August 6, 2007
Changing Times Bring Growth Opportunities…or Challenges?
Supermarket and drug store retailers, and the suppliers that support them, are faced with tough choices these days in forging a strategy that will promote growth and prosperity. Merchants today are dealing with a lot more complexity in their markets than has been the case in the past, presenting a challenge in developing go-to-market formats that will work.
For example, while the U.S. household population is growing at about one percent annually, a variety of factors have created an increasingly fragmented and complex consumer experience than ever before, according to a Nielsen presentation at a recent industry conference. Such complicating factors include media influences, product choices, attitudes and preferences, and, in particular, retail choices.
Value and convenience, as has been well-documented, is critically important to many consumers and retailers have responded with a building boom to, in part, address the need.
According to the Nielsen presentation, between 1996 and 2006, the number of convenience stores increased by 33,000 to just over 145,000; dollar stores by 14,000 to over 19,000; and supercenters by over 2,000 to 2,758. Warehouse clubs increased in the ten-year period to 1,119 from 725.
Supermarket store count was essentially stable at about 31,000, as was the number of drug stores, at around 40,000.
Value is indeed important. New store openings benefited dollar stores, for example, by increasing household penetration of this retail class to 65 percent from 59 percent over the five-year period to 2006. Supercenter household penetration moved to 62 percent from 51 percent during the same time frame, while warehouse clubs showed an increase to 52 percent from 50 percent.
In contrast, drug store household penetration receded from 86 percent to 82 percent. Grocery pretty much only held the line, dipping to 99 percent from 100 percent.
But what about shopping patterns?
Convenience is the dominant factor more than ever. The large and extra large trips, the staple of the supermarket, are about 14 percent of shopping trips, according to the Nielsen presentation. But small trips for immediate needs accounted for 68 percent of shopping trips in 2006, while the medium trips for fill-in were 18 percent of the total. Indeed, when Nielsen took a look at multi-channel shopping for several key food and drug categories, consumer choice is obviously for going to many different types of stores. For oral hygiene, for example, the presentation indicated that multi-channel buyers made 12 trips per buying household, compared to about four for single channel buyer trips.
Totaling it all up, drug stores and supermarkets have some work to do in making themselves more appealing to today’s fragmented and complex consumer dynamics.
Discussion Questions: What strategies and format changes are open to food and drug retailers to not only swing with marketplace changes but benefit from them? How can they collaborate with suppliers to achieve this?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Investors appreciate financial discipline. In retailing, that often means restricting store growth, so that only the best new locations are opened, keeping return on investment high. This does not maximize market share, it maximizes profits. When a category experiences high location growth, inevitably that means most new locations will have reduced return on investment. Family Dollar, for example, is a $30 stock today, versus $27 five years ago. Kroger is $26 today, versus $20 five years ago. So the retailer in the higher-growth category had stock price appreciation 1/3 of the retailer in the low-growth category. Of course, there are many exceptions to this, but the “chasing location growth pitfall” has killed more retailers than the “maximizing return on investment” low-growth strategy.
The Nielsen report, as well as other research, has documented the change in consumer shopping behavior more towards quick trips and multi-outlets.
As pointed out in the article, a time of change presents new challenges and opportunities for retailers and suppliers. However, you have to dig a little deeper to see the real issues.
The dominant items in the quick trip shopping basket tend to be consumables such as bread, milk, snacks and beverages. Every outlet is trying to capture these quick trips, since these destination items provide the opportunity to sell other products.
You would think that grocery stores would have the advantage in this battle, but they are on the defensive. While there are exceptions, most grocery stores have sterile aisles, large footprints and unfriendly layouts. They have made shopping for a few items an unpleasant experience and a waste of time.
Retailers need to work with their supplier partners to redesign stores around today’s consumer shopping habits. Grocery stores, in particular, need to follow the consumer and change their focus from lawn chair promotions and large value packs to the shoppers primary choice for quick trip shopping.
I really like what Food Lion has experimented with in its Bloom stores. I haven’t seen it in execution, but I love the idea of revamping the entrance of the store to stock it with more convenience-driven foods. In the design for Bloom, there is a ring around the entrance that gets stocked with a changing array of meal ideas. Each section of the ring contains all the ingredients for a complete meal. You just grab what you need and go.
HEB’s Central Market does a good job with this concept too–all their take-home and semi-prepared foods are available through an entrance off to the side, so that if you are there just to get those last few things needed for the family meal tonight, you don’t have to fight the big crowds, you duck in the side entrance, get your deli selections and maybe grab a pre-packaged “dinner for two” and then duck back out.
It’s the whole concept of not putting the milk in the back corner just to make your customer walk through the entire store to get there. The customer may end up with more than they planned for that trip by walking through the entire store, but if someone else makes it more convenient for them, how loyal do you think they’re going to be to you in the long run?
