PRIVATE LABEL READY TO REBOUND P. 10
THE FUTURE OF PHYSICAL IS BRIGHT P. 28
RLâ€™S INAUGURAL DIVERSITY SCORECARD P. 37
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Retail Leader SUMMER 2017 VOL. 7, NO. 4
6 LETTER FROM THE EDITOR
INNOVATION OBSESSION. How retailers and suppliers think about innovation today has changed dramatically because their survival is at stake.
8 GROWTH AND BUSINESS DEVELOPMENT
POWERED BY PRODUCE. Sprouts’ aggressive expansion plans have extended the company into territory occupied by a potential takeover target.
10 GROWTH AND BUSINESS DEVELOPMENT
READY TO REBOUND. A host of factors are forecast to restore private brand growth.
12 GROWTH AND BUSINESS DEVELOPMENT
A MULTICULTURAL MOMENT. How ethnic supermarkets are winning with authenticity in the industry’s hottest segment.
16 COVER STORY
The RL100. Top companies and trends transforming commerce.
23 FINANCE AND CAPITAL MANAGEMENT
WHO PAYS BEST. A new study from researchers at Rutgers spotlights a major pain point in retailer and supplier relations.
BEYOND THE SMARTPHONE. Tech industry innovators are reimagining mobile and envisioning a hands-free future.
Associate Brand Director Mike Shaw email@example.com Office 201-855-7631 Cell 201-281-9100
34 TECHNOLOGY AND INNOVATION
Account Executive Matt Kavney firstname.lastname@example.org Office 443-203-6379 Cell 202-607-5368
DYNAMIC PRICING DE-MYSTIFIED. Controversial and misunderstood, dynamic pricing is here to stay and guess what? Shoppers don’t mind.
37 SOCIAL RESPONSIBILITY DIVERSITY SCORECARD. Target, Kroger and Walmart outperform peers, while Costco, Amazon and Albertsons lag.
ADVERTISING SALES & BUSINESS
CUSTOM MEDIA VP, Custom Media Pierce Hollingsworth email@example.com General Manager, Custom Media Kathy Colwell firstname.lastname@example.org
MARKETING VP, Marketing & Communications Bruce Hendrickson email@example.com Senior Marketing Manager Wendy Duffer firstname.lastname@example.org
CATMAN 2025: VISIONS FOR THE FUTURE. The category management framework that revolutionized retail two decades ago is adjusting to new marketplace dynamics and huge increases in data volumes.
50 WHAT’S NEXT
CANNABIS BECOMES A CATEGORY. CPG categories are poised for disruption as cannabis comes out of the shadows.
Director of Audience Development Gail Reboletti email@example.com Audience Development Manager Shelly Patton firstname.lastname@example.org
ART/PRODUCTION Director of Production Kathryn Homenick email@example.com Production Manager Anngail Norris firstname.lastname@example.org Advertising/Production Manager Bette Boyers email@example.com Art Director Bill Antkowiak firstname.lastname@example.org Art Director Regina Loncala Subscriber Service/Single-Copy Purchases EnsembleIQ@e-circ.net
Executive Chairman Alan Glass President & CEO Peter Hoyt Chief Operating Officer Rich Riveria Chief Brand Officer Jeff Greisch Chief Financial Officer Len Farrell
PERCEPTION AND REALITY. Headlines about the demise of physical retail have become common, but the 37,000 people who gathered in Las Vegas in May see things differently.
Chief Buisness Development Officer & President, EnsembleIQ, Canada Korry Stagnito President of Enterprise Solutions/ Chief Customer Officer Ned Bardic Chief Digital Officer Joel Hughes Chief Human Resources Officer Greg Flores
8 Retail Leader.com SUMMER 2017
EDITORIAL Editor-In-Chief Mike Troy email@example.com 813-857-6512 Managing Editor Gina Acosta firstname.lastname@example.org 813-417-4149
31 TECHNOLOGY AND INNOVATION
28 FINANCE AND CAPITAL MANAGEMENT
SVP, Group Brand Director Katie Brennan email@example.com 917-859-3619
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letter from the
Innovation Obsession How retailers and suppliers think about innovation today has changed dramatically because their survival is at stake. The retail industry has dealt with countless innovations over time and many of the things taken for granted today were seen as major advancements in the day. The advent of electric lighting that allowed stores to stay open in the evening was a pretty big deal. So was refrigeration. The open display of merchandise and the use of price tags were big changes for operators. The introduction of bar codes, scanning and credit cards forever changed retail and the shopper experience. When I became involved in the retail industry in the early 1990s, innovation centered on store formats with focused on specific merchandise categories. There was also a lot of activity around store design, store size and merchandise planning and presentation. For Walmart to open a 150,000-sq.-ft. supercenter rather than a 200,000-sq.-ft. location, or supermarket operators adding gas stations to their parking lots — these were all regarded as innovations. Such changes were significant at the time. Now, as consumers, we are living through, adapting to and constantly being offered new ways of engaging with retailers and brands to satisfying our daily needs and wants. Some of our expectations today are things we didn’t know we needed and now can’t live without, such as a smartphone with high definition video capabilities capable of live streaming on social media platforms or the ability to speak to a digital assistant and have ordered products delivered within an hour. For these reasons and countless others the retail and consumer goods industry is obsessed with innovation. You have probably read or heard at least 1,000 times, how the pace of change is accelerating and the industry is being disrupted and transformed in unprecedented ways. No argument there, but prior generations of retailers and suppliers would have said the same thing in their day because change has a tendency to feel unprecedented to those experiencing it. Putting aside stuff like electricity, refrigeration and bar codes, it was a pretty big deal in the 80s when warehouse clubs emerged or when Walmart started rolling out supercenters. There was a lot less hype at the time and the changes were easier to see from further away. The best example of this phenomenon today is the imminent arrival of Lidl along the East coast, a market entry the company has made no effort to conceal, or perhaps Amazon’s foray into physical stores. An obsession with innovation is a good thing because retail is