MAKING THEIR MARK

Lucia Moses / Carol Angrisani / Amanda Chater

Food retailing today is all about creating a point of difference among multiple formats. And while that's commonly associated with signature bakery, deli and meat items, retailers are striving to carve out a niche in the center of the store as well. That's the end goal of five key retailer initiatives described in the pages that follow.

To serve consumers, retailers first have to know what they want. That's why retailers are working harder to gain shopper insights, then responding with relevant products and offers.

Technology continues to be critical in enabling these activities, by not only helping keep shelves stocked but by distinguishing retailers. They're moving toward tailoring offers to shoppers based on their shopping history, often using e-mail to deliver offers. Space-planning software is helping operators customize their floor plans and assortments to the markets they serve and give new products their best chance of success.

And while Wal-Mart may have won the low price-image war, retailers aren't ignoring price as a way to compete. Price-optimization software is helping operators set optimal prices based on such criteria as sales history, competitors' prices, supply chain information and sales goals. Active practitioners are using price optimization to forecast shopper demand and set promotional prices. Retailers increasingly will be setting prices to meet goals related to various customer groups.

Retailers are getting help from manufacturers, too. The need to differentiate is leading trading partners to put a higher priority on collaboration, which has spawned exclusive promotions.

INITIATIVE 1: UNDERSTAND SHOPPER INSIGHTS

It's not enough to simply get shoppers into the store. Understanding what got them there in the first place is becoming equally important.

That's why retailers are working harder to understand shopper needs, then tailoring offers accordingly.

"Shopper insights help retailers determine if they're truly differentiating themselves," said Bill Bishop, president of Willard Bishop Consulting in Barrington, Ill.

Retailers are beginning to use insights to develop solutions that transcend the category and department level, said Ted Taft, managing director of Euro RSCG Meridian in Westport, Conn.

Taft cited Stop & Shop Supermarket's "Best Sellers!" entertainment departments, which include videos, books, magazines, compact discs, video games, computer software and toys.

"There's a movie marquee and beautiful signage that sets the section apart," he said.

Retailers obtain shopper insights in a variety of ways.

K-VA-T in Abingdon, Va., is analyzing loyalty card data and sending color-coded coupon offers to different shoppers depending on their spending behavior. The chain then analyzes coupon redemptions to see if the offers changed behavior.

"Shopper insights help us understand what a customer is doing in the store," said Ron Bonacci, K-VA-T's director of loyalty marketing.

Then, retailers can use targeted marketing to build customer relationships.

"You have to start thinking of yourself as a media company and how you can communicate with the customer with multiple touch points," Bonacci said.

ShopRite, part of the Wakefern Food Corp. in Elizabeth, N.J., learns about shoppers through an e-newsletter that lets shoppers customize the offers they receive to their lifestyle needs. ShopRite can then send them personalized offers.

Harris Teeter Supermarkets in Matthews, N.C., meanwhile, runs an e-mail service that notifies customers when items they regularly buy are on sale. The e-mails contain a link to a Web page that provides customized shopping lists.

Carol Angrisani

INITIATIVE 2: REWARD LOYAL CUSTOMERS

Rewarding top shoppers isn't a new idea -- Kroger partnered with British loyalty-marketing firm Dunnhumby back in 2003 to develop more customer-specific strategies. Still, retailers are increasingly recognizing that they need to do more to differentiate themselves to maintain and grow market share in an ever-more competitive food market.

Three-store Dorothy Lane Market in Dayton, Ohio, recognized that it costs less to keep existing customers and increase their spending than it does to use traditional advertising to attract new customers.

"We treat all our customers the same, but we reward them differently, depending on what they spend and what they spend on," said Tom Winter, vice president of marketing.

Every November, for example, the chain gives a free turkey to its top shoppers. Other customers receive coupons offering $20, $16 or $12 off a turkey, based on their spending level. Dorothy Lane also rewards its best customers through special offers, such as a free loaf of bread, an organic item the chain would like to promote, or coupons offering extremely low prices.

