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.
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Customer First Radio Episode 2 | Erich Kahner, Associate Director of Customer Strategy at dunnhumby
The 2021 Retailer Preference Index: Who's winning and why. David Ciancio, Global Head of Grocery discusses the 2021 U.S Retailer Preference Index (RPI): Grocery Edition with the lead author of the RPI, Erich Kahner. They unveil key insights and discuss who is winning and who is best positioned for the future.
In my last post, I posed five questions to retailers to help them determine whether they're ready for a customer-first mindset. Now, I'd like to challenge the retail basics that seasoned retailers were trained on, and suggest instead a new customer data science approach.
"Retail is detail" is common industry wisdom, and it means that achieving success is subtle and difficult. Success in any field demands practice and experience, and so it is little wonder that many senior retail and brand leaders and managers have vast years of involvement, and that most have grown up through the business in progressive steps.
Accordingly, business decisions are heavily based on experience, and more often on personal memory of choices and executions and how a thing has traditionally been done. As Chris Foltz, director of operations at Heinen's Fine Foods, told me, "Our industry, and our company, was very opinion-based, albeit expert opinions. We realized early on that we needed data on customer needs, customer satisfaction and customer buying behavior to improve our decision-making. As we adopted this metric-driven approach, I believe we prioritized our investments and effort to deliver a better customer experience."
These are a just few of the things that most retailers absolutely know for sure:
- We must acquire new customers in order to grow our business.
- Price-sensitive and "cherry picker" customers are not profitable. The competition is welcome to them.
- Customers are different in every region of the country. There are also differences between urban and suburban shoppers.
- Loyal customers are already giving retailers most of their spend in the categories offered.
- Weekly flyers and promotions always drive footfall and sales.
- After all these many years in the business, we know what customers want.
Why What We Know About Customers Just Ain’t So
The old axioms are no longer factual because customers themselves have dramatically changed, in their needs, expectations and experiences. Separating fact from fiction—and business truths from myths—will change how the business sees itself and how it will make decisions. The following are some of the new truths of retailing in the 21st century:
- Expanding share of wallet from customers who are already "loyal" can better optimize growth.
- Loyal customers need more love and investment than new customers.
- Retaining loyal customers and reducing churn among "opportunity" customers can drive more growth than acquiring new customers.
- Price-sensitive customers are often more profitable than other segments because their basket mix includes more private label products or higher-margin portion sizes.
- Behavioral "buy-o-graphics" and intended trip missions matter much more than demographics or geographics.
- Customer segments are typically distributed variably within geographic regions or zones, but all customer types exist in all stores.
- Store clusters built upon customer dimensions are more useful to operations and execution than store groupings based on geographic zones or volumetrics.
What We Know for Sure Can Fit on a Post-It Note
Agility in retail can only be maintained by understanding customers and using data in all available quantitative and qualitative forms. Here's a personal story to illustrate:
A perception-based research tool measured one retailer's progress against factors that customers themselves had said are most important to them. Before the first customer perception report was published, I set out to learn how the customer ranking compared to the rankings that the senior decision-makers would assign.
The regular weekly senior team meeting brought together many of the wisest and most seasoned leaders in the business. After briefly introducing the research methodology, I asked the team to list what factors they thought customers would list as important, and in what order they thought customers would place them.
Not surprisingly, each merchant tended to rank factors in their department higher on the list than those for other parts of the store. Although little agreement was reached, a compromise ranking was eventually defined.
Comparing our list to the customers' list revealed spectacular differences; leaders had listed most of the same elements as did customers, but in completely the wrong order. That day, the team experienced a true epiphany—they realized that "we didn't know what we didn't know."
The lessons learned were:
- Humility gained in discovering that "we don't know what we don't know" empowers the customer-first journey.
- To become more relevant to customers, we must become fact-based deciders and activators.
- Using customer data well creates true consensus and inclusive action.
In summary, “In God We Trust” ... all others must bring data.
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
Retailers Are Focusing On The Wrong Kind Of Disruption — It’s Not About Technology Per Se
Article originally appeared on Forbes.
Are retailers confusing innovation and disruption?
In a very good book by Thales S. Teixeira, Unlocking the Customer Value Chain, he lays out the argument that many assume innovation and disruption are highly correlated. As Teixeira points out, it is a reasonable argument to defend one's position through innovation and technology if you are being disrupted by innovative competitors. And that also helps to explain why most traditional grocery retailers are rapidly building up their digital and e-commerce capabilities.
In dozens of markets such as music, books and apparel, we have seen e-commerce and digital technologies lay waste to many retailers. In grocery, we have seen Walmart buy Jet.com and the emergence of Ocado, which is a pure play online grocery retailer. There have been more than a few articles written about the retail apocalypse and the demise of brick-and-mortar retailers. No doubt there has been disruption in this space, and much of it centers on technology.