going to be very different in 5, 10 or 20 years. How exactly, I’m not sure and neither are some of those working on innovations, but one thing is for sure. Some of the concepts that sounded outlandish the first time you heard them — drone delivery, autonomous vehicles, cashier-less checkouts — are well along the path to reality and may seem ordinary in the future. A fertile imagination and a willingness to fail have always been important in retail, but now those traits are essential as retailers and brands will eventually serve consumers in new and strange ways that sound impossible today. This point was driven home recently while attending the IRI Growth Summit and hearing from Mick Ebeling, founder and CEO of Not Impossible Labs, a company that describes its mission as creating technology for the sake of humanity. His presentation was one of the most thought-provoking I’ve had the opportunity to hear during the past 25 years and the key takeaway was that everything that is possible today was once impossible. The same will be true in the retail industry, which is why those most obsessed with innovation today will be the retail leaders of tomorrow. RL
MIKE TROY Editor-In-Chief email@example.com
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> GROWTH AND BUSINESS DEVELOPMENT
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UNDETERRED BY DETERIORATING SAME STORE SALES GROWTH, SPROUTS’ AGGRESSIVE EXPANSION PLANS HAVE EXTENDED THE COMPANY INTO TERRITORY OCCUPIED BY A POTENTIAL TAKEOVER TARGET. > By Gina Acosta and Mike Troy
An hour before the May grand opening of a new Sprouts store in Tampa, Fla., dozens of shoppers were lined up in 90-degree heat to try their hand at milking a cow. The large black and white cow made for an odd sight, but giving shoppers an up-close-and-personal view into dairy farming is a perfect fit for a retailer with a “healthy living for less” value proposition. Sprouts’ emphasis on all things fresh and customer service was evident on opening day. While moms, dads and kids took turns tugging on teats, free samples of organic chocolate milk were served. As more people arrived at the store carrying reusable shopping bags, they were met by applause and singing from cheerful Sprouts staff. Employees offered samples of organic rotisserie chicken, deli meats and sushi while flat screen TVs played video tutorials on healthful diets. Beautiful fresh displays and organic pineapples priced at $1 apiece turned heads. It was the type of reception Sprouts needs given the dynamics of the natural and organic space. The operator of 270 stores is entering new markets and expanding in existing markets where, as Whole Foods Market has learned, there is now abundant competition for shoppers. The Tampa market is dominated by Publix, which operates nearly 800 locations throughout Florida and is regarded for its fresh efforts and Greenwise brand. In the affluent South Tampa Neighborhood where the newest Sprouts is located, shoppers have their choice of Trader Joe’s, Whole Foods and The Fresh Market within a mile. To be sure, Sprouts does have a key point of differentiation related to its approach to produce merchandising, which accounts for about 15 percent of the selling space in a typical 28,000-sq.-ft. store, but generates 24 percent of sales. Whether in Tampa or other markets, the presentation of produce on low fixtures in the center of the store gives Sprouts a farmers market feel. The fresh emphasis extends to Sprouts CEO Amin Maredia the meat department, where
Retail Leader.com SUMMER 2017
Sprouts employs in-store butchers and promotes an offering that is additive-free and never frozen. The vitamin and body care department features more than 7,500 products made with sustainable and ethically sourced ingredients. Sprouts also drives differentiation with its private brand, which now numbers 2,100 items and accounted for 11 percent of 2016 total sales of $4 billion. The newest Tampa location also contained new features that indicate how Sprouts is thinking about future opportunities. For example, an enlarged prepared foods area includes more snacks to go and a new offering of readyto-heat meals are designed to satisfy all manner of diets, from paleo to low carb to gluten-free. An expanded deli, an initiative that will arrive in 50 stores this year, offers $3.99 sandwiches made to order, a salad bar, fresh juices, a soup station and freshly prepared proteins and side items. A new “Fresh Finds” cooler features an array of supplements to support gastrointestinal health. An enlarged refrigerated bread case offers preservative-free products. “The Sprouts model of fresh, natural and organic products at prices the everyday shopper can afford continues to resonate with our customers,” Sprouts CEO Amin Maredia said during the company’s first quarter earnings call. “We remain focused on delivering innovative products and connecting with our customers both in and out of the store. This focus continues to produce exceptional customer engagement and service scores, strong operations and solid financial results.” Sprouts, along with many other retailers, is riding a wave of growth fueled by healthy eating aspirations and a wellestablished organic movement that has become mainstream. Organic food sales increased 8.4 percent in 2016 to around $47 billion, representing 5.3 percent of total U.S. food sales, according to the Organic Trade Association’s industry survey released in May. That type of growth rate would attract a crowd in any retail sector, but especially in the food channel where operators have grown accustomed to growth rates in the single digits and persistent deflation. Deflation has been a headwind for Sprouts too, receiving most of the blame for a 1.1 percent same store sales increase during the first quarter and muted expectations for full year growth in the range of 0.5 percent to 1.5 percent. The first quarter comp increase was noteworthy in that it was the 40th consecutive quarter of growth. However, warnings signs have begun to emerge as the key indicator of performance has deteriorated every year since peak-
The 270th Sprouts Farmers Market opened in May in South Tampa, Fla. The store will compete with Publix, Trader Joe’s and The Fresh Market all located nearby.
