Customer First Radio Episode 5 | Ted Eichten, Head of Price & Promotions, North America for dunnhumby
April 21 2021
Blog
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Convenient locations, one-stop shopability, and right product variety make up the Convenience pillar. Convenience is the least important factor for explaining short-term market share gains, and retailers in each of the four Covid Momentum Quartiles performed similarly on Convenience.
customers favored Speed during Covid, which correlates negatively with larger format stores where customers can do all their shopping at once. Moreover, evolving commuting behaviors from people working from home and limited mobility due to stay-at-home orders shifted which stores were now considered Convenient. While people were adjusting to new ways of shopping for food, and making trade-offs on Price and product quality and variety, they were being hit with out-of-stocks, which affected their ability to easily buy their typical brands.
Despite stay-at-home orders, changes in commuting behaviors and erratic outof-stocks (or perhaps because of these things), basket sizes were up and visits per customer were down for every retailer we studied. At the time we surveyed, the average basket size was ~30% higher for shoppers in the market. Additionally, the average share of wallet that customers were giving to their current grocery retailer was ~14% higher. Translation: customers consolidated their shopping to fewer stores, giving more money to each store. This occurred even for stores that were competitively less well-positioned for one-stop-shopability heading into Covid. In fact, stores that scored in the lowest quartile on "I can do all my shopping at this one store" had the largest increases in basket size and share of wallet during Covid. In other words, during Covid, shoppers were more forgiving of a retailers' faults in their quest to fulfil their short-term shopping needs and get home quickly and safely.
"With work at home - I cannot shop at the grocery stores I usually shop at because they are in the town where I work - 30 minutes away and feel wasteful driving that far just for groceries."
customers' overall price perceptions for each banner drive this pillar. Price has been the dominant driver of long-term preference in the grocery industry. Over the past three years, the importance of Price was marginally declining as the economy strengthened but was still the most important driver in 2019. During 2020, however, Price was less important as consumers looked to get in-and-out as quickly as possible and scrambled to simply find items in-stock.
Price perceptions are also correlated with how far shoppers will travel and how emotionally connected they are to the store. Simply put, shoppers will travel longer distances for better prices and are more likely to be satisfied with retailers with strong price perception. Additionally, Price perception is much more likely to be positively impacted by better base prices than by relevant discounts and promotions.
So, how has Covid changed the competitive dynamic? As mentioned above, the Price is the top driver in explaining long-term performance in previous reports, but for driving short-term financial performance during the Covid Era alone, Price dropped behind Speed, Digital, and Discounts, Rewards & Information. This shift in customer needs aligns nicely with traditional banners, who have historically done well on Speed and Discounts, Rewards & Information, but poorly on Price. This also helps explain why traditional banners like Food Lion, Albertson's and Winn Dixie performed well in 2020, while powerhouse banners like Walmart, Costco and Trader Joe's have stumbled a bit.
Also, in a year of rapidly growing prices and the chaos resulting from the virus, we saw traditional banners improve their Price perception scores more than any other channel. We don't expect that traditional retailers did anything much different, but we hypothesize that their Speed and Safety scores helped to create a Price perception halo and that customers felt EDLP competition had less reliable and consistent pricing than they typically had. More relative value was delivered by traditional banners and that translated in improved Price perception for many shoppers. However, we expect Price perception across banners to return to their pre-Covid levels once the dust settles in the back half of 2021 and 2022. The two tables on the right highlight the gains made by traditional grocers with regards to Price perception. The first table below shows the First Quartile banners for Price. Only four of the fourteen banners are traditional banners, and they include Market Basket, H-E-B, ShopRite and Fareway. The remaining ten banners fall into mass, warehouse, or discount channels which is consistent with the three previous RPI studies. However, when we look at the notable gainers in the second table, all those jumping more than five ranks are traditional banners. Although Price was less important this year, these gains by traditional banners also helps to explain why they did so well in 2020.
We also expect that, long-term in a post-Covid world where supply chains are back to normal and pricing signals are once again clear, Price will be the dominant driver for choosing a preferred retailer. This could also be amplified if the much of the country experiences economic struggles and government stimulus is delayed or non-existent. The structural damage to the economy is still not fully understood and the more damage that occurs during the virus, the longer it will take for the economy to fully bounce back.
"I only buy where I can pick up groceries without leaving my car, but I must purchase minimum $35. If I only need a carton of milk, I just have to wait until I need 5 or 6 cartons, or enough other things to add up. I almost always end up spending too much."
The retail sector has experienced both of these extremes, with some seeing strong sales while others have been forced into bankruptcy and liquidation.
What we have seen is an acceleration of trends that were in motion prior to the pandemic but are now even more essential for success. One such trend is, understandably, the enhanced focus in retail on health and wellness. This is not a new phenomenon especially within Retail Pharmacy as "buy and build" expansion pushed the market towards saturation. More savvy competition, both within the sector, as well as grocery, mass merchant, and ecommerce began to expand into Health & Beauty (H&B) and prescriptions.