But I will attempt to show that while there has been disruption in the grocery market, it has not been driven primarily by technology. There is a bigger, more fundamental driver.
It's called value.
There have been many waves of disruption in the grocery market, and the A&P was the first to innovate on a grand scale. It used branding along with innovations in food-processing, products and packaging to disrupt the local general store. The second wave saw King Kullen use refrigeration and abandoned warehouses to build the first self-serve modern supermarket. Walmart then used warehousing, logistics and analytics to create a lower cost structure and then used scale to squeeze suppliers. In the 1990s, Costco and Trader Joe's brought a new business model and a new value proposition to the market.
By the early 2000s, Walmart, Costco and Trader Joe's began to accelerate their growth and expansion. Each of these three retailers provided a combination of price and quality that was superior to most traditional grocery retailers, which, like many general store owners, hoped their customer relationships would be enough to keep their customers from straying.
With an already rapidly growing store base, the three disruptors became even more relevant to shoppers with the popping of the housing bubble and the Great Recession. Price and value became even more important to many shoppers who began to try these less expensive, less traditional retailers. Two of the three maximized their value perceptions through their own private brands, which were unique and offered quality items at very competitive prices.
With the Great Recession, the gross margin rate dropped from a high of 28.9% in 2007 to 26.7% in 2014, according to the 2016 U.S. Census Annual Retail Trade Survey. However, many traditional grocery banners missed this sizeable drop in gross margin because of their internal focus. Consequently, they just continued to grow their gross margin rates and their corresponding prices at historical levels rather than adjusting to a fundamental shift in the market. Consequently, the gap to these new disruptive retailers grew from a manageable difference to a game-changing shift in value perceptions.
In our recent Retailer Preference Index (RPI) report, we highlight the connection between value perceptions and financial/emotional performance. I believe it is this shift in value perception, which is the combination of price and quality perceptions, that is the key disruptor of the grocery market.
It happened when the A&P overwhelmed the corner store. It happened when King Kullen overtook the dry goods grocery store, and it has happened over the last 15 years as Walmart, Costco and Trader Joe's brought a unique combination of price and quality to the market. Keep your seat belts on because Aldi, Lidl and Amazon are the next wave of disruption, and their robust value perceptions will continue to disrupt the grocery market, particularly for traditional grocery retailers.
We have seen retailers invest heavily in technology and e-commerce because they have likely seen the impact on other industries, and I believe they are misattributing their current poor performance to technology and e-commerce. They logically think they can defend against e-commerce by developing their own e-commerce solutions, but this is not the core of their current performance issues. It is the gap in value perception that needs to be addressed and not an e-commerce offering.
Moreover, the investment in technology is likely raising the costs for many smaller retailers that are then going to pass them onto customers in the form of higher prices, which will exacerbate their value perception issue. Even if a retailer has the best e-commerce solution, the best website and the best phone app, it will not drive incremental value unless their price perceptions are in line with the industry and consumer expectations.
Amazon's recent move into brick-and-mortar outlets suggests that technology and e-commerce may not be disrupting fast enough. E-commerce is still less than 5% of grocery sales, and it has been around in earnest for over 15 years. Peapod was founded 30 years ago, and a 2016 Wall Street Journal article stated that the company was only profitable in three of its 20-plus markets. In a more recent 2018 Crain's article, Peapod's CMO stated the company was profitable in established markets but did not say it was profitable overall.
It is essential that retailers carefully align their own unique abilities with opportunities in the market before embarking on an expensive and risky technology spending spree. Walmart, Costco and Amazon versus traditional regional grocers is a modern-day David and Goliath story. And as David chose not to use the same weapon nor the same heavy armor as Goliath, it is important that regional grocers carefully consider how they can leverage their strengths to compete and coexist with the Goliaths of today.
Article originally appeared on Chain Store Age
Forget the headlines. Grocery stores are nowhere near extinction due to the battle between online and brick-and-mortar grocery stores. Although online grocery is now the fastest growing grocery channel with a CAGR of 19.5%, it represents only 2.0% to 4.3% of the $700 billion U.S. grocery market, and has a long way to go to dethrone physical grocery stores. According to IGD, the U.S. online grocery market was $23.9 billion in 2018 and is predicted to grow to $59.5 billion by 2023, still less than 10% of the size of the entire grocery channel.
Grocery stores are in fact in a new period of growth and reinvention. Although the Amazon effect is placing pressure on both brick-and-mortar and online retailers, it is also ushering in a future of transformative changes for grocery stores. Here are some of the changes coming.
Customer experience will be huge
In the future, stores will cater to shoppers' insistence on a seamless experience whether they are in the store or shopping online. Retailers will create experiences that easily guide customers through the store to make shopping trips faster and easier. For example, some stores are activating customer data and working closely with brands to create new in-store experiences that make shopping easier for customers including organizing product sections around consumer needs, such as gluten-free and organics, or moving ready-to-eat meals to the front of stores. Metro, Canada has created new in-store experiences in dairy, frozen food, and beverage and snacks.