ing at 10.7 percent in 2013. That was the year Sprouts private equity owners, the Apollo Management Group, took the company public. Comps remained strong at 9.9 percent the following year and by March 2015, Apollo had exited its position in Sprouts. That same year, Sprouts experienced a senior leadership transition that year that saw Maredia become CEO in August 2015 after serving the prior four years as CFO. His CFO position was filled in March 2016 by Brad Lukow, a former 99 Cents Only and Shoppers Drug Mart CFO Brad Lukow. During Maredia’s first year as CEO, same store sales continued to grow but advanced at a lesser rate of 5.8 percent, followed by a 2.7 percent increase in 2016. If 2017 comps materialize as expected it will be Sprouts slowest rate of growth since 2013, despite the addition of more than 100 new locations since going public, including a record 36 new stores last year. Sprouts is committed to opening more stores, especially in the Southeast, but the prospect of an acquisition also seems possible if Sprouts’ history and the track record of the company’s former private equity owner are any indication. Roughly one year after exiting Sprouts, Apollo re-entered the natural and organic space with its April 2016 acquisition of The Fresh Market, a company in the path of Sprouts’ eastward expansion. Sprouts opened a fresh distribution center in Atlanta last December to serve stores in the Southeast, including a concentration of 16 stores in Atlanta. Beyond that, the company has relatively few stores in the region with six stores spread between Memphis and Nashville, one location in North Carolina and the initial locations in Florida. Meanwhile, The Fresh Market’s highest concentration of stores is in Florida, where it operates 45 stores, followed by North Carolina with 22 stores, Virginia and Georgia with 15 each and a lesser number in adjacent states serviceable from a distribution center in Atlanta. The Fresh Market is already in many of the places where Sprouts would like to be, but that doesn’t mean
a deal will get done. Fresh Market stores tend to be smaller, about 21,000-sq.-ft., compared to the typical 28,000-sq.-ft. Sprouts stores, so there would be operational considerations in play. For example, delivering a Sprouts experience with a strong and theatrical fresh presentation in a smaller footprint Fresh Market store would create challenges. Even so, Apollo has a history of serving as a consolidator in the natural and organic space. The firm was the force behind the 2011 combination of Sprouts and Henry’s Holdings, operator of 35 Henry’s Farmers Market stores and eight Sun Harvest Market stores. The following year, the company controlled by Apollo acquired 37 Sunflower Farmers Market stores, which resulted in the Sprouts chain that investors bought into with the 2013 IPO. Even without an acquisition, Sprouts has a strong organic pipeline in place with 63 approved sites and 43 signed leases, according to Maredia, who noted the company is also making investments. “We are investing in infrastructure to support our store growth and drive productivity improvements. Our technology projects are progressing as planned, focused on driving efficiencies both at the store level and the support office. All of this is key for scale and will enhance the experience of our team members and customers alike, driving retention and improving service in the store,” Maredia said. The company is also focused on the digital future. Sprouts says it plans to expand a 10-store test of providing home delivery through Amazon’s Prime Now one-hour delivery service with a goal of 20 stores this year. “We’re now exiting the pilot phase and we are ready to ramp and to accelerate into more of our markets by year-end,” Maredia said. “We would expect to have at least a couple of stores in most of our major markets as well as build out a more robust plan for 2018.” RL SUMMER 2017 Retail Leader.com
> GROWTH AND BUSINESS DEVELOPMENT
A HOST OF FACTORS ARE FORECAST TO RESTORE PRIVATE BRAND GROWTH. > By Kathie Canning
As with much of retail, the private brand industry has undergone a dramatic transformation during the past decade. The recession that began in 2007 spurred demand for store brands and thanks to satisfaction with product quality demand remained intact as economic conditions improved. Another contributing factor to growth was a shifting mindset among retailers. The traditional margin-play focus gave way to an emphasis on differentiation to drive banner loyalty and the result was more unique products great-looking packaging. Sales that were on a multi-decade uptrend hit a wall last year. Dollar sales fell by 0.7 percent and unit sales declined 0.4 percent in 2016 across the supermarket, drug store, mass, dollar and club store channels, according to the Private Label Manufacturing Association’s (PLMA) 2017 Private Label Yearbook. PLMA relies on data from Nielsen that showed store brand dollar share slipped from 17.7 percent to 17.5 percent. A portion of private brands’ recent lackluster performance is also attributable to disruption among retailers, according to Jim Wisner, president Wisner Marketing Group. Albertsons, for example, is in the process of transforming the
STORE BRAND MARKET SHARE BY CHANNEL DOLLAR SHARE
SUPERMARKETS SOURCE: PLMA/Nielsen
Retail Leader.com SUMMER 2017
MASS, CLUB & DOLLAR
private branding in all of its banners which disrupted product availability and marketing efforts. Walmart and Topco Associates LLC, a retailer cooperative, have also made disruptive private brand moves while other CPG retailers have launched dozens of new private brands, according to Wisner. “Let’s not everybody get excited and say, ‘Oh no, the bloom’s off the rose and customers don’t care about store brands anymore. You really have to look beyond the numbers to see what’s causing it,” Wisner said.
VALUE STILL MATTERS The downturn, while unfamiliar territory for private brands, is expected to be short lived. Deflation which depressed growth in many food categories has abated, value remains intact as a driver of long-term purchase behavior, especially among Millennials, and company specific issues are being resolved. Meanwhile, private brand-centric retailers such as Aldi and Lidl are in growth mode. “They have very different business models,” Todd Maute, a partner with CBX Software said of Aldi and Lidl. “They are 85 percent to 100 percent private brand.” Amazon is also expected to have a bigger impact on private brands, having recently entered the CPG space. “Amazon’s online strategy amplifies the importance of private brands,” said PLMA president Brian Sharoff. Private brands also continue to post strong growth in niche categories such as organic and local and specialty foods under both private brands and smaller, often regional brands are growing. Another factor impacting private brands, according to Jordan Rost, vice president of consumer insights at Nielsen, is polarization, a phenomenon occurring across retail. “At the high end, there’s a reinvention of a more premium private label brand experience that’s resonating with some consumers,” Rost said. “At the other end of the spectrum, consum-
ers are increasingly using value-oriented private labels to be smarter and savvier shoppers.”
A POSITIVE OUTLOOK Expectations of a resumption of private brand growth are forecast to happen quickly. Charisse Jacques, a principal in the retail and consumer products practice of A.T. Kearney, calls the outlook for the next year and a half very positive. It is view rooted in the belief that leading retailers will continue to make investments needed for private brand innovation. “The more retailers shift their mindset to treating private brands as a way to drive differentiation and loyalty, the more consumers will continue to buy them,” she said. “Also, as more branded CPG companies look to increase their direct-to-consumer business, retailers will be forced to look for other ways to make up for the potential loss in sales, and private brands will rise to the top of the list.” Millennials favorable attitudes toward private brands will also fuel growth while national brands’ continue to struggle with how best to connect with a mass audience in an increasingly fragment media landscape. “This generation is feeling much better about serving private brands to their family, as well as to their guests,” said CBX’s Maute. “That’s a fundamental emotional shift to the acceptance of these brands, where it’s not just being driven by economic challenges.” Maute also forecasts a continued push to the perimeter of the store on the part of store brands to match consumers’ shopping behavior. Online purchases of center-store food and non-food dry goods are on the rise because consumers feel less of an emotional connection to those products, he adds. “You’re seeing growth in dairy, produce, bakery and meal solutions, which are pretty much owned by the retailer,” he said. “So the branding, which typically didn’t live in the perimeter, is starting to show up there. I think that growth will continue, especially with all of the things around sustainability, eating better, eating fresher foods.” On the non-foods side, private brands are expected to continue to shine, especially on the health side of HBC. Private brands already account for well over half of all over-the-counter preparations purchased. And on the personal care side, Kroger’s success with mirra and Walgreens’ home run with No7 demonstrate growth is attainable.
