The predicated British invasion of 2007 — or the opening of Tesco stores on the West Coast last fall — proved less traumatic for traditional retailers than feared, with many industry observers saying the financial impact has so far been minimal. But the U.K. retailer’s psychological influence has been felt far beyond its initial markets and caused supermarket retailers to re-evaluate their store formats and product offerings.
Tesco opened its Fresh & Easy stores in California, Arizona and Nevada in November, following months of anticipation. The stores are loosely based on Tesco’s Express Metro format in the United Kingdom, with a strong emphasis on express shopping. Product offerings lean toward private label as well as natural and organic.
Initial reaction, according to retail industry experts, is that the openings had little effect on traditional supermarkets: “It’s doubtful that supermarkets and supercenters in Phoenix, Southern California and Las Vegas have seen a measurable loss in either transactions or sales due to the Fresh & Easy stores,” reported Barrington, Ill.-based retail consultant Willard Bishop in its January 2008 Competitive Edge newsletter.
But, says Managing Partner Jim Hertel, “There are really two impacts — the direct impact, that is to say, the sales they are developing and where they are garnering their share. I would say it’s been a real minimal impact on traditional retailers.
“The flip side is this whole notion of format experimentation, and especially small-format experimentation. We’re seeing an awful lot of people who are experimenting with smaller footprint stores.”
'The new big'
The U.S. grocery industry has been shrinking — at least in terms of its thinking — for some time, even prior to Tesco. Many industry experts report U.S. grocery retailers that have successfully retained shoppers have focused on unique, often smaller formats, convenience and differentiation through consumer data.
In 2007, grocery held 56.3 percent of the consumer packaged goods share of market, down slightly (0.2 percent), from 2006, reports Information Resources Inc., Chicago. Wal-Mart held 18 percent of the market, while other supercenters held 13.3 percent, mass merchandisers 9.2 percent, club stores 7.3 percent, drug stores 5.6 percent and dollar stores 1.2 percent.
“Grocery retailers’ differentiation strategies are moving the needle in their favor,” while supercenters are beginning to cannibalize existing stores, IRI stated in its Times & Trends report “Channel Migration 2007.” But it points out, the cross-channel battle for market share is not over. In fact, the biggest gainers last year were drug stores, which increased their share of CPG sales 0.5 percent.
When it comes to beverage sales, supermarkets still account for the majority, or 61 percent. “Other” retailers, including convenience and dollar stores, sell 13 percent of beverages, while supercenters sell 10 percent, club stores 8 percent, mass merchandisers 5 percent and drug stores 3 percent. Beverages sold through supermarkets declined 0.8 percent in 2007 vs. the prior year.
Some of the best-in-class retailers are examining smaller formats with more limited product selections as a better way to appeal to consumer needs, according to Cannondale Associates, Wilton, Conn. The company’s PoweRanking study allows product manufacturers to rate retailers and retailers to rate manufacturers on their business fundamentals. “The result is that ‘small is the new big,’” Cannondale said in its most recent study.
Many retailers are experimenting with urban platforms based on Tesco Metro and France’s Carrefour Dia stores, says Ken Harris, partner at Cannondale Associates. Examples include Chicago’s Dominick’s Urban Fresh Stores, Manhattan’s Whole Foods Market at Union Square, new Giant Eagle Express stores and Wal-Mart’s new Marketside pilot stores in Arizona.
In keeping with the “smaller-is-better” theme, small retail formats have made mid-sized or regional product manufacturers more important to retailers, the report says. Local manufacturers are more likely to find a receptive audience when they are pitching products to retailers because they can work more closely with the retailer and address local preferences.
“There is one wild card,” Harris says. “These ideas were built on a three- to five-year strategic plan. No one factored in oil costs at $120 per barrel.”
Higher oil costs could easily force consumers back into bulk purchasing situations as they try to conserve fuel by making fewer store trips.
But, Harris says, that could be a boon to the retailers that come up with the right format with the right product and price selection. “You could argue that it’s an enhancement. Trips are becoming even more important,” he says. “The number of trips has declined for the past seven years. That trip is even more important. [Retailers] better find a way to deliver.”
Harris’ comments are echoed in a recent ACNielsen report that shows consumers are combining shopping trips to compensate for higher gas prices. The number of grocery store trips has dropped from 72 per year in 2001 to 59 in 2007. Shopping trips to all outlets declined from 181 per year in 2001 to an average 164 last year. Grocery’s household penetration, however, dropped only one point during the measured period, indicating consumers are still shopping in those outlets, albeit less frequently.
