THE NEW ERA 2006-05-08 (7)

ELLIOT ZWIEBACH

Supermarket retailing is returning to its local roots.

Rather than trying to merchandise to a mass market that no longer exists, national and regional chains are trying to align their assortments and promotions to appeal to smaller, more specific demographic segments, several industry observers told SN.

"Retailing has always been a local activity when done best, and market specialization is really a return to best practices," said Jim Hertel, senior vice president with consulting firm Willard Bishop, Barrington, Ill. "In fact, in some ways this process is more 'back to the future' than fundamental change."

"There's no such thing as an average customer anymore," said Richard George, professor of food marketing at Saint Joseph's University, Philadelphia. "Supermarkets created a model based on a plain vanilla landscape for the large group of consumers in the middle, but ironically, the rise of Wal-Mart - which threatened the future of the industry - has allowed companies to scatter from the center and left plenty of room for creative people to develop companies like Whole Foods and Wegmans at one end of the spectrum and Aldi's, Save-A-Lot and dollar stores at the other.

"As a result, there are no longer markets for goods and services that everybody likes a little - only for goods and services that somebody likes a lot."

While much of the impetus for supermarkets to tailor their assortments on a local basis has been driven by the growth of Wal-Mart, even Wal-Mart is beginning to localize its offerings, said David Frost, principal at Frost & Partners, Bellevue, Wash. "Wal-Mart was one of the first companies to actually use scanner data in merchandising decisions - in fact, its fabulous information systems have enabled it to identify something like 20 separate Hispanic cultures - and now supermarket operators are trying to do the same to be competitive with Wal-Mart," he said.

Sticking with the kind of mass merchandising that carried the industry through most of its first 75 years is unlikely to result in improving sales, said John Carlson, managing director of Cannondale Associates, Wilton, Conn. "If you try to appeal to the average shopper, then that's what you'll get," he told SN. "What retailers need to figure out is how to appeal to the shoppers who are really driving the business - the 30% that drives 80%-85% of sales and a higher percentage of the profits.

"Through data analysis being done at a central level, the chains have the ability to identify those shoppers and differentiate assortments on a store-by-store basis, and that ability is continuing to evolve, though it still has a long way to go."

Although most chains have centralized their buying in locations far from the local markets they serve, the availability of point-of-sale data - from both transactional analyses and frequent-shopper-card data - is enabling operators to pinpoint the localized needs of their stores, industry sources said.

Although it's tough to pinpoint, merchandising differences from store to store can range from 10% to 25%, said Chuck Cerankosky, an analyst with KeyBanc Capital Markets, Cleveland.

But even armed with the raw information on those differences, it's execution that determines success, he said. "Companies like Safeway, Kroger, Publix, Wegmans, Harris Teeter and Giant Eagle are all mining data to tailor their stores to fit different markets, but each one is different from the others because each executes its own strategy," Cerankosky explained.

For Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm, supermarkets must differentiate themselves to succeed.

"The only way the supermarket business will survive is through specialty niches," he said. "The traditional way of thinking - that the supermarket is a food store - is a trap. To survive, each one has got to be the best store in each department or else it's not going to be able to compete with Wal-Mart. And if you adopt the point of view that each department is going to be the best store in town for a given group of products, then you'll automatically tailor the assortment.

"But the traditional mentality of the supermarket goes against that approach. A supermarket operator makes deals with suppliers and locks in the space - an approach that works against tailoring assortments. But as Wal-Mart grows and fewer deals become available, supermarket operators are realizing they've got to operate on facts, not deals, and respond to what consumers want, and they're getting better at responding to those wants by using technology more effectively."

That process requires more than lip service, however, Gary Giblen, senior vice president and director of research for Brean Murray, Carret & Co., New York, told SN, noting that Boise, Idaho-based Albertsons once hired an executive to oversee kosher foods at its stores, "but that didn't make Albertsons a destination for Jewish customers. And it's unclear what happened with its goal of opening stores geared to individual neighborhoods," he added.

