While the fortunes of some US food and grocery retailers improved, 2011 was a challenging year as the pace of economic recovery remained slow.
In 2011, consumers were treading carefully, under pressure from high unemployment, a weak housing market and the removal of US stimulus programmes. In response, many retailers were forced to re-think their strategies, given that price and promotional tactics alone were often not enough to encourage US consumers to spend.
Improving performance, but outlook remains challenging
Taking a closer look at grocery retailers’ results over recent months reveals an improving trend for most, and while Walmart’s US same-store sales remain in negative territory, this has been driven predominantly by its previous strategic initiatives. However, a clear strategy has been formulated to turn the business around, adding back deleted items and categories and making space allocation changes, although last month the retailer noted that this process would take longer than initially anticipated.
Elsewhere, however, impressive results have been delivered, with Whole Foods Market leading the way with identical store sales increasing by 9.1% over the first quarter of 2011. Mass-market retailers such as Kroger and Target have also delivered robust performances, yet trading results are peppered with notes of caution.
"We anticipate the overall competitive environment in 2011 will be more rational but still challenging as retailers compete for customers' limited dollars."
David Dillon, Chairman and Chief Executive, Kroger, March 3, 2011
Maintaining current strategies
Despite improving performances, retailers continue to emphasise their value for money credentials, reflecting in part, a desire to maintain strategies that have proved to be successful over the last year, while also reflecting the financial reality of many consumers.
Promotional strategies have been refined to stress pricing clarity, such as round-dollar price points, and private label development also continues at pace. However, there has been a shift away from the development of entry-level ranges to more premium-based offerings, further enhancing the opportunities for retailers to potentially expand their margins at a time when costs are under pressure.
Delivering value through innovation
However, retailers are also investing in innovation to deliver improved value. Many of the initiatives have their foundation in improving the shopping experience, and being more relevant for shoppers.
- The development of new smaller-formats, targeting urban areas offer shoppers greater convenience
- Initiatives such as the introduction of the 5-Step Animal Welfare Rating System at Whole Foods Market provides shoppers with greater information and transparency
- Digital nutritional labels at Bashas aim to ease the shopping process
- Cookery classes at Publix provide meal inspirations and bring new shoppers into categories
Pressures on volumes remain
Despite many of these initiatives, pressures on volumes remain. Increased commodity costs are driving higher inflation levels as these costs are being passed through to consumers in the form of higher prices. Many manufacturers will seek to absorb these higher costs. However, with profitability under pressure, some will have little option than to push through requests for higher retail prices.
While the price elasticity of products varies considerably, the media is alert to higher food prices and shoppers are becoming adept at dialling out inflation from their shopping baskets. This often translates into switching between stores and brands, impacting individual manufacturers and retailers to different degrees, yet helping to maintain overall consumer spending levels.
Supply chain initiatives offer cost savings
Currently, one of the greatest cost challenges that both manufacturers and retailers face is higher distribution costs as a consequence of rising gas costs, an impact which has been amplified by growing instability in the Middle East and Africa. Consequently supply chains will face even more scrutiny for potential cost savings with retailers embracing a range of initiatives including rationalising ranges to reduce complexity, and introducing efficiency based measures such as Retail Ready Packaging (RRP), an initiative that is now gaining traction across North America.
Technology offers competitive advantage
While technology has revolutionised the interaction and contact points between retailers and shoppers, through the advent of social networking, multi-channel retailing and self-checkouts, it is also playing an important role in driving operational efficiencies. US retailers have also traditionally been early adopters of many of these new technologies.
Particular focus has been placed on inventory management systems, to help drive down overall stock levels and improve on-shelf availability, labour scheduling systems which have helped to drive improved customer service and better manage this major cost line, and multi-channel fulfilment technologies are boosting retailer capabilities in this key growth area.
RFID also continues to be tested and rolled-out across certain categories in the US, although large scale trials have been restricted to general merchandise retailers to date. While Walmart has been involved in these trials, food and grocery items are likely to be among the final group of categories to be involved in any roll-out due to the low ticket value of the majority of items and the complexities of tagging many products.
Investing to demonstrate value
As retailers respond to the challenges of financially strained consumers and upward pressures on pricing, they continue to invest in order to differentiate their propositions and grow market share. Whether this be through format development, private label ranges or the use of technologies, the grocers are seeking to reach out to new customer groups and capture an increasing share of their existing customers’ spend.
These strategies also enable retailers to demonstrate value without relying solely on pricing and promotional strategies, an important consideration given that it may become increasingly more difficult to pull on these particular levers given the current economic backdrop.
"We believe our value efforts and differentiation are continuing to gain traction as evidenced by our strong 7% increase in transaction count in identical stores."
Walter Robb, Co-Chief Executive Officer, Whole Foods Market, February 10 2011