This is another of the topics that, in one shape or other, shows up on RetailWire almost every week. Clearly, food and drug (and retail in general) are having a difficult time meeting the expectations of their served markets. Our data confirms this: 91% of all retail organizations’ products and services fit their markets 70% or worse; 92% of all retail organizations have a customer service rating of 70% or worse; and 96% of all retail organizations meet 70% or fewer of all customer expectations.
It appears the food and drug continue to operate within the basic system that they used during their heyday 1940s and 50s. Our data shows that the underlying assumptions that determine operations and strategies have not changed significantly since then. This is an astonishing fact, and shows that assumptions are very difficult for organizations and industries to see, understand, and most of all, change–even when faced with obvious ineffectiveness.
This is another example of an element of every organization’s Master System, and explains not only an individual’s resistance to change (a favorite topic of executives), but also an organization’s resistance to change, and an entire industry’s. There are certainly executives within food and drug that have a clearer view and a more progressive approach. Most of them, in our experience, are deeply frustrated by their organization’s failure to listen to, and act on, their pleas.
Contrast this topic with another on RetailWire today, about the power of heroic CEOs. We appear to have quite a contrasted mind-set, almost a schizophrenia–on one hand, we trumpet the power of one person to control an entire organization (power), and on the other, we face the fact that progressive executives cannot seem to get anyone to really even listen to them (powerlessness).
I think Raymond Jones may have hit a very large nail squarely on the head. Data point of one: there is no such thing for me as a quick trip into a supermarket to get a convenience item or a small quantity buy. The lines are unpredictable, often long, and the locations of items don’t lend themselves to a quick trip.
Solution: is there any way to redesign the layout of the store to accommodate convenience trip shopping without losing the advantages of category groupings currently seen in most store designs? I think there is.
I wonder the impact on volume and profit would be if the endcap at the front of each aisle was reconfigured to classic impulse/convenience merchandising? I know these are profit producers from a slotting point of view, but still…wouldn’t it be interesting to model this?
My observations would indicate that customer service is a huge area for improvement. And not necessarily the human aspect of customer service but the actual store itself can be more customer friendly. Store layouts and merchandise plans can and should be geared towards ease for the consumer. Don’t get me wrong, the human element is probably 80% of it but a store that is essentially unshoppable will negate any forward momentum on the labor side. Retailers can make so much more money if they put more of a focus on the customer and look at things through the consumer viewpoint.
There are signs of innovation among supermarkets in every corner of the country, from Food Lion’s Bloom format, to Safeway’s Lifestyle store remodels, To HEB’s format portfolio to the new Ike’s Farmers Market format introduced this month by Basha’s here in Arizona.
True, the industry hasn’t exactly turned on a dime, and there are plenty of dreary stores designed to optimize supply chain efficiency requirements rather than consumer experience. And yes, these deficiencies and inertia have been seized upon by other formats as a competitive opportunity.
The issue, I think, is not what clever format supermarkets will launch next to combat the latest competitive threat. It is about how winning supermarkets will shift their underlying business models to favor maximum responsiveness to emerging market conditions, rather than optimizing them to rigid norms based on last year’s performance.
Retail winners of the future will be flexible by design–whether that means tailoring local stores to customer demand patterns or re-merchandising carry-out items in the entry lobby by time of day. They will balance customer experience and store implementation performance against the efficiency requirements of the supply chain.
Every shopper is and will remain a split shopper. Choice is hyper-abundant. Retailers and brands compete over fragments of divided wallets. At a certain tipping point, more stores in more format variations only adds more market complexity.
Overall, the industries are in trouble. But of course there are exceptions.
You’ve gotta love Publix latest gambit…7 antibiotics, free to everyone.
More Discussions
Has Same-Day Delivery Become an Expectation Across Retail?
Are expectations around retail delivery speed in flux?OpenAI Names the Infrastructure Standard for Agentic Commerce
Will OpenAI or Google (or another entity) set the gold standard for agentic commerce?Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?
Investors appreciate financial discipline. In retailing, that often means restricting store growth, so that only the best new locations are opened, keeping return on investment high. This does not maximize market share, it maximizes profits. When a category experiences high location growth, inevitably that means most new locations will have reduced return on investment. Family Dollar, for example, is a $30 stock today, versus $27 five years ago. Kroger is $26 today, versus $20 five years ago. So the retailer in the higher-growth category had stock price appreciation 1/3 of the retailer in the low-growth category. Of course, there are many exceptions to this, but the “chasing location growth pitfall” has killed more retailers than the “maximizing return on investment” low-growth strategy.
The Nielsen report, as well as other research, has documented the change in consumer shopping behavior more towards quick trips and multi-outlets.
As pointed out in the article, a time of change presents new challenges and opportunities for retailers and suppliers. However, you have to dig a little deeper to see the real issues.
The dominant items in the quick trip shopping basket tend to be consumables such as bread, milk, snacks and beverages. Every outlet is trying to capture these quick trips, since these destination items provide the opportunity to sell other products.
