Special Reports 2005

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• Alternate Channels  2005

Virtually every retail outlet is an ‘alternate channel’ for supermarkets, given all the outlets other than supermarkets selling food and supermarkets expanding their offerings beyond groceries. 

The most visible segment is discounters, attributable to Wal-Mart and its impact on all retailers. In the past year, Wal-Mart has been in the news for flirting again with banking, for its site selection, its long-term influence on communities (from rural to urban) and how it is reinventing the magazine business. 

Despite Wal-Mart’s size, influence and global reach, other discounters still thrive. Target made news for divesting its department store operations to focus and continue to prove that style and chic need not be compromised for price. By contrast, Kmart and Sears  decided to merge to better compete. Although financial analysts were enthralled with the marriage because of the financial acumen of its engineer, Eddie Lampert, retail watchers were less enthusiastic. Their consensus is that both companies have significant operational problems that can be masked by selling off real estate assets only for so long. Time will tell. 

Among drug chains, consolidation continues as Penney sold Eckerd to CVS and Coutu. Walgreen continues to be a company to watch both because of its retail operations but also because of how it manages its pharmacy benefit programs vis a vis mail order companies working with insurers. 

Convenience stores are responding to channel blurring in several ways: Knowing they are the outlet for choice because of prime locations, they are tailoring their assortments more and more to their neighborhood’s clientele. They are opening in virgin territory such as malls and airports…and using technology to ensure they maintain their edge. 

For the price-obsessed shopper, dollar stores and limited assortment operators are becoming increasingly available options. Lessons learned in Europe are translating well across the pond. 

And proving how broad the term alternate channels really is, electronics and hardline retailer Best Buy is now testing an HBC format. Toys ‘R Us decided to throw in the towel after years of trying to survive against other big boxes—and then became a trade relations gold standard.

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• Labor & Leadership 2005

2004 will likely be remembered for the settlement of the 4+ month long Southern California strike, where the only winners were the independents and alternate channels not involved. The major supermarket chains lost press and community clout and top line sales and profits. The union—while steadfastly standing by its members—lost power by finally having to accept health care cuts and a two-tier pay structure to preserve jobs.  

In part because the watershed event covered 70,000+ employees, it served as model for subsequent negotiations: Contracts covering fewer employees with major chains in the Midwest and elsewhere were renegotiated with less fanfare. Still, workers covered by contracts in Denver and adjacent areas stayed in the news for 3+ months, culminating with national union management intervening after a strike vote was in progress to get parties back to the bargaining table with a federal mediator. 

The California strike opened up other areas of scrutiny, including union management inbreeding in various locals, union targeting of chain officials, questions about chain fiduciary responsibility in a long-term strike…and most important, how labor and management could so obstinately fail to unite against a common foe—in this non-union Wal-Mart’s entry into California with supercenters. 

Still, there were some bright spots: Management at several companies, including Whole Foods and—yes, Wal-Mart—acknowledged that different policies and practices in dealing with labor, the press and customers were critical for long-term survival and growth. These included rethinking health insurance, financial disclosures and employment guidelines and classifications.

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• American Diet & Food Safety

Few things attracted as much attention and changed as quickly as consensus about the optimal diet and American food safety during 2004. At the beginning of the year, all food purveyors—manufacturers and foodservice establishments—were racing to incorporate low/no-carbohydrate alternatives. By midyear, trend watchers were saying the preference had peaked and by year end inventories were stuffed into every corner of the supply chain—waiting to be scrapped. 

Diet still remained in the news as some countries banned trans fatty acids from foods and American policymakers took aim. The entire food pyramid came under review, and increasingly food producers persuaded legislators that they could self-regulate better and faster than national guidelines could be agreed upon.

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• Supermarket Shoppers 2005

Despite the fact that everyone has to eat, supermarkets remain in a battle to retain shoppers. In an effort to do so, increasingly supermarkets look to ways to segment and understand their shopper base beyond traditional age, family size and income demographics. 

FMI introduced nine new psychographic groupings for segmentation. Unfortunately, most are based on some disheartening truths: (1) most do not consider grocery shopping fun, (2) quick trips are the best trips and (3) saving money is paramount. That said—and since those truths run across all demographic groups—optimists propose some tactics to win back sales from other channels: (1) Be large-family-friendly (think bigger shopping carts, play areas, etc). (2) Speak to shoppers other than the female head of household (teens, men, etc.). (3) Play both sides of the family dinner opportunity (cook at home/takeout). (4) Focus on the growing ethnic population and their preferences.

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Shopper States of Mind

Understanding Wal-Mart Shoppers

Appealing to Larger Families

Remember the shopping carts!

Winning back channel defectors

Tracking Shoppers in Stores

NonTraditional Selling To Teens

Changing Dining Habits: Takeout rules!

Marketing Lesson: Hispanics: Numbers and beyond, Cultural phenomena, How a dwindling majority copes

How to Win Buyers

Strategy: Eat & Spend ... Anytime

Ways to Attract Shoppers: Play areas, Being more male-friendly, Mothers with impatient kids

The Changing Customer: As income rises, pleasures less tangible, In-stock expectations: Blame Wal-Mart, Logic guides smart organic shoppers

Tracking Consumers

Segmenting seniors to predict behavior

Multitasking while eating

Everchanging Shoppers: Men in stores and malls more, Family dinners rebound, Capturing More Supermarket Sales

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• Annual Industry Reviews 2005

Industry tallies continue to show that concentration is increasing among the top operators, despite increasing numbers of stores. The big change this year is that in addition to the global focus of the pure numbers, financial and industry analysts increasingly focus on the global nature of grocery retailing. 