Rewarding top shoppers is the best use of a loyalty-marketing program, according to Glenn Hausfater, managing partner of Partners in Loyalty Marketing in Chicago. Focusing on retaining the most loyal shoppers, rather than trying to force semi-loyal customers into being more loyal, usually also leads them to increase their spending, he said.

According to America's Research Group, Charleston, S.C., it costs three to four times as much to attract new customers (using advertising, marketing and promotions) as it does to retain an old one.

Most retailers aren't making their customers more loyal because they aren't making enough use of the data they gather.

Winter and two other employees run Dorothy Lane's Club Card program. They meet every three to four weeks to brainstorm ideas. All data that are collected through the program are used to track the chain's best shoppers and devise special offers for them.

During the holiday season, Dorothy Lane sends mailings to its top shoppers for gifts they can redeem from managers in the store. This way, managers can get to know their customers, Winter said.

The chain also sends holiday gifts to its most loyal shoppers. This year, the presents are gift-wrapped upscale products, mostly private label. Top shoppers have received gift baskets and bouquets of flowers.

One of the simplest ways to increase customer loyalty is just by saying thank you, Hausfater said. Managers of some Pathmark stores, for example, call shoppers, introduce themselves, and thank them for shopping their store, he said.

Amanda Chater

INITIATIVE 3: PROFIT WITH PARTNERSHIPS

Trading partner collaboration is providing retailers with differentiated product offerings, packaging and store experiences.

One retailer that's active in this area is Ahold USA's Stop & Shop/Giant division, based in Quincy, Mass. It plans to strengthen its manufacturer partnerships in 2006, with an emphasis on programs that reward consumers who meet certain spending qualifications, said Amy Murphy, merchandising program manager for Stop & Shop/Giant.

According to Cannondale Associates' 2005 PoweRanking report, the Top 10 retailers that have made collaboration with their trading partners a high priority are, in descending order, Wal-Mart Stores, Target, Kroger, H.E. Butt, Publix, Costco, Wegmans, Walgreens, Safeway and Meijer.

Competition is helping to drive the trend. Since Wal-Mart has won the low-price battle, supermarkets are looking to stand out in other ways.

"Retailers are looking to communicate with consumers above and beyond price," said Tammy Brumfield, director of integrated marketing for ConAgra Foods.

Manufacturers, meanwhile, benefit through innovative brand messaging at the point of purchase, according to the Cannondale report.

ConAgra just concluded an account-specific Thanksgiving promotion with Stop & Shop in which shoppers who bought $20 worth of participating ConAgra brands over the course of several weeks received $10 off the purchase of a cooked Butterball turkey dinner. Regularly retailing for $59.99, the dinner was designed to serve eight to 10 and included a turkey, side dishes and dessert.

"These types of partnerships allow Stop & Shop/Giant to create a point of differentiation among competitors," Stop & Shop/Giant's Murphy said.

The turkey event followed two other exclusive promotions, including one with Procter & Gamble called "Rewards in Store," in which those who spent $30 on participating products received 30% off their produce or deli purchase.

Another, called "Back to School With Staples," was a joint effort with Procter & Gamble, Unilever and Kraft. Shoppers who spent $20 on participating products saved $7 on purchases from Stop & Shop's in-store Staples departments.

ConAgra develops exclusive programs for other retailers. A holiday promotion with Kroger featured exclusive recipes on the retailer's Web sites.

"The power of customer-specific programs is significant," said Doug Knudsen, president of retail sales at ConAgra.

Carol Angrisani

INITIATIVE 4: CUSTOMIZE PRODUCT ASSORTMENT

Craig Silverman can remember when space planning meant "old crusty guys in a warehouse room with empty shelves, physically putting boxes on shelves to see what fit."

Silverman can appreciate how things have changed. Now executive vice president of retail solutions at Information Resources Inc., he was at the creation some 20 years ago of the Apollo brand of space and assortment planning tools, which IRI now owns.

Today, retailers create shelf plans in mere days instead of weeks using space-planning software that automates the process according to rules the retailer has set. They tell the software when to remove a slow-seller and how to give more weight to the most profitable items and products that matter most to key shopper groups. Other rules may deal with the minimum amount of supply to have on the shelf, the variety and placement of private label, and so on.