You would think that grocery stores would have the advantage in this battle, but they are on the defensive. While there are exceptions, most grocery stores have sterile aisles, large footprints and unfriendly layouts. They have made shopping for a few items an unpleasant experience and a waste of time.
Retailers need to work with their supplier partners to redesign stores around today’s consumer shopping habits. Grocery stores, in particular, need to follow the consumer and change their focus from lawn chair promotions and large value packs to the shoppers primary choice for quick trip shopping.
I really like what Food Lion has experimented with in its Bloom stores. I haven’t seen it in execution, but I love the idea of revamping the entrance of the store to stock it with more convenience-driven foods. In the design for Bloom, there is a ring around the entrance that gets stocked with a changing array of meal ideas. Each section of the ring contains all the ingredients for a complete meal. You just grab what you need and go.
HEB’s Central Market does a good job with this concept too–all their take-home and semi-prepared foods are available through an entrance off to the side, so that if you are there just to get those last few things needed for the family meal tonight, you don’t have to fight the big crowds, you duck in the side entrance, get your deli selections and maybe grab a pre-packaged “dinner for two” and then duck back out.
It’s the whole concept of not putting the milk in the back corner just to make your customer walk through the entire store to get there. The customer may end up with more than they planned for that trip by walking through the entire store, but if someone else makes it more convenient for them, how loyal do you think they’re going to be to you in the long run?
This is another of the topics that, in one shape or other, shows up on RetailWire almost every week. Clearly, food and drug (and retail in general) are having a difficult time meeting the expectations of their served markets. Our data confirms this: 91% of all retail organizations’ products and services fit their markets 70% or worse; 92% of all retail organizations have a customer service rating of 70% or worse; and 96% of all retail organizations meet 70% or fewer of all customer expectations.
It appears the food and drug continue to operate within the basic system that they used during their heyday 1940s and 50s. Our data shows that the underlying assumptions that determine operations and strategies have not changed significantly since then. This is an astonishing fact, and shows that assumptions are very difficult for organizations and industries to see, understand, and most of all, change–even when faced with obvious ineffectiveness.
This is another example of an element of every organization’s Master System, and explains not only an individual’s resistance to change (a favorite topic of executives), but also an organization’s resistance to change, and an entire industry’s. There are certainly executives within food and drug that have a clearer view and a more progressive approach. Most of them, in our experience, are deeply frustrated by their organization’s failure to listen to, and act on, their pleas.
Contrast this topic with another on RetailWire today, about the power of heroic CEOs. We appear to have quite a contrasted mind-set, almost a schizophrenia–on one hand, we trumpet the power of one person to control an entire organization (power), and on the other, we face the fact that progressive executives cannot seem to get anyone to really even listen to them (powerlessness).
I think Raymond Jones may have hit a very large nail squarely on the head. Data point of one: there is no such thing for me as a quick trip into a supermarket to get a convenience item or a small quantity buy. The lines are unpredictable, often long, and the locations of items don’t lend themselves to a quick trip.
Solution: is there any way to redesign the layout of the store to accommodate convenience trip shopping without losing the advantages of category groupings currently seen in most store designs? I think there is.
I wonder the impact on volume and profit would be if the endcap at the front of each aisle was reconfigured to classic impulse/convenience merchandising? I know these are profit producers from a slotting point of view, but still…wouldn’t it be interesting to model this?
My observations would indicate that customer service is a huge area for improvement. And not necessarily the human aspect of customer service but the actual store itself can be more customer friendly. Store layouts and merchandise plans can and should be geared towards ease for the consumer. Don’t get me wrong, the human element is probably 80% of it but a store that is essentially unshoppable will negate any forward momentum on the labor side. Retailers can make so much more money if they put more of a focus on the customer and look at things through the consumer viewpoint.
There are signs of innovation among supermarkets in every corner of the country, from Food Lion’s Bloom format, to Safeway’s Lifestyle store remodels, To HEB’s format portfolio to the new Ike’s Farmers Market format introduced this month by Basha’s here in Arizona.
True, the industry hasn’t exactly turned on a dime, and there are plenty of dreary stores designed to optimize supply chain efficiency requirements rather than consumer experience. And yes, these deficiencies and inertia have been seized upon by other formats as a competitive opportunity.
The issue, I think, is not what clever format supermarkets will launch next to combat the latest competitive threat. It is about how winning supermarkets will shift their underlying business models to favor maximum responsiveness to emerging market conditions, rather than optimizing them to rigid norms based on last year’s performance.
Retail winners of the future will be flexible by design–whether that means tailoring local stores to customer demand patterns or re-merchandising carry-out items in the entry lobby by time of day. They will balance customer experience and store implementation performance against the efficiency requirements of the supply chain.
Every shopper is and will remain a split shopper. Choice is hyper-abundant. Retailers and brands compete over fragments of divided wallets. At a certain tipping point, more stores in more format variations only adds more market complexity.
Overall, the industries are in trouble. But of course there are exceptions.
You’ve gotta love Publix latest gambit…7 antibiotics, free to everyone.