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03/01/2014

2013's Challenges: Size, Smartphones, Security

Questions facing grocers and other CPG retailers in 2013 ranged from the eternal–How big should my store be? What should I sell?–to the distinctly modern–How do I protect against cyber-theft? How do I welcome cyber-shoppers?

Retail Leader asked experts to look at four of the biggest trends in CPG retailing today, review how they affected the industry in 2013, and predict what the likely next developments are.

1. FORMATS

How big do you think a grocery store should be?

It's a question that's a lot simpler to ask than to answer. Some of the major chains grappled with that issue in 2013, continuing to experiment with alternate size formats.

Walmart has been trying out alternatives to its Supercenters for years. It introduced Neighborhood Markets, at about 38,000 square feet, about five years ago, and is now up to about 300 stores. A newer experiment is Walmart Express, about 15,000 square feet, rolled out in 2011 and now up to about 20 locations. (By contrast, Walmart Supercenters average about 182,000 square feet.)

Walmart has stepped up its plans for Neighborhood Market in the light of disappointing sales growth in 2013. In a yearly forecast issued in late February, Walmart announced that it plans to add between 270 and 300 Neighborhood Markets this year, double the number it had previously planned.

In Columbus, Ohio, Kroger is testing a 7,500-square-foot alternative store called Turkey Hill Market, which falls between its regular stores, at about 67,000 square feet, and its Turkey Hill Minit Marts, a chain of 4,000-square-foot convenience stores. In July, Target Corp. is scheduled to open its smallest-ever store, a 20,000-square-foot Target-Express on the bottom floor of a complex being constructed near the University of Minnesota.

There are various motivations for grocers to try out smaller sizes. In urban locations, real estate often is too expensive to make superstores, with requisite parking, feasible. Many communities have zoning or other restrictions on store size. Smaller grocery stores have the potential to open up new markets, in city centers and elsewhere, to grocers that have reached growth plateaus in the suburbs.

But the biggest motivation for trying out alternate sizes is optimizing the customer experience. Many consumers want, or say they want, stores that are easier and faster to get into and out of.

"The number one driver of convenience is proximity," says Ben Ball, senior vice president of Dechert-Hampe & Co., a Northbrook, Ill., consulting firm. It's all about finding an economically viable way, and a locally acceptable way, of getting closer to consumers. In many cases, that means physical proximity to population centers or major transportation corridors.

On the other hand, finding portions of the United States that are underserved by food markets is not an easy proposition, says Nick Hodson, vice president with Booz & Co. and a former head of strategy for Safeway. Hodson says most of the country is saturated with grocery stores, using the Los Angeles area as an example.

"Frankly, if you look at a map of the L.A. basin and draw a one-mile disk around every supermarket, there's not a lot of uncovered ground," Hodson says. "There's a hell of a lot of supermarkets in this country."

It's also a challenge to determine how to stock a smaller store: which categories not to carry, and which SKUs to leave out from the categories that remain.

"Typically, both categories and SKUs are trimmed, but SKUs are trimmed most," says Jim Hertel, managing partner with Willard Bishop, a consultancy based in Barrington, Ill. "Reduced SKU counts can lessen space, in-store labor, and distribution expenses, and drive item-velocities (inventory turns) really high, all of which combines to make such stores really profitable. But you have to get the assortment right; there's less room for error when you have five items in a category compared to when you have 100."


"You have to get the assortment right. There's less room for error when you have five items in a category compared to when you have 100."

–JIM HERTEL,

Willard Bishop


Hodson isn't enthusiastic about the small-store concept as such. They're unable to offer the same selection as standard-size supermarkets, and usually can't compete on price, either. The basic problem is that economies of scale usually don't materialize.

"It's not as simple as saying, 'I had a 40,000-square-foot store doing $20 million a year. I'll have a 20,000-square-foot store, and if it does $10 million a year, I'll be fine.' No, you won't. You'll be completely underwater," he says. "Because there are a whole bunch of fixed costs, and a small store costs more to build per square foot."

It comes down to giving shoppers a reason to pass up a larger store in favor of an older one, Hodson says, and most of the time, they won't have a motive to do so. That was the basic reason, in his view, behind one of the more spectacular flameouts in the store-format battle: The abandonment by Tesco of its Fresh & Easy venture in the U.S. Fresh & Easy Neighborhood Market, a chain of more than 200 small-format stores in California and the Southwest that was unloaded by Tesco in a bankruptcy sale last fall after a never-profitable six-year run. Hodson said Tesco didn't realize that to be successful, Fresh & Easy would have to take away market share from conventional supermarkets.

"I don't want to pick a fight with Tesco, but my personal view is that's where they went wrong," he says. "They said, 'Do you like this store?' and consumers said yes, but they didn't really ask, 'Would you drive past another store that has more selection, more parking and probably lower prices, to get to it?'"

2. HEALTH AND WELLNESS

Healthy foods and upscale urban neighborhoods go together like arugula and heirloom tomatoes.

At least that's the conventional wisdom, based on the early history of chains like Whole Foods and Trader Joe's. But the locations Whole Foods has chosen for some of its new stores indicate that healthy, upscale groceries have fans everywhere.

Whole Foods opened its first Mississippi location, in Jackson, in early February. It opened stores in downtown Detroit and downtown Newark, N.J., last year, and one on New Orleans' Broad Street in early February. The New Orleans store was part of a $20 million downtown redevelopment project undertaken by a local nonprofit. Whole Foods also announced plans last year to open a location in Chicago's depressed Englewood neighborhood.

