Profitability is not the Customers’ fault
[This is the fourth in a series of articles advocating the voice of the Customer in the highly competitive food-retail industry. David Ciancio is Global Customer Strategist for dunnhumby, a pioneer in Customer data science, serving the world's most Customer-centric brands in a number of industries, including retail. David has 48 years experience in retail, 25 of which were in Store Management. He can be reached at David.Ciancio@dunnhumby.com].
Treating Customers differently based on their 'profitability' is counter-productive to building loyalty and toward creating a healthy retail Customer Experience.
All Customers are not created equal…
Any typical Recency/Frequency/Spend analysis tells us that some Customers are more valuable than others in terms of the sales given to a retailer or brand. Further, loyalty industry methodologies like the EMO Index and the Net Promoter Score indicate that those Customers who are more emotionally engaged with, or who more strongly advocate for any retailer or brand tend to be more loyal to that entity.
Logically, it might follow that some Customers might be more profitable than others, and conversely, some could be downright unprofitable. Knowing which is which is the all-important question in a popular relationship management concept called 'Customer Profitability'.
A recent Google search returned more than 7 million references to Customer Profitability – how to segment, measure, and manage relationships with Customers based on how much an individual contributes to the firm's bottom line. An accountancy method even has developed around this concept: for example, understanding 'Customer Lifetime Value' and 'Customer Value Management Cycle' are seen as keys to business health by some firms.
But beware the siren song to consider individual Customer or household profitability.
Customers’ gifts of choice – or not
Typically, Customers have choices around at which retailer they spend their money, what brands they select, and how much they engage with a brand's marketing. They decide to what degree they prefer one brand to another, and advocate at-will for their best (or worst) retail and brand experiences.
Customers do not, however, have a choice on how much margin they give to a retailer or brand.
So, how is it that Customers can be responsible for their own profitability? Is the Customer accountable to margin by choosing to respond to a particular set of value propositions offered on the retailer's terms? Is the Customer culpable if a value proposition is not itself profitable, or if it allows for choices by Customers that vary in net profitability?
I don't think so.
Doing what’s right for the business…and for Customers
Every business – and most particularly a Customer First organization – must focus its decision-making energy on doing what's right for its Customers and its shareholders at the same time. For Customers, it's about which value propositions increase participation (reach), sales (uplift), or frequency (visits) and thereby incrementally grow the basket 'one more item, one more time'. For shareholders, this means understanding which value propositions grow sales and margin and which don't.
Customers expect a fair exchange of value for their money. Shoppers cannot be expected to understand the cost to the business of the value offered. It is not the Customers' fault if a loss leader is offered, or if a store coupon reduces the net margin, or if the mix of the products bought according to one level of affluence and lifestyle delivers a higher basket margin than that of another.
Wrong for Customers, wrong for business
In my experience, (and please feel free to provide a different opinion in the comments) credit card and financial services providers are the strongest advocates of a 'Customer Profitability' approach to relationship management. It's little wonder in these quarters that annual industry churn of accounts is greater than 40%, or that the cost to acquire / switch each new Customer account is in the hundreds of dollars as industry standard, or that business costs have spiraled upward now for decades. Of course, these increased costs are transferred to the Customer via higher interest rates or hidden in higher exchange rates for the retailer (which in turn, drive up retail prices).
'Good' profitable Customers maximize their credit limits and retain high balances owed, whilst 'bad' Customers 'revolve' by regularly paying off their balances. Poaching to encourage switching is a hallmark industry tactic, using offers like 'freeing balance transfers', often punishing the Customer with hidden charges and costs to serve so that profitability by Customer might be optimized.
It's my observation that a 'Customer Profitability' mindset sits at the heart of these Customer-disrespectful and anti-loyalty practices. Simply, Customers do not have the gift of choice or the ease to understand which factors drive individual profitability, particularly given the customary qualification requirements and fine print common to this industry.
A better language – Proposition Profitability v Customer Profitability
In a Customer First organization, measuring the profitability of its various valuepropositions should become a business imperative: without it there is no fact basis for managing the value exchange between the company and its Customers.
In a respectful, Customer First approach to business growth, each value proposition delivers recognizable value to Customers as well as recognizable margin to the retailer or brand. The better mindset and language is, therefore, around Program / Proposition / Offer profitability.
An emerging best practice in this area is an analysis of the relative cost of each proposition using a common cost metric vs. the Customer impact (uplift).
Analyzing the relative cost of each Customer or Customer type is a misguided exercise, and is counterproductive to growing true loyalty. If anything, the data reveals more about the retailer's bad habits than it does about 'bad' Customers.
Implications for retail leaders
Think about the choices Customers are given in the value propositions you offer; is the profitability of these offers in any way within the Customers' gifts of choice? Who makes the profit margin decision – you or the Customer?
