The start of the baseball season always seems to bring with it the sense of the possible. Whatever happened last year is past and we have the luxury of a clean slate. As we envision how this year’s slate will be written for the consumer packaged-goods industry, and particularly supermarkets, another baseball memory comes to mind: Yogi Berra. Who better to call on than the master of absurdity to help us fix a system that is, quite simply, broken?
“You can observe a lot by watching.” — Yogi Berra
Around 20 years ago, supermarkets were at the top of their game. They were the dominant outlet for food with 100 percent penetration and 83 percent share. Households were averaging close to 110 trips to supermarkets per year. Retailers had recently wrested information control from suppliers when scanners achieved 70 percent of ACV in 1988.
On top of this, suppliers were competing with each other to become category captains. They spent 47 percent of their marketing budgets on trade promotion — an amount that, by our calculations, totaled more than $1 trillion dollars over the last 20 years. There were some clouds in the sky for supermarkets, like the incursion of supercenters and warehouse clubs into supermarket turf, but focus on the supply chain through Efficient Consumer Response and stocking “club packs” was expected to solve those problems pretty easily. Besides, as it was almost universally believed, these “alternate” channels could never handle fresh foods.
What happened instead was a confluence of factors that have changed the consumer packaged-goods industry to this day. The year 1985 marked the first time more than half of American women were working outside the home. For these women, time became as precious a commodity as money. Choice of products and stores became a series of trade-offs between price and convenience. The first Walmart supercenter opened in 1988, offering the convenience of one-stop shopping and the guarantee of always low prices, a powerful one-two punch. By 1993, Walmart had a 0.9 percent share of US grocery sales. Today, Wall Street estimates of Walmart’s US grocery share go as high as 33 percent.
The result for supermarkets? Share has fallen to 47 percent; trips have dropped to an average of 59 per year; and profit is flat. However, the good news for supermarkets is that suppliers are now spending 65 percent of their marketing budgets to have their products featured, displayed or the price temporarily reduced.
“It’s déjà vu all over again.” — Yogi Berra
For the supermarket industry, the next wave is about to hit, and it’s creeping in as quietly and unobtrusively as Walmart did. Just like 20 years ago, we have a changing consumer — in this case, the Millennials. This group, whose leading edge has just turned 30, number 79 million. They are digital natives who will be your target customers within the next five years and for the next 20.
Like 20 years ago, we have a redefinition of value. Price is no longer viewed as the number on a shelf tag but as landed cost, or what it takes in time and dollars to get the product-of-choice into the shopper’s home. Pricing apps make price comparison a click away, anytime, anywhere.
And, like 20 years ago, we have a new competitor aligned with the needs of a changing marketplace — Amazon — providing low prices, the broadest assortment and more convenience. This is a competitor where 53 percent of shoppers come back month after month; where pricing is determined by bots that scan the web to ensure that offerings remain competitive; where replenishment products — the types of products that drive supermarket trips — are offered at a flat 15 percent subscription discount and delivered free to the shopper’s door; where Millennials welcome the artificial intelligence and online reviews that help them determine the right product for their needs (which Amazon has in-stock because carrying virtually every SKU is an affordable part of their business model); and, to top it off, in test in Seattle ... fresh foods.
“When you come to the fork in the road, take it.” — Yogi Berra
Supermarkets and their suppliers have a problem that is only going to get more serious. While it may seem small now, like Walmart in the early 90’s, it cannot be minimized or ignored. Supermarkets and suppliers can solve this problem together — and only together — in a way where they both win. However, doing so will require some out-of-the-box thinking that we know will be a tough sell on both sides.
Although change in an industry that, as the FMI reports, nets 0.98 percent is not a risk that most are prepared to take, the alternatives look bleak. Even without Amazon, Willard Bishop is forecasting continuing erosion of share for traditional grocery, and supermarkets in particular, by another three points by 2015. Beyond this, Bishop estimates that non-traditional grocery share will surpass traditional grocery for the first time in 2018. The predictions from Goldman Sachs would tend to amplify this: Overall online growth will surpass store-based growth in dollars by 2015, and by 2020, 90-95 percent of all growth will come from online. Can you afford to let this happen?
