Inside information

Some of the grocery industry’s top executives offer their insights for the coming year. Entering the New Year, supermarkets face a myriad of challenges, from pricing pressure to increased channel competition to constantly changing technologies—just to name a few. Remaining successful has never been more difficult. With challenge comes opportunity. Grocery Headquarters tapped top executives from all reaches of the food retail industry, including grocers, manufacturers, trade associations and analysts, for ideas to help retailers overcome the challenges and effectively differentiate themselves from their competition. In their own words, here is what they had to say: Pat Conroy, vice chairman and U.S. consumer products leader, Deloitte It seems as if nearly every store, product category and brand has been impacted due to the confluence of trends in four pillars of our industry: agricultural supply, consumers, retailer landscape, and technology. I see these four challenges intensifying, and also bringing about opportunities for consumer product manufacturers and retailers. For the industry, I propose four resolutions for the New Year. First, consider developing distinct product and marketing strategies for diverging consumer segments. Consumer product companies and retailers can revamp their product lineup at the low end with value brands, and at the premium end, with distinct innovation. Retailers and brands are understandably reluctant to pass-on all the commodity cost increases via price increases or fewer promotions at the low end of their product lineup. Traditional market share is under siege and companies are worried that defending it through aggressive discounting is cheaper in the long run than losing it now and trying to recapture later. Second, consider embracing dollar and discount channels. Some consumer product companies have jumped in head first to the dollar store market, recognizing that many consumers are including them as a regular shopping channel for products they previously purchased at traditional grocery stores or mass merchandisers. They have developed channel-specific brand extensions, created smaller product packages to meet target prices, refined their supply chain for unique distribution requirements and embraced the very different point-of-sale environment in dollar stores. Third, consider pursuing more sophisticated hedging and risk mitigation strategies. Economic uncertainty is whipsawing through the supply chain in the form of rising and volatile commodity prices. As a result, some companies are upping their game on more sophisticated commodity and currency hedging to help manage risk. And finally, consider looking to technology innovation from mobile technology, social media and cloud computing for a competitive advantage. Harness mobile (and social and online commerce) technologies to help consumers with the pre-store planning process, to enhance the in-store shopping experience and to engage consumers in a post-purchase conversation. Lee Holman, lead retail analyst, IHL Group Competition from non-traditional retailers is but one of the issues that supermarkets are facing. The economy, raised customer expectations, increasing margin pressure, food away from home competition, operational efficiencies, aging technology, service offerings, ethnic diversity, loyalty (or the lack thereof) are all bearing down upon the traditional supermarket to a degree heretofore unseen. The bankruptcies of Penn Traffic, A&P and Winn-Dixie, among others, Safeway’s less-than-stellar performance and the breakup of Albertsons all may be due in part to trying to compete with out-of-segment giants, but all are symptomatic of the pressure being exerted upon these retailers to remain viable. By itself, a new store format is not sufficient to compete. Neither is a new technology, a new loyalty card or a fancier flyer. Supermarkets must find a way to get back to square one and determine exactly what they want to be in the industry; they cannot expect to compete without a sea change in attitude. That said, there are a number of key issues and opportunities that traditional supermarkets can exploit to their advantage. Smaller Footprints: The idea has seen a resurgence of late, mainly due to out-of-townspace being dominated by the big box retailers, as local communities continue to push them in that direction. Additionally, the overhead involved in running the smaller format stores makes for a more efficient margin generation. Union Impact: Recent news makes it pretty clear that the cumulative effect of salaries and benefits involved in union shops is the can that has been kicked down the road for too long. Some serious re-thinking needs to happen in this area, or there won’t be any work to perform for workers, regardless of union affiliation. IT Spend and Technology Adoption: Supermarkets have always been early adopters of certain types of technology, but their low margins tend to make them default to those solutions that provide the best bang-for-the-buck. Dr. Bob Whitaker chief science and technology officer, PMA Food safety was certainly in the headlines throughout 2011. There have been positive stories such as the signing of the Food Safety Modernization Act and exciting new research announced by the Center for Produce Safety. We have also witnessed the tragic side with the events this past fall involving cantaloupes. Here is a food safety wish list for the new year. Food safety: A Business Imperative Yes, greater commitment to a comprehensive, broad-risk assessment, food safety program will cost more money. That is because food safety must be more than a plan on a shelf in an office or the ability to pass an audit; it must be part of