The reach into areas not normally associated with upscale food is helping fuel an aggressive growth strategy for Whole Foods overall. The company plans to open up to 38 stores in this fiscal year, which would expand it overall outlets by more than 10 percent.

Whole Foods is able to go into depressed areas in part because it's getting strong incentives from local government to do so, says retail consultant David Livingston.


"If the city pays for your construction, pays for your security, rebates your property tax and lets you walk away if it doesn't work, well then, you might do it."

–DAVID LIVINGSTON,

DSL Research


"Are you going to sink millions of your own money into Detroit? No," Livingston says. "But if the city pays for your construction, pays for your security, rebates your property tax and lets you walk away if it doesn't work, well then, you might do it. That's a whole different thing than growth and demand." A little less than half of Whole Foods' cost for the midtown Detroit store came from state and local grants, plus the sale of tax credits tied to the project. The Englewood store got $10 million in tax increment financing, in a deal engineered by Chicago Mayor Rahm Emanuel.

But the proliferation of stores with a healthy/organic/natural theme is taking place all over the country. Sprouts Farmers Market has aggressive expansion plans beyond its Western base, with moves into Kansas, Atlanta and other Southern and Midwestern states. Many of the shuttered Dominick's supermarkets in the Chicago area are being replaced by upscale grocers like Mariano's and Mrs. Green's Natural Market.

That plays into a broader dynamic: Increasing interest in healthier food across the population as a whole.

Consumption of organic food has been steadily increasing in the United States, with the Organic Trade Association estimating that eight out of ten parents purchase at least some organic food regularly. A report from TechSci Research predicts that the organic food market will grow 14 percent a year during the next four years. It's part of a general trend toward healthier eating that has seen Americans consuming 78 fewer calories per day, 7.9 percent less cholesterol and 7.5 percent more fiber in the period between 2005 and 2010, according to a U.S. Department of Agriculture study.

Health is not just a factor with organic or niche foods. America's largest food processors have reduced calorie counts in their mainstream products by an average of 78 per day per person, for a total of more than 6 trillion calories cut collectively between 200 and 2012, according a study by the Robert Wood Johnson Foundation.

Stores that specialize in healthy food are capitalizing with various forms of outreach to consumers and the wider community. Whole Foods, for instance, bought a separate building next to its Detroit store as a location for a nutrition center with cooking and other classes. Whole Foods also has a program for lending money to local farmers, food artisans and other local suppliers; it has pledged $25 million of its own money to the effort so far. And in February, Whole Foods announced that it has created Whole Cities Foundation, a nonprofit organization dedicated to supporting efforts to increase access to nutritious, fresh food and health education in underserved communities.

3. OMNICHANNEL

When it comes to long-term strategy for customer service, perhaps the Holy Grail for grocery is the omnichannel experience. It's a fluid concept, but it can be basically defined as offering a seamless customer experience across all available portals: in-store or online, on desktops, smartphones or other devices. The goal is to give shoppers a consistent experience no matter how they interact with the retailer.

The motivation is high. Shoppers are increasingly adding online components to their shopping. According to a recent study by NPD Group, almost 75 percent of smartphone owners use their devices as part of their overall shopping experience, either before or during their trip to the actual store. Another study found that almost all consumers (97 percent) use some form of online media to research products or services in their local area. While traditional print coupons still dominate, online coupons have been outstripping print coupons in growth rates for years.

Given that omnichannel is an amorphous concept, and that there are a lot of aspects to online shopping, it's not surprising that assessments differ on how far along grocery and other CPG retailing is on the scale.


"In general, no grocer is very far along in omnichannel. But we are starting to see some signs of progress and innovation."

–KATE WENDT,

Wells Fargo


"In general, no grocer is very far along in omnichannel," says Kate Wendt, an analyst in grocery and specialty retail for Wells Fargo. "But we are starting to see some signs of progress and innovation." She mentioned new apps by major players like Kroger, Trader Joe's and Whole Foods that generate personalized recipes, ads and coupons, as well as proliferating tests of online delivery and click-and-collect setups.

Those developments, and others, lead John Caron, VP of marketing at Catalina, to say of grocers and omnichannel, "They're way out ahead. That's not what you would expect." Catalina, a personalized digital media company that supplies shoppers with ads and coupons, has for years served as the vendor for an app that lets shoppers at Stop & Shop and Giant Landover, banners of Ahold USA, scan their groceries with their own phones and use the phone to pay. Caron noted that ShopRite, another East Coast chain, recently announced a test of a similar program in eight of its stores.

Grocery has some unique challenges when it comes to omnichannel. There are a lot more products in grocery stores than in most other retail outlets, and shoppers come in much more often. That adds up to a lot of data that has to be managed quickly.

"You've got to be real-time," says John Bastone, Catalina's executive director for retail product marketing. "When they walk into the store, you've got to present added value and relevance in order to move the needle in their shopping behavior."

And of course, there's the nature of food, especially perishable food. Not only does it have to be moved around quickly, but there's a bigger range of quality–which leads to trust issues for online purchasing.

Wendt believes that, when it comes to online ordering, this is where established grocers–especially ones like Whole Foods that have developed a reputation for high quality–can have a built-in advantage.

"Even with click-and-collect, you're still having somebody pick out your head of lettuce or your piece of meat," Wendt says. "There's less of a chance of the quality being less than you would expect with Whole Foods than there might be with some of the other traditional grocers."

Online ordering is the ultimate step in the omnichannel path. For grocers who don't want the daunting task of setting up home delivery, click-and-collect is the logical alternative.

"Once you get past mobile [devices], 'buy online and pick up in store' seems like a logical first step before you would consider full delivery," Wendt says.