Top 5 Trends that Will Shape Grocery in 2016

Year after year, grocers face unpredictable factors that influence business performance. 2015 was no different, with a flurry of M&A activity, traditional grocers serving up gourmet foodservice, and more grocers testing the waters of delivery services. In 2016, we expect the rate of change to accelerate. Here are the top trends to watch in the coming year:

1. Spotlight on specialty departments: As big box retailers, convenience and drug stores continue to encroach on grocery's share of wallet, we expect to see traditional grocers invest more in specialty departments to differentiate themselves. Coborn’s took the plunge with its gluten-free bakery and has been inundated with orders. Similarly, Food Lion accredited recent profit gains to investments in its bakery, dairy and deli departments. Other grocers are staffing their meat and seafood departments with skilled butchers and fishmongers, or hiring dieticians to consult customers perusing the shelves.

While these specialty departments and services can successfully draw in customers, they are often very expensive. For example, those with new positions on their payroll are likely paying a premium for specialized skills. As such, grocers need to implement these initiatives in a subset of locations to evaluate and tailor strategies before investing in broader rollout. For example, a small-scale bakery test could reveal which products sell like hotcakes, where there are opportunities to limit specialized labor to peak hours, and more.

2. Clipping unprofitable promotions: With consumers thirsting for discounts, grocers have gone highly promotional in recent years. However, as more convenient offerings thicken competition, grocers are feeling the pressure to get their promotional strategies right. In 2016, we expect to see grocers get smarter with their promotions by putting their Big Data to work.

For years now, grocers have been collecting vast amounts of data as storage costs decrease and data capture technology becomes readily available. Yet, due to time and resource constraints, many can’t leverage these valuable assets to inform their promotional strategies. As a result, they often fall back on a variation of last year’s strategy, which can leave a lot of money on the table. Successful grocers are finding that investing in tools to turn these massive data sets into actionable insights enables them to quickly and accurately understand which items should be promoted to move the needle on profits.

3. Online players deliver new flavors of competition: Industry gurus have been talking about online grocery services since Peapod’s inception in 1996, so the topic is not necessarily a new one. However, it’s a trend that continues to expand. Established online players like Instacart are expanding into new markets, and traditional grocers like Kroger are testing online ordering programs. There has also been a proliferation of meal kit delivery services like Blue Apron and partnerships between tech start-ups and grocers. A recent case that made headlines was Prince Valley Market in Detroit joining forces with Uber to give free rides home to customers spending $50 or more.

Before investing big bucks to compete online, traditional grocers need to answer a number of questions, including:

• What is the true impact of introducing these programs?
• How can we design our program to maximize profitability (delivery fees, add-on suggestions, etc.)?
• What types of customers do these services attract?  

Given the rapid rate of change in this space, intuition and industry analysis can only tell decision-makers so much. To accurately answer these nuanced questions, grocers must try each idea on a small scale and analyze the performance in real time using rigorous methods that provide an accurate read, despite the small number of test stores. These pilot programs will also help grocers identify unforeseeable issues with implementation and address them before broad rollout.

4. Shoppability takes center stage: Grocers have always focused on creating an enjoyable shopping experience. Recently, this has translated to grocers trying new tactics, such as refining assortments and designing new planograms to make stores more “shoppable.” UK-behemoth Tesco made headlines earlier this year for reducing its assortment by 30 percent to simplify shopping. Others are taking less radical approaches, such as removing temporary shippers and investing in wider aisles.

In many cases, grocers’ strategies are centered on reducing shelf space, which is always a risky game, as less shelf space means fewer items on the floor. Given that traditional “rank and cut” methods of assortment optimization are no longer sufficient to meet market requirements, grocers now need to also evaluate product loyalty and basket composition to determine which items should win the coveted shelf space. Other strategies focused on shoppability should also be carefully examined to weigh the costs and benefits of introducing them to market.

5. Putting operational costs on the chopping block: With grocery volume falling over the past few years, grocers are increasingly focused on finding other ways to grow the bottom line. As a result, many are getting creative with cost-cutting, particularly through reduced energy and maintenance spending. WinCo was recently recognized for its energy-efficiency investments, while others are adjusting their labor strategies. Perhaps the most extreme case is Aldi, who engages in various cost-cutting measures, including leaving produce in open-faced boxes to streamline operations.

While these measures seem great on paper, there are many anecdotes that show they are not a fit for all grocers. Putting closed doors on refrigerated units will cut costs, but will impulse purchases take a hit and eat into those savings? To prevent becoming a cautionary tale, grocers should cut costs scrupulously to ensure each decision does not negatively impact sales or customer satisfaction.  

While these trends create exciting opportunities for grocers, it isn’t a given that each one will work for every business. Determining which of these strategies will work for your company requires building an “innovation funnel”— a process for collecting ideas, testing them in-market, and rolling out the winners. What better time to start building this funnel than with your planning for 2016?