your corporate DNA. Making food safety a corporate-wide commitment and a guidepost in managing your business—not risking people’s lives—is simply the cost of doing business and the responsible thing to do. Hold Each Other Accountable All supply chain members must be accountable for not taking food safety shortcuts. Retailers should assess their stores’ own controls, beginning with knowing trading partners’ food safety philosophies. This means inquiring about suppliers’ corporate food safety plans and what they are doing to follow those plans every day, not just during audits. By staying abreast of research and innovations, and the risk- and science-based food safety programs growers need, retailers can outline what’s expected of suppliers and champion elements of a solid food safety program at all costs and show loyalty to growers that do too. Take Measures That Make Food Safer Too often food safety is a discussion about passing an audit or whether to do product testing. These are simply tools and by themselves cannot make food safer. Our focus needs to be a risk, process and science based development of food safety programs designed specifically for individual operations, from small farms to large processing plants to distribution centers to retail stores. Dave McConnell president/CEO, GMDC As annual reports have been arriving for many supermarket chains I am concerned that we are seeing more companies reporting positive comp sales growth—certainly a good thing—but in an increasing number of cases this sales growth is accompanied by a decrease in profits. This situation creates a potential big issue if we don’t find a way to turn around the trend. GMDC’s focus is on the general merchandise and health beauty wellness categories. We believe it is important that supermarket operators and their trade partners refocus their efforts to provide a better mix of these profitable products in the store. In January GMDC is releasing new insights that will be focused on the misunderstood potential and power of general merchandise. Our industry, as well as other trade channels, has suffered from a lack of good analytical data to help us truly understand and evaluate the potential of these categories in the overall store mix. We have established a couple of key strategic partnerships that are allowing us to access data heretofore unavailable to us, and the industry. This data will provide us with the ability to access, analyze and implement more effectively within the GM categories—certainly a big issue and opportunity for our members in 2012. Included in this new insight will be a focus on better understanding the consumers’ path to purchase in key GM categories such as baby, pet, household cleaning and housewares. Our insights will not only focus on traditional GM products within these categories but also grocery nonfood categories that must be integrated if we are going to truly take a holistic look at the consumers path to purchase. We believe thinking like the consumer and understanding her/his path to purchase on an integrated basis in these big categories is absolutely essential if the food channel is to grow and/or recapture share in some of these critical crossover categories. Another big issue GMDC will be tackling in 2012 will be to focus on helping the supermarket business capture a larger share of the beauty business. We have created a special subcommittee within our Health Beauty Wellness Advisory Board that will be attacking this issue by turning it into a big opportunity for supermarkets from both a sales and profit standpoint. Jon Hauptman, partner, Willard Bishop Pricing has never been more important to retailers and their shoppers. The continued economic downturn characterized by high unemployment and home foreclosure rates, reduced wealth, etc.; combined with strong food price inflation, is causing shoppers to scrutinize all spending and look for ways to stretch their grocery budgets. To attract shoppers and drive profitable growth, retailers will have to ensure they are:

Anne Fink, senior vice president, PepsiCo Sales With the increasing speed of change we are all seeing, PepsiCo realizes that it is more important than ever to deliver against what we call “The Promise of PepsiCo.” This promise is our commitment to partner with our retailers to deliver sustainable, long-term growth—even in challenging times. Our promise is based on providing unique insights, groundbreaking innovation and outstanding in-store execution that is designed to help drive store traffic, increase basket size and encourage repeat and cross-category purchases. Knowledge is power, and at PepsiCo, we realized our depth and breadth provided us with one of the most valuable and powerful assets we can offer our customers—information. Our approach to insights revolves around a deep understanding of the nuances that exist in the marketplace from region to region and store to store. Targeted execution and tailored solutions against a deep understanding of the granularity that exists from store to store will drive customers’ growth. Also, consumer tastes and interests are changing at a faster pace than ever before. Adapting our insights and approach to understanding this new consumer dynamic remains a critical element of our commitment to delivering “ahead of the curve” and understanding of our customers’ shoppers in order to provide growth-driving solutions. We also realized we needed to develop more innovative products, packages and promotions that satisfy very specific and unique consumer needs, shopping occasions and cohorts. For this reason, we included a commitment to innovation across our business as part of our “Promise of PepsiCo.” By developing products that address these