Advertisement
09/01/2015

Measuring Performance in a Changing Environment

The grocery and CPG retailing environment is changing rapidly, and the metrics that the industry uses to gauge its performance can be expected to evolve as well.

As retailers invest more in their fresh perimeter departments, roll out new, smaller formats, and experiment with e-commerce and click-and-collect offerings, they will need to place increasing focus on how they measure the success of these endeavors, according to industry analysts.

"We are in an age of disruption of retail," says Thom Blischok, chief retail strategist at PwC’s Strategy&. "So we would expect a pretty significant change in the metrics retailers will use to evaluate their business going forward."

As retailers test new formats and new ways of doing business, such as click-and-collect, they will need to do so on a "fail fast, fail cheap" basis, he says. They need to be able to validate those tests quickly with new benchmarking tools that might differ from typical performance analysis.

TRIPS AND BASKETS

One set of metrics retailers have been looking at differently lately has been the measurement of trips, traffic and basket composition. As shopper behavior has evolved to include fewer stock-up trips and more fill-in shopping occasions spread out across multiple banners and formats, retailers are looking at information that reveals how shoppers are using their stores.

"Am I losing more of the weekly stock-up trips? Are the stock-trips changing? Am I seeing a rapid increase in fill-in trips? One of the new metrics is looking at how trips are developing within a given store," Blischok says.


"One of the new metrics is looking at how trips are developing within a given store."

–THOM BLISCHOK,

PwC’s Strategy&


A related metric is the basket composition, he says–how much of the basket includes core grocery essentials, versus the number of specialized or add-on items in the basket.

For example, Blischok says, retailers are beginning to look beyond the traditional measurement of basket sales by category and are instead measuring together as a group products that serve a particular need for the customer, such as "better living" products, which could include natural and organic items from multiple categories along with health-and-wellness related items.

"There are going to be a whole series of metrics coming out about, not traditional category sales, but lifestyle sales," he says. "It would be great for a retailer to be able to say that 20 percent of their basket is healthier living products, or 40 percent is related to health and wellness shoppers."

Core, overall trends in trip counts and basket sizes also remain important metrics for grocery retailers, notes Tom Compernolle, principal at Deloitte Consulting.

"If your traffic is falling, that's probably more alarming than if your transaction size is falling," he says. "You can always promote a new thing, or change the experience to get that basket back up. But if you lose a customer, how are you going to get them back? Are they gone for good?"

FRESH FOCUS

As grocery and other CPG retailers continue to ramp up their offerings in fresh and prepared foods, they will be paying closer attention to the performance of those departments relative to the rest of the store. Retailers have long measured their performance by department, but Blischok says he believes there is "heightened awareness" around this area because of investments to drive perimeter sales.

Fresh sales have been increasing as a percentage of total store sales across both perishable-focused formats and traditional supermarkets, according to Securities and Exchange Commission filings from some of the publicly held operators.

At Whole Foods, for example, perishable sales as a percentage of total sales have been increasing steadily, from 65.9 percent in fiscal 2012, to 66.2 percent in fiscal 2013, to 66.8 percent in fiscal 2014.

Traditional operators have seen similar increases, albeit from a much smaller base. Weis Markets, for example, saw its perishables increase as a percentage of total stores sales as well during that time frame, rising from 28.1 percent in fiscal 2012, to 28.7 percent in fiscal 2013, to 29.0 percent in fiscal 2014.

With that growth in fresh volume comes the need for a heightened focus on some of the metrics that are critical to the success of those departments, such as shrink and labor costs.



"For any format with a high percentage of perishables, that shrink number becomes more important to the chain."

–TOM COMPERNOLLE,

Deloitte


"For any format with a high percentage of perishables, that shrink number becomes more important to the chain," says Compernolle of Deloitte.

Salad bars and hot-food bars–a staple of Whole Foods' offering that many traditional operators are seeking to emulate–in particular pose challenges around production volumes and labor.

"There's a certain irreducible minimum sales volume needed to make money in those areas," says Compernolle, citing additional costs for both inventory and labor. "If you are not meeting that minimum [in sales], you can very quickly realize you are not making money and you need to get out of that business."

While labor costs are higher in perimeter departments, bigger profit margins can compensate, he explains. Still, Compernolle says, retailers can track the productivity of each of their perimeter offerings by monitoring sales per labor hour by department.

"That never goes away as a major measure of productivity," he says.

