Wilson Perumal & Company point of view on U.S. grocery market trends

1. Wilson Perumal & Company
Grocery Retail: Perspectives
November 2013

2. Introduction and Background
• Even by grocery retail standards, the industry is undergoing high levels of
change, creating sizeable complexity as well as new opportunities
• Wilson Perumal & Company*, a management consultancy, works with retailers to
find advantage in this fast-changing environment
• In the course of our work, we have developed a point-of-view. In this
document, we wish to share with you our perspective on key trends
• The 5 key trends we discuss are:
1. Localization a “must-do”; question is what scope/how far to go
2. Race to Omni-Channel impeded by execution issues
3. As traditional promo strategies fail to drive lift, need for innovation in
promotions + promotional efficiency increases
4. Big Data “arms race” means that many personalized offerings are now
expected and for free
5. Contraction and consolidation of large grocery chains requires update of the
Operating Model
*For further information on Wilson Perumal & Company, see Appendix 2, pg 35
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3. Five key themes that are shaping the industry
Grocery retail trends
Pages
1
Localization a “must-do”; question is what scope/how far to go
4-5
2
Race to Omni-Channel impeded by execution issues
6-7
3
As traditional promo strategies fail to drive lift, need for
innovation in promotions + promotional efficiency increases
8-9
4
Big Data “arms race” means that many personalized offerings
are now expected and for free
10-11
5
Contraction of grocery chains requires revised operating model
12-13
Additional trends and Appendix on supplemental data
14-47
Source: WP&C Retail and CPG research and analysis
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4. 1 Demographic shifts increasingly apparent...
Trend:
Implications:
Race/ethnicity and age mix changes rapidly, and it is
not equally geographically distributed
Demographic trends require extensive
localization from retailers
Percent of total population
54
2012
2035F
17
White & Oth
12
Hispanic
13
5
Afri. Amer.
6
Asian
2
3
Mixed
$ Share of food spend
• Develop differential pricing
• Understand customer segments
willingness to pay; lead customers
towards high-margin products
• Plan promotions effectively to
meet target audience’s needs
20.0%
Asian
10.5%
70.2%
10.5%
Afr. Amer.
62.5%
Hispanic
7.0%
2012
Footprint &
format
White & Oth
14.0%
5.3%
• Offer products to local demand
• Re-assess price and promote
linkages between products
• Re-select flag-product lines to
ensure stock availability
23
Pricing
64
Product
Range
Population by race and ethnicity (2012, 2035F)
• Select locations that match your
brand image and offering
• Understand local behavior and
adjust format offering
• Plan footprint with a long-term
view on demographic change
2035F
Source: Nielsen consumer reports; US Census Bureau; Euromonitor report 2012; WP&C Analysis
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5. …Prompting retailers to determine degree and
scope of localization
1
Our Perspective/Approach:
Scope of Localization1
Degree of localization
•
•
•
•
Economies of scale
Simple supply chain
Easier to manage
No additional CapEx
Standardization
•
•
•
•
Increasing complexity and cost
Unique
clusters
• No localization or
• Each cluster receives
clusters, same
a standard product
offering in every store offering (same
offering for all stores
in each cluster)
•
Localization vs. Scale1
Core /
clustered
• Set a basic or core
offering (i.e. 80%)
carried in all stores
• Vary remaining
offering (i.e. 20%) in
clusters
Core/clustered
/ localized
• Set a basic or core
offering (i.e. 70%)
carried in all stores.
• Clustered offering (i.e.
20%) for clusters
• Local offering (i.e. 10%)
for each store
Few economies of scale
Complex supply chain
Hard to manage
Large CapEx required
True
localization
• All stores have their
own unique offering
Decision on degree of localization is based on: your strategy, size of your
chain, timeline, available data and analytical capability, execution resources (capital and
human), and the flexibility of your operations and organization
1. Additional approaches to localization (scope & scale) are in the appendix to this presentation
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6. 2
Online channel grows rapidly, creating
opportunity and challenges…
Trend:
Implications:
Online grocery sales continue to grow rapidly,
driving leading grocers to invest in the sector
Emerging opportunities for grocer in the
online space…
2%
Percentage of total U.S. consumer
packaged food sales purchased from
online grocers in 2012
$6 billion
Revenue generated by online US. grocery sales in
2012, with expected 12.1% growth to 2016
• Selling extended range
• Increasing reach to new customer
segments
• Focused marketing efforts: personalized
offering and promotions
• Improving cross-selling
..as well as new challenges
1,620
• Developing a profitable operating model
Number of online grocery businesses in 2012
• Facing channel and product
cannibalization
55+
Age group that buys the most groceries
online, accounting for 24.5 percent of purchases
• Developing consistent positive customer
experience
$175
• Stock management (balancing holding
costs, waste, stock availability, etc.)