specific demands, we help create pull at the store level. Finally, data has shown that exceptional in-store execution—beginning with a flexible go-to-market system—makes a significant difference in the grocery channel. From ensuring the right packages are on the shelf to creating displays and point of sale materials with powerful, effective messaging, PepsiCo promises to make the consumer in-store experience memorable. Peter Larkin, president/CEO, NGA To ensure that independent retail grocers and wholesalers can operate under balanced tax policies that encourage growth and create jobs constitutes to be one of the National Grocers Association (NGA)’s top legislative priorities for 2012. With the failure of the Super Committee in Congress to come to an agreement to identify at least $1.2 trillion in savings, increased pressure mounts on both Congressional parties to find new revenues to offset spending and reduce the deficit. Add to this the fact that in December of 2012 the current individual tax rates are set to expire, effectively raising taxes on millions of Americans and businesses that operate as pass-through entities. In 2010 NGA’s Tax Committee and Board of Directors identified the top seven tax issues—prioritized in an NGA member tax survey—beginning with individual rates for flow-through entities, followed by the estate tax, corporate income tax rates, accelerated write-off of capital expenditures, capital gains in individual rates, work opportunity tax credit, and protecting LIFO from repeal. Advancing these key tax initiatives that directly bear upon the bottom line of independent grocers and wholesalers is a top priority for NGA in 2012—and efforts are already in full swing. In October 2011 members from NGA’s Tax and Government Affairs Committees were on Capitol Hill, meeting with key staff in House and Senate leadership offices to urge support for these tax initiatives and to explain the influence on their businesses. Leslie G. Sarasin president and CEO, FMI Sometimes to anticipate where you are headed, you simply have to look at where you have been. A significant feature of FMI’s research document, The Industry Speaks, is the data collected in the heading we call the top five worry index. This index reflects the ranking that food retail executives give the issues that keep them up at night. In 2011, for the third year in row, the economy topped the list. In fact, the 2011 score was even higher than that of previous years, indicating a growing intensity to the issue. All the markers—unemployment figures, consumer price index and the consumer confidence index—are pointing to 2012 being another year in which the economy remains the top concern and challenge facing the food retail industry. For the consumer, often the most tangible way the amorphous concept of the economy gets manifested in the grocery store is a focus on food prices. This means that the average American’s front line experience that his or her money is not going as far as it used to is frequently in the checkout aisle. This sometimes puts food retailers in the unenviable position of being the undeserving target of customer economic frustration, with the only defense being an explanation of the intricacies of business economics and the complexities of the supply chain. For the food retailer, a tighter economy means the industry, which is already highly competitive, becomes even more so, and the very thin profit margin the industry operates on becomes even more tenuous, allowing for even fewer missteps and no breathing room for risky moves. The economy issue becomes more complicated by the fact that it is a lingering problem, with both retailers and customers confronting the similar challenge of turning belt-tightening steps—once considered emergency and temporary measures—into standard operating procedures. This challenge presents a unique opportunity for retailers and their customers to realize the truth of the adage that “a friend in need is a friend indeed” by working together to manage the choppy waters of the present economic sea—forging a bond that will last when the waves begin to calm. Steven C. Anderson, IOM, CAE, NACDS The congressional and presidential election may seem many months away, but it is important to elect pro-patient, pro-pharmacy advocates who will support community pharmacy. NACDS has been increasingly effective and aggressive in its public policy fights in the areas of Medicare and Medicaid. NACDS continues to urge state and federal lawmakers, executive branch officials, as well as the judiciary branch, to help preserve pharmacy access for these patients, and to raise awareness that pharmacy is part of the solution for curbing long-term health care costs. NACDS is also aggressively working in the public policy arena to prevent pharmacy benefit management (PBM) companies—middlemen—from limiting patient choice and access to pharmacy services. NACDS supports the bipartisan House and Senate bills that would preserve pharmacy choice for patients and takes additional steps to prevent threats to pharmacy patient care. NACDS also opposes the proposed merger of Express Scripts and Medco—which would create a “mega” PBM, specialty pharmacy provider and mail-order pharmacy with market power in all three of these related product markets that are critical to controlling health care costs. The anticompetitive effects of this proposed merger would harm patients by reducing pharmacy choice, decreasing access to pharmacy services and ultimately leading to higher prescription drug costs paid by plan sponsors and consumers. This proposed merger faces strong opposition from consumer groups, and Congress. The House and Senate have expressed skepticism with the proposed mega-merger