Mind your language, and coach your loyalty people away from segmentations based on 'Customer Profitability'. Yes, there is a value in understanding 'Customer Lifetime Value' and 'Customer Value Management Cycle' – but only by using spending and preference metrics; profitability considerations do not belong in the equation, however.
Guide toward the best practice of measuring the relative cost of each proposition to Customer impact, using a standard cost metric.
So, I repeat, Customers do not have a choice on how much margin they give to a retailer or brand. Treating Customers differently based on their 'profitability' is counter-productive to building loyalty and toward creating a healthy retail Customer Experience.
The ‘why’ behind the ‘panic buy’
Memories of panic buying may be fading here in the UK but have resurfaced elsewhere1. The near constant threat of another wave of Covid-19 may yet prompt another round of hyper demand. Whilst there is little hard evidence to determine the underlying drivers of panic buying2, there are numerous theories that the retail industry may benefit from exploring.
Feroud Seeparsand, dunnhumby's Senior Consumer Psychologist, outlines some likely theories to explain the 'why' behind the 'panic buy' and some implications for retailers to prevent it reoccurring in future.
Nobel Prize-winning economist Daniel Kahneman stated that 'loss aversion' was his and Amos Tversky's single greatest contribution to decision-making theory3.
We feel the pain of loss more than an equivalent gain. In other words, losing £100 hurts more than the joy of winning £100. When applied to panic buying, we fear for the loss of a product we could otherwise have had. Perhaps more to the point, we would normally have had access to a variety of products. Relative to this normal point of reference, the relative loss of not possessing a product helped lead to panic. As customers would normally possess a certain product, the relative loss of it created pain.
A curious detail is that small numbers can make big differences, a concept called 'diminishing sensitivity'; winning £200 does not double the joy relative to winning £100. In other words, even small numbers of a valued product can have a significant effect on one's decision making. It is because of this diminishing sensitivity customers may lean towards zero risk aversion, in other words not to risk missing out on a product; if you see it, buy it!
Implication for retailers: Use the new reference point that past panic buying did not stop most customers obtaining products.
Another Nobel Prize-winning economist, Richard Thaler, and his colleague Cass Sunstein highlighted numerous heuristics to nudge behaviour4; one of these is social norms or copycat behaviour. We are perhaps all guilty of assuming restaurants with longer queues have superior dishes or assuming that the more popular films, plays or books are worth consuming. When applied to retail, if a customer sees another purchasing a particular item, the odds are that they will follow. This can easily be exaggerated through social media and news reports.
It does not matter if this perception is factually inaccurate; perception will still hold sway. If customers do cause products to sell out as a result, this is likely to lead to a scarcity effect, where those products are valued even more than before. This can be further exacerbated if such products are perceived to be potential life savers, like hand sanitisers or medicine.
Implication for retailers: Highlight how most people are not panic buying. Foodstuffs North Island and South Island, in New Zealand, got out ahead by introducing their 'Shop Normal' campaign, which encouraged customers to 'shop normally and be kind in supermarkets'. Tesco in the UK also ran a 'Together we can do this' campaign in national media to encourage people to 'shop normally together'.
3.Uncertainty Breeds a Desire for Control
Sometimes the actions that can save lives, such as hand washing and social distancing, are simply not enough to regain a sense of control5, as they are too dependent upon the goodwill of others. Therefore, there remains a need to reduce anxiety. Stockpiling or buying more, as a form of retail therapy, is a manner for regaining control.
Scientists have found uncertainty leads to the consumption of utilitarian products (such as cleaning agents and cooking ingredients), i.e. products that give you something to do6. Shoppers are less likely to be interested in the latest fashion trends. When one adds to the mix a virus that demands hygiene, the hyper-demand for particular products can be better understood. The same scientists explore the concept of 'displaced coping', where shoppers purchased items that are of no direct relevance to their uncertainty. This may go one step to explain the recent insatiable worldwide desire for toilet paper.
Implication for retailers: Provide customers with products that may provide a sense of control, such as gardening, DIY, crafts, puzzles.
Whilst behavioural economics and nudge theory assume irrationality, game theory (which also can claim a Nobel Prize by John Nash, as featured in the film A Beautiful Mind), assumes rationality.
In the same way panic buying exists, customers may panic and create a bank run, where customers take money out en masse which then collapses a bank. In one study, it was found that asking participants to recount a time when they felt fear was found to increase the likelihood of a bank run in the form of a game format7. There was some evidence that inducing sadness was less likely to create a bank run. Given the emotion of fear led to bank runs, it is of little wonder that the fear of a pandemic may have led to panic buying.
Implication for retailers: Influence emotion to avoid fear (e.g. through in-store media and music).
A recent global survey addressed toilet paper hoarding through personality traits8. It was found that customers who felt more threatened by the pandemic, possessed greater emotionality and greater conscientiousness (i.e. planned more) led to more toilet paper hoarding. This study may suggest that appealing to higher values2,9 (ie encouraging responsible behaviour) may not help to avoid panic buying.