Grocers will also be taking a page from retailers that are creating "experience destinations" based on the needs of their communities. For example, Raley's is building a new flagship store that "will emphasize healthy living and destination meal offerings, with key features including a loft dining area, wine tasting room, sushi and bakery departments and 25,000 square feet of outdoor seating."
Future shoppers' grocery store visits will be driven by a desire for inspiration in their leisure time, instead of just needing to restock their kitchens. They'll visit to experience new products in-person and via augmented reality, participate in cooking demonstrations, and enjoy activities like wine tastings.
Convenience will be center stage
Twenty years ago Jeff Bezos predicted that brick and mortar stores would survive only if they provided either entertainment value or immediate convenience, and that has proved largely true for grocery stores. Shoppers in the future will continue to be pressed for time and will want to shop at stores that are conveniently located, have the right variety of products to meet their needs, and where they can get into and out of quickly.
Before even leaving for home, the shopper's integrated smart home will help inventory what items need to be purchased and add those items to the list that is then automatically relayed to the retailer to prepare for the shopper for either home delivery or click and collect in store. Once the shopper arrives, the retailer will alert the shopper of real-time promotions that are based not only on their shopping patterns but also on other variables such as the weather. On a rainy day, a shopper may have soup coupons displayed on their phones, whereas on a hot day a shopper may have coupon deals for a barbecue dinner.
Once inside, shoppers can open a mobile app to enable personal pricing on digital shelf edges. They will also be able to scan and pay for their items with their phone. Before exiting, shoppers will also have "infinite" options available for home delivery or click and collect.
Grocery stores will shrink
While the superstores and hypermarkets still command the largest share of the customer basket today, future grocery stores will be one third to one half the size of what they are today. The average grocery store built over the last 10 years has a footprint of 45,000 square feet but newer stores are already shrinking with many closer to 20,000 square feet. Future grocery stores will be even smaller.
The stores will carry about 5,000 items compared to today's stores that have 45,000+ SKUs. The stores will focus more on local, regional offerings as well as on private brands. Dark stores will likely attach to the smaller footprint store from where products will be picked and staged for pickup or delivery.
Discount grocery shares will capture increasing market share
Beginning with the Great Recession, consumers have become very price conscious and have grown used to looking for the lowest prices for their groceries. And more than 10 years later, consumers remain very price conscious resulting in the price sensitive and low-income consumer demographic is the fastest growing demographic. So, it's not surprising that 2018 saw a 30% increase over 2017 in new grocery store openings according to JLL that were largely propelled by the number of discount stores openings.
Aldi opened 82 stores in 2018, accounting for nearly 16% of all grocery stores opened during the year.
Aldi alone opened 82 stores accounting for nearly 16% of all grocery stores opened in 2018. Over the next five years, the discounter will build 800 more stores and have just shy of 3,000 stores in the U.S. In fact, Aldi plans to be the third largest grocer – after Walmart and Kroger – by 2022. Trader Joe's, part of the Aldi Global family, also plans to add 25 to 30 new stores this year and due to its superior focus on price and quality was named for the second year in a row as the top-rated grocery retailer in dunnhumby's Grocery Retailer Preference Index. Lidl recently announced plans to open 25 more stores in the U.S. as it continues its expansion in the U.S. market.
Discount stores are the second fastest growing grocery channel next to online grocery and are expected to grow at a CAGR of 5.8% and will be $514 billion by 2022. With discount stores offering lower prices, private brands that consumers are growing to love, and with nimble stores to get into and out of quickly, it is not surprising they are expected to continue growing at a brisk rate in the future.
The robots are here — and more are coming
Robots, drones and other forms of automation have already arrived to a number of grocery retailers and more will be coming. Some retailers are already using automation and artificial intelligence to closely monitor inventory and picking in the warehouse and to make sure their inventories can be replenished within a day instead of weekly. Drones will also be used to hover above the aisles and scan inventory. In fact, Pensa, a startup based in Austin, drone solution that does just that is expected to be in stores by the end of the year.
Grocery stores will be automating routine and time-consuming tasks, to not only save money but also free up customer service people to engage with customers. Retailers that have built up troves of customer data through loyalty programs over the years will also be at an advantage. By utilizing video analytics and artificial intelligence, retailers will be able to predict customers' state of mind and then be able to make timely recommendations to customers as they shop.
Autonomous vehicles delivering groceries, similar to the ones Kroger has introduced, will also be in play delivering groceries to customers who don't want to shop in the store. And, robotic assistants like Giant Food Stores' "Marty" will be common place scanning shelves, identifying spills, and even scrubbing floors.
Online or offline, customers will demand an exceptional experience from retailers. And the best way for retailers to ensure they are creating the store of the future their customers want is to make sure they understand not only the technology on the horizon, but more importantly are listening to what their customers are already telling them through their data.