articulated on the shelf,” said Carol Spieckerman, president and CEO of Spieckerman Retail. “These days, retailers are advertising these brands online, and as retailers continue to refine their click-and-collect, delivery, drive-through and other convenience options, private brands will be in the mix. The end result will be private brands competing favorably against national brands across all channels.” Retailers — regional retailers, in particular, also are challenged by the recent wave of consolidation among the private label supplier base. It has become harder to find manufacturers that can handle the shorter runs required for some of the more unique, differentiating products. In addition to overcoming challenges, retail leadership must emulate today’s private brand leaders to succeed. Winning retailers know how to reach millennials, too, notes Keith Daniels, a partner at Carl Marks Advisors. Millennials’ purchasing power continues to grow, and they care about quality and banners and channels more than they do about brand. Private brand leaders also know how to leverage technology to have better control over product development and inventory regulation — so they can get private brand products to market faster, says Achim Schneider, global head of SAP Retail. “Additionally, technology allows for optimized management and synchronization of in-house and outsourced manufacturing, which strengthens collaboration with business partners,” Schneider said. Above all, perhaps, private label leaders are adept at tying the private brand proposition to that of the retail banner itself, suggests Ben Ball, senior vice president with DechertHampe, Northbrook, Ill. “If HEB means quality, then HEB’s private brands have to mean quality,” he says. “Laggards define the private brand as a value offering for price competition and little else.” RL
Store brand sales are poised to rebound in 2017 and beyond $116.3 B
A strong private brand program brings many concrete advantages to a retailer, of course. But developing such a program requires a top-level commitment and a strategic plan. Top-level executives also will need to find ways to overcome some current challenges including e-commerce, where national brands are seen outperforming private brands. Making a stronger digital connection with shoppers will be critical or potential growth will be at risk. “In the past, private brand value was primarily
LEADERS VERSUS LAGGARDS
$8.4 2014 DRUG CHAINS
2015 MASS, CLUB & DOLLAR
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> GROWTH AND BUSINESS DEVELOPMENT
TRADITIONAL GROCERY STORES ARE BATTLING NATURAL AND ORGANIC CHAINS FOR MARKET SHARE WHILE ETHNIC SUPERMARKETS ARE WINNING WITH AUTHENTICITY IN THE INDUSTRY’S HOTTEST SEGMENT. > By Gina Acosta
A Spanish language soap opera is blaring from a speaker at Pepe’s Taqueria. Soon, a customer receives his basket of tacos. Warm corn tortillas filled with beef and chicken are topped with minced cilantro and raw white onions. The tacos are accompanied by wedges of lime and charred green onions, as well as two kinds of salsa made in-house: one with chipotle peppers, the other with tomatillos. This simple but delicious plate of food costs under $6. Pepe’s is not some hot new restaurant but rather a taco bar in a Fiesta Mart grocery store in the Northside neighborhood of Houston. It’s just one of the many special features of this thriving supermarket chain in Texas. While shoppers pull their carts around the store, fresh chiles, yucca and tomatillos are piled high in the produce department. A butcher’s counter with a “carniceria” sign overhead is heavy on the pork and beef and sits in the back. Shelves are stocked floor to ceiling with Mexican spices, assorted dried chilies, rice and a whole wall of beans. Posters for Mexican concerts abound, and fliers advertising rental apartments are
plastered near the front of the checkout area. There is a community feel around every aisle of this store. As the United States becomes ever-more diverse (the U.S. foreign-born population reached a record 43.2 million in 2015, according to the Pew Research Center), ethnic markets such as Fiesta Mart offer a plethora of items central to cultural cuisine that aren’t found in many traditional or natural food stores. These ethnic grocers are playing an increasingly important role for communities as a gathering place that provides a sense of culture and connection. That sense of authenticity, and a surging ethnic population, are the main reasons why Fiesta Mart and other ethnic retailers are poised to be the next area of growth in the supermarket industry. In fact, U.S. shoppers demanding more cultural foods, coupled with disposable income growing at an annualized rate of 2%, are expected to push ethnic supermarket revenue up 2.6% a year to $41.7 billion by 2021, according to IBISWorld, a global business intelligence firm. Most of this boom is anticipated in California, Texas and Florida, with Hispanic and Asian populations driving the growth. As food retailers look for more avenues of growth, a really strong offering that appeals to an ethnic community could represent an enormous opportunity. According to a 2015 LoyaltyOne study, 61% of shoppers are not finding enough ethnic food or ingredients at their main grocery stores, and 59% shop at three or more stores regularly just to find everything they need for recipes. But these are not just ethnic shoppers. While 85% of ethnic shoppers revealed that they would cook traditional foods more often if they could find the proper ingredients, 65% of other shoppers said they’d would cook more multicultural foods if their stores had a better variety. This Fiesta Mart is located in Houston’s Northside, a traditionally Hispanic community near the city center.
Retail Leader.com SUMMER 2017
THE ‘TEXICAN’ LEADER For decades, Houston-based Fiesta Mart has been the innovator and the top store in Texas for shoppers seeking fresh multicultural ingredients, flavors and brands. “Since 1972 Fiesta has been providing customers with a unique and revolutionary shopping experience by offering a wide variety of food from near and far,” said Mike Byars, CEO of Fiesta Mart, which was acquired by private equity firm Acon International in April 2015. Acon hired Byars, a former Bi-Lo president, to run the company, which had sales of about $1.5 billion last year. Fiesta now has 70 stores in the Houston, Austin, and Dallas-Fort Worth markets and Byars says the chain serves customers from over 100 countries. “More and more, customers are looking for authentic brands. They want the real thing. Our goal is to have those varieties, plus the experience, available for our customers.” Fiesta Mart is trying to leverage the massive growth in the U.S. Hispanic population, which is expected to double by 2050, according to sales and marketing research firm Acosta. In addition, Hispanic customers tend to buy more groceries and shop more often than other demographics in the United States. A recent study by Nielsen revealed that Hispanics are true to their heritage, attracted by cultural touchstones of smell, taste and familiarity, which is hard for traditional grocers to replicate in a store designed and assorted for mass-market appeal. More than half — 61% — said they shopped at cultural supermarkets at least once over the past year. “Fiesta Mart offers authenticity. Our customers look for scratch-made products in the bakery (cakes, pan dulce, etc.) all made in-store. We have skilled, certified meat cutters, bakers and cake decorators ready to help our customers with anything they need. We have international foods from over 30 countries. Our prepared foods are made fresh, from authentic recipes,” Byars said. Last year, Fiesta Mart went on a remodeling spree in an effort to expand its appeal to a wider demographic. New store features include Puerto Rican breads, redesigned employee uniforms, a larger apparel section and a smoothie bar. “What you see in the new format is a store that still is relevant not only to the core Hispanic shopper but also provides outreach to any of the demographics we serve,” Byars said of a revamped market in Houston. “The grand re-openings are part of a long-term reinvigoration of Fiesta and our commitment to provide uncompromised freshness, great value and unsurpassed variety every day. We have been meticulously working to bring Fiesta to life in these locations. We’ve evaluated every item to ensure we meet the needs of local customers, and we have brought more variety
THE ETHNIC EFFECT
Index of fresh spend to total basket in key categories. AFRICANAMERICAN
Read as: African-Americans spend 16% more on meat than the average consumer. SOURCE: Nielsen Homescan TSV Panel, data 52 weeks ending July 2, 2016
that did not previously exist in some locations such as fresh seafood and our vast assortment of international grocery offerings.”