Implication: Encourage long term planning and purchase of long shelf life products, to ease supplies if a second or third wave returns.
This is not an exhaustive causal list, but instead focuses on theories that could have at least some practical application to limit panic buying. The theories covered include areas that assume irrationality, such as behavioural economics and nudge theory, or rationality such as game theory. Other theories may sit more on the fence.
Whatever the drivers for panic buying this is a topic that retailers need to address. Even if panic buying does not reoccur within the Covid-19 pandemic, it is likely to return in some future event whether it be a natural disaster, climate change, strikes or supply shortages.
2. Lunn, P. et al (2020). Using Behavioural Science to Help Fight the Coronavirus: A Rapid, Narrative Review. Journal of Behavioral Public Administration Vol 3(1): doi: 10.30636/jbpa.31.147
3. Kahneman, D. (2011). Thinking Fast and Slow. Penguin
4. Thaler and Sunstein (2008). Nudge. Improving Decisions About Health, Wealth, and Happiness. Penguin
5. Taylor, S (2019). The Psychology of Pandemics. Cambridge
6. Chen, C.Y. and Pham, M.T. (2018). Affect regulation and consumer behaviour. Consumer Psychology Review 2(1): 114-144
7. Dijk, O. (2017). Bank Run psychology. Journal of Economic Behavior & Organization 144: 87-96.
8. Garbe L., et al (2020) Influence of perceived threat of Covid-19 and HEXACO personality traits on toilet paper stockpiling. PLoS ONE 15(6): e0234232.
Do you actually TRUST your Customer contact data?
Are you looking to increase your contactable Customer base? How much money are you losing on incorrectly identified Customer communications? Throughout our 30 years of big data experience working with clients across industries around the globe, we have found that maintaining contact through relevant Customer engagement is a crucial component of putting the Customer First.
Essential to preserving contact data is ensuring that you have the most up-to-date information from your Customers; not an easy task. On average, people in the United States will move an average of 12 times in their lifetime. United States Postal Service data indicates 14% of the population change addresses annually. As email contact has grown, it's important to note that, on average, 30% of people change their email addresses each year. This is driven by ISP or job changes, or just to stop being spammed. As people move away from home phones to primarily mobile devices, phone numbers are stabilizing as consumers maintain the same numbers through physical moves.
Contact data maintenance also includes an effective and trackable process for removing Customers who "opt out", unsubscribe or otherwise request to not be contacted. Beyond Customer fallout for not honoring their request, regulations such as GDPR and CCPA can deliver fines as high as €20 million, or up to 4% of the annual worldwide turnover of the preceding financial year (whichever is greater), for any violations.
So, how are you collecting and managing sensitive, frequently changing Customer metadata? These three questions can help you perform a quick data health check for your business:
- How flexible are our Customer data platforms? Can multiple departments use the same Customer master data profile?
- What are the accuracy requirements for each of our communication channels?
- How unique is our Customer data asset and how valuable is it to our company?
Here are the most common data management options we encounter across industries:
Maintaining Customer information manually through an internal data team can be time-consuming and costly. It may require Customers to update their information online or through a call center, with an internal data team to validate the changes, and your Customer engagement team to be made aware of the changes so they can update their downstream systems. If you are in contact with your Customers on a weekly basis, this process will need to be on-going and thorough to accurately capture the data changes.
Many third-party CRM systems and databases exist, often removing the manual steps from this process and may even automatically update Customer address information via online sources. In many cases this information is based on publicly available data or the USPS' address tools. However, these updates can verge on being "creepy" to many Customers. Automated systems do remove many of the manual touch points for your teams, but the information is then strictly provided by the third-party databases and processes. Additionally, downstream systems often still require updates from these tools to maintain the most correct Customer information across your data landscape.
