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11/01/2013

To Optimize Growth, Grocery Retailers Explore Digital Footprints

Consumer demand for high-quality food and very low prices has driven sales growth in recent years, but optimizing growth over the long haul will require a serious dive into big data and e-commerce, analysts say.

"Companies have got to be progressive in offering value to their customers, and that means partnering with all of their retailers via social media in order to sell the maximum amount of product," says Dexter Manning, leader of Grant Thornton's Food and Beverage practice, commenting on a 2013 Grant Thornton industry study.

The emphasis is a shift away from manufacturers' focus on the supply chain, he notes, which was "how to take cost out of the system in order to maximize profit, and have the lowest possible cost at retail."

"That's no longer the mantra. Now it is the 'demand chain,'" he says.

"In general, when the recession hit, people became very conscious of their dollars," Manning says. After the financial crisis in 2008, for example, private-label products experienced a tremendous growth spurt.

Grant Thornton's food and beverage study, conducted last summer, found 56 percent of food and beverage organizations reported generating sales from private-label products, with 14 percent earning a majority of their sales from private labels.

But sales also were driven by expansion into new markets and new store formats, says Michael Forhez, director of the consumer products and retail practice at CSC: "Expanding formats were designed to capture a greater share of the customer's wallet." Today's formats and channels are "blurring," Forhez says, citing as an example the now-common format where pharmacies sell groceries, and grocery stores have pharmacies.

In addition, "when the biggest of the big boxes made clear in the mid-'90s they were going after grocery, we saw the ultimate swing to consolidation, with wave after wave of acquisitions," Forhez says.

"But acquiring your competitors for economies of scale or to outflank them will only take our industry just so far," he says. "What is now called for is a degree of inventiveness driven by technology that just did not exist in those humble days of the corner grocery."



"Traditional grocery stores are under attack like never before. The space is being revolutionized by technology."

–Dexter Manning,

Grant Thornton


"Traditional grocery stores are under attack like never before," says Grant Thornton's Manning. "The space is being revolutionized by technology."

Big Data Goes Mainstream

With the bar raised by e-commerce, the key to identifying future opportunities is to understand technology, data analytics and predictive consumer intelligence, analysts say.

"Already, such new- and old-age giants including Amazon, Nordstrom, Kroger and Tesco are moving aggressively in this direction," Forhez says.

According to the Grant Thornton study, 78 percent of food and beverage executives view their company websites as the top method of attracting and/or retaining customers. Many also said they use social media and other digital tools for brand awareness and loyalty.

In addition, more than three-quarters of the executives surveyed reported their companies will increase spending on equipment, new product development and information technology in the next 12 months.

Currently, "about 1 percent to 2 percent of grocery sales are online," says Morningstar equity analyst Kenneth Perkins. "This could change over the next five to 10 years as consumer habits change."

Manning says there is no single answer to the question of how grocery retailers can optimize growth. "You have to understand what value you can bring to the market," he says. "You cannot compete with Walmart on prices" given their scale, he says. "And Amazon is offering the convenience factor." So grocery retailers "have to offer value."

"The question to ask is, 'Why would a consumer buy baby diapers from me?'" he says. To answer that, grocery retailers have to understand their consumers better than before, and to realize every market is different.

"It all comes back to Big Data," Manning adds, referring to the term describing a massive quantity of both structured and unstructured data.

"Technology allows us to do tech marketing," Manning notes. To that end, "I can't think of anything bigger than social media," he says.

"The great news is that social media is a 'low hurdle,' " Manning adds. "Unlike big TV or magazine campaigns, it's a fraction of the cost. And retailers are able to reach a subset of consumers."

Offerings inside a virtual world are well beyond the days of "frequent shopper or loyalty programs," Forhez says. Advanced analytics, coupled with Big Data, can "determine what we need–and might want–even before we know it."

Online clicks, in-store visits

Morningstar's Perkins says, "The best retailers find ways to use e-commerce to drive people back into their stores."

While many "smaller guys don't have the methodology" to track consumers' every click, he says most of the players are experimenting with various delivery options, or customer pick-up options for online purchases.