MORE THAN A STORE Pure-play chains such as Fiesta Mart are winning by truly knowing the customer and catering to specific cultural expectations and differentiators, said Ryan Fisher, a Principal in the Consumer and Retail practice of A.T. Kearney. “Leading Hispanic chains such as Fiesta Mart have some the best perimeter merchandising in the market. Quality produce merchandised in farmers market-like fixtures, a back wall of every type of cut of meat a person could want and in-house bakeries are all standard. In-store restaurants and tortillas are also big differentiators. In addition to store merchandising, ethnic grocers focus on brands and price to match their target consumers,” Fisher said. While Fiesta Mart has a large presence in Texas, it’s not the biggest Hispanic chain in the state. La Michoacana Meat Market is the largest Hispanic grocery chain in the country, with nearly 100 locations in Texas. La Michoacana stores typically offer a mole bar, a wellstocked cheese case stuffed with Mexican quesos, giant pork rinds and Mexican beers. The hot food bar and taqueria offer specialties such as gorditas, sopes and ceviches. Sales circulars are written in Spanish. Yet, it’s not just the Hispanic chains that are poised for growth. Other ethnic markets focused on Asian foods are also booming. Last year, California-based SUMMER 2017 Retail Leader.com
> GROWTH AND BUSINESS DEVELOPMENT Japanese chain Seiwa’s first store in Houston opened to large crowds, according to local media reports. The value proposition at Seiwa is all about the sushi: It is made with high-grade rice and some of the fish are flown in from Japan. Seiwa also boasts the largest assortment of Japanese products in the United States, and a staff member could be overheard telling a customer that the prepared foods are cooked in “the strict Japanese way.” A few miles from the Houston Seiwa, one of the largest Asian grocery chains in the United States, H-Mart, has opened a store with a food court, a housewares shop and a yakitori restaurant. Down the street, 99 Ranch Market is encroaching on H-Mart’s turf. With locations in California, Washington, Nevada and Texas, 99 Ranch Market has expanded rapidly because of its popularity within the Asian community and is now the largest Asian grocery chain in the country. The market in Houston offers a mix of Korean, Vietnamese, Chinese, Japanese, Thai and other Asian foods. The store has a huge bakery with seating, a produce department stocked with every vegetable one might need for an Asian recipe, and an enormous seafood selection (including many things still swimming). The market also has an instore mini-mall that carries a selection of Asian cosmetics, toiletries and jewelry, as well as a pho bar. All of these strong offerings from ethnic grocers are pushing some traditional grocers to increase their ethnic offerings. Some traditional food retailers are placing a bigger emphasis on ethnic with greater shelf space and broader assortments. While Walmart, Target, Kroger and other big chains expand their ethnic assortments, Southeastern Grocers recently opened five Fresco Y Mas
99 Ranch Market is an Asian American supermarket chain owned by Tawa Supermarket Inc. and based in Buena Park, Calif.
branded stores in South Florida catering to Hispanic communities (see sidebar). “Conventional grocers can win diverse shoppers by managing ethnic as its own growth category and not just an add-on to the assortment. Winning in ethnic is about knowing the customer and providing a broad-enough assortment that can be paired with a more traditional assortment to fill baskets,” Fisher said. Traditional supermarkets may not be able to offer the expansive assortment seen in ethnic stores, but one of the ways retailers can stay relevant is by catering their product mix to their customer demographics. Traditional Food retailers should be looking to leverage the potential of an ethnic food trend that is only intensifying. RL
SOUTHEASTERN GROCERS MAKES A CULTURAL CONNECTION For Southeastern Grocers, catering to multicultural consumers means more than just adding a few ethnic products to the assortment and adding new signage. It’s about a determination to put the right store experience in front of the shopper. Last year, the company piloted a new format branded as “Fresco y Mas,” and has since converted 11 of its former Winn-Dixie stores to the new banner. The stores are designed to offer an authentic product assortment experience to South Florida’s large Hispanic community with offerings that include pork roasting machines, a cafeteria with carne asada and yucca and a bakery with tres leches and pan dulce. Another interesting store feature is the “dollar” zone: an aisle in which more than 600 popular Hispanic staples, spanning the grocery, cleaning and health and beauty categories, cost only a dollar. “We are meeting the expanding consumer demand of providing more communities with an authentic Hispanic grocery store,” said Ian McLeod,
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President and CEO of Southeastern Grocers. “As we continue to listen and learn from our customers, we are developing new stores that reflect exactly what our shoppers are looking for. Each store’s new Hispanic-focused product assortment and features are our commitment to providing a shopping experience that reflects the cultural connection we strive to make with our Hispanic customers.” McLeod hasn’t said how many more Fresco Y Mas stores are planned and the company declined several interview requests. However, it is clear Southeastern Grocers has a potential growth opportunity on its hands. Many of the company’s 730 stores are located in states with large Hispanic populations, creating the potential for banner conversion in markets with the densest populations. At a minimum, Southweastern should be able to leverage insights from shoppers product preferences at Fresco y Mas locations to inform assortment decisions at its traditional stores where non-Hispanic shoppers are also clamoring for ethnic items. RL
It’s one thing to know what he’s buying today. But what about tomorrow? There’s a science to knowing the answer, and when you work with Nielsen, that science is working for you. Learn more about The Science Behind What’s Next™ at nielsen.com.
Copyright © 2017 The Nielsen Company (US), LLC. All Rights Reserved.
> COVER STORY
A ranking of global retail leaders competing for shopper dollars in the food, consumables, health, beauty and wellness worlds. > By Mike Troy
he RL100 is Retail Leader’s look at the world’s most significant companies operating in the retail industry based on their annual revenues. The goal in compiling the list was to provide a definitive ranking of the largest retailers offering food, consumables, health, beauty and wellness on a global scale. It is a massive industry worldwide and the companies comprising the RL100 ranking combined to grow annual revenues by 5.5 percent to $3.63 trillion in 2016 from $3.44 trillion the prior year. It is worth noting that a conscious effort was made to develop the list based on a company’s total revenues 16
Retail Leader.com SUMMER 2017
as opposed to retail sales. At some companies revenues and sales are synonymous, however at more diversified organizations retail sales is a subset of revenue. The distinction is important because it is the revenues and profitability of the entire enterprise that bolsters or undermines retail performance. The best example of this phenomenon is Amazon. Its Amazon Web Services (AWS) division accounted for only 9 percent of last year’s total company revenues of nearly $136 billion, but generated 74 percent of total operating income of $4.2 billion.
