packaging, and the future of Fair Trade.
Hybrid EDLP Continues to Evolve in Supermarkets
By JON HAUPTMAN
Pricing has never been more important to supermarket retailers and shoppers, and it will undoubtedly be a primary driver of store choice over the next few years. The struggling economy, characterized by high unemployment, reduced wealth and continued crisis in the housing market — combined with high food price inflation — is causing shoppers to scrutinize all prices and spending. Most consumers are attempting to stretch their shopping budgets and are actively looking for stores that help them do so.
During the coming year, supermarket operators will be heavily focused on strengthening their price-value image to attract America’s increasingly price-sensitive shoppers. We expect this will encourage many retailers to shift from their traditional high-low pricing strategies to hybrid-EDLP strategies featuring fair pricing/values every day along with a limited, highly focused promotional program — a trend that’s already starting. It’s not a revolutionary swing all the way to pure EDLP, but an evolutionary adjustment featuring the best of high-low and EDLP strategies.
Here’s why and how it will play out in 2012 and beyond:
• Regular shelf prices matter: Some retailers with high-low strategies inflate their regular shelf prices to afford/offset aggressive promotions. However, this can generate excessively high shelf prices that alarm consumers, hurt retailer price image, and encourage shoppers to simply “cherry-pick” sale items. Shoppers are not simply looking for agreeable average prices. Instead, they’re aware of — and make decisions based on — regular shelf prices along with promotions. So, everyday fair pricing is needed — a key component of a hybrid-EDLP pricing strategy.
• Current promotions are largely inefficient: While many high-low retailers have been attempting to maintain store traffic by promoting more aggressively, i.e., buying the business, they’re finding that these promotional efforts are not driving growth. Less than half of promotional volume is truly incremental, or said another way, well over half of promotional volume is subsidized; shoppers would have purchased the items even if they were not on sale.
• Shoppers still love a great deal: Most retailers will want to maintain some type of promotional offering to generate excitement and attract shoppers, but promotions will look different than in the past. Many operators will look to significantly condense their weekly ads to focus on fewer, productive promotions, i.e., those that generate incremental purchases.
• EDLP offers can generate excitement: Retailers adopting the hybrid-EDLP strategy will complement their new, highly focused promotions and widespread fair prices with a relatively small number of great EDLP values representing every department and aisle across the store. The EDLP values will provide market-leading prices for an extended period of time — three months or so, for example — thereby giving shoppers comfort that the prices will be available whenever they shop. Retailers will likely rotate these items three or four times a year to maintain shopper interest.
The adoption of hybrid-EDLP strategies will be the next big trend in supermarket pricing. And, this will provide opportunities for CPG suppliers and technology providers to tailor new offerings to meet changing retailer needs.
Jon Hauptman is managing partner at Willard Bishop, Chicago.
Wal-Mart Goes Urban
By ROBIN SHERK and LEON NICHOLAS
Though Wal-Mart’s strength lies in operating big boxes in rural and suburban areas, the retailer is also developing smaller stores like Walmart Express and Neighborhood Market to help Wal-Mart reach into urban centers. Whether Wal-Mart will win in this unfamiliar landscape remains to be seen. Here are three key issues that Kantar Retail will be monitoring:
• Small-store dynamics are different — To operate small, urban sites profitably a retailer must balance several dynamics: overhead costs, labor, inventory replenishment, product mix, turns, price, and gross margin. And each of these involves trade-offs. For instance, too many products in the box pressures labor costs to keep shelves in-stocks. Another key trade-off is between price and margin. For small stores to feature low prices, private label is commonly used to offset the margin pressure. This is particularly important for urban sites because operating costs are high.
Today, Wal-Mart’s small stores emphasize a wide range of national brands at a very low price. Such a deep assortment of national brands will certainly pressure gross margin and store labor costs —assuming that these SKUs turn fast enough to justify their placement.
• Assortment for urban shoppers is tailored — The next area we monitor is the assortment’s fit for the shopper audience. Urban shoppers tend to travel by public transit. They also tend to live in smaller places. Recognizing this, things like large packs are ill-fit for shoppers who carry goods in their bags and need to stock in apartment cupboards. Wal-Mart’s downtown Chicago Neighborhood Market grocery currently stocks such bulk sizes along with other SKUs that seem poorly tailored to the urban shopper. Wal-Mart will need to finely tune and regularly refine its assortments by neighborhood, perhaps a new skill for the mass merchant.