Supermarkets continue to be well-represented on lists of largest privately held companies, despite continued sales of these companies to publicly traded chains.

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• Banking & Financial Services

As supermarkets look to squeeze out every penny, they are increasingly considering multiple avenues: (1) Some no longer accept shopper checks for payment because of processing charges. (2) Some are issuing proprietary cards good for charging elsewhere and generating loyalty points. Starbucks was the first with a debit/cash card for coffee and credit card in one. (3) Some are installing kiosks for additional services, including money orders, cashing pay checks and wiring funds.  

Wal-Mart continues to pursue full service banking—a move that could deliver an enormous advantage in transaction processing. Those who look more than a year ahead talk about RFID for payments to further speed checkout and satisfy customers’ desires to carry less cash everywhere.

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• Branding, Private Label & Advertising 2005

As consumers become better informed, increasingly value-conscious and more environmentally and politically concerned, brands and private labels and their advertising come under the microscope. 

Always striving for a point of differentiation, national brands faced controversy about whether their advertising actually works, whether line extensions are new enough to be considered innovation and the cruel reality that if a product is not #1 or #2 in its category, it may not help the company after all. 

Private label and store brands again posted gains. Retailers are increasingly applying their learning, having watched manufacturers market for years. Closest to shoppers, retailers move quickly into opportunity areas—most recently into store-branded perishables, where margins are high.

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• Trends & Strategies 2005

As channels blur and the race for efficiency intensifies, the nature of business is changing: Enter the possibility of monopsony in the food business. So far, competitive concentration has been driving pricing down, but at some point the equilibrium could shift. Interestingly in the drive for efficiency, real estate is becoming a focus, both because urban areas offer such customer concentration and because outlying areas can be cheap to operate in. Also, big boxes are moving into generation two. 

Still, basic business strategies abound: Retailers worldwide have developed unique features worth adapting. Six Sigma, once the standard for manufacturing companies, is spreading to retailing, and pricing analysis remains critical.

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• Supermarket Technology 2005

In 2004, supermarket industry players focused on RFID (radio frequency identification). This singlemindedness began because of Wal-Mart’s (now the largest supermarket operator in the US) edict that its top 100 suppliers would have to ship cases and pallets so identified by January 2005. The upshot was that by year-end, other major retailers including Target and Albertsons had also announced plans…and Dallas distribution centers became the focus of early efforts.  

All the publicity fueled privacy concerns, so many retailers reiterated their slow adoption of the technology, saying there was little or no interest in item-level RFID notification near-term. By year-end, item-level RFID remained far off, but for economic reasons (prices were not dropping as fast as anticipated) and because the Dallas tests were not as seamless as had been hoped. 

Other technology topics during the year: biometrics and the adoption of Check 21 eliminating paper check processing and speeding checkout.

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• Formats & Store Design

Supermarketers continued to experiment with smaller and larger format variations. Gas pumps became increasingly common in corners of parking lots…often with C-stores nearby. Retailers without major drug or general merchandise assortments added them. Albertsons concluded that combination stores would be its best defense against Wal-Mart’s impending arrival in California. Other chains tried gourmet variations.

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• Legal & Regulatory Developments

 Everyone continues to await whether the sex discrimination suit against Wal-Mart  gets class action status. The discovery process made it clear that the magnitude of dollars and people involved is enormous. It also heightened sensitivity among other retailers and underscored that passivity was no longer acceptable management —especially in view of earlier settlements by leading industry players. 

The federal government found plenty of time to irk manufacturers and retailers alike with high-cost potential legislation designed for ‘consumer protection and enlightenment.’ The bills included Country of Origin Labeling, trans fats  labeling guidelines and food serving size on labels. 

Regulators also took a closer look at accounting  transparency after the Ahold  scandal…and of course, slotting fees.

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• Supermarket Consolidation and Globalization 2004

Consolidation and globalization in the supermarket industry extended past mergers and acquisitions during 2003. In the food manufacturing industry, since 2000 sales for the top ten food and beverage manufacturers have grown by 16%. With the supermarket industry, acquisitions were geographically confined, due to declining performance of the major chains, which made so many acquisitions in past years. Evidence of this is A&P’s trimmed store count and Supervalu’s exit from the Denver market. Two companies long on the selling block were removed when no acceptable bids were received: Marks& Spencer’s Kings in NJ and Safeway’s Dominick’s in Chicago. 

Growing concentration was obvious elsewhere: Four companies now control 60% of pork production in the US; the two data collection companies in the industry are locked in a lawsuit and no longer report sales from Wal-Mart—a growing factor; competitors in Mexico and Canada are forming buying groups to improve efficiency and there is a backlash against chains in Britain.  

Perhaps the single most telling evidence of industry consolidation is the evolution of the FMI Exposition each May. The trade group—which now includes the formerly separate food wholesalers association—is now acting as landlord/host to other trade associations at the May event. Attendance has been steadily declining among both exhibitors and attendees, as remaining larger companies demand headquarters visits.

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