Average order size of pure-play UK-based Ocado
amongst its 360K active customers’ base
Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites
• Ensuring strategy, organization and
operational coherence across channels
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7. 2
…requiring greater omni-channel integration and
coherence
Our Perspective/Approach:
In today’s increasingly complex marketplace, retailers must prioritize coherence
Strategy
Execution
Customer
Sources of Complexity
Offering
Channel
Market
Process
Output
The Challenge & Opportunity
Pace of change
Strategy & execution coherence
• Align processes to effectively exercise
strategic goals across silos
Growing product lines
Customer & portfolio coherence
• Optimize mix of private label & branded
• Localize assortment by region
Channel marketing
Channel coherence
• Align marketing initiatives across channels
• Align pricing & promotional strategy
Fragmented supply base
Supply chain coherence
• Balance supply chain risk vs. cost
• Optimize waste vs. out-of-stock
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8. 3
Traditional promotional levers are not driving the
same level of lift previously achieved…
Trend:
Implications:
Promotion effectiveness reduced due to
complexity of increasing channels
Grocery retailers are spending significant
time/resources on ineffective promotions
• Expanding channels in grocery segment have
intensified price competition
• Shoppers have many low price options, and are
fragmented across retail channels
• Price cuts and promotions remain critical tools to
drive traffic/revenue
• However, traditional promotional power is
eroding
Promotion1 Average Unit Lift (%) by Department
139
128
119
123
2011
2012
114
96
Dry
Grocery
93
HBC
91 90
Frozen
Dairy
Non-Food
GM
Case example: Avg. promotion uplift/week
4 month period2
% sales uplift units
136
122 120
Low-impact promotions are costly:
• Supply chain: Inaccurate forecasting can lead
to out-of-stocks and overstocks
• Corporate planning: Detailed planning with
multiple handoffs/rework each week
• Store labor: Labor required to stock
shelves, assemble displays, customer service
110
100
90
80
70
60
50
40
30
20
10
0
0
10
20
30
40
50
60
70
80
90 100
% of promotional SKUs
1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions, 2) WP&C client analysis of US grocery chain
Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis,
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9. 3
…putting more pressure on identifying new promo
innovations + efficient execution
Our Perspective/Approach:
Promotion Check-Up
The right promotions for
the right segments…
• How well do promotions meet
the needs of the customer?
• What is the expectation around
promotion lift for product and
basket?
Evaluate issues from a top-down &
bottom-up approach
Top-down: Are promotions meeting
the business’ strategic goals and the
needs of the customer?
Bottom-up: Are individual
promotions performing as expected
in both effectiveness and efficiency?
HIGH
?
Where we want
to be
LOW
?
?
LOW
Effectiveness
• How well do promotions meet
their strategic goals?
HIGH
Efficiency
…done the right way
• Is the promotion process operating as intended in each segment?
• Are there opportunities to make the promotion process faster /
more flexible / more dependable / less expensive?
• What is the right governance to sustain better promotions?
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10. 4
Personalized, value adding extras are becoming
expected services…
Trend:
Implications:
Grocery retailers are providing more personalized
customer experiences to combat intense price
competition
Consumers are becoming increasingly
accustomed to direct communication1
– The ‘Just for U’ program gives shoppers digital
coupons and deals on items they regularly buy
– Amazon enhances one-on-one interaction with
specific product recommendations
– Ahold is leading the way with consumer choice
for online orders, in-store pickup or delivery
55%
43%
Use my prior purchasing
to offer me promotions
Use my prior purchasing to
recommend new products
43%
36%
Invite me to
events
Involve me in new
product ideas
Grocery retailers have more access to
consumer info than ever before2
35% 36% 34%
2012
31%
2013
– Hyper-local advertising, the ability to target
customers by location, is on the doorstep
11%
As more companies employ these services, they
will become expected rather than value added
extras
Websites
Email
14%
10% 11% 8% 11%
7% 9%
Social
Group List/Notes Mobile
Networking Buying Function
App.
Sites on Phone
1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2)“Question: What online or
interactive tools/sites do you use regularly for planning your grocery shopping trip and/or which specific products you eventually
Wilson Perumal & Company, Inc.
