Big Players Think Small in Format Fights

Big Players Think Small in Format Fights

Todd Hale, SVP, Consumer & Shopper Insights, The Nielsen CompanySUMMARY: The days of super sizing are over. The big players in grocery are opting for smaller, niche footprints in urban locations featuring a focus on packaged fresh food offerings. The idea is to make shopping more rewarding, and to reward consumers with coffee boutiques, new ideas, special discounts, free groceries and gas cards.

We live in interesting times. On the one hand, value retailing is driving price compression, benefitting consumers. On the other hand, inflation attributable to scarce energy and increased global demand for commodities like corn, wheat, meat, poultry and seafood is pushing up producer costs and consumer prices. According to Nielsen, the impact can be seen in the bigger 2008 basket values across all channels, which range from $14 for the typical ticket at dollar stores to a whopping $100 at warehouse club stores, where the emphasis is on weekend stock-up trips.

The comparatively large supercenter basket value ($65) relative to mass merchandiser ($49) and grocery ($41) channel register rings suggests that shoppers are meeting multiple needs in a single channel offering value and variety under one roof.

Assorted variety

Given the size and diversity of the alternative channel shopper base, it’s clear that shoppers hunger for alternatives to grocery. Despite the drop in category killer household penetration (pet stores were the sole exception), these formats continue to be shopped by large numbers of households that find food, beverage, health and beauty aids available in alternative aisles.

Roughly three-quarters of all households patronized a hardware store in 2008. Two-thirds of U.S. households still shopped at a department store, although that penetration was off 11% from 2001 levels. Electronic stores captured visits from 45% of households—a result that may change dramatically with the closing of 567 Circuit City stores. It will be interesting to observe the impact of additional store closings and shopper base erosion on “category killer” health.

More stores

Traditional formats like food, drug and mass merchandise have experienced stunted growth relative to the aggressive expansion plans of alternative channels. For example, the dollar store count grew 52% since 2001, adding 6,823 stores. The Target banner led mass merchandise channel expansion, offsetting the loss of more than 600 Kmart stores and Walmart’s conversion of regular discount locations into supercenters.

In the drug channel, powerhouses Walgreens, Rite Aid and CVS added stores while independents and other drug retailers were acquired, closed their doors or shuttered poor performing outlets. Grocery added 1,622 stores since 2001, a modest increase of 5.3% compared to the rapid expansion of competing channels. Niche retailers like Aldi and Trader Joe’s and some traditional grocers like Kroger are winning with value messaging and store expansion and reformatting. The convenience channel ran out of gas, losing 1,419 stores since the end of 2007, although for the seven-year 2001–2008 period, the channel posted 16% growth. Convenience store gas sales evaporated in the face of historically high gas prices and the addition of gas pumps at big box retailers.

Small is big

Tesco imported the small footprint idea, launching the Fresh & Easy format in 2007, with plans to open 200 stores by the end of 2009—well below original target, but still an impressive number. Walmart is fine tuning its own small-scale pilot, with a strong fresh and private label emphasis with their Marketside format. Safeway got on board with The Market at Vons in Long Beach. Supervalu opened a 16,000-square-foot prototype called Urban Fresh in the Chicago market.

Typically, the downsized markets feature upscale inventory displayed in bright, clean, well-organized layouts with sampling stations near fresh sections, a robust private label offering, adequate dry grocery, household and personal care assortments, designed to appeal both to scratch cooks and prepared food fans.

‘If you can’t eat it, you don’t need it.’…

Stable staples

“If you can’t eat it, you don’t need it.” That phrase pretty much summed up category performance in 2008 across the food/drug/mass channels, with staples accounting for the bulk of dollar and unit growth tracked by Nielsen. On the dollar growth measure, flour rose to the top with a 31.4% dollar growth increase, followed by dry vegetables and grains at 25.9%, pasta at 25.5%, canning/freezing supplies at 17.9%, shortening and oil at 16.4% and fresh eggs at 14.7%.

