Surviving General Merchandise's Competitive Landscape

Editor’s Note: Information and insights for this article are based on the 2019 General Merchandise Benchmarking Report by A.T. Kearney, a global consulting firm with headquarters in Chicago, and GMDC Retail Tomorrow of Colorado Springs, Colo. It is republished with permission from the report’s authors, including Rodey Wing, partner, and Jason Maehara, consultant, with A.T. Kearney, Toronto; Archit Subramanian and Victoria Zhang, consultants with A.T. Kearney, Chicago; and Mark Mechelse, VP of GMDC.

Online sellers are capturing ever-increasing shares of many general merchandise (GM) categories, and to stay competitive, brick-and-mortar retailers need to evaluate their situation on a category-by-category and platform-by-platform basis.

That’s just one of the findings in the 2019 General Merchandise Benchmarking Report, which asked more than 100 retailers key questions about business performance, the competitive landscape, shifts in customer demand and buying practices, product assortment and store experience. A majority of the respondents (87%) were retailers, and the remaining 13% were wholesalers and distributors. While they represent small, regional, multiregional, national and multinational operations, 80% of respondents work in operations that are regional or larger. They work across a broad range of functions, including sales, marketing, merchandising, operations and strategy, with 80% having titles of “manager” or above.

When asked, “How do you perceive the competitive landscape shifting in the next three to five years for your business?,” 90% of drug retailers and 71% of mass and food retailers said they expect the landscape to become even more competitive due to the continued growth of GM categories in the digital market. Seventy-one percent of respondents mentioned “online” as a key driver of increased competition, while only 24% mentioned “discount stores.”

Given the performance of certain GM categories, cynics might conclude they have no future in traditional brick-and-mortar food, drug and mass retailing, but there’s more potential than is obvious at first glance. GM is at a transformational crossroads. While food, drug and mass sales numbers are down in some categories, they are up in others. GM categories are far from dead, and consumer demand for them remains strong. The only issue is knowing who is in position to meet it.

Online is perhaps the first shopping alternative that comes to mind, but manufacturers’ direct-to-consumer programs, pop-ups, boutiques and subscription services are all competing for the attention of GM consumers and changing the way they think about these categories. The survival of GM categories in brick-and-mortar stores will require retailers to completely change their traditional approach to marketing and merchandising. Rather than try to stock everything in every category and then “push” it onto the consumer, successful retailers need to tailor their strategies to the way shoppers buy. They should leverage the emerging bifurcation in the way consumers purchase GM products by identifying which categories customers see as “chore” categories (for example, household products and office supplies) and which categories they will “shop” (for example, pet, baby and home).

Optimize ‘Chore’ Categories 

Chore categories require drastic changes in order to optimize in-store space. In paper products, for example, there are a couple of possible strategic approaches (out of a near-infinite number of possibilities based on a variety of factors, including brand identity, consumer population, location and competition).

Retailers should also determine relevant pack sizes based on market needs—for example, smaller sizes in urban stores and larger sizes in suburban locations—and extend assortment that is available online.

Optimize ‘Shop’ Categories 

Shop categories, which perform much better than the chore categories, have seen less erosion as consumers look for more emotional and experiential connections to their purchases. Winning in these categories requires significant in-store investment to develop a credible emotional connection with the customer in key GM categories. For example, a retailer might decide to reduce 90% of SKUs for a chore purchase such as paper towel replenishment but create a comprehensive, in-store “pet experience” area with an extended assortment and a pet play area. Other examples of the premium pet experience can include providing pet daycare (drop your pet off while you shop); sampling new pet foods; offering pet grooming services; hiring a part-time pet nutrition or training specialist; or working with a local veterinarian who could sponsor monthly pet wellness clinics. While this example shows some scenarios for pet, the goal is to become a destination for a specific “shop” category in the minds of the consumers.

Consumers’ humanization of pets and the premiumization of pet products have helped drive strong brick-and-mortar performance through increased pricing. Total pet category sales in 2018 were $21 billion, a 3% change over 2017 despite a loss of 1% in unit sales. Prices were up 4%.