decide to buy?. The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Source: WP&C research and analysis,
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11. 4
…just as Big Data capabilities enable new levels of
insight, value, and personalization
Our Perspective/Approach:
Evolution of Big Data trends…
…Lead to new opportunities
More data
Better predictive analytics
Exponential growth in customer data from
online interactions and loyalty cards
More effective advertising and service
delivery strategies
Better tools
Deeper Data Mining
Reduced storage/processing costs, and better
analytics tools allow mining of more data
Suggests further cross-sell, up-sell and new
product opportunities
Improved access
Tailored promotions/cust. experience
Multi-faceted view of customer available from
multi-channel interactions & data vendors
Individual level initiatives maximize sales and
customer satisfaction
Easier testing
Accurate future value estimates
Simple experimentation allows retailers to
test customer responses
Accurate customer future values aid
customer acquisition and retention efforts
Source: WP&C analysis
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12. 5
As industry contraction and consolidation
continue…
Trend:
Implications:
Share of traditional formats continues to shrink , but with
slightly lower pace
$ Share by Store Format: 2012-2017F
$1.113T
$1.249T
Contraction/consolidation
has direct impact on
operating model…
53.5%
46.5%
55.0%
45.0%
Non-Traditional
’12
• Supercenters
17.3%
• C-Stores
14.9%
• Wholesale Club
8.7%
• Drug Stores
5.4%
• Dollar Stores
2.4%
• Other Non-trad. 4.9%
’17F
18.2%
16.0%
9.0%
5.5%
3.1%
3.2%
Traditional
• Supermarkets
• Ltd. Assortment
• Fresh Format
• Other Traditional
36.5%
3.4%
2.1%
3.0%
39.8%
2.7%
1.1%
2.9%
2012
2017F
Heightened consolidation/contraction of chain size and change
of ownership in 20131
•
•
•
•
Branch rationalization
Asset/footprint consolidation
Speed of migration
Post merger integration
..and the impact is not only
on the physical stores but
•
•
•
•
Supply chain/inventory
Pricing
Branding
IT
Traditional formats need to
also pull other growth levers
•
•
•
•
•
New (smaller) format
New categories
Private Label
Customer loyalty-localization
M&A
1) 14 trx (total $9.3B) for NA. food retailers, up from $702M in all of 2012 (Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 )
Source: Neilson What’s In Store 2016; Willard Bishop, Includes both grocery and consumables; WP&C analysis
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13. 5
… retailers facing new challenges in revising
operating models & integrating acquisitions
Our Perspective/Approach:
Pre-integration
Structured & strategic approach to
integration will shorten timeline and
smoothen transition
Non-value add
Value add
Conducting holistic pre-integration
planning is key to integration’s success
• Strategic fit and coverage
• Operational and capability
assessment
• Analytics and planning
From our experience this planning is
frequently only done partially
Post-integration
During the migration or integration of stores and
back-end processes, complexity can arise
exponentially unless carefully managed
Take the integration opportunity to cut
complexity and set cost saving target
• Holistic business integration
• Complexity reduction in
org., processes and product lines
• New strategic plan in new
market, if necessary
The Complexity Cube
Organization
Product
Complexity
is:
Number of
products and
services you offer
Too much • Unwanted prod.
complexity • Cust. confusion
is bad: • Poor service
Process
Organization
Number of
Number of
processes, steps, h assets, facilities, e
andoffs, etc.
ntities, partners, e
tc.
• Duplication
• Disarray
• Rework
• Confusion
• Work-arounds
• Functional silos
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14. Additional trends in the grocery retail space to
consider
Industry
Trend
Description
Operational
Fragmented, global supply base
Narrow margins force the continued optimization between
cost, risk, and speed/flexibility in supply chain operations
Range growth
In an effort to reach new segments, grocers continue to
expand SKU ranges, often without control processes in place
Preparing for mobile commerce
Consumer
Blurring across sectors
New challengers (e.g., Dollar, Convenience, Drug, Online
stores) enter the market while traditional grocers also
expand (e.g., prescriptions)
Both consumers and grocery retailers are preparing for the
new wave of mobile commerce. As demand
increases, business flexibility will be critical
Trust in private label
Nearly all consumers buy private label products when grocery
shopping2. As quality to improve, trust in PL brands will grow
Influence of social media
Social media is increasingly integrated into society, and a
growing force in purchase decisions/awareness. Savvy
grocers are already making their presence felt in this space
1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013, 2) Market Force Information
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15. We will be happy to discuss with you…
1) Are these issues affecting your business?
2) Are you seeing other trends that can benefit or pose a threat to the
business?
3) How are you reacting to these? Are you ahead of the game?
4) What is your competition doing to take advantage of these trends?
5) How can we help you in thinking through strategy and operations?
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16. Contact Us:
North America
Europe
Two Galleria Tower
13455 Noel Road, Suite 1000
Dallas, TX 75240
Longcroft House
2/8 Victoria Avenue
London, EC2M 4NS
+1 972-716-3930
+44 (0)203 206 1496
www.wilsonperumal.com
Stephen Wilson swilson@wilsonperumal.com
Ann Bryan
abryan@wilsonperumal.com
Asaf Navot
Steve Liguori
anavot@wilsonperumal.com
sliguori@wilsonperumal.com