It should also be noted that inclusion on the RL100 does not mean a company is necessarily a retail leader even though revenue generated from customers remains the industry’s ultimate measure of success. However, the industry is dynamic so there are always companies advancing and others declining. That was the case last year with a total of 78 companies reporting sales growth and another 22 experiencing declines. What’s not so easy to spot are the new breed of retail leaders whose approach to innovation and development of new business models are impacting established retailers even if their revenues aren’t significant enough to warrant inclusion on the RL100. Established retailers hoping to remain on the RL100 or advance through the ranks in the years ahead will be those best able to capitalize on some or all of the following seven trends: Speed: It wasn’t an accident that the phrase, “moving with speed,” appeared on the cover of Walmart’s annual report. The world’s largest retailer is out to convince investors that it is nimble, aggressive and taking action to serve shoppers in new ways to maintain its dominance. Walmart is not alone in its desire to take action more quickly. The concept of speed has always been important in retail, to move more quickly than competitors, but now consumer adoption of technology has left most retailers in “fast-follower” mode attempting to keep pace with customers more so than competitors, many of whom are in the same boat. Speed applies to every aspect of retail now, from decision-making to implementation. Recent years have seen retailers move to doing in days what used to take weeks or months, but the next progression is doing in hours what used to take days and in extreme cases doing in minutes what used to take hours.
Seamless Execution: Online is not a channel and retailers and brands who continue to regard it as such are in peril. Attempting to attribute a sale as digital or physical misses the point and is impossible anyway because shoppers flit back and forth between these worlds. The concept of seamless integration between physical and digital remains an elusive goal for many retailers who provide a clunky experience, but mastery of the art of seamless has become essential. Direct-to-Consumer: The phenomenon of brands selling direct to shoppers will continue to gain momentum in the years ahead. It represents a viable distribution option for major brands and especially tertiary brands unable or unwilling to comply with retailers’ financial and supply chain requirements. These brands also increasingly have available to them the cross border trade opportunities with companies such as Alibaba eager to help facilitate the sale of U.S. brands in China via its platform. That Could Have Been Us: The lack of innovation will be the undoing of many a retailer in the years ahead. While some conventional operators are focused on driving scale the old fashioned way, such as the 2016 merger of Ahold and Delhaize Group or the 2015 tie up between Albertsons and Safeway, other companies are inventing new ways of serving shoppers. The best most recent example is meal kit provider Blue Apron, a company whose first quarter sales have it on track to surpass the $1 billion mark in 2017. Supermarkets wedded to a legacy model of relying on promotions to generate traffic ceded the meal kit space to startups even though they had the infrastructure and proximity to customer to execute a meal kit program. Don’t let it happen again.
Online is not a channel and retailers and brands who continue to regard it as such are in peril.
Convenience: Retailers are moving more quickly because consumers are moving more quickly, demanding to be served in new, faster more efficient and always less expensive ways. As the level of convenience demanded by consumers continues to increase, retailers competing in the age of instant gratification have to look in the mirror and honestly assess and repair the potholes along the path to purchase shoppers traverse to interact with their brand.
The Death of Channels: Retailers who think in terms of channels are doomed because shoppers don’t think in terms of channels. Channel blurring is a well-established trend, yet it is common for those in the industry to ascribe channel monikers to segment the marketplace in outdated ways that are not relevant to shoppers. Traditional supermarkets compete with every other venue that sells food. The extreme proliferation of competitors vying for share of stomach means requires traditional retailers of fresh and packaged food to think much differently about their competitive set.
Customer Service: Customer service takes many forms in the digital world, but even Millennials want to be able to interact with a human when other forms of communication are unsuccessful. The same is true in physical stores where in a classic chicken and egg scenario, retailers have degraded the store experience by “optimizing” store labor and then wondering why shoppers have migrated online. It has been said countless times, even by online-only retailers, that there will always be a role for physical retail. Those who are most successful will find a way to provide customer service in the way that shoppers want to receive it rather than how retailers are willing to provide it. All of the above, as well as numerous other factors, will determine the composition of next year’s RL100 list. For example, the retailer best able to capitalize on drone delivery, autonomous vehicles or robotics will likely fare well in a future that arrives more quickly every day. RL SUMMER 2017 Retail Leader.com
> COVER STORY Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50
Company Wal-Mart Stores CVS Amazon Schwarz Gruppe/Lidl & Kaufland (Germany) Costco Walgreens Boots Alliance Kroger Home Depot Aldi (Germany) Carrefour (France) Aeon Co., Ltd. (Japan) Tesco (U.K.) Target Metro Ag (Germany) Ahold Delhaize (Netherlands) Lowe’s Companies Albertsons REWE Group (Germany) Auchan Holding SA (France) Leclerc (France) Seven & I Holdings (Japan) Edeka (Germany) Intermarche (France) Wesfarmers (Australia) CK Hutchison Holdings/A.S. Watson (Hong Kong) Woolworths (Australia) Groupe Casino (French) JD.com (China) Loblaw Companies Limited (Canada) Alimentation Couche-Tard Publix Super Markets TJX COS INC Système U, Centrale Nationale Rite Aid J Sainsbury (U.K.) Coop Group (Switzerland) Migros (Switzerland) Macy’s Lotte Shopping Co. (S. Korea) H-E-B Grocery Alibaba (China) Mercadona (Spain) Sears Holdings Dollar General Dollar Tree WM Morrison Supermarkets (U.K.) Dairy Farm International (Hong Kong) Empire Company/Sobeys (Canada) Kohl’s Staples
2016 Revenue (USD. Mil.) 485,873 177,526 135,987 128,327 118,719 117,351 115,337 94,595 93,399 79,696 73,129 70,056 69,495 66,454 65,669 65,017 59,678 57,050 55,649 55081 53,032 52,256 51333 48,940 48,057 44,916 37,959 37,465 35,370 34,145 33,999 33,183 32947 32,845 31,898 29,204 26,051 25,778 24,474 23,000 22,994 22,781 22,138 21,986 20,719 20,467 20423 19,102 18,686 18,247
2015 Revenue (USD. Mil.) 482,130 153,290 107,006 118,961 116,199 103,444 109,830 88,519 87,171 81,066 72,832 67,570 73,785 65,554 64,141 59,074 58,734 54,353 56,696 49208 52,973 50,992 44098 46,318 51,074 45,284 37,203 26,109 34,614 34,530 32,362 30,944 26048 30,736 28,592 28,924 25,712 27,079 24,139 21,931 14,694 21,946 25,146 20,368 15,498 20,223 17907 18,567 19,204 18,764
YOY % Chg 0.8% 15.8% 27.1% 7.9% 2.2% 13.4% 5.0% 6.9% 7.1% -1.7% 0.4% 3.7% -5.8% 1.4% 2.4% 10.1% 1.6% 5.0% -1.8% 11.9% 0.1% 2.5% 16.4% 5.7% -5.9% -0.8% 2.0% 43.5% 2.2% -1.1% 5.1% 7.2% 26.5% 6.9% 11.6% 1.0% 1.3% -4.8% 1.4% 4.9% 56.5% 3.8% -12.0% 7.9% 33.7% 1.2% 14.1% 2.9% -2.7% -2.8%
THE RL100 RANKING METHODOLOGY The RL100 ranking that appears on pages 18 and 19 is a ranking of global retailers for whom the merchandise categories of food, consumables, health, wellness, beauty and related products comprise the bulk of their sales or represents a key aspect of their go-to-market strategy. The list is compiled from extensive Retail Leader research and other sources deemed reliable