Prescription benefit managers (PBMs) grew increasingly powerful and began demanding lower reimbursement terms and restricted access to customers. Some even set up their own mail order prescription businesses and became direct competitors. This direct attack on the pharmacy business model, combined with the erosion of the convenience advantage forced chains to find other ways to extend their reach. For many, the answer lay in diversification and, specifically, the integration of products and services that had previously sat with dedicated medical providers.
Faced with limited development prospects, retail pharmacies once again needed to re-examine their offering and carve out a distinctive customer proposition.
In the US, prescription medicines account for around two-thirds of retail pharmacy revenues¹. As a result, repeat business is vital. Clinical services – a longer-term, more consultative offering than pure dispensary – can help to encourage ongoing business by building a stronger relationship between pharmacist and patient.
With that in mind, it's little wonder that for many retail pharmacies in the mid-2000s, the decision to expand into clinical services seemed like a natural evolution.
CVS, Walgreens and others went through a flurry of acquisitions, purchasing small health service companies up and down the US. In-store facilities were rolled out to capture new clinical business and commence the shift into a wider "health services" offering.
Certain activities, such as immunizations, had successful starts. But the growth of these clinics and their services rapidly dropped off and it soon became apparent that success would not be as readily won as those retailers may have hoped.
One major problem lay deep in the complex inner workings of US healthcare. Limited by their insurance plan benefit structures, customers would often find themselves unable to access the full range of services offered in-store. Clinical service costs, while usually lower than those available at a hospital or doctor's office, would likely be higher than the insured co-pay price paid by the consumer at the latter.
Retailers quickly learned that in order to integrate into the healthcare industry, they would need to learn how to influence and control it as well.
CVS, which made the strongest initial investment into in-store clinics, has spent more than a decade in pursuit of that goal. Major product decisions, such as the removal of tobacco from stores (itself a $1bn annual business) were executed in the name of a slow repositioning towards healthcare.
Strategic acquisitions have only helped to further that ambition. With its first major vertical healthcare purchase – that of PBM Caremark in 2006 – CVS gained control of the levers of customer access and prescription reimbursement for millions of lives. 13 years later, with the acquisition of Aetna, the company added the ability to provide health, dental, vision and other insurance plans to customers.
Taken to its logical conclusion, this trajectory could lead to the eventual formation of an integrated healthcare system supported by some 10,000 points of service.
There is growing evidence that an empire of that kind is firmly in the retailer's plans. CVS has already announced its intention to evolve clinics into more expansive "Health Hubs", bringing enhanced services to 1,500 locations by 2021. Health Hubs include more space devoted to clinical services and a broader focus on proactive wellness and nutrition alongside extensive health services.
That wider remit is immediately evident in an enhanced product assortment, one that includes numerous specialized items and categories for maintaining health and preventative wellness products –. And, perhaps influenced by insights delivered by Aetna, CVS has also chosen to put significant emphasis on chronic condition management, an area that can provide a pharmacy with some of its most valuable customers.
While CVS is playing a highly strategic game, though, it is by no means the only player to watch.
As the world's largest retailer, just about anything Walmart does is reason for the competition to pay attention. It may have taken more than a quarter of a century for Walmart to start selling groceries after all, but the retail behemoth now holds top position in that segment in North America by an overwhelming margin.
With that precedent in mind, and in light of Walmart now holding the position as the nation's third largest retail pharmacy provider, it seems likely that another fierce battle for the future of retail pharma is about to begin.
Launched in fall 2019, the Walmart Health Care Clinic serves as a good indicator as to the strength of the company's ambitions.
Staffed to deliver an expansive set of services that range from primary care and disease management through to dental, hearing, nutrition and fitness, these sleek, modern facilities offer the same one-stop-shop approach as Walmart's core store.
Moreover, Health Care Clinics also employ the company's "everyday low pricing" model, something that makes for a compelling proposition regardless of insurance coverage. Medicare and Medicaid are both accepted too, encompassing what is likely a significant number of customers.
Similar at their core yet, subtly different, these offerings from CVS and Walmart represent a dramatic shift in healthcare delivery in the US.
While the scale of each remains too small at this point to draw many conclusions, those small differences could carve out room enough for both to flourish. CVS' focus on providing specialist-level health and chronic condition care is different enough from Walmart's "low price, one-stop shop" approach to appeal to a distinct group of customers.
Rather than between each other, the biggest challenges ahead for CVS and Walmart may actually be found within. As both companies make fundamental changes in order to facilitate a future in which healthcare is a significant part of their offering, they will need to focus on evolving their relationships with their long-term customers too.