E-COMMERCE METRICS

As consumers increasingly shift their purchases online, either for home delivery or for pickup via models such as click-and-collect, Blischok says retailers will need to rethink how those sales are credited. Will a store get credit for an online sale that is delivered from a warehouse to a customer who lives near a particular store, for example?

"Smart retailers are starting to think about this a little differently," he says. "What's starting to happen is that if items are sold online within the catchment area of a store, those items are being credited to that store. Whether it is purchased online and shipped to within 10 miles of that store, for example, or whether it is purchased online and shipped to that store."

Blischok says he thinks measuring online sales in that way is important because it reveals how much influence a particular banner has within the specific catchment area it serves.

"With all of the retail market fragmentation, it is becoming increasingly important how much influence your banner has in a local market," he says. "The closer a retailer can get to understanding the influence of their banner in the market locally, the more they can move away from traditional market measurement and begin to understand market influence."

As far as measuring the profitability of e-commerce operations, Compernolle of Deloitte notes that such ventures "are still in the entrepreneurial stage," where profits are seen as a long-term goal.

As these models are tested and rolled out, there are certain costs that retailers need to keep tabs on, he says.

"If you are using a store for picking," Compernolle asks, "how do you isolate the store labor that's involved in that part of the operation? That's critical."

E-commerce requires a different way of thinking about the traditional supermarket model, Compernolle points out.

"The big secret about supermarkets is that the shoppers do all the work," he says. "They walk through and do the picking, and they carry the stuff to checkout. To try to reverse that model is an expensive proposition."

NEW FORMATS

The trend toward opening smaller formats serving local communities also could lead to the creation of some new metrics, Blischok says. As retailers open more of these stores, with a smaller product assortment closely tailored to the needs of the local community, they will want to benchmark them against other stores that serve similar communities.

"To be effective as a retailer, you are going to have to understand your relevance to the community," he says.

Another key metric as retailers roll out smaller formats is sales per square foot, says Compernolle of Deloitte.

"This has always been important, but one of the reasons it's become more important now is that some retailers are getting into multiple formats," he says.

A retailer that opens an alternative format such as a fresh-focused box or a discount banner might gain market share in that area, but sales per square foot could suffer, which reflects a lesser return on investment.

Retailers considering any new-store development must do so on a market-by-market basis, notes Chuck Cerankosky, an analyst with Northcoast Research, Cleveland.

"The cost of the physical plant varies quite a bit state to state and city to city," he says. "You have to adjust sales and profit expectations based on the market. You might pay a multiple three, four or five times higher on the West Coast than in the Midwest."

OTHER FINANCIAL METRICS

In addition to traditional metrics such as comparable-store sales and EBITDA (earnings before interest, taxes, depreciation and amortization), other financial metrics that can provide insights into the health of a grocery/CPG retailer include calculations such as GMROI (gross margin return on inventory), which is used commonly by department stores and other types of retailers.

Although public supermarket companies don't report GMROI as a metric, it actually is at the heart of category management, says Andrew Wolf, an analyst with BB&T Capital markets.

"Retailers want to maximize gross margin dollars in any category, or any strategic sub-unit–a certain shelf in a store, for example," Wolf says. "GMROI is a window to how good their merchandising and pricing is, all at once."

GMROI can be calculated as gross margin rate times sales, divided by average inventory cost.

"For a lot of companies, when they are doing well, their inventory is hardly going up, but their gross profits are going up. Why? Because their inventory turns are going up," says Wolf.

"It's an incredibly powerful way to measure the effectiveness of a company's marketing," he says. "If you take that and same-store sales, you can probably get about 80 percent of a chain's health."

CONSOLIDATION METRICS

Retailers in acquisition mode have additional sets of metrics to consider, both in their own companies and in the entities being acquired. Consolidation forces retailers to think about a different set of measurement scorecards to gauge success.

In an acquisition, new metrics emerge around the synergies that can be achieved through the combining of overhead and logistics.

"All of this is far easier said than done," Cerankosky notes. "Once you own the property, there's a lot of work that needs to be done, and it can take a lot of time. It can take longer than investors expect."

In particular, the administrative component of SG&A expenses–selling, general and administrative costs–are the target of cost reduction in a merger, notes Compernolle of Deloitte.

Overall, consolidation should boost retailer performance through capacity reduction via store closures, he says.

"It ends up taking stores out of the market, leaving more selling volume per store that's out there," Compernolle says.