Retail Leader.com SUMMER 2017
Rank Company 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100
2016 Revenue (USD. Mil.)
Meijer X5 Retail Group (Russia) Ace Hardware PJSC Magnit (Russia) Wakefern / ShopRite China Resources Vanguard (China) John Lewis Partnership/Waitrose (U.K.) Whole Foods Market Cencosud (Chile) Nordstrom Companhia Brasileira de Distribuicao (Brazil) L Brands JC Penney BJ’s Wholesale Club Supervalu Bed Bath & Beyond Southeastern Grocers Co-Operative Group Ltd. (U.K.) S Group (Finland) E-Mart (S. Korea) CST Brands Hudson’s Bay Company Office Depot Trader Joe’s Liberty Interactive (QVC) Hy-Vee Giant Eagle Canadian Tire Shoprite Holdings (South Africa) Army & Air Force Exchange Service Wegmans Food Markets Petsmart Spartan Nash Co. Casey’s General Stores Soriana (Mexico) Tractor Supply Co. President Chain Store Corp. (Taiwan) WinCo Foods Dillard’s Pick n Pay Holdings (South Africa) Defense Commissary Agency (DeCA) Lawson (Japan) Big Lots Inc. Neiman Marcus Ulta Salon Cosmetics & Fragrance Save-A-Lot Petco Smart & Final Stater Bros. Markets The Save Mart Cos.
17,430 16,849 16,677 16,255 16,000 15,915 15771 15,724 15,446 14,498 12,749 12,574 12,547 12,500 12,480 12,104 11,820 11,652 11609 11243 11,106 11,022 11,021 10678 10,647 9,800 9,500 9,414 8,800 8,500 8,300 7,950 7,735 7,506 7,045 6,780 6,658 6,500 6,256 6,104 5,560 5537 5,200 4,950 4,854 4,488 4,480 4,342 4,300 4,200
2015 Revenue (USD. Mil.) 16,900 13,210 14,345 14,441 15,400 17,606 15278 15,389 16,430 14,095 11,434 12,154 12,625 12,000 12,907 11,881 11,898 11,318 11377 10637 11,455 8,511 11,727 9949 9,989 9,600 9,500 9,116 7,695 7,206 7,900 7,700 7,652 7,122 5,160 6,227 6,353 6,400 6,595 5,669 4,646 5117 5,191 5,100 3,924 4,623 4,100 3,971 4,100 4,300
YOY % Chg 3.1% 27.5% 16.3% 12.6% 3.9% -9.6% 3.2% 2.2% -6.0% 2.9% 11.5% 3.5% -0.6% 4.2% -3.3% 1.9% -0.7% 3.0% 2.0% 5.7% -3.0% 29.5% -6.0% 7.3% 6.6% 2.1% 0.0% 3.3% 14.4% 18.0% 5.1% 3.2% 1.1% -5.1% 36.5% 8.9% 4.8% 1.6% -5.1% 7.7% 19.7% 8.2% 0.2% -2.9% 23.7% -2.9% 9.3% 9.3% 4.9% -2.3%
including Kantar Retail, Deloitte and Fung Global Retail and Technology. The ranking is based on a company’s total revenue, rather than the subset of retail sales, because it provides the broadest view of a company’s overall performance which impacts retail competitiveness. In cases of international retailers who report financial results in local currencies revenue figures were converted to U.S. Dollars on the date of their most recently reported fiscal year end. RL
RL_717_16-19_Cover StoryGA.indd 19
SUMMER 2017 Retail Leader.com
6/23/17 3:31 PM
the heartbeat of the marketplace
Make It Mine Non-food manufacturers carve out growth with shopper-centric approaches.
he rise of digital media has brought have found opportunities to carve out growth in power to the fingertips of today’s a low-growth environment. Many are innovatshopper. Shoppers have the knowling within existing categories and creating new edge that comes from shared inforproducts that deliver on needs many shoppers mation and experiences. They have didn’t even know they had quite yet—they’re choices—choices in not only where the shop, making shoppers’ lives easier, more affordable but also in what they buy. They expect—even and more convenient than ever. demand—information and experiences that are relevant to their personal needs and wants. Delivering Dollars, or not As a result, shoppers are in control. This Though these innovative products are successis a wave that had been building for several fully engaging and activating shoppers, it is imSuSan ViamaRi, IRI Vice years, and the impact on the CPG industry has portant to note that the very nature of targeted President, Thought Leadership been profound. From a new product innovainnovation translates to smaller dollar sales. tion standpoint, the demand for relevance Median year-one dollar sales from even the most has raised the bar. Manufacturers must dial in on growth impactful product launches are declining. pockets, focusing on personalization to deliver on the high During the past several years, the number of IRI New Product expectations of shoppers today. Pacesetters earning less than $20 million in year-one sales has Savvy non-food manufacturers are successfully meeting nearly doubled. This year, two-thirds of NPP 2016 brands earned that bar with products that demonstrate a keen understanding less than $20 million in their first full year on retail shelves. of their shoppers’ consideration sets. IRI’s 2016 non-food New Product Pacesetters exemplify companies and brands that ConvenienCe takes Many ForMs For years, convenience has been a cost of entry in CPG aisles and it remains a significant driver of new product trial today. IRI New Product Pacesetters In non-food aisles, that means products that provide profesYear-One Sales Distribution sional-quality results at the price and with the convenience that only a home-based option provides. Shoppers have high $ Millions expectations of performance and value in non-food purchases, > $100 6% 6% and easier, better and longer-lasting results are also imperative. $80-$99 6% 14% Understanding what is convenient for key shopper targets is 22% $80-$99 $80-$99
$80-$99 < $20
38% 67% 37%
Source: IRI Market Advantage™, new products that completed their first year in calendar 2016. Note: Numbers may not add to 100% due to rounding.