Beyond that, retailers are starting to use point-of-sale data and demographic information about the people who shop their stores to customize assortments by store type. Such information might lead the retailer to stock more liquid dish soap at a store that mainly serves apartment dwellers, while stocking up on dishwasher soap at another store in the same market that caters to single-family homes.

In shifting to a customized mind-set, retailers are recognizing that they can no longer afford to have one box for all markets.

"There's a large focus on the community initiatives, which is about fitting the assortments and space plans to the community of shoppers who shop the stores," said Fred Baumann, vice president of collaboration for JDA Software Group in Scottsdale, Ariz., a leading space-planning software vendor.

By getting closer to their customers, retailers hope to fend off Wal-Mart and other rivals. They're also interested in improving the success of new products -- an important driver of category sales. Being able to project needed days of supply also can reduce out-of-stocks that can result from not having the right amount of product on the shelf.

All that, in theory, leads to increased business. One JDA retailer client saw sales and profits in the soda category increase 15% and 7% over the baseline performance after implementing space planning, Baumann said, adding such a result is "fairly typical," especially when retailer and supplier collaborate.

Customization is costly, so it won't always pay off for retailers to create individual assortments in each category for every store.

But there's plenty of other developments in this relatively nascent field. Vendors said space planning may lead to more collaboration between trading partners now that they can use the Web to communicate quickly about planograms, and promoting more holistic category management.

By looking at categories' performance in relation to each other, retailers can see how categories work together to drive a store's overall success. "It's a huge step for them in terms of the insight of the business," said Ralph Williams, category management lead for JDA's Strategic Business Solutions Group.

Lucia Moses

INITIATIVE 5: SET OPTIMAL PRICES

Pricing optimization has yet to arrive as a mainstream application, but interest from retailers is growing, driven by pressure to maximize margins without losing sales to competitors.

Most major supermarket chains and many smaller ones are experimenting with pricing software, said Neil Stern, a partner with McMillan-Doolittle, a Chicago-based retail-consulting firm.

"We're now into the real world application of these programs," he said. "This is part of the evolution of taking retail merchandising from an art to increasingly becoming more scientific." With the greater analytic power of today's software, Stern said, "you literally can price each store to the market."

In SN's 2005 technology survey, 31% of respondents listed price optimization as an important priority, up from 13% in 2004, and 26% said they planned to test or launch it in 2005, up from 10% in 2004.

Price-optimization software suggests optimal prices based on such criteria as sales history, competitors' prices, supply chain information and sales goals. It can also be used to forecast shopper demand and set promotional prices.

Using optimization software, the average retailer client is seeing 1% to 2% volume lifts, 2% to 3% same-store sales increases and 3% to 5% gross-profit dollar lifts on optimized items, said Marc Dietz, senior director of retail product marketing for DemandTec, a San Carlos, Calif.-based vendor.

Greg Buzek, president of IHL Consulting Group in Franklin, Tenn., said improvements in software have helped retailers move from figuring out optimal markdown prices to trying to avoid markdowns in the first place. "Margins being as tight as they are, you really have to get the price right the first time," he said.

The typical supermarket user is optimizing prices on the top 1,000 items and analyzing the prices' impact on the shopping basket, considering factors like price elasticity, competitor reaction and product seasonality.

More sophisticated users are comparing the forecast outcome of various promotions and optimizing prices on new items based on the pricing history of like products, Dietz said.

They're also looking at incorporating consumer intelligence. Through an alliance with ACNielsen, DemandTec is enabling clients to analyze a price's impact on a given shopper group and setting prices to meet goals related to that customer group. "Becoming more consumer-centric is where retailers are needing to go," Dietz said.

Price-optimization projects compete for a retailer's money and attention, however. Pilots start at $500,000, with full-fledged rollouts costing $1 million and up, according to one estimate. Said Buzek, "You only have so much money."

Observers agree that pricing optimization isn't going away.

"It's clearly going to gain interest," Buzek said. "It drops right to the bottom line. If you do pricing right, and you don't have to mark down, and it doesn't affect your shrink, those are things that are immediately evident on the bottom line."

Lucia Moses