• Unique services are required — It is also important for the small stores to leverage unique offerings and services to differentiate themselves in ways that encourage shopper traffic. Wal-Mart’s prepared-meal solutions, pharmacy, site-to-store, and MoneyCenter services all give unique reasons for shoppers to visit and distinguish it from rivals.
Robin Sherk and Leon Nicholas are directors of retail insights at Kantar Retail, Cambridge, Mass.
Merger Activity Will Accelerate
By DAVID SCHOEDER
The outlook for the next five years in the supermarket industry is a continuation of the past decade of consolidation, although at an accelerated rate.
As a result of the economic downturn, a fundamental shift has occurred. Consumers have become more educated about shopping choices and are shifting their shopping patterns at an accelerated rate. Retailers that are adaptable and conscious of consumer trends cater to these consumers, and have momentum in same-store sales and store count.
As a result of this shift, retailers are pruning non-viable stores, with a majority of locations closing rather than being sold as grocery stores. The “weeding out” process will fundamentally change the outlook of other retailers in these markets. Traveling on store tours across the country the last 12 months on numerous visits to retailers, the common theme of almost every discussion from a strategic standpoint has focused on what competitors will potentially close stores and when. Given the increased pressure on operating margins and the uncertainty about the economy, a number of these retailers are considering divesting of their retail stores because they do not see any upside from other competitors exiting the market.
The industry consolidation over the next five years will focus on two groups of supermarket operators. The first group of retailers consists of those operating six to 20 conventional stores that have not carved out a niche in their market. We expect this group of retailers to shrink by half over the next five years due to divestitures primarily to other independent operators that are market consolidators.
The second group where we see consolidation is regional chains that are or will be in financial distress in the near term. A number of retailers in this group have been shrinking in sales and store count, have non-viable retail stores they continue to operate to spread overhead, support their distribution centers and are not competitively priced in the market. We anticipate that the retail consolidation in this group will be primarily break-up plays with multiple buyers involved.
David Schoeder is a prinicpal at The Food Partners, Washington.
Smartphones and the Consumerization of Retail
By THOMAS D. MURPHY
The move to smartphones by today’s consumers — perhaps the most quickly adopted technology in the history of the world — is fueling one of the greatest retail business upheavals in decades. I call this business transformation the “consumerization of retail.”
Already, mobile networks and devices — smartphones and tablets alike — have enabled consumers to drive a host of changes across the retail industry. For example, when consumers want to communicate about a retailer, they can reach hundreds or even thousands of contacts with a single Facebook entry or YouTube video. When they want to check on price or availability, they can search a broad swath of local merchants or even global ecommerce distributors. Retailers are striving to adapt to this quickly changing landscape in which they are losing control of their brand image, word of mouth is no longer a one-to-one message, and price transparency is widespread.
Moreover, consumers are starting to employ the mobile device not just for information gathering and dispensing, but also for tendering and fulfillment. This began with companies like Amazon, Apple and Wal-Mart allowing consumers to investigate and order products online. But now companies like Google and PayPal are building “digital wallets” in which a consumer can store, access, and utilize all types of tender accounts and customer loyalty programs on their mobile device. With the digital wallet, the consumer can choose which account to use for payment, and select customer loyalty points or promotions for redemption. Forward-thinking food retailers are already piloting these wallets to determine how best to leverage a closer relationship with the consumer, reduce payment fraud, and possibly cut tender costs.
In addition, more and more of today’s smartphones are equipped with technology that allows a consumer to pay by simply tapping a payment terminal with their phone.
In 2012, we will see large market launches of the digital wallet, as innovative grocers begin to use the mobile device and customized apps to differentiate their brand. They will not hesitate to integrate their mobile platform with social media so that the consumer can make product and service recommendations to friends and followers; and they will use transparency as a commitment to quality with the message, “We have nothing to hide.” It may not shift the customer tide overnight, but it will quickly create winners and losers in the battle for the consumer mind and wallet — the digital wallet.
Thomas D. Murphy is a principal at Atlanta-based North Highland and a former IT executive with Kroger.