"Click and collect" is one combination commerce model that is very successful in the UK, Perkins says. Consumers order groceries online and pick up the bagged purchases at a store near their home. Typically, in the UK, shoppers also will go in and purchase things that are not on their list, Perkins notes.


"If it feels like you're getting a better experience, or that the retailer 'gets you,' customers spend more money."

–Kenneth Perkins,

Morningstar


"If it feels like you're getting a better experience, or that the retailer 'gets you,' customers spend more money," Perkins said.

"Tesco is the clear leader" with click-and-collect in the UK, Perkins says. "They're getting the allotments right. The trick is managing the logistics," particularly with perishables, he says.

Tesco is "good at targeting customer analytics," Perkins says. The company uses a subsidiary, dunnhumby, which also works with retailers and brands worldwide.

In a release, Tesco says dunnhumby's insights "help us stock the right products, optimize prices, run relevant promotions and communicate personalized offers for customers across all contact channels."

Kroger also uses dunnhumby for consumer intelligence in a joint venture.

In general, Perkins says, "there haven't been too many companies that have been built out on that click-and-collect model (in the U.S.), apart from Peapod." The UK's geographical makeup comprises a greater population density, Perkins notes. "The question is, will it work in rural America?"

But he adds that Walmart is testing an e-grocery initiative with pickups at more convenient, smaller stores in urban areas. In certain markets, Walmart is augmenting its traditional structures of big-box stores on the outskirts of cities with smaller, e-commerce-linked stores. Perkins says the strategy competes with Dollar General and other discount retailers with stores in urban neighborhoods and strip malls.

Fine-tuning customer outreach

Grocery chains clearly are being more strategic, Manning says. More are investing in data systems and are able to make cultural and regional generalizations.

"When you are looking for solutions, they are lifestyle solutions," Manning says.

To add shopper value, grocery retailers have to offer something different, like bringing guest chefs into the store, or bringing in a sommelier to sample wine every week, Manning says. The goal is to combine entertainment and the retail experience.

In addition, traceability, or sourcing of food, also is important to many shoppers, Manning says. "Locally grown is very popular and offers a way to compete versus online retailers."

Millennials are "very big on sustainability and cause" marketing, Manning says. That strategy emphasizes "feel-good" products like those benefitting the Susan G. Komen Foundation to fight breast cancer.

Older consumers are more responsive to health-oriented products, which has helped grow niche markets. For example, the Grant Thornton survey found the U.S. gluten-free market has grown to more than $4 billion, with a compound annual growth rate of 28 percent from 2008 to 2012.

The study also points to another transformation in the industry: Consumers use smartphones and tablets to find product information while they shop.

An estimated 61 percent of Millennials and 58 percent of 36- to 65-year-olds have used smartphones while they shopped, according to a Sprint "Mobile Moment of Truth Survey" conducted in 2012. Smartphones are used in stores to compare prices, find coupons, make lists and research products.

That trend is being mined and made available by a growing number of companies. Premise, for example, is a small company that created a smartphone application now used by 700 people in 25 developing countries, according to a November New York Times report.

Premise staffers take pictures of food and other goods in public markets, then analyze photos of the prices and the placement of those everyday items. The data is compiled into an index to sell to companies "who are hungry for insightful data," the New York Times reported.

Forhez says the future of retailing will be no less than "commerce at the speed of thought."


Grocery retailers will move "from an exclusively ground-based game to the addition of a virtual-based one where the Internet, mobility, social media and e-commerce converge to create a 24/7 world of instantaneous information and transactional enablement."

–Michael Forhez,

CSC


"The next big wave," Forhez says, "will fundamentally shift the axis of the store as we now know it." Grocery retailers will move, he says, "from an exclusively ground-based game to the addition of a virtual-based one where the Internet, mobility, social media and e-commerce converge to create a 24/7 world of instantaneous information and transactional enablement."

Freelance writer Suzanne Cosgrove has served as real-estate editor for the Chicago Tribune and as the Chicago bureau chief for Market News International.