Clearly the industry is faced with a decision. If supermarkets do nothing differently than they are doing at present, they risk losing another 10-15 share points as they become overwhelmed by new-wave shopping habits and the lethal price/convenience benefit of online between now and 2020. In other words, maintaining the status quo has ceased to be an option for supermarkets or suppliers. Going forward, those who do best will be those willing to leapfrog tradition and respond to really big threats with really big ideas.
“The future ain’t what it used to be.” — Yogi Berra
Unlike the late 1980s, the changes faced by retailers and marketers today are revolutionary, not evolutionary. The “shopping experience” is no longer predicated on what the shopper finds “in-store.” Now market-driven factors have shaped the shopping experience into a cycle where each of the three components — pre-store, in-store and post-store — can be equally important in driving traffic, increasing sales and building loyalty. For example:
Booz & Company reports that more than 75 percent of shoppers now do research before going to the store (either to check prices or download coupons).
Driven by recession frugality, impulse versus planned purchase ratios have completely flipped, from 70 percent unplanned in 1992 to 70 percent planned in 2012, according to POPAI/IRI.
Loyalty is no longer primarily influenced by the retailer’s frequent shopper program (if it ever was). Now the key driver of loyalty is consumer-generated post-store feedback on sites like Yelp, Facebook and Twitter.
This presents a serious challenge for supermarkets, in particular because most are operating under a legacy system that still focuses most of the attention and resources on the “in-store” component of the path. This system is deeply embedded strategically, organizationally and financially. Despite this, extricating oneself from this system will be essential to survival.
Why do we say this?
“If the people don’t want to come out to the ballpark, nobody’s going to stop them.” — Yogi Berra
Strategically, the focus remains on in-store. While we know that some (like Kroger and Safeway) are reaching out, overall the downbeat is still on maximizing in-store instead of attracting and holding new customers. Unfortunately, the long-term effect of this is a shrinking customer base where growth is achieved only by extricating more dollars from current customers. In other words, the customers a retailer currently has could theoretically be all the customers it is ever going to get without stepping back to align with how shoppers shop today.
Organizationally, for many companies, the last five years have been characterized by a “sorting out” of responsibilities as the expanded role of supermarket marketing departments bumped up against the traditional and well-entrenched roles of merchandising departments. These growing pains, although natural and to be expected, forced supermarkets into a position in which focus was more internal than external. Suppliers, unsure where responsibilities lay, called on both — further complicating issues. The goal is to have solid merchandising combined with solid consumer path-to-purchase communications — not either/or.
While strategic and organizational issues are certainly a problem, the biggest issue by far — for both suppliers and retailers — is financial. Try as we might, it is still difficult to believe that with an 83 percent share and $1 trillion in supplier trade-promotion dollars at its disposal, an industry as smart and experienced as supermarkets could not marshal its resources, including its suppliers, to block and blunt the growth of non-traditional food retailers.
The game has permanently changed. If you are a supermarket and your spending on “pre-store” only keeps pace with what your suppliers contribute to your marketing budget, you will never differentiate or leverage your core equities. By default, you will consign yourself to sameness and risk vulnerability to new-wave companies like Amazon. The time to establish your footprint is before the store — at the beginning of the path — not after others have had the opportunity to capture the shopper’s attention and exploit her interests.
Once you have that shopper’s attention, the focus needs to switch to meeting the shopper’s needs and delivering the right products at the “right” price. Brick-and-mortar supermarkets have many intrinsic strengths, but trying to compete with pricing bots is not one of them.
On the plus side, the advent of the digital era for supermarkets makes reaching out to potential customers far more affordable and loyalty-building more individualized. On the minus side, it requires systemic changes that fly in the face of tradition and cannot be addressed merely by tweaking “business as usual.” (see sidebar)
Supermarkets definitely have a role in the digital era, but it is incumbent on both supermarkets and their suppliers to help define that role with a fresh and clear vision. Whether that vision leans more toward the efficient, economical and austere, or a richly interactive delight for the senses, will be for each supermarket to determine.
What we know for sure is that if supermarkets wish to survive and if suppliers wish to bring their products to market there, they will re-invent the industry — or in the words of Yogi Berra: It ain’t over ‘til it’s over.