How grocers can learn from the UK as the industry undergoes a massive structural shift
Anush Viswanathan is an account manager at Ugam, a global data and analytics company. To learn more about the application of data and analytics to make confident business decisions, visit www.ugamsolutions.com
The grocery industry is at the cusp of a massive structural shift. From German low-cost grocery chain Aldi expanding its U.S. footprint to Amazon’s recent price cuts at Whole Foods to Walmart’s response in kind, prices are dropping everywhere. At the same time, online grocery is growing rapidly. All this has traditional grocery stores fearful about what it means for the future of their business.
This is a once-in-a-generation shift driven by several key trends happening at the same time. Together, they are bringing a seismic effect to the industry.
One of those trends involves discount supermarkets. Aldi, Dollar Tree and Dollar General added more stores in 2016 than all other supermarkets combined. Lidl's expansion plans on the East Coast surpass all new store openings by other supermarkets in the same region combined. Aldi already has 1,600 stores in the U.S. and plans are to go to 2,500 stores by 2022. If they do that, they will be just behind Walmart and Kroger.
Another set of trends involves changing consumer behavior. Lifestyle changes — including always-on digital connectivity, greater nutritional awareness and scarcity of time — have led to the steady dismantling of the weekly shopping affair for families. Customers want to shop smaller but more often, flocking to services like Instacart that make it easy to do so.
Online grocery is growing by leaps and bounds. Conservative forecasts point to online being 20% of the market by 2025. Amazon's acquisition of Whole Foods will give them a combination of cutting-edge delivery capabilities and fresh grocery integrated into their supply chain — a formula that will be very hard to crack by other retailers.
Then there are prices. Amazon’s much-publicized Whole Foods price cuts fell in the range of 20% to 40%. Walmart has invested billions in price cuts, while Aldi plans to be 20% cheaper than Walmart, and Lidl has promised to come at a 50% cheaper price than the current market. That is massive savings for the customer and massive losses for the supermarket — especially tough if you are operating at wafer-thin margins. Kroger recently announced a profit drop of 7% in Q2 2017, driven largely by price cuts.
U.S. food price deflation is making things worse. Last quarter improved, but with better crop production in the U.S. (except corn), lower gas prices and cutthroat competition, the deflationary trend appears ready to pick back up, hitting supermarket profits hard.
What many may not realize is these trends are not new. The U.S. has faced some of these before. However, today they are combining to create an inflection point that will sound familiar to a lot of U.K. supermarkets.
Europe’s supermarket battle
Until 2011, the top four supermarkets in the U.K. controlled the industry with a market share of 76%. No one challenged this dominance for more than three decades. But over the next five years, those leaders lost 14 percent and continue to drop.
This might not seem that abrupt, but put it in the context of grocery. Grocery is a comparatively mundane industry. There is no Steve Jobs, no romanticism of disruption or new features. Even Amazon was struggling to figure it out. Food is an essential for life. People may drool over food, but not grocery. For such an industry, this was the Blackberry moment for the supermarkets. Are they still relevant? What hit them?
One of the disruptive forces involved two German retailers that came in and offered extremely low prices for a lesser number of items at excellent quality. Coupled with the recession and families reducing spending, this hit a sweet spot. The discounters found that they could undercut their bigger rivals by stocking fewer high-quality ranges.
First, the big four supermarkets ignored them. Then they tried to differentiate. When these attempts were unsuccessful, they promised savings through coupons and loyalty programs and lost even more revenue. The stores finally invested in price cuts, salvaging some revenue, but still collectively lost more than 30 percent of their bottom-line.
So, it was a familiar sounding set of circumstances. An industry dominated by a few supermarkets had shifted structurally to make way for discount and convenience. An economic downturn had led families to look for the lowest price and food prices deflated. Consumers eventually ended up winners as they saw their shopping bills go down, while supermarkets experienced major losses.
Meanwhile, as this was playing out, online delivery was growing. Ocado, a similar service to Instacart, was the sole shining light in an otherwise grim landscape.
What we can learn
These trends are not market-specific nuances. They are a broader structural shift in some of the major consumer markets in the world. U.S. supermarkets can look across the Atlantic and learn some valuable lessons.
For one, price cuts in the form of coupons and basket-level discounts didn’t work. Instant savings proved to be more powerful than coupons with a promise of savings later. Basic human tendency to crave instant gratification cannot be matched by more effort-intensive savings through redemption. Offering a low price in a simple form is the way to go.
Additionally, the market strongly established that having fresh products should not come at the cost of high prices. Both are strongly intertwined with each other, but one need not be at the cost of the other. The U.S. marketplace is seeing this play out already with Amazon reducing prices on Whole Foods’ products. It’s not a great strategy to be the costliest premium player anymore.
Tangentially, loyalty for supermarkets is dead. People have been saying this for a while now, but recent events have made amply clear that price is more important than loyalty.
We also learned that promotions must be clear and simple. Aldi and Lidl were ruthless in establishing this transparency. Customers are being hit with varied messages today, and this puts a premium on clarity in marketing.
Guiding principles to succeed
American grocers must master their own value equation. Customers’ definition of value in grocery has changed. It’s become more nuanced and complex. It’s not just about getting the lowest price or getting their order quicker, or even flexibility to buy in diverse ways or the quality of food. It’s all of the above. Retailers that bring these things together in a simple and meaningful way will become successful. They should know who their customers are and what value means for them.
One successful case study is Waitrose. They found that their target customers were mostly affluent and tended to have less time to prepare food. However, they also wanted to enjoy their meals. These insights led to a value equation that comprised high quality, easily prepared ingredients and affordable cost. This drove their assortment strategy to include ready-to-go meals, meal kits, expansion of deli and more premium bakeries. Lowest price was not part of the value equation. Therefore, the need was to be affordable, but not to be the lowest price in the market. This is what worked for Waitrose, but each retailer needs to find their own value equation. This requires focus on what your customers want.
Grocers also want to avoid becoming overdependent on price, assortment or quality as a lever to provide value to customers. Rather, they must use all their levers together in an intelligent way to move the needle. Pricing executives’ role today is to find a way to be the lowest possible on certain SKUs without hurting profits. But the next-generation supermarket pricing executive is someone who can come up with a strategy that is relevant for the retailer’s value equation. They must then figure out the means to execute the strategy effectively, be it by having more competitive intelligence or having dynamic in-store pricing. This requires them to understand the other parts of the equation and how those fit into price as levers.
Connecting all those dots is enabled by data and analytics. The world is moving to a data economy and the grocery industry is no different. Supermarkets should be greedy in collecting data that will allow them to discover their value equation. Being an in-store dominant player does put them at a disadvantage in this area compared to the online dominant retailer.
However, all retailers should strive to collect more data, irrespective of channel. They must be careful, though, since a constant flow of information, if not controlled well, can lead to scarcity of insight. Supermarkets should have a systematic approach in how they traverse the path from data to insight.