Points of Sale
Are you optimistic about the way things are going?
Not quite as much as a year ago, according to results of Progressive Grocer’s 83rd Annual Report of the Grocery Industry, which gauges the temperature of the nation’s retail food climate, courtesy of the direct input of retail executives charting the prevailing trends.
In 2015, just about half of the retail executives responding to our exclusive survey said they were more optimistic about the retail climate versus a year earlier, with about one-fifth expressing less optimism. This year, there was a fairly even three-way split among bad, good and indifferent attitudes regarding the retail food tempo.
The most trying factors singled out as weighing most heavily on our executive survey participants’ minds were perennial retail industry hot buttons: wages and benefits, data security, and price increases, all of which are taking a toll on retailers’ outlooks for the months ahead. The tepid mood also suggests that the competitive landscape shows no signs of leveling out as the omnichannel environment continues to evolve.
Conversely, this year’s results simultaneously depict an increasing focus on remaining relevant with more sophisticated customer relationship marketing tactics, greater emphasis on prepared foods, and more dedicated community outreach as key factors in making brands unique and loyalty-inspiring.
A closer look at these statistics — and many more — unfolds on the following pages, underscoring both the expected and unexpected changes unfolding across the industry. New to this year’s report is a more user-friendly, visually enhanced treatment of some of the hottest industry trends and issues, such as leading advertising, marketing and engagement tactics; most valuable merchandising schemes; most productive uses of capital investments; most effective ways grocers are connecting with consumers; and most impactful store departments and services.
Amid an active arena of mergers and acquisitions over the past year, grocery’s brick-and-mortar business is relatively flat — overall sales rose only 1.7 percent at supermarkets with sales of at least $2 million, with an overall net increase in store count of just less than 300.
Retail execs probed in this year’s study were also gradually picking up on ways to enhance the physical store with digital, from shopping apps to click-and-collect, both of which are essential to the future of traditional grocers, along with specialized services designed to meet shopper needs.
It’s a trend that continues to expand with newer players like San Francisco-based Instacart, which is steadily expanding its delivery service into new markets, and traditional retailer powerhouses like The Kroger Co., in Cincinnati, which is testing online ordering programs and its “endless aisle” offerings. Hybrid alliances are also popping up with smaller regional grocers, such as Seattle-based PCC Natural Markets, which had an existing alliance with Instacart, but took its digital offering one step further through a dual-delivery option including Amazon’s Prime Now one- or two-hour delivery service for PCC’s local, organic, sustainably sourced food.
Consequently, it’s understandable that grocery executives’ “cautious optimism” is growing even more guarded, as costs and regulations make delivering on brand promises more challenging in a cutthroat multichannel world.
BATTLING THE FORMIDABLE FOES
While the federal minimum wage debate has long been a hot button with supermarket executives, the issue has become especially thorny in the past 12 months amid a nationwide push to raise federal and state minimum wages, as well as hourly wage hikes recently implemented by some of the industry’s largest players. Following Bentonville, Ark.-based Wal-Mart Stores Inc.’s recent phased-in wage increases to $13.38 an hour for the average full-time hourly worker and $10.58 an hour for part-timers, Costco followed suit, raising minimum wages by $1.50. The Issaquah, Wash.-based club store retailer’s lowest hourly wages are now $13–$13.50 an hour, up from the previous $11.50–$12 an hour.
Despite the fact that most grocery stores pay their average hourly workers more than the federal $7.25 minimum, the looming threat of federally mandated higher wages finds many grocery executives deeply concerned about how such a change will affect their overall operations. Accordingly, wage costs (89.5) once again topped the hit parade of factors most expected to increase among this year’s panelists, paced closely at No. 2 by the ever-escalating price of benefits (86.7), both of which retain their rankings as top-of-mind concerns.
Aside from wages and benefits, other obstacles cited as posing major threats to operational stability include two of the most often discussed industry topics: competition (73.6) and technology spending (73.3). In terms of the latter, while low margins and high fixed costs are givens, the escalating level of competition that today’s food retailers are forced to contend with is undeniably unprecedented. During the past year, online and hard-line discount-format operators made marked gains, providing affirmation that the reshuffled landscape will become even more congested and complex going forward.