While there are some hybrid models of options, here are the main pros and cons we have identified for the primary methods:
|Internal Pros||Internal Cons|
|The fastest method if you own and manage your data ingestion platform||Managing a metadata repository tied to your website or mobile platform may require significant improvements in your front-end systems and teams|
|Your internal security can ensure that personal data standards and protections are maintained||A true "Customer master" repository will require significant resources, a robust data governance structure and regular audits for both security and data accuracy|
|The easiest method for maintaining your Customer opt-outs and communication preferences||If there is a data breach from your systems, your company is 100% liable for the breach|
|Platform and tool agnostic. An internal "Customer master" repository can serve as a single source of truth for Customer data within your organization|
|Leverages the information provided from your Customers which in practice should be the most trusted|
|3rd Party Pros||3rd Party Cons|
|Removes significant pressure from your internal teams and systems as you are pushing the process to the 3rd party||May require you to maintain your own Customer opt-outs and communication preferences external to their platform|
|If the data resides on and is consumed from their systems, on-going security becomes less of a concern for your internal teams*||May not allow Customer provided information to be captured or maintained|
|Can be a very accurate source if they are leveraging governmental and legal databases||May require the use of their specific software and technology, limiting the ability for your organization to create an internal "Customer master" on your own databases and downstream systems|
|May be updated on a real-time basis from their systems||You are tied to the 3rd party data match and update process dependencies. Additionally, some companies limit the daily number of requests or queries|
|APIs and other data integration points with the 3rd party may be made available ensuring that all internal teams have the same "Customer master"||Are they consuming publicly available data (ex. mortgages and legal proceedings) or are they using some large unmanaged database to match Customer details and data?|
|How often are they confirming the accuracy of their data? Example "John Smith" may simply be a typo from years ago or it could be correct. How do they confirm accuracy?|
|*If the 3rd party or their associated processors breach your Customer information, you may still suffer reputational and financial consequences|
Regardless of your chosen data mastering methodology, the Customer's preferred data should always be treated as the "most trusted," as this is the data your Customer is asking you to use. We recommend prioritizing Customer-provided data over other sources, only falling back on alternate sources if there are issues with Customer communications.
dunnhumby can help your company develop a comprehensive Customer mastering solution, regardless of your existing CRM process, technology or vendor. We have spent the last 30 years working with Customer data in many different stages of maturity and complexity. Through this process, we have developed proven best practices to collect and maintain your Customer metadata. If you are interested in discussing Customer mastering or Data Consulting, please reach out to your dunnhumby client representative or Contact Us.
Why Food Retailers Have Little To Fear But Fear Itself
Article originally appeared on Forbes.
My company recently produced a report on the state of the food retail industry, and in studying that sector, we discovered something that we hope will make food retailers stand up and listen. We learned that the nation's top grocery chains have found a way to focus on both short-term financial performance and investment in long-term consumer engagement. The latter is considered an insurance policy for the future — a sobering thought in the new year.
Insurance for the future may be one of the most difficult things to buy if you are overly concerned about present-day financial performance. As a consultant and provider of technology services to food retailers all over the world, I understand why they are concerned. Despite positive projections for the industry in 2019, there are signs that the economy is slowing, and that could very well soften consumer spending.
There's also the continuing threat from digital disruptors like Amazon that might coerce retailers into taking actions, such as blindly lowering prices, that further erode margins that are already razor thin. Another threat, well known to the industry but perhaps less so to the general public, is the new generation of discount chains that have figured out the magic of balancing short and long-term strategy and planning.
But here's the biggest challenge facing food retailers: falling prey to fear itself. I'll admit that fear can sometimes be a helpful motivator to monitor and manage your business. A recent article reported the one photo that the CEO of Walmart keeps on his phone. It lists the top 10 retailers per decade over more than sixty years, and it serves as a reminder for how many companies come and go. But McMillon is managing fear, not falling prey to it. Retailers can manage their fear, rather than fall prey to it, by leaning on three tools that can alter their standing in the industry.
Recent years have brought with them the dawning realization that retailers possess abundant consumer data. Gathered and culled from direct interactions between stores and their customers, data of this quality helps retailers price and promote their products more intelligently. It helps them with product assortment, store design and managing the new kinds of services they offer. This can include things like in-store pickup and options for self-service, depending on what makes sense for their customers. More profoundly, data can help retailers think about how they can monetize that data to help their vendors connect more meaningfully with customers. The reality is that all grocery retailers potentially are media companies, with access to online and offline media properties. It's a lesson learned from Amazon, but a small number of retailers around the world are helping to raise their profit margins by taking a page from the playbook. The place to start is with first-party customer data, which is what retailers uniquely possess.
For food retailers especially, we learned that there is an enormous number of inefficiencies with how food retailers engage with vendors, beginning with how they collaborate on pricing and promotions. Some retailers are struggling to move beyond spreadsheets to other systems that help automate exceedingly detailed work. We are living in a time where inefficiencies can make or break a business. But still, many food retailers are ready to concede that times have changed. Beyond providing technology that moves beyond spreadsheets, retailers would benefit from interviewing their vendors to discover what would make life easier for them in this highly competitive industry.
Change may be painful, but inertia will be lethal.
As the celebrated business scholar Clay Christensen has written, it is very difficult for any business to change course on a strategy that had made it successful in the past. He calls this the innovator's dilemma because, at almost any time in the evolution of any industry, leaders must understand that a decision regarding the future must be made.
To that end, the future is not served by signing a partnership with a third-party fulfillment provider to launch an e-commerce service. It's about making better decisions that impact the core of your business and operating more efficiently to better serve your customers across all of your channels.
But here's where food retailers have a unique opportunity, at the beginning of 2019, to ignore fear and take a small leap into becoming more viable by making decisions based on what they know about their customers. There is no business that knows more about people than retail, because they actually meet and greet them every day.