“Long-term trends show us that all value retailers — supercenters, warehouse clubs and dollar stores — are gaining in their quest to grab shoppers,” said Senior Vice President Consumer & Shopper Insights, Nielsen Consumer Panel Services Todd Hale in a statement. “Keep in mind, however, that some U.S. grocers reported stronger same-store-sales growth than supercenters or dollar stores in 2007. Proximity to shoppers and a healthy focus on convenience and value helped many of these grocers deliver sold results.”
The company also noted that both deep-discount grocery retailers and high-end, specialty grocers significantly increased store counts between 2001 and 2007. “New and remodeled mainstream grocery formats also helped pave the winning ways for some grocers,” Hale said.
Shopper insights
Another area where supermarkets have been successful is the use of shopper insights. Grocery retailers have “harnessed the power of frequent shopper data,” tailoring promotions to specific customers based on prior purchases, says Bump Williams, executive vice president at IRI and head of the wine, beer and spirits practice.
Based on shopper data, “Retailers are also beginning to understand truths about how shoppers are shopping the store,” Cannondale’s Harris says.
Kroger and Safeway, two of the top retailers cited in the company’s PoweRanking survey, “both have well-developed shopper card programs,” he says. “Both have engaged manufacturers and [offer] proof that the programs actually work.”
Kroger picked up 4.5 percentage points in the annual rankings, and Safeway 4.3 points, based on manufacturers’ opinions of the retailers.
“To understand what Safeway has done with their marketing programs, all you have to do is walk into their Lifestyle stores,” commented one survey-taker. “It’s just not the same place it was five years ago. They understand their consumers better, they’re targeting their needs, and the Lifestyle stores reflect this change.”
Sophisticated shopper insights can be used to create more targeted promotions and fine-tune a store’s product selection, but retail fundamentals remain one of the ongoing challenges for supermarkets, IRI’s Williams says.
“The biggest problem for supermarkets remains out of stocks,” he says. “Supermarkets lose billions of dollars in sales to out of stocks.” He also lists proper space management and new product assessment as two of the factors that could greatly impact supermarket success going forward.
“New products are a challenge, “ he says. “But they are also the lifeblood of stores.”
Most beverages play in center-store floor space, where there is both good and bad news. The supermarket conversion to fresh formats has led many retailers to devote space that previously stocked dry goods — including soft drinks, bottled water, juice and ready-to-drink beverages — to produce and other fresh offerings.
But the center store space that remains has become more profitable. Across all retail outlets, dollar sales in the center aisles were up 3 percent last year, IRI reports. Beer was up 2.1 percent, bottled water 10.8 percent and wine 8.1 percent. High-growth categories included ready-to-drink teas and coffees, which were up more than 28 percent; energy drinks, which grew more than 26 percent, and drink mixes, which contributed 12 percent to center store gains last year.
“One thing we know about the center of the store — which seems paradoxical — is that it’s incredibly profitable for the retailer,” says Willard Bishop’s Hertel. “Two-thirds to three-quarters of the profit is out of the center store.
“At the same time,” he adds, “there are significant space allocations that aren’t paying their way. So there are lots of opportunities for the retailer to reduce space [for certain product categories] in the center store, and in fact, increase overall profitability.”
For beverage companies, that means the opportunity to fight for shelf space by showing retailers the contribution their products make to the overall profitability of the store.
“With center store square footage shrinking, retailers are focusing on differentiation, variety, shopping experience and profit on the perimeter,” says Ron Hughes, director of shopper strategy solutions, supermarkets, at The Coca-Cola Co., Atlanta. “Conventional supermarkets still attract more shoppers than any other food format, but their monthly and weekly shopper base is shrinking as consumers migrate to other food formats.
“Retailers are asking manufacturers to work together to deliver convenient meal and snack solutions to help build basket size and meet shoppers’ need for quick meal solutions,” he says.
Hughes adds that Coca-Cola also is working with retailers to liven up the center store with more visual impact. He says the company uses a portfolio marketing and merchandising approach based on shopper insights, and has helped retailers capture incremental purchases by finding other areas of the store where beverages can be paired with ready-to-eat products.
Coca-Cola and PepsiCo both were cited in Cannondale’s PoweRankings survey as offering the most helpful shopper insights and category management expertise. The companies that ranked highest in retailers’ opinion were the ones that could best take insights from a national level, and “drill them down to retail to operationalize the insights in a tactical way,” Cannondale said. In soft drink’s case, much of that success is credited to the direct store delivery system.
Even beverage companies that don’t have the clout of major DSD systems can work with retailers to manage shelf space, Willard Bishop’s Hertel says. From a supplier standpoint, brand owners need to understand how their categories contribute to the overall store profitability, “and make sure that the recommendations they’re making to the retailer are going to be supportive of driving enhanced space productivity,” he says. “If they are, then from our point of view, they’re going to be singing to a very receptive audience.”