To that end, technology is paramount to driving growth and enhancing customer engagement for grocers. But it’s also costly, as evidenced by its fourth-ranked standing on the key operational-obstacles lineup. Capital costs and the complexity of technology outlays and upgrades reside as retailers’ foremost considerations, alongside related necessary investments in personnel, processes and procedures across nearly all aspects of their operations.
And though they’re managing many changes, the one constant that supermarket leaders can never escape is the age-old conundrum of retail prices (70.9), which ranked as the fifth most watch-worthy operational issue. Indeed, during a year of fairly tumultuous variations in key categories, it’s little wonder that retail price uncertainties were cited as an operational hindrance by this year’s panelists.
To wit: Lower retail prices for several items, including salad, orange juice, shredded cheddar cheese, ground chuck, sirloin tip roast, vegetable oil, white bread, and deli ham, posted slight decreases in the American Farm Bureau Federation’s (AFBF) Spring 2016 Picnic Marketbasket Survey, released as PG went to press with this issue. The informal survey shows that the total cost of 16 food items that can be used to prepare one or more meals was $53.28, down 59 cents, or about 1 percent, compared with the year-ago AFBF survey. Of the 16 items surveyed, 10 decreased and six increased in average price.
Egg prices are up sharply from the first quarter of 2015, due to the effect of the High Pathogenic Avian Influenza event last year, but are working their way back down as increasing production has started to catch up with demand. Retail beef prices also peaked in early 2015 at record high levels, but a combination of increasing beef production, weaker exports and lower competing meat prices has led to modest price declines since.
While deflation affected sales in several key categories, price declines offer a silver lining, with ripe opportunities for higher incremental and impulse purchases around the store, particularly in the all-important fresh food categories.
A contextual illustration of the same was discussed by Kroger EVP/CFO Mike Schlotman in the company’s recent fourth-quarter and fiscal year investors’ call. “There is a lot of speculation about inflation or deflation or disinflation,” Schlotman observed. “We believe a deeper dive is required when the operating environment has increased volatility. When you look at identical-supermarket sales, you should not come to the conclusion that less inflation is fundamentally a bad thing. In fact, if you look at our real growth in the fourth quarter — that is, identical-supermarket sales less inflation — this year’s fourth-quarter result was stronger than last year’s fourth quarter, when identical sales were over 6 percent.”
Noting that all but one department had positive same-store sales during Q4, with natural foods, deli and produce leading the way, Schlotman said that while meat sales were slightly negative, due to 5 percent deflation in the category, “the deflation has allowed retail prices to return to levels where more customers can re-enter the category or increase their purchases in the department. As a result of strong tonnage, the meat department had a great quarter, with strong FIFO [first-in/first-out] gross-profit dollar growth and a nice contribution to margin. This is what we often refer to as ‘good deflation.’”
Aside from the top five culprits discussed above, the familiar foes rounding out the list of growing operational issues include gross margins (64.7), capital expenditures (63.5), net profit (57.4), employee turnover (52.8) and energy/fuel costs (42.8).
In the grand scheme of the most effective tactics to capture shoppers’ attention, the tried and true tactics of in-store signage and, more recently, digital media, remain invaluable elements of helping engage and inform shoppers as they navigate the aisles. That’s why nearly two-thirds (62.7 percent) of 2016 Annual Report panelists ranked both traditional and digital POS as their most important consumer marketing/advertising strategies.
Meanwhile, in the present age of “e” and “m” everything, it’s no mystery that digital (42.6 percent) and mobile (35.8 percent) marketing are making inroads as top shopper engagement and educational strategies. Interestingly, however, the prevalence of newspaper inserts (42.4 percent), direct mail (32.4 percent) and newspaper ROP/print ads (29.9 percent) remain ingrained as steadfast marketing/advertising mainstays for food retailers.
To this point, reviewing the traditional paper circular at home or in the store factored as the top money-saving behavior among shopper panelists in Retail Feedback Group’s (RFG) most recent “U.S. Supermarket Experience Study.”
But Cheryl Black, CEO of Brisbane, Calif.-based You Technology, notes that e-coupons will become a more integral piece of retailers’ promotional mix. “Because of the security and flexibility that they offer, they will be used to provide the sharpest of price points to loyal consumers,” she says. “Retailers and CPGs can track, at a very granular level, what is happening with digital coupons.”