Take heart, and fear not. This is only the beginning of a story that's mostly yet untold.
The worst hard times for Retailers and Brands?
Lately, retail has become almost impossibly more brutal than ever before.
These are unprecedented times of rapid and deep changes for customers and society, driven primarily by technology, economic volatility, and political uncertainty (e.g. Brexit, US elections).
For Retailers and Brands, these are dangerous times of disruption and of tectonic shifts in structures, formats, and channels. A new epoch of retail has arrived, wherein, once again, only those most agile and adaptable to change will survive.
Amongst the new realities keeping retailers up at night and dragging down already thin margins:
- Economic forces. For customers, the definition of "value" has changed because of economic forces like recession and austerity politics. The data points to growing numbers of customers concerned about price. As one supermarket CEO puts it, the "lower third of price-sensitive customers has become the lower half."
- Disruptive price innovators. Hard discounters like Aldi and Lidl are becoming more aggressive (and more popular) every passing day. Both recently appeared in a '10 Best Supermarkets in the US' list from Food&Wine. European grocers' experience suggests that this variation of discount format might impact the global industry even more significantly than has Walmart, and within a shorter time period as well because this approach impacts the mid to upper tier of shoppers as much as it does the price-sensitive.
- Higher operating costs, especially for store labor. Staff turnover combined with a smaller pool of qualified workers is driving up wages.
- E-commerce. Online and mobile will account for 24% of global chain retail sales in 2020. E-commerce represents a structural shift at the very foundation of a retailer's or brand's existence, from simply producing and distributing products, to delivering a valuable and personally relevant "experience" wherever the customer is in space and time. And most of the growth in ecommerce will not be through today's pure-plays or in bricks&mortar.coms, but rather through 3rd party marketplace 'aggregators', introducing yet another form of competition for the embattled retail industry.
- Customers are increasingly demanding a faster, simpler, less-painful shopping experience. Chains are allocating larger shares of their capital budgets to enabling technology and repositioning existing stores to be more attractive to convenience-seekers and millennials. Underperforming assets – particularly big boxes – are being shuttered at a faster pace.
Arguably, in today's multichannel world, retailers face a binary decision (relative to competition) to either be cheaper or more relevant (as any middle position is short lived and profit starved). Being cheaper means beating Walmart, Rakuten, Amazon and others at their own disruptive model game, which is highly improbable. Being more relevant means understanding customers better than others do, and from this, delivering an experience that customers personally value.
The best of times for Retailers and Brands
On the other hand, the opportunities for business growth arising from these challenges are immense. Seeing a tremendously fertile (and frightening) environment for change, even the hard-nosed, raised-in-the-business retail leaders are realizing that they must become more science-driven and more customer-aware if they want to even survive, let alone seize upon any opportunities for growth.
Agility is exactly the capability that retailers need, driven optimally by using data and science to delight customers. Retailers and brands must embody a cultural and mind shift to putting customers first; this is how they become empowered to seize on the opportunities now presented, and how they enable themselves to thrive therefrom. To change best and with purpose, it must be via Customer First – to deeply understand customers, to strategically invest in what matters most to them, to improve the shopping experience, and to personalize conversations with the most precious assets of the business – its customers.
The higher purpose for a Customer First approach
Delighting customers using a loyalty approach – what I call Customer First – is not just some warm, fuzzy, altruistic thing (although a Customer First organization will feel better to its employees as a place to work and customers will enjoy better experiences), but is, rather, a growth-driving, growth-sustaining machine proven to generate profit when executed optimally.
Customer First delivers profit and margin growth by focusing on growing top line sales first. Sales growth, as every good retailer knows, covers many sins: it improves the percentages on the measures retailers care about most (e.g., store labor percentage, OG&A expense percentage). Greater sales directly translate into greater purchasing leverage on suppliers. Simply, growing sales via Customer First grows greater shareholder value.
More importantly, beyond projecting well-being for customers, Customer First protects jobs and well-being for employees of the business. In this protective role, Customer First becomes a moral obligation for the business and a moral responsibility for its leaders – and this is the highest purpose.
The new reality is that change is here to stay, perhaps more fiercely than ever. Those of us who understand this reality, who accept it and adapt quickly, will emerge profoundly the better for it. Better in terms of market value and employability as a business and as individuals. Better because we don't squander precious time and energy resisting the inevitable. And certainly, better when it comes to the health, happiness, and well-being of our customers and ourselves.
This is the seventh in a series of LinkedIn articles from David Ciancio, advocating the voice of the customer in the highly competitive food-retail industry.
The Price of Emotional Connection for Grocery Stores
The traditional, regional U.S. grocery store—it's the institution that has fed communities for decades and families for generations. It offers that connection to a simpler time, a time when the guy behind the meat counter would know Customers by name, a time when a dad pushed his child around in a shopping cart while they "helped" him shop and a time before mobile phones invaded our lives and sped up the pace of life…
That place—the traditional grocery store—has history. Customers and the people who work there are part of a family. That kind of emotional connection is priceless.