While various sources said regional chains - including Publix Super Markets, Wegmans Food Markets, H.E. Butt Grocery Co., Ukrop's Super Markets and Hy-Vee Food Stores - have excelled for years at market specialization, other operators are now giving more attention to market segmentation, including the following:

Wal-Mart Stores, Bentonville, Ark., is merchandising to local preferences by dividing its store base into marketing regions of 10 units each "to ensure we can capture the needs and wants of customers in those markets," Eduardo Castro-Wright, president and chief executive officer of Wal-Mart Stores USA, said in a presentation in March.

In the process, the company is adjusting its mix as needed to include more ethnic varieties, or as in a new supercenter in Plano, Texas, to go upscale.

"We've redefined the role of the merchandising organization to focus on customers - to define our strategies to drive the right assortments for very distinct segments," Castro-Wright said. "That's something we need now because we've grown so much, and we need to be a merchant that actually deals with specific customer segments to be much more relevant to our customer base and to broaden that base in some cases."

Kroger Co., Cincinnati, formed a joint venture in 2002 with Dunnhumby, a United Kingdom-based loyalty marketing firm, to analyze frequent-shopper data and tailor store assortments and marketing plans based on that data.

"The Dunnhumby data helps us quite a bit in understanding what the customer base is," David Dillon, Kroger chairman and CEO, said during a conference call in March.

Although details of actual changes Kroger has made are sketchy, industry sources estimate sales have risen more than 10% as a direct result of initiatives resulting from the partnership with Dunnhumby (see related story).

Safeway, Pleasanton, Calif., has also been mining data to customize its stores, Giblen said. "They don't talk much about what they're doing, but they've done a good job - although ironically they didn't apply what they'd learned to their acquisitions of Dominick's, Genuardi's and Randalls, where they tried to over-standardize the assortments," he said.

Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., had a similar view. "The mistake Safeway made was trying to homogenize the acquired stores too much," he told SN. "But they've learned from their mistakes, and the lifestyle format they're introducing across the chain is a reflection of the kind of fresh stores all three acquired chains used to operate. So while Safeway erred in converting the acquisitions into Safeways, they are now essentially making Safeway into the acquisitions."

Delhaize America, Salisbury, N.C., is in the early stages of utilizing store clustering techniques to break its Food Lion stores into different groups based on buying preferences to see if it can deliver a more targeted shopping experience.

Rick Anicetti, president and CEO of Food Lion, said in a presentation earlier this year that by utilizing shopper data to segment its customer base, "we can determine how we can best deploy capital to get the greatest return for Food Lion, so in the future we can determine what combination of store formats might play within a particular marketplace to best serve a targeted consumer population."

Bi-Lo/Bruno's, Mauldin, S.C., is combining data from a variety of sources to determine which stores should be reset to tailor assortments to local needs. "We're using the data to decide which stores to change, but there's a lot of 'noise' surrounding these changes because of competitive activity, which makes it difficult to pinpoint what impact the process has," said Tim Cano, director of category management analysis and market research.

"However, we are seeing some benefits to sales, household penetration, basket size and transaction size."

Supervalu, Eden Prairie, Minn., plans to rely on local marketing to avoid integration problems encountered by other operators in the past as it begins to broaden its national scope next month when it completes its acquisition of part of the Albertsons chain.

"We have a strong opinion that you have to be very local in food marketing," Jeff Noddle, chairman and CEO of the Minneapolis-based distributor, said in a March speech. "That doesn't mean you don't use the size and scale of a large company, but food is a very local business. Food preferences are driven by personal ethnicity, by [people's] background, by the brands they are used to or grew up with.

"It's different with general merchandise, [where] there is not that much differentiation in consumption patterns other than climate. But there is [differentiation] in food, so the belief we have about food being very local is one of the drivers of strategy for us going forward."

In general, the move toward market segmentation is evolving slowly, industry observers told SN.

"There's too much data and not enough information available from frequent-shopper cards," said George of Saint Joseph's. "A lot of companies are still selling the data to manufacturers instead of trying to use it themselves to understand who their customers are.