PERCENT OF RESPONDENTS RATING EACH STRATEGY AS EXTREMELY OR VERY IMPORTANT
In an era when folks have more options than ever about where to spend their food dollars — along with more ways to share and amplify their opinions of the same — showing customers love and admiration with more purposeful, impactful consumer engagement strategies has never been more critical.
The ease and increasing reliability of e-commerce and m-commerce mean that traditional grocery retailers must fight harder than ever to get shoppers into their stores. Why visit the local supermarket when products can be delivered at a time convenient to the customer? If the “chore” of grocery shopping is removed, that means more time for leisure activities. Brick-and-mortar retailers are fighting back by recognizing that they’re competing not just with other channels, but with other forms of entertainment as well. Their focus is increasingly turning to enhancing the in-store experience: a culmination of physical design, curated assortment and professional staffing.
PG’s Annual Report survey breaks out experience into three buckets: Merchandising/brand enhancement, customer interaction and in-store services. Respondents rated the degree of importance of each strategy, from which it’s clear that retailers are gaining an appreciation for the emotional and physical experience they must deliver to meet consumer expectations.
In the merchandising/brand enhancement bucket, more than three-quarters (76.1 percent) of respondents cited prepared foods as extremely or very important. Grocery retailers recognize that Americans don’t want to give up quality meal experiences, but they’re hard-pressed to prepare meals on their own, whether due to time or talent constraints. The growing grocerant segment is the new reality. While grocerant programs vary widely among grocery operators and are still in the early stages for many, the most progressive grocers are building programs that press other experiential hot buttons, with initiatives that feature signature dishes and seasonal and special-event programs, as well as boosting community engagement with dedicated dine-in areas.
Retail execs in this year’s study further indicated that locally sourced (65.7 percent) and private label products (61.2 percent) are extremely or very important to their banners, as are cross-merchandising (59.7 percent), store-within-a-store specialty departments (54 percent) and signature products (52.2 percent), all of which provide a unique in-store experience.
Customer-centric strategies and services are where retailers can tap into the emotional needs of shoppers — connections that e-commerce providers aren’t able to create. Retailers indicated that customer interactions around community involvement (74.6 percent), seasonal events (57.6 percent) and sampling/demonstrations (50.7 percent) are extremely or very important. In-store services that ranked high include on-site butchers (71.2 percent), community programming (40.9 percent) and seafood specialists (36.4 percent).
These are also major pain points for grocers, challenged as they are by labor costs associated with highly trained and engaged experts. E-commerce solutions can fight back with “endless” aisles, but too many — or the wrong — choices in-store will only frustrate shoppers. When the right talent designs smartly curated and merchandised offerings, the connection between store and shopper will keep happy consumers coming back for more.
THE OMNICHANNEL TIDE IS RISING
From home delivery to click-and-collect to the new “smart fridge” that allows consumers to place grocery orders right from their kitchens, omnichannel retailing is a reality that all retailers must embrace to remain relevant in the years ahead.
Category blurring rages on with abandon across all retail channels. According to the third annual Consumer Insights research survey conducted by Eugene, Ore.-based retail design firm King Retail Solutions (KRS), 54 percent of U.S. shoppers find the option to buy merchandise online for in-store pickup “appealing,” and have shopped this way in the past 12 months; 34 percent said they’d buy groceries online for in-store pickup (40 percent of men, 29 percent of women). For Millennials, that jumps to 47 percent, versus 33 percent of Generation Xers and 21 percent of Baby Boomers.
Meanwhile, 65 percent of U.S. shoppers bought groceries from a non-grocery store in the preceding 12 months, and 91 percent would consider doing so in the coming 12 months. That means traditional grocery retailers must work harder than ever before to demonstrate their relevance and earn shopper loyalty. For grocers, this means embracing mobile technology to engage shoppers at every point along the path to purchase, while leveraging historic competencies with food. Grocery chains across the spectrum — from Kroger to Meijer to Hy-Vee to Buehler’s — are finding success with this strategy.
According to the results of this year’s Annual Report survey, grocery retailers are doing better, but still have a ways to go. Just 9 percent of respondents said they have a fully integrated omnichannel strategy. However, nearly 45 percent said they at least have a strategy that they’re executing, up from about a third of respondents a year ago. A quarter said they’re “just getting started,” with the rest either barely there or oblivious to the existence of omnichannel — in our view, a sure way not to stay in business.