Much of this growth was fueled by an increased demand for premium products such as Blue Buffalo in brick-and-mortar stores. Owners tend to treat their pets’ bodies the same way they treat their own, with 70% of consumers who are on diets also putting their pets on special diets. As one retail executive said, “Consumers resonate with brands on emotion; a simple tagline has gone a long way in driving the connection.”

That connection translates into real dollars. In response to this trend, more and more brick-and-mortar retailers are shifting their product mix to take advantage of the increased consumer appetite for premium pet products. Another retail executive said, “Twenty percent of our pet category has been premiumized in the past 18 months.” It should be noted that some of the categories in this space, such as pet food and cat litter, are prime for online disruption given their bulky pack sizes, recurring nature of purchase and other factors. So even though there are not currently declines in brick-and-mortar doesn’t mean there isn’t a risk in the category moving forward.

Not All Categories Are Equal 

High-emotion categories are growing in traditional physical stores, and few categories are as emotional as baby products, a category that perfectly illustrates how a single category can be bifurcated into both shop and chore subcategories. Overall, 2018 category sales reached $18 billion, and while that figure represents 0% growth, it jumps to 2% if you exclude baby clothes. The category had a negative 2% unit change, and prices were up 2%.

Proving not all subcategories are created equal, high-emotion shop subcategories such as organic baby care grew 10% in 2018, while direct-to-consumer brands, such as Honest Co., shifted to selling through retail channels. But low-emotion chore subcategories declined in unit volume in brick-and-mortar stores in the face of growth by online subscription services such as Made Of, Parasol and Amazon. This suggests that in high-emotion shop categories, traditional retailers should focus on brands that resonate with key customer needs, values and concerns, such as nutrition, organic and safety. For low-emotion chore categories, where 42% of consumers rated price as the most important factor in their buying decisions, retailers should focus on price and convenience.

By their nature, shop categories require deeper, creative investments rooted in customer needs. As in the case of chore categories, the 2019 General Merchandise Benchmarking Report authors offer two possible strategies: Generate additional space by leveraging optimized space from chore categories and using space peripheral to the store, such as garden centers or parking lots; and smart assortment expansion, broadening assortment by three to five times current offerings based on customer demands (premium, natural, local brands, economy brands) or offering services such as direct-to-home delivery through the store for large, bulky items.

Hope in Understanding the Customer 

The 2019 GMDC General Merchandise Benchmarking Report offers hope to brick-and-mortar retailers concerned with falling GM sales. The first step toward holding or developing share in GM shop categories and subcategories is to develop a deep understanding of the customer—the foundation for using experiential retail to develop an emotional connection with a shopper. The three building blocks of experiential retailing are:

In terms of curation, 53% of surveyed retailers listed improving customer experience as one of their top two initiatives, yet only 13% said they had invested in building personalized experiences last year—the first step in creating a sense of community. Customers who are emotionally connected with a retailer spend twice as much as those who aren’t.

For engagement, 43% of customers reportedly would choose shopping in-store over online for the fun factor. But fun is only one tool for building engagement. There are many others, including demonstrating a commitment to values such as sustainability, supporting a cause such as Pride, donating a certain percentage of GM sales to help support a local community crisis or conducting in-hospital beauty demonstrations for cancer patients.

Optimizing Data 

Because both retailers and manufacturers stand to gain or lose based on data, it is crucial for both camps to begin developing more effective ways to share both raw data and the insights that data generates. This involves building trust, safeguarding data security and renewing a sense of openness to work toward a common cause of building GM sales through developing better insights into the GM shopper.

Those serious about holding and boosting GM sales should ask themselves five questions:

experience?

The way consumers shop continues to evolve at a dizzying speed. The market of 2003 bore almost no resemblance to the competitive landscape of 1993. And that was before the explosion of mobile apps, the internet of things, digitally-integrated households, voice-activated ordering technologies and online subscription services.

For retailers, it’s time to take a risk and be bold, because if you don’t, your consumers will evolve past you while your competitors continue to outmaneuver you