If this is true, then why does Aldi—which borrows a quarter per shopping cart and operates with a small crew that arranges shelves while taking care of customers—have a stronger emotional connection with shoppers than 90% of its competitors?
Yes, that's right. Aldi, known for its cost cutting and low prices, has– an emotional connection that is stronger than nine out of 10 traditional grocery stores.
Traditional grocers may take for granted that they have an advantage over non-traditional channels in the strength of their emotional connection with shoppers, but that doesn't appear to be the case at all. So just how bad is it for traditional grocers?
The inconvenient truth is that the average traditional grocery store has a lower emotional connection with its shopper than the average store in any other major channel where groceries are sold. While traditional grocers have been focused on selling groceries to the same towns for decades, non-traditional grocers have been able to move into those towns and secure a stronger emotional connection in far less time.
How? Well, it appears that emotional connection does have a price, after all. In fact, price perception is slightly more associated with emotional connection than perception of the quality of products and store experience:
And, whereas traditional grocers have managed to hold their own on quality perceptions, they lose on price perception.
So, where does the traditional grocer start if they want to win back the hearts of their local constituents? After all, there are many levers they can pull within pricing, assortment, and store experience to move perceptions. A close look at data from our 2019 Retailer Preference Index: Grocery Channel Edition offers some hints. Stores who have the strongest emotional connection separate themselves from the pack with the following:
- Private brands that customers love
- Leading prices on natural and organic items
- Fast checkout
- Staff who show they value shoppers
Translated into language customers might use, that means:
- Have products I can't get anywhere else, at competitive prices
- Make healthy food affordable
- Don't waste my time
- Treat me like a person
Of the 56 retailers ranked by emotional connection, 24 of the bottom 25 are traditional retailers. And while Aldi, ranked 17th for emotional connection, has been used as a stark example to illustrate traditional grocers' emotional connection issue, many other non-traditional stores have a stronger emotional connection with their shoppers than Aldi does with theirs.
However, 3 traditional grocery stores buck the trend and join non-traditional retailers in the top 10: Market Basket (4th), H-E-B (5th) and Publix (6th). They each check more than one of the boxes on the core ingredients of emotional connection.
These retailers, more than any other traditional, regional grocer, have established with their emotional connection an insurance policy for an uncertain grocery industry future. And the prevalence of non-traditional grocers with superior emotional connection proves the point that this insurance policy is more a product of "what have you done for me lately" than a product of consumer nostalgia. Non-traditional grocers are buying emotional connection with better prices while delivering on some combination of a superior private label, offering the best natural and organic prices and having staff who show they value customers.
The 50,000 Square Foot Convenience Store
A new format in grocery retail is emerging: the 50,000 square foot convenience store. Its value proposition to customers is simple: higher quality perishables and ready-to-eat items than your typical grocery store. Thousands of the same center-store products you can also find at Walmart, Target, Amazon, Costco and Sam's Club. Everything at higher prices. Added bonus: since the store is 10x to 20x bigger than your typical c-store, you can get your steps in and burn calories at the same time.
The reality is that this is not a new format—rather the customer-led repurposing of a familiar one: the traditional, regional grocery store. This finding comes from a follow-up analysis of data collected for the recent 2019 Grocery Retailer Preference Index report, a report which identified winners and losers among the 56 largest retailers in the U.S. Grocery Retail Industry. In this follow-up analysis, we examined the types of trips people took (e.g. bigger vs. smaller) to each retailer, as well as the categories they bought (e.g. produce, ready-to-eat or paper products). The findings cast further light on the problems faced by traditional grocers in an evolving grocery landscape that has seen national mass, club, drug, dollar, convenience and digital players invest more in the grocery game the past few decades.
When considering trip types and categories sought by customers, five general types of retail destinations emerge:
- All-around grocery shop
- Perishable and ready-to-eat small basket
- Quick and convenient meal
- Non-perishable stock-up
- Non-perishable small basket
Certain channels lend themselves to certain destination types. Specialty grocers like Trader Joe's or Sprouts, with fewer SKUs and smaller formats than the traditional grocer, tend to fall in the "Perishable and ready-to-eat small basket" destination type. Club and mass are non-perishable stock-up destination. Drug, dollar and digital in non-perishable small basket. C-stores in quick and convenient meals. However, many traditional grocers have an identity crisis. Only 6 in ten are seen primarily as "all around grocery shop" destinations, despite all of them carrying the full complement of SKUs.
In other words, almost half of traditional grocery stores are shopped more like a convenience and specialty store than like a store with 10-20x more products than that. At best, categories beyond perishable and RTE food are typically an afterthought and only shopped in a pinch. At worst, those categories are bypassed completely by shoppers, who instead buy the same products for cheaper at widely available mass, club, digital, dollar or drug channels.