CVS, for instance, will need to ask customers to reconcile the idea that a company that continues to dominate in snacks and candy is now an active participant in their healthcare. And Walmart, famed for its leadership in building highly efficient operations, will need to scale and sustain a healthcare business rooted in flat, affordable pricing, as well as build the credibility as a viable provider of quality healthcare.
Neither challenge is easy. But if history has taught us anything, it's that when companies of this size decide to redefine an industry from the ground-up, they tend to succeed.
The arrival of Covid-19 also introduces a new reality unthinkable less than a year ago. Health and wellness permeates all aspects of our lives and vigilance is essential to protect ourselves and our loved ones.
The Great Recession programmed lasting value-consciousness into the minds of consumers. How might COVID-19 rewire us again?
The fourth annual dunnhumby Retailer Preference Index for U.S. Grocery (RPI) sheds light on what makes a retail winner, and how the pandemic has impacted consumer shopping behaviors. Known as retail's equivalent of the Gartner Magic Quadrant, the RPI surveyed about 10,000 consumers to understand what's driving customer preference and rank the top 57 grocery retailers in the United States.
Join dunnhumby CEO Guillaume Bacuvier as he dives into the latest study, revealing the levers for success, and which retailers are winning the hearts, and wallets, of shoppers today.
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In order to reflect on how the grocery world changed in 2020, we have changed how we calculate our overall Grocery RPI score. Given the historically unique metrics we've witnessed in the economy, the restaurant industry and the grocery industry, along with the rare influence a global pandemic has brought to consumer behavior, we're viewing grocery success in 2020 through a different lens than we viewed grocery success in prior years.
In the first episode of Customer First Radio, Dave Clements, Global Head of Retail for dunnhumby and David Ciancio, Global Head of Grocery for dunnhumby kick off the series by discussing what it means to be a truly Customer First business, share which retailers and brands today embody a Customer First mindset, and examine how Customer First materialized during the pandemic with retailers.
In part two of our blog series exploring some of the common challenges in setting up a Retail Media operation, we take a look at the building blocks of a strong business case.
In July last year, we estimated that grocery Retailers in the UK could be missing out on as much as £1.7bn in unrealised media revenues – equivalent to some £11bn across EMEA. While those numbers might give us an indication of the overall scale of the Retail Media opportunity, they tell us a little less about its potential on a business-by-business basis.
One way to start working that out for your own organisation is via the creation of a business case. Not only will this help you evaluate your current capabilities around Retail Media, it will give any other stakeholders involved a clear analysis of the benefits, costs and risks involved.
The good news is that, for many Retailers, the key components needed to turn Retail Media into a profitable reality will already be in place. And where they aren't, many options exist for augmenting your existing activity to maximise the value it can deliver.
Let's take a look at some of the most common considerations, and the questions that will need to be addressed in an accompanying business case.
Every Retailer today owns valuable, engaging advertising inventory. From in-store space to apps, websites and more, Retailers have an opportunity like few others to reach Customers with relevant, timely content across the duration of their shopping journey.
Many Retailers, of course, already utilise these channels for advertising to some degree. As a result, the biggest question that needs to be answered as part of a business case here is not "can we do this?", but "can we do this better?".
Historically, most Retailers have included advertising opportunities as part of trade negotiations with consumer packaged goods (CPG) suppliers. But with access to Customer data on an unprecedented scale, Retailers now have a gigantic opportunity to offer those brands a more targeted and personalised way to reach out to shoppers – maximising the value of their media inventory in the process.
The major questions to answer in your business case around channels are:
If the answer to those questions is yes, then you may also want to consider maximising the effectiveness of your channels by:
As is the case with media inventory, Retailers are in a unique position in terms of their ability to gather and analyse data on Customers and their purchasing habits. If digital media revolutionised advertising by introducing unseen levels of precision and measurability compared to traditional media, Retail Media makes a similarly evolutional shift by allowing Retailers to add real purchasing behaviour into that equation.
As vital as this data is to Retailers for their own planning and loyalty purposes, it can be just as invaluable to CPG suppliers looking to maximise their own return on advertising spend. Put simply, the easier you can make it for them to target, reach, and influence the Customers they care about, the more likely they are to spend on advertising with you.
Monetising data in this way isn't just about pure profitability either. For your stakeholders with an invested interest in loyalty and satisfaction, they'll no doubt be pleased to hear that around two-thirds of Retailers who do monetize their data see an improved Customer experience as a result[1].
The major questions to answer in your business case around data are:
If the answer to those questions is yes, then you may also want to consider maximising the effectiveness of your data by:
While effective use of data and channels form the backbone of an effective Retail Media operation, some other issues are worth addressing as part of your business case. As with the above, few of these questions should prove difficult to answer.
Next in this series, we'll be looking at building the perfect Retail Media blueprint.
[1]The Future Of Retail Revenues Must Be Data Led, Forrester Consulting, November 2019