Canning/freezing supplies locked up the unit sales growth lead position with a 10.6% increase, followed by wine at 7.4%, vitamins at 4.8%, fresh meat at 4.7%, dry vegetables and grains at 4.6% and dry mix/prepared foods at 4.4%. Once-strong unit sales leaders that qualified as affordable indulgences like dairy desserts, men’s toiletries, personal bath needs and skin care—fell off the leader board entirely, replaced by edible items.

Store brands were a major beneficiary of the economic downturn, with an average 4% increase in unit sales growth for the last half of 2008. However the development of retailer brands varies dramatically across retail department with the highest share coming from the diary department. All departments recorded gains in retailer brand dollar share except for alcoholic beverages.

Ad spending patterns , both predicted and validated the importance of “need-to’s” versus “nice-to’s”…

Ad games

Ad spending patterns , as tracked by Nielsen, both predicted and validated the importance of “need-to’s” versus “nice-to’s” for shoppers in 2008. Dairy products, frozen foods and fresh/packaged meats each enjoyed double-digit increases in ad spending, with budget allocations reflecting marketplace realities. Conversely, fresh produce, viewed by some as a menu luxury, lost ground with a 2% reduction in ad spending. Health and beauty aids remained basically stable with a 1% increase.

Standouts within advertising budget categories included pork, which bolstered spending by 69% in 2008 to a portly $26.5 million, and frozen pizza, which iced out other frozen products thanks to a 40% ad spending hike.

The big time

Walmart remains the 800 pound gorilla of retailing with more than 7,663 stores around the world carrying more than one million different products and annual sales rapidly exceeding $400 billion per year. Same-store sales for Walmart U.S. reported year-to-year gains of 3.2% vs. only 1% last year. Food departments continue to fuel the Walmart growth engine, with $4.1 billion in soda sales alone big enough to qualify for the top 20 U.S. grocers roster. All this — despite the fact that only 29.8% of Walmart Supercenter sales are from households earning $70+K per year — compared with 52–64% at competing retailers.

Walmart qualifies as an industry leader on multiple criteria, including technology, sustainability, product and format innovation. The company already offers a mobile web site and iPhone application robust enough to include a store finder and interactive promotions. Its shopper-intelligent network at retail has launched on 27,000 in-store screens.

Green movement

Walmart purchases enough wind energy to provide 15% of the power needs in 360 Texas stores. The company is committed to reducing detergent phosphates 70% by 2011. Currently, the firm is testing hybrid-electric and alternative-fuel delivery trucks for commercial feasibility. In addition to a commitment to carrying locally-grown produce, Walmart webcasts its quarterly Sustainability Milestone meetings and offers a ‘Sustainability 2.0’ DVD for sale for environmentally-aware consumers for one dollar.

Healthy planet, healthy shoppers. Expect to see as many as 400 Walmart in-store health clinics co-branded with local hospitals by 2010. The popular retail clinic trend is fueled in large part by accessibility and affordability, with a typical visit costing $50 – $55.

Opportunity knocks

Perhaps unexpected from a retail giant where bigger means better, Walmart is enjoying success with its Marketside format featuring 300 natural and organic products and 200 wines under $10. Also unexpected is the new Canopy private label furniture line with an upscale look and feel.

Recognizing the importance of at-home entertainment in a weak economy, Walmart negotiated several exclusive DVD packs, Hannah Montana CD + DVD packages complemented by 140 Hannah Montana-inspired products, the AC/DC Black Ice CD and apparel line, Rock Band and Guitar Hero games and a one-of-a-kind Bruce Springsteen Greatest Hits CD.

Marketing opportunity lies behind every perceived market downturn…

Sign of the times

From alternative formats to alternative merchandising and assortment ideas, 2008 proved that a marketing opportunity lies behind every perceived market downturn. If big stores no longer make economic sense, downsize the footprint. If consumers are cocooning and watching movies at home, bump up your DVD catalog. If gourmet and prepared foods are taking a hit, offer recipes that feature staples and canned items.

When competitors co-opt traditional product lines, diversify by adding services that distinguish your format and build loyalty. The door never closes fully on retail opportunities for the nimble and innovative firm.