Retail success takes many forms in today's dynamic marketplace. From large legacy retailers to disruptive start-ups and all manner of competitors in between, the paths to retail success involves common principals around which there is a wide variation of understanding and execution.
To bring clarity to the issue of what makes a winner, dunnhumby, the global customer data science firm, conducted a massive survey of more than 7,000 U.S. shoppers for the second annual Retailer Preference Index (RPI), the first study of its kind in the industry. In what's quickly become known as retailing's equivalent of research firm Gartner's often-cited Magic Quadrant, dunnhumby's RPI is a ranking of more than 50 large food and consumable retailers based on a combination of shopper sentiment and financial performance.
Join Retail Leader and dunnhumby's Grant Steadman, SVP of Client Services, and Erich Kahner, Associate Director of Strategy, for a deep dive into the RPI, the levers for success, and an unvarnished look at why some retailers win and others don't.
Topics discussed include:
- The 7 drivers of consumer preference and what's changed.
- Understanding the RPI methodology.
- How retail winners make emotional connections.
- The new rules of value perception, key drivers and amplifiers.
- The three things RPI laggards must do to improve their appeal to shoppers.
For a look at the retailer rankings and to understand how your business can benefit from implementing the RPI success framework, watch our webinar which took place on Thursday, September 5, 2019.
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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.
Since our update last week on How Food Retailers and Manufacturers are Serving and Protecting their Customers in the midst of the Coronavirus, food and pharmacy retailers and their suppliers continue to work tirelessly and heroically – in the face of health risks to themselves – to ensure their customers are able to feed themselves and their loved ones.
As the crisis continues to escalate, this week we look at how retailers are putting employees first and protecting them as part of a Customer First strategy, as well as determining the right way to offer value for money to customers and future considerations for pricing and promotion strategies.
Protecting Employees
Many governments around the globe have turned to formally classifying grocery, pharmacy and convenience store employees as "essential" and "emergency" workers due to the critical nature of their role in keeping stores open to feed and care for their communities. However, also understanding that these workers are exposing themselves to possible health risks, many retailers rolled out a series of safety protocols over the last week including:
- Installing Plexiglass shields between cashiers and shoppers at pharmacy and grocery counters and in any still-open service departments
- Implementing employee safety, self-care, and distancing rules
- Providing protective gloves, masks, face screens, and other personal protective equipment
- Increasing the frequency of sanitization efforts on all high-touch surfaces like payment pin pads, card machines, door handles, and conveyor belts
- Altering hours to close stores earlier and close on Sundays to allow time for staff to rest
- Establishing entrance and access controls to ensure crowds are in compliance with safe social distancing practices
- Assigning employees with higher health risks to tasks with the lowest exposure risks, such as backroom work, and ensuring vulnerable groups are on paid leave.
- Implementing contingency plans to possibly close selected stores, based on data projections for available workforce and competitive intensity to ensure that consumers have a competitor choice if a particular store closes.
Sharing Resources between Sectors
Over the last week, we have also seen associations and outside industries providing resources and sharing workers with the grocery sector. The International Foodservice Distributors Association (IFDA) has partnered with The Food Industry Association (FMI) to provide excess foodservice resources to the grocery sector. In addition, foodservice distributors with unused capacity — including products, transportation and warehousing services — are connecting with food retailers seeking more supply. Some quick service restaurant franchisees have agreed to provide their staff to local grocers to both help their employees continue working and to fill manpower needs for the grocers. Some grocers have partnered with hard hit sectors in the service industry including travel, entertainment and hospitality to have their furloughed workers transition over to grocery stores and distribution centres.
Early take-aways for Price & Promotions Learnings
Each phase of the crisis will necessitate a different level of promotional intensity by retailers. For those regions still in the early weeks of the pandemic, retailers need help in managing intense demand in order to relieve the pressure on store operations.
Here are some of the actions retailers are taking now in Phase 1 of the crisis:
- Reducing promotions by 30 to 40% during the first several weeks of the pandemic. Some grocers are opting to eliminate all promotions.
- Discontinuing promotions that encourage shoppers to stock up.
- Stopping promotional flyers.
- Increasing digital communications through the website and mobile apps. Retailers are pointing shoppers to their most local stores and updating them on store hours.
Key recommendations for Price & Promotions
- Be careful about your pricing practices and how these affect price perception. Keep strong entry prices and be cautious about taking any price increases during this time of relatively inelastic demand to avoid being seen as profiteering. Price-sensitive and vulnerable shoppers are finding this a particularly tough period – so it is important to keep competitively low prices on KVIs (Key Value Items) and those most price-sensitive lines. Online channels should continue to also reflect in-store prices, and certainly not diverge during this time.
- Shoppers need to find value – so don't stop promoting altogether. Fully cutting all promotions should be done with caution and an understanding of local regulations, how the change is being messaged, and with an eye towards consumer perceptions. Continue to use personalised offers and targeted promotions to drive frequency and spending.
- Trade Planning requires new thinking now. Disruption to the traditional model that now puts supply over demand means that more than ever, grocers and CPGs cannot simply follow last year's promotional plan – and we see this disruption continuing for the next 3 to 6 months. Understanding shopper attitudes and future intentions around key events will be an important factor in event planning over the foreseeable future.
Key Price & Promotion Strategies Looking Forward
1. Value for money will become a heightened driver of behaviour as consumers face a depressed global economy. We see this leading to 1) Further Private Brand differentiation and expansion; 2) Deeper investment in base prices on key lines; 3) Fewer, more efficient promotions; 4) Focus on driving cash profit over % margin.
2. A Customer First approach to pricing and promotion (and ranging) is still the right answer. The good news is that consumer-data-led frameworks such as Key Value Items (KVIs), the Balanced Matrix and Category Roles, Seven Levers of Value Perception – will continue to be appropriate for informing strategic and tactical decisions going forward.
3. Disruptive pricing and promotion models are expanding as a result of consumer behavior changes during the pandemic. We believe that the crisis will trigger a tipping point for retailers to switch from the paper flyer to more digital communication through their website and app, with a more urgent value in making this personal. In-store media will become more important and impactful as well. Subscription models are being adopted by retailers such as "Delivery Savers to help manage online demand. Online pure-players are pointing the way to opportunities for new pricing bundles and subscriptions on "destination" areas, in concert with suppliers.
Implications for Retailers and CPGs
- Retailers and CPGs need to reset price and promotion strategies in order to create a more sustainable, consumer data-driven model. Let's face it – the crisis has forced the entire industry into "rehab" to re-examine its practices on many levels. This catharsis gives both retailers and CPGs an opportunity to step-change promotional effectiveness and efficiency, led more by data than by legacy.
- The "Art" of merchandising and the "Science" of analytics need to be blended, now more than ever. For example, as consumers burn through their loaded stocks and pantries, we believe it is imperative for retailers to institute selective pricing and promotional efforts for perishables and fresh items in the basket mix. Conversely, an expected decrease in some core centre store categories – but not all – calls for precision pricing and promotion to minimise overinvestment.
In this time of unprecedented challenges for businesses, employees, and shoppers, Customer First principles should play a key role in every retailer's strategy. Not just for protecting employees and frontline workers so they can continue to serve their communities, but to prepare for the changing Customer needs as the pandemic develops.