Missing Hte 1 Percent Solution

Traditional grocers need to better establish an identity to recapture losses to alternate channels.

The fixture of American grocery — the traditional supermarket — reached its zenith in terms of market share in the late 1980s, but since then a combination of pressures has resulted in its market share slowly but steadily eroding at a rate of 1 percent or more per year.

The advent of warehouse clubs like Costco, the widespread success of mass merchants like Walmart, the growing credibility and acceptance of discount stores like WinCo, and specialty chains ranging from Whole Foods Market to Northgate Gonzalez have all eaten away at the traditional's share. And now online grocery shopping shows real signs of catching on.

The nontraditional's share of the market — more than 20 percent in 2009, according to a well-known industry trade publication — amounts to well above $325 billion. According to the Department of Agriculture's Economic Research Service, inflation-adjusted sales growth for grocery stores was virtually flat from 1999 to 2009.

That's good for customers, but not so good for traditional grocers.

Why have the once "alternate channels" been so successful? There are many reasons, and for most, conclusions have to begin with price: Walmart and WinCo, for example, routinely sell the same items as their traditional counterparts at significantly lower everyday prices. A family that switches over can save $50 per week — a staggering $2,500 per year.

These "discounters" have steadily improved the shopping environment and breadth, so you don't have to compromise on selection and experience to save a bundle. Surely, economic conditions today provide extra incentive to be thrifty.

It's not just price, though: Specialty retailers are doing an increasingly adept job of delivering a quality shopping experience. Chains like Northgate Gonzalez don't segment "Hispanic foods" in an aisle; their entire brands are built to embrace the culture from the ground up.

Whole Foods might just be the first cool place to grocery shop, with its packaged medley of healthy and gourmet foods wrapped in a stylish market setting. Retailers can deliver a quality experience through a solid understanding of who they are. Many traditional chains, bent on a prototype of "everything everywhere," inevitably create an average brand that, in comparison, can seem bland, unfocused and costly.

The share battle hasn't been without major casualties. Perhaps the highest-profile struggle is represented by Supervalu, which was broken up after several straight quarters of comparative-store declines and quarterly losses. The sale to Ceberus will hopefully give the stores a fresh start. A focus on "sales and cash" could suggest sharpening price and getting more productive with inventory, the empowerment of divisions perhaps to become more agile and market-centric. Yet amid the turmoil, there have been high-profile success stories. So what works?

No More 'One Size Fits All'

Traditional grocers aren't without their success stories. H-E-B thrives in San Antonio — it's no coincidence it covers the market with multiple formats, cluster strategies, a local focus and varying scales that allow the grocer to operate just

about anywhere. Publix thrives in Florida by keeping to scale through adept store-locating practices and focusing on core customers. Safeway has been highly successful with its Lifestyle stores fitted to the right markets, and by applying various localizing techniques.

The lessons: Be focused, be efficient. What does this mean for traditional grocers?

The first step is to invert the notion of prototypes. Instead of celebrating absolute consistency across stores, define success in terms of the differences in each locality. This isn't about redesigning everything, but instead how you adapt the standard. And these celebrated differences need to be based on facts.

It's about analytics: an approach to formats and clustering that incorporates consumer demand, planning assortments that target local opportunities, and wrapping these in floor plans and planograms that are optimized for the store. Optimization is crucial because it fundamentally recognizes the limits of space and resource. Without optimization, you don't factually resolve the trade-offs, and you're back to guesswork and opinion-oriented adjustments, or, worse, you build large stores and try to jam everything in them. Meaning: You're shooting arrows in the dark. You're often going to be wrong. You'll lose.

Next, with the organization shifted from a production-centric "prototype" approach to a local, consumer-centric one, you can begin to design programs that are both more effective for consumers and more efficient for operators. Simply clustering categories, so that there's a slight but important difference in the mix of assortment, presentation, pricing, promotion, service, etc., will create a program that both sells better and incorporates fewer resources.

Designing assortments that are objective-driven and space-aware will produce ranges that fit into spaces efficiently, yet clearly target opportunity. Planograms that adjust strategy for individual store demand may not change every facing, but the facings that are adjusted add up to reduced out-of-stocks and less excess inventory, not to mention the potential to sell more. In other words, what you formerly aimed to do at the regional or chain-wide level, you need to do at the local level.

Being effective is intrinsically efficient when you do it right — when you select the tools from the outset that are designed to localize and optimize. You get a more effective assortment, efficient replenishment on shelf and less waste. In other words, you free up capital for investment in price, service or strategic breadth.

The New Chic

Since the Great Recession started four years ago, the new reality is that U.S. consumers have become more price-focused, or, as my CEO said recently, "Being price-conscious is more chic than it's ever been."

Surveys suggest that consumer frugality is here to stay. In 2010, the Strategic Resource Group predicted that consumer spending could remain weak for four to eight years and lead to a "downturn generation" that learns to scrimp and save permanently.

Therefore, part of the localization theme has to include a renewed focus on efficiency to fund price cuts, but with an intelligent approach. There are traditional metrics for things like labor as a percent of sales and shrink, and organizations press to meet or beat these through a variety of methods. The hammer approach involves what we've seen recently within the market: "right-sizing"' store labor. But reducing labor without changing operations only reduces standards.

However, empowering stores with greater efficiency will result in improved labor productivity. In-store logistics and related inventory costs consume several percentage points of sales. Right-sizing capacity, inventory investments and rethinking ordering and restocking schedules can reduce cost without reducing standards. Simply put, fine-tune your system with the right ordering and space allocation so you achieve a high rate of "back door to retail floor" product flow. This kind of practical solution is far cheaper and can be implemented far more quickly than a wholesale supply chain re-engineering — and these latter efforts often don't improve store productivity, as they fail to address this crucial "last mile." Getting capacities right improves restocking and reduces excess inventory.

Now, the simple math: Inefficient restocking in-store costs about 50 cents per product per week. That's $26 per year, per store, per affected item. A recent Galleria study found thousands of such cases likely driving many millions of dollars in wasted labor per year — not to mention out-of-stocks, damages, warehouse space requirements and other examples of excess inventory. Resolving these reduces costs and improves the brand by delivering a better product assortment to customers.

Other challenges exist. Online shopping continues to grow at a much quicker pace than brick-and-mortar stores, and while its share today is small, it won't remain that way. Also, restaurants are responding to changing consumer preferences with menu choices and takeout options. Anyone that sells food is a competitor, and all should be watched.

Success is going to be about more than just being local, but rather being effectively local — giving you the sales and cost basis that allow for reinvestment into other aspects of brand that need attention: synchronizing the store and online presence, building excitement back in stores, energizing associates, reaching out to communities, and reinventing and renovating the store. All of these things are essential, but much more difficult to afford when you aren't maximizing sales with what you already have, when you're wasting labor on in-store inefficiencies, taking unnecessary markdowns and tying up capital in unproductive inventory.

There may be lots of obstacles in the way, but no one ever promised retailing in the most competitive sector was going to be easy. You could choose to carry on as you are today, but as Einstein famously said, "Insanity is doing the same thing over and over and expecting a different result."

Success is going to be about more than just being local, but rather being effectively local.

Invert the notion of prototypes. Instead of celebrating absolute consistency across stores, define success in terms of the differences in each locality.