"The problem with the industry today is, most big chains are still looking for profits at the back door - from display allowances, slotting fees and trade promotions - and it's taking awhile for them to focus on the people who buy their products and pay their salaries who enter through the front door. Plus, they're reluctant to change and to give up the money manufacturers give them."

Davidowitz said the process of making buying decisions involves both qualitative and quantitative elements, and companies that mine their data also need to keep the human element in mind. "The business requires both dimensions," he said.

"The chains use their clout to negotiate deals and to price products competitively, but it's the buyers who use the computer to adjust the assortment. With all the information that's available, you need someone who knows what to do with it - a quantitative team that can deal with the facts. That's what the general merchandise industry has been doing for 50 years, and it's part of the reason Wal-Mart has been so successful.

"A computer can only tell you what you sold, not what you didn't sell. So the store manager is important because he's aware of what items customers may request."

Ziegler also cited the importance of the human element. "Loyalty card data tells you what products customers bought but it doesn't tell you what you're missing if you had made it available in the store for them to buy," he said. "But once someone figures out what to stock in a given market, the card data will tell you if it's moving."

Robert Gorland, vice president of the Harrisburg, Pa., office of Matthew P. Casey & Associates, Clark, N.J., said supermarkets that compete with Wal-Mart supercenters need to understand their customer base and demographics, including ethnic diversity, income levels, age groups and life stages, "to cater or merchandise to their daily needs."

He suggested retailers undertake customer spotting surveys of their stores, either on a regular basis or before or after a major competitive opening, to determine customer draw and make informed, targeted advertising decisions. "Using address information from loyalty cards, [retailers should] develop large maps depicting a strong cross-sample of customers down to street level so you know exactly where your existing customers are coming from, then calculate percent of sales-by-mile rings, census tracts and ZIP codes," he said.

"Market-share calculations can also be made to fine-tune advertising strategies and determine possible cost-savings initiatives."

Manufacturers can play a major role in helping retailers localize their assortments, Ziegler said, "because they have a lot of product movement data. But they've got to be more of a driving force and engage in more dialogue with the industry or else they're missing a major opportunity."

"Like retailers, manufacturers are coming out with their own micro-segmented products that are aimed at very specific segments," Giblen said.

Frost also said manufacturers are tailoring some of their products to localized tastes by changing the look of their packages - for example, by using bilingual graphics for ethnic areas or producing smaller packages for areas with older populations and multipacks for areas with larger families - and they're also becoming more aggressive at altering product formulations to meet local or ethnic tastes.

But the manufacturer's role is changing, Frost added, as retailers have gotten more direct access to information on their own at the POS. While Wal-Mart has been driving manufacturers to be more proactive in managing shelves at store level, he said, supermarket retailers have begun adopting that practice and become more adept at micro-marketing on a store-by-store basis.

Associated Food Stores Segments Marketing

SALT LAKE CITY - Associated Food Stores here is calling in S.W.O.T. to help its members improve their marketing efforts.

"S.W.O.T." is an acronym for "strengths, weaknesses, opportunities and threats" - four factors members need to consider in assessing their store's positioning and gearing their marketing message to appeal to the specific consumer segments served by each location, Rich Parkinson, president and chief executive officer, told SN.

As Associated begins making changes at the six corporate stores and two member stores participating in the first round of segmentation testing, it is seeing sales increasing at a rate of 8% to 15%, he pointed out.

"It all gets down to trying to differentiate our stores," he explained. "The most successful operators are the ones that can align themselves with the needs of their immediate marketplace, in contrast with the chains and box-store operators, who tend to standardize their offerings.

"But using the data we have, we can look at more specific attributes of the shopping experience and emphasize what's consistent with the wants and needs of customers on a very localized basis," Parkinson said.

While the eight stores, in various stages of testing, have seen sales jump by at least 8% in the year or less that they've been implementing changes, one of the two independent retail members is seeing sales growth in the range of 15% to 18%, Parkinson said, by redesigning his store to appeal to the younger families that surround it rather than the older shoppers he used to go after. He declined to name the retailer.

"The data were a real wake-up call for that retailer because he had been trying to appeal to consumers in the 45- to 55-year-old age group, at a time the average age in his area was coming down," Parkinson noted.