The result of being treated as a perishable c-store is a lower share of customer wallet. Traditional grocers who are all-around grocery destinations win 33% of their customer's share of wallet, versus only 20% for traditional grocers shopped like a perishable c-store.
So, what can traditional grocers who are not being viewed as an all-around grocery shop do about it?
According to an analysis of customer needs gathered from a survey sent to 7,000 shoppers in the U.S., if traditional grocers want to ensure they'll be an all-around grocery shop, they need to ensure some key ingredients are in place:
- Highly relevant assortment, which is rarely out of stock
- Prices that are consistent on inelastic and competitive on key-value items, while offering discounts on the products that are important to customers and responsive to promotions
- Decent perishable quality
For now, traditional retailers aiming to be all-around grocery shops can trade-off on having the best digital offering and the best ability to get customers in and out quickly. These things are less important to customers when picking an all-around grocery destination.
While some traditional grocers are struggling to win the title of all-around grocery shop, one non-traditional store isn't: Aldi. Aldi's consistently industry-leading prices and their ability to manage out of stocks and store cleanliness just as well as your average traditional grocery store, has made them a stock-up destination for perimeter categories, like produce and dairy, as well as center store packaged food items. As a result, despite having stores which carry less than 2,000 SKUs, Aldi's share of customer wallet is in line with that of the average traditional grocery store, which often carry more than 40,000 SKUs.
Of course, the reality is that no single non-traditional competitor is eating away at traditional grocers' hold on the all-around grocery shop. Rather, a host of non-traditional competition, each with unique value propositions, are all taking small bites, which add up. The data suggests that this is because traditional grocers took their eye off the retail basics, perhaps because they grew complacent after decades of dominance and relatively little industry disruption from non-traditional substitutes.
So, the call to action is clear: before overinvesting on any shiny new toys, like eCommerce or technology to speed up checkout, get back to your roots and make sure you're offering the right prices on the right products.
U.S. Covid-19 Pulse Study, Wave 7 How the pandemic is impacting shoppers one year on
Last March, when we realized the potential impact that COVID-19 might have on all aspects of our lives, dunnhumby launched a survey to understand how the virus would affect consumers food shopping habits. It was designed to help our clients better meet the needs of their Customers by seeing the impact of the virus through their customers eyes.
Little did we know at the time that one year later we would still be dealing with the impact Covid-19. This study presents the results of the sixth global wave of the study and the seventh wave for the United States. Other waves were conducted in March, April, May, July, September and November of 2020. This wave was conducted in February 2021.
This report focuses on just how things have changed over that year and what remains the same.
Ready for ‘Customer First’? Five questions food retailers need to ask themselves.
Retail leaders must objectively understand how their business currently considers Customers before trying to set a more Customer-centric direction and focus. There are some formal assessment methodologies, like dunnhumby's Retail Preference Index (RPI) and Customer Centricity Assessment (CCA), which offer detailed evaluations of a business' capabilities, strengths and weaknesses based on Customer perceptions (RPI) or global best practices (CCA).
The approach outlined below is not intended to replace these formal tools; rather, these observations are intended as a kind of 'toe in the water' to help retail leaders form early hypotheses and points of views. These are rules of thumb, heuristics culled from global experience. Later, leaders might use these observations to informally check progress from time to time as a way of assessing whether the "program in the stores matches the program in our heads".
Hence, the context and laboratory for these suggestions is the retail store, where the rubber meets the road, so to speak.
1. Who really runs the store?
Walking around a store (or better, walking around several), can give many clues toward understanding a retailer's attitude about its Customers, as well as revealing some of the challenges ahead for installing Customer First. As Customers ourselves, we are qualified to assess an organization's 'readiness' for Customer First, simply starting by walking around.
How a Customer experiences the store shapes their perception of the brand, and there are dozens (even hundreds) of 'moments of truth' for Customers in each shopping trip – opportunities for the retailer to win more loyalty, or indeed to lose it. And it only takes one 'bad' experience to erase all the good.
Leaders can form an opinion about the Customers' true shopping experience by observing 'Who really runs the store?' – a way to put on a Customer lens to assess if the Customer, the retailer, the supplier, or no one is driving shopping experience decisions, like range and presentation. For example:
- Choose three sections across the store (telling categories include yogurt, pasta sauces, milk, and packaged lunch meats). Look to see how the product is organized and presented (remember to try to see through the eyes of a Customer).
- Is the section organized by brand (e.g. all Danone yogurt is merchandised together in a recognizable Danone brand block)?
- By Customer benefit or usage (e.g. all brands of probiotic yogurt are merchandised together, as are all Greek style yogurts, all kid's yogurts, etc)?
- Or, by some hybrid but logical planogram rather random plan, with little recognizable logic at all?