and held two hearings to investigate further. Both times, NACDS members testified urging Congress to oppose the merger of the two PBMs for the sake of patient choice and access to pharmacy services. We know that pharmacists provide unparalleled value in improving patient health and reducing health care costs across the board. And it is important to recognize what pharmacists do every day for patients. The medication therapy management (MTM) services provided by pharmacists help patients understand how and why they need to take medications as prescribed. Improving medication adherence is part of a cost-savings solution for the nation’s health care system. NACDS has endorsed House and Senate legislation that would enhance patient access for MTM services. Beverly Grant, vice president & chief customer officer, U.S. food and  specialty channel, customer business development, Procter & Gamble We as an industry need to create and deliver more consumer-centric innovation in all parts of product lifecycle—from ideation to manufacturing to shopping to use. By this, I mean innovation that fundamentally changes the consumer experience in three ways: innovation that provides much better performance than what consumers get today, innovation that lessens the physical consumer burden of doing the task and innovation that requires much less precious and scarce consumer resources to get the job done, specifically, time and energy. Truly innovative ideas must convert consumer or shopper knowledge into economic value. For the grocery industry this means driving real incremental dollars, finding ways to grow existing categories, finding ways to develop new categories and creating a shopping environment that extends the regimen of product usage and helps consumers find solutions they seek—and in doing so, helps us improve business results. We must collectively agree as an industry to facilitate innovation. It is critical we work together to identify those ideas that are “ownable” and unique to grocery retailers. Our own consumer insight work confirms that emerging trends point to fewer total trips, smaller/urban formats; an aging population, growing Hispanic population and more ‘green’ shoppers. The good news is that all of these disproportionately benefit grocery retailers. It is a wonderful opportunity to capitalize on regional strengths and ties to the local community. At P&G, we have a robust innovation system and process that is designed to deliver four different types of innovation: Commercial Innovation, which exploits current benefits and drives new levels of trial; Sustaining Innovation, involving improvements to current product offerings that enhance benefits; Transformational Sustaining Innovation resets competitive advantage in a category resulting in significant share increases, sustainable competitive advantage and typically category growth and Disruptive Market Innovation, creating new categories or disruptive current categories. Our renewed approach for shopper and consumer research as well as our new criteria for initiatives to deliver category growth is just two examples of how we are changing the game. However, we know our success depends on leveraging upon working with and leveraging the strength of our grocery retailers. We seek to secure input earlier as well as reapply our past learnings. Together, we can make a difference. Mary Kellmanson group vice president of marketing, Winn-Dixie Stores At Winn-Dixie we strive to earn trust and loyalty every day. Looking to the challenges and expectations of our guests in 2012, we see three overarching themes: time, money and convenience. With these themes in mind, we continually ask ourselves, “How can we create a fun shopping experience with fresh offerings and solutions that make life easy for guests?” We are designing meal solution programs that help our guests find delicious, convenient and affordable answers to the “what’s for dinner” question. Through programs like “Make A Meal” and “What A Deal,” we are helping build meals that are easy to prepare, great-tasting and affordable, all at once. We continue to transform our stores to better meet our guests’ needs. It is not just in the outer perimeters with perishables, but in finding ways to make center store more fun too. From our aggressive new transformational store remodel program to transforming our ordering process, we are delivering solutions to meet our guests’ needs at every turn. And to help our guests alleviate financial stress, we offer our Reward Card, providing savings throughout their store every day. In the last couple of years, we rolled out an extension of that program through our fuelperks! Rewards. This program allows our guests to realize savings at the gas pump just for doing something they do anyway—shop for groceries. And by working with vendor partners, we are able to augment the program through promotions that offer bonus Rewards—a fun and easy way to save even more. Mike Potthoff, vice president large format, Anheuser-Busch   Beer consumers are inundated with options of where to purchase beer and they are shopping across several channels. Therefore it is important grocery retailers focus on how the beer looks and feels to the consumer in the store—and differentiate your store from the competition. Winning retailers also know the value of a having balanced approach to the beer category. They recognize their competition and understand their shoppers. Grocery retailers that are winning are focused on the items that are driving incremental sales—not just more variety of brands. They understand it is about having the right brand mix for their shoppers. We realize retailers face challenges today and we are committed to helping them identify