Nearly 48 percent of respondents told PG they offer some type of omnichannel services, with mobile shopping apps, store-supported home delivery and click-and-collect the most prevalent. Lesser numbers offer their shoppers in-store product scanning with mobile devices, third-party home delivery services (through such vendors as Instacart or My Web Grocer) and ordering kiosks.
To be sure, most omnichannel services are possible because of the ubiquity of smartphones, which can be used for any number of tasks related to the grocery shopping trip.
Just more than half of survey respondents named accessing Facebook as the leading benefit of mobile devices, suggesting that social media continues to be a popular mode of consumer engagement for retailers. In fact, respondents named social networks as the second-best way to engage with customers, followed by digital surveys, loyalty card data, a customer service hotline, third-party data, outside agencies and focus groups.
The top customer engagement tool, according to our survey? Associate feedback — and to those encouraging greater interaction between associates and shoppers, well done! Despite embracing digital technology, shoppers still crave the human touch and continue to look to store associates to answer their questions on subjects like food preparation, origin and nutrition.
Other top assets of smartphones: using e-coupons, visiting interactive websites, reading digital circulars, and accessing meal-planning and shopping list apps, all at various points along the path to purchase: pre-shop, in-store and post-visit.
In just two years, the percentage of shoppers who’ve bought groceries online in the past 30 days has doubled, according to a new report from Brick Meets Click, “How Consumers Are Using Online Grocery and What It Means for Retailers in 2016,” which highlights what’s at stake for the grocery industry.
“One in five U.S. consumers is now an active user of online grocery services, and these shoppers are a valuable group,” says Bill Bishop, chief architect of Barrington, Ill.-based Brick Meets Click and primary author of the study. “Active users spend an average of 16 percent of their weekly grocery dollars online, and that grows to 64 percent on weeks they do a major online grocery trip.”
Grocers not already embarked on the omnichannel boat would be wise to climb aboard before the tide washes them and their profits out to sea.
MOST BANG FOR THEIR BUCK
When considering the best investments in their respective businesses, survey respondents overwhelmingly deemed pouring funds into the renovation and upkeep of their stores a winning move, with 30.1 percent choosing it as such over the past five years, and 26.9 percent indicating that they intended to direct their money that way, with every expectation of success, in the next five years.
Other investments that respondents considered solid were rolling out a social media strategy, building new stores, upgrading technology and beefing up their private label/store-brand programs. Some items showed a dramatic rise in terms of their perceived future effectiveness: For instance, only 3.9 percent of respondents found training and retention programs to be their best investment over the past five years, while fully 10.1 percent anticipated such initiatives would be so over the next five. Other items diminished in importance: Expanded assortments were the best investment over the past five years for 7. 3 percent of respondents, but just 3.6 percent expected them to be so in five years’ time.
With the popularity of the perimeter so much in the news of late, it’s no surprise that the produce, meat and deli/prepared food departments topped the rankings of the most successful departments, with produce generating the most sales, according to 55.1 percent of respondents, and meat overwhelmingly driving traffic, as indicated by a whopping 69.2 percent of those surveyed. Additional sales-generating giants included beer/wine/liquor (chosen by 46.4 percent), dairy (43.5 percent), center store (42 percent) and private label (37.7 percent), while among the major traffic drivers were fresh bakery (44.2 percent) and organics (36.5 percent).
Less successful at generating sales were ethnic foods, selected by just 11.6 percent of respondents, while health, beauty and wellness was chosen by only 13.5 percent as a top traffic driver.
$649,087 TOTAL SUPERMARKET SALES
THIS IS A 1.7% INCREASE OVER LAST YEAR, ADDING $10.7 BILLION IN SALES
89.5 WAGE COST
RANKED NO. 1 IN EXPECTED 2016 CHANGE IN COMPANY OPERATIONAL FA CTORS
76.1% PREPARED FOODS
PERCENT OF RESPONDENTS THAT CITED PREPARED FOODS AS EXTREMELY OR VERY IMPORTANT
21.3% STORE-SUPPORTED HOME DELIVERY
NEARLY 48 PERCENT OF RESPONDENTS OFFER SOME TYPE OF OMNICHANNEL SERVICES, WITH MOBILE SHOPPING APPS MOST PREVALENT
MOST INFLUENTIAL DEPARTMENT IN DRIVING STORES’ OVERALL BRAND/IMAGE/POINT OF DIFFERENTIATION