The changes the retailer has made include remodeling his store; upgrading his assortment, particularly in produce; gearing his displays and the number of employees on hand to accommodate more business between 5 and 7 p.m.; updating his Web page to accommodate younger consumers who are more comfortable looking at ads online, and scheduling in-store demos and cooking classes in the evenings.

The other independent customer in the test discovered that he was missing out on appealing to the large number of Hispanic shoppers in his area, Parkinson said.

While that operator has not yet implemented any changes, he's developing a strategic plan "that will include changing the mix in his produce and meat departments, adding more bilingual signage and using more Spanish in his ads," Parkinson said.

The segmentation effort by Associated is based on software that uses U.S. Census information to cluster stores based on a variety of demographic factors - in Associated's case, into 141 geographic clusters - that include ethnic background, age, income level and household composition, Parkinson said.

"Once we broke the store base down into those clusters, we did a competitive analysis to see who's operating in each area so we could identify what they were doing right and wrong," Parkinson explained.

Armed with that information, Associated began sharing information with its individual members "so they could design a strategic plan to take advantage of the factors that would work best in their areas in terms of products, pricing, assortment and departments, and to define what changes they will need to implement to take a better approach in their market."

Associated is also conducting a talent audit to evaluate the skills of store personnel and to make sure each store had people with knowledge of the specifics of the marketplace. "We're also going through each store department by department to see what needs to be done to take full advantage of the new market profiles," Parkinson said, "and we're providing financing to assist with some re-fixturization."

Opportunity Abounds In Customer Data

CINCINNATI - There is vital information lurking in the frequent-shopper-card data most supermarket operators have, if they are willing to mine it and apply it to their pricing, promotions and store assortments.

That's the message from Simon Hay, chief executive officer of Dunnhumby USA, the locally based partnership between the London-based loyalty marketing firm and Kroger Co. here that began in 2002.

"While it's obviously difficult to judge what companies other than Kroger are doing [in terms of using frequent-shopper data], I would say that, although supermarket operators have come a long way, they still have a long way to go," Hay told SN.

The data available to supermarkets contain significant consumer insights, he said.

"The reality is that the consumer is getting more complex, as he has more and more shopping choices, as supermarket organizations become more multifaceted in terms of formats and different ways to serve customers, and as more products are being added to the mix. So there's a constant need for companies to build their learning base and try different things as they move forward."

If more supermarkets utilized more of the information available to them, "they would gain insight into how well they are competing with each other and how well they're executing their plans and growing their share-of-customer," Hay said.

But most operators take too narrow a view of their customer base, he said. "With more than 50% of food being consumed outside the home, supermarket operators should think less about each other and more about companies like TGI Fridays or Arby's or Starbucks," he said.

"Too often, supermarkets tend to look too much at history and not where their stores can take them in the future."

What Dunnhumby tries to do "is not only look at actual transactional data but also at data from customers outside the supermarket industry - not just where they shop for groceries, but how they shop, period," Hay said.

"My sense is that more companies are at the end of a period of underachievement in utilizing the data, and while no one can claim to be overachieving, I believe more are giving a greater priority to trying to understand the information they have," he said.

"So, in general, the industry is probably at the end of the spectrum where people are not getting full value - though we hope Kroger is ahead of that curve."

Dunnhumby's role with Kroger is to provide insights provided by data from a variety of sources, Hay said. "We're on a mission to help Kroger understand its customers better and learn how to run a better store, which includes having the right products at the right price with the right promotional strategy.

"What we do is test various ways to use information to improve the customer shopping experience, which can involve combinations of pricing, promotions, assortments or direct marketing activities. Our role is to figure out what matters to consumers, and then Kroger decides how to use that information."

Kroger began testing some of Dunnhumby's suggestions at a handful of stores in 2002 and has been rolling programs out to a wider store base since 2004, Hay said. However, he declined to pinpoint any specific examples of what the partnership has tried and how those efforts have succeeded or failed.

Dunnhumby has been working with Tesco in the United Kingdom since 1993 and is also working with nine other companies around the world on pilot projects, Hay said.