- Would you conclude that the product display / layout logic is influenced more by supply chain, by brands, or by the Customer need states or trip missions?
- How broad is the range (e.g., number of varieties or sizes)? How deep (e.g., number of brands of the same flavor or variety)? Does the breadth and depth feel Customer friendly, or confusing?
Of course, analysing any available loyalty data will later tell us how Customers shop the category and that might well be by brand (or flavour or size, etc., and will certainly vary by section). But this first assessment helps us begin to form our perspective on how tuned-in the business is around its Customers, and about where within the business leaders might need to begin to install insights and the Customer language.
2. What messages are Customers receiving?
Store signage not only delivers a written message, but also a type of 'body language' that Customers tune in to, albeit not always consciously. Look around the store to see both the written and hidden messages, and hear the tone being communicated: ask, do messages speak respectfully to Customers? For example:
- Signage at the entrance rudely telling Customers what the rules are, even though 99.999% of Customers will never even think of shopping without shirts or shoes, or wearing roller blades
- Narrow limits on the quantities of promoted products or services.
- Rules and restrictions, terms and conditions.
- Aggressive security barriers and gates at entrances – although sometimes operationally necessary, these also tell honest Customers that they, the shoppers, are not to be trusted.
- Phony expiration dates for promoted prices – Customers learn that the deal will be repeated soon, if not immediately. Best example is the many carbonated soft drink promotions below shelf price that are repeated frequently, and the innumerable 'roller' prices practiced by many retailers.
- Stupid pricing signs (any stupid sign, really).
3. What messages are Employees receiving?
While walking the store, traveling through stock rooms and the employee break room, note the signage and messaging aimed at staff. What seems to be valued more – numbers or people?
What policies and rules guide employee behaviour?
How are they expected to interact with Customers?
Are the messages respectful of staff? Of Customers?
What do signs say about the culture around Customers?
4. Who has the power to satisfy Customers?
dunnhumby's Loyalty Drivers analysis suggests that Customers exhibit four 'mindsets' in their shopping journey – Discover, Shop, Buy, and Reflect. One element of the 'Reflect' mind-set includes the decision to return, exchange, or to request a refund when the product or service does not quite suit.
On your store walk, observe who has the power to satisfy Customers making a return or wanting a refund: is the front-line employee empowered to satisfy the Customer, or must the Manager be called? Is there one 'service' desk where Customers must queue to get their money back, or can the helpful cashier make it good on the spot?
Examine the return policy to assess its sensibility and ease from a Customer viewpoint. For example, must a Customer act within 7 or 30 days, and is a receipt required and signature under penalty of perjury? Is the taking of an oath necessary, or perhaps a drop of blood? The store's practice says volumes about who deserves trust in the eyes of the business. Requiring levels of approvals and higher management involvement (or some other form of hoop-jumping) is neither trusting of employees nor Customers.
The return / refund policies and practices are strong indicators of a company's readiness for, or progress along the Customer-centric journey. Customer First organizations give front-line employees broader authority to resolve Customer needs, and extend the power to satisfy Customers to most members of staff, in some form. For best practices in this area, please see the policies from Nordstrom in the U.S. and Ritz-Carlton globally.
5. Do the words of your leaders matter?
Senior leaders set the tone for how Customers are regarded and treated in the business both by their words and their actions, of course. And the C.E.O.S – Customers, Employees, Owners, and Suppliers – all take notice. It's widely documented that leaders who walk the walk are more effective than those who only talk the talk.
One simple yet powerful way to assess readiness and progress is seeing how leadership's walk and talk align. A word cloud, like the one illustrated below, makes the point very clear. In this example, recent shareholder statements (same quarter) were compared for two companies on a Customer-centric journey. We can see different progress in a form of 'walking the walk' at Retailer X and Retailer Y. The C.E.O.S are hearing what really matters to the leaders, and are forming the Customer culture accordingly, all the way down to store level.
Implications for retail leaders
The store shapes Customers' perception of the brand; there are hundreds of opportunities for the retailer to win or lose loyalty in each shopping trip. Customers take clues, consciously and unconsciously, throughout their entire shopping experience, and draw conclusions about retailer warmth and attitude toward shoppers. And it only takes one disappointing experience to erase all the good.
Retail leaders must take an objective assessment of the shopping experience using a Customer lens to understand their current state and readiness for customer centricity. Pay close attention to the body language and tone of your policies. Store signage, employee empowerment and communications, and practices around assortment and presentation are clear indicators of the organization's attitude about the Customer.
Who actually runs your store?
This is the first in a series of LinkedIn articles from David Ciancio, advocating the voice of the customer in the highly competitive food-retail industry.
Customer First Radio Episode 1 | What it means to be Customer First
In the first episode of Customer First Radio, Dave Clements, Global Head of Retail for dunnhumbyand 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.