the best ways to connect with the beer-drinking consumer. We use market-level data to analyze store’s competitive market and then use that data to provide actionable recommendations and solutions. This information also allows us to identify and make recommendations about where to place specific brands and packages to create the best assortment and shopper experience for the retailer to meet the demand within that market. This is why we recommend that retailers have the best plan to include the key drivers of the segment when planning assortment. For example, we know the craft segment should be used to generate excitement and craft drinkers like to experiment so retailers must have the right offerings, but not at the expense of the overall beer category, because even the craft shopper spends 70% of their beer purchases outside of craft, with half of those purchases in the premium and value brand segments. Brian Sharoff president, PLMA Store brands in 2012 should not be much different than store brands in 2011 or, for that matter, store brands over the past three to five years. Market shares will continue to rise. Truth be told, that has been the pattern of store brands over the past three recessions. It is wishful thinking to believe that store brands growth will unravel as employment improves and people go back to spending. There will be other forces at work in 2012 that will be far more influential. First will be theongoing segmentation of the marketplace. Affluent consumers have their own world of food stores at which to shop, ranging from Whole Foods and Trader Joe’s to Costco. All of them are committed to their own brands and will keep store brands statistics rising. Budget minded consumers also have their own world of food stores where, likewise, store brands are popular and growing, including Aldi and Save-A-Lot. As for the traditional supermarket chains, their determination to expand their store brands simply goes without saying. As for the consumer, store brands have achieved a paradigm shift that was unthinkable a decade ago. Shopper perceptions of quality, taste, performance, packaging, awareness and plans to purchase are at record levels. No one has a crystal ball, but trend watchers can easily see a time when store brands in the U.S. will resemble the penetration of “own label” in Britain or “marque de distributeur” in France or “handelsmarken” in Germany. Will national brands close down their factories and become a vague memory? Of course not. The battle for the consumer’s dollar will continue and as a result shoppers will have more products to choose from, at more competitive prices than ever before. Paul Cooke, vice president/director industry development, Nestlé Purina PetCare Co. A couple of years ago, I was reading in one of our industry studies that approximately 70% of a grocery retailer’s total sales and almost 75% of the total store’s profits were generated from the center store. That surprised me to say the least. I thought about how many retailers have defined themselves by their perimeter and I realized that with the odd exception virtually nothing has really changed in the center store in decades. Retailers have made a significant investment to differentiate themselves from their competitors in the perimeter, but very little to differentiate themselves in the center store. If the center store is that important why are they investing so much money and focus for 25% to 30% of the business? If we keep doing the same things over and over, why would we expect anything to change? With that said and recognizing that Nestlé Purina is in a category that competes in the center store, how can we help our retailers be the store of choice for pet? Pet owners are looking for products that meet their specific needs. Their expectations are different from many other center store categories. This category is personal and it is about understanding the emotional bond people have with their pets and recognizing they are part of the family. If you can’t provide an in-store experience that makes your pet owner feel good about how you value them and their family they will find someone who does. Don’t give them a reason to look elsewhere. The pet consumer is in your store every week, but for numerous reasons many choose to shop for their pet’s needs somewhere else. Some thoughts as we look forward: The No. 1 opportunity for success in the pet category is to understand the importance of the pet category and the value of the pet consumer across your entire store. Make the in-store experience the very best it can be. Make pet an “anchor department” in the center store that satisfies the needs of your customer. Stock the right core assortment for all your customers’ needs, you probably have what they are looking for, they just don’t know it. Create a dedicated end cap that reinforces the commitment to pet and introduces the department. Make the aisle/department right, make it easy to see and convenient to shop. Clearly call out the key categories and their attributes. Make sure the core items are in-stock when your customer chooses to shop. Make the in-store experience as personal as possible and understand the emotional connection people have with their pets. Cleaning supplies, auto accessories, insecticides are not good aisle partners. Use navigational signs, for ease of shopping and information on nutritional needs. Use pictures and signs with people and their pets; make the experience personal. Upgrade supplies and accessories; pet care is a significantly larger opportunity than just food. Think about merchandising pet solutions throughout the store. The “Pet purchase trip” in many cases can determine where the customer will shop and what they will purchase.