Retail Leader.com Summer 2017
Personalization is huge and driving down the median sales take of the most successful product launches. Food & beverage median year-one sales: $11.4M non-food median year-one sales: $17.6M Personalized for: Lifestyle Skin Type Skin Tone Mood & More!
Data & Insight Provided By
also essential. Twenty-three percent of IRI’s 2016 New Product Pacesetter non-food brands offered convenience-oriented benefits that cut a wide swath of intrigue in the marketplace. With R&D technology, CPGs are delivering on these needs, but convenience remains an essential factor in winning. The products that shoppers respond to make their lives easier with simplified, more powerful products and streamlined ingredients. Products need to make cleaning easier and more thorough, beauty care more “professional-grade,” and personal care simpler and more discrete. As technology continues to advance, expectations will also rise. Non-food manufacturers must invest to keep a solid pulse on the next great thing, especially given how quickly shopper demands change and how quickly they are informed on the good—and bad—of any product or brand.
WiNNiNg MeaNS STayiNg aheaD oF The gaMe
The pace of change is escalating. Competition is fierce and shoppers are relentless in their pursuit of the next great thing. To win, CPGs absolutely must keep pace. This is no easy feat in an industry historically dominated by goliaths. The tides of change, though, are strong. Small and medium-sized players, many of whom are new to the CPG industry, are increasingly launching brands that achieve New Product Pacesetter status. In 2016, small and medium manufacturers accounted for more than three-quarters of Pacesetter companies, and 64 percent of Pacesetter dollars. Mid-size and large CPGs have taken notice and are investing heavily to compete more effectively in nuanced growth pockets. Mindsets are changing. Winners in the CPg world going forward will: Think like a start-up: move fast or fall behind
Proceed with a solution mindset: Think like a shopper
non-food NPP brands feature these attributes:
Strike with precision: Understand the shopper and resonate to activate
This year’s non-food New Product Pacesetters deliver. They deliver by building their brands and their own companies, and by driving sales at retail in meeting shopper needs and demands with personalization at the center of strategy. The market will continue to evolve and innovation will continue to challenge. But with a focus on shopper insights and desired product attributes, growth in non-food categories will continue as long as the approach is customer-centric. RL
Convenient multiple benefits Simple ingredients Simplified design
IRI 2016 New Product Pacesetters: Non-Food 1
The Pioneer® Woman Collection
Gillette® Fusion® ProShield™
Skin Care, Facial Cosmetics
CESAR® HOmE DELIGHTS™
Tide PODS® Plus Febreze™
Tampax® Pocket Pearl™
Sanitary Napkins/ Tampons
Crest® Pro-Health™ Advanced™
80.1m Old Spice® Fresher Collection™
Deodorant, Soap, Shampoo
Source: IRI Market Advantage™, new products that completed their first year in calendar 2016.
Summer 2017 Retail Leader.com
September 27-28, 2017 Donald E. Stephens Convention Center Rosemont, IL
Achieving Operational Excellence Progressive Grocer invites retailer executives to learn more about how to create and maintain successful and strategic fresh prepared food programs that boost customer loyalty and boost store profits. • Learn about health & wellness opportunities in fresh prepared foods • Break down in-store silos for total meal solution success • Discuss and find solutions to find and maintain passionate employees • Network with other retailers that share your interest in grocerant opportunities
For more information, contact: Katie Brennan kbrennan@ensembleIQ.com • 917-859-6319
> SUPPLY CHAIN
The Fresh Supply Chain A NEW APPROACH TO OPERATIONS AND COLLABORATION UNLOCKS PRODUCE POTENTIAL. > By John Piatek and Giacomo Tortora
Produce has been the star of the show for food retailers for a long time. Looking to communicate an image of freshness and quality from the moment shoppers arrive in store, grocers have moved packaged goods away from center stage while positioning produce as the focal point of the store. The strategy has paid off, with produce growing at an annual rate of 4 percent while other grocery categories collectively muster annual growth of around 1 percent. Meanwhile, consumers have spoken. They have voiced concern about food waste, they demand quality, and most important, they want transparency — not just evidence that a product meets food safety requirements, but traceability from the grower to store aisles. The good news is that, just as consumers’ expectations are changing, so are suppliers’ capabilities. They are changing in ways that favor new forms of engagement with grocery retailers that offer the potential for even greater growth. The time has come for grocers to invest in their upstream capabilities to gain better control of the value chain that will enable produce to remain the star of the increasingly experiential retail show. Retailers need to form strategic partnerships and invest in a different set of produce capabilities at multiple points in the value chain — especially for the most in-demand items.
MULTIPLE PATHS TO PARTNERSHIP There is a concentration of commercial and agricultural sophistication among suppliers unlike anything that has previously existed. Data show that over the past few years, the agricultural landscape has John Piatek
undergone significant consolidation. In the United States, for example, from 2002 to 2012 the number of farms required to produce 75 percent of our fruits, tree nuts and berries declined by 30 percent. Viewed over a longer time horizon, during the past 25 years the size of the average U.S. farm has nearly doubled, from 589 acres to more than 1,100 acres. While supplier partnerships are still a comparative novelty among major grocery chains, there are notable exceptions elsewhere in the industry. For example, companies such as Heinz and Del Monte have integrated with growers to the extent that they finance R&D programs to develop proprietary seed varieties to differentiate their offerings from competitors’. Food industry partnerships often take the form of joint ventures with long-term contractual linkage and a defined objective. Participants share costs, risks, profits and losses. It is an approach waiting to be adopted — and adapted — by grocery retailers in managing their produce supply chain. Retailers, for example, might reach agreements with growers to provide operational and financial support — co-developing products through research and development investments or creating agreements that reduce commercial risk. In exchange, growers would prioritize the needs of the retailer with whom they form partnerships. SUMMER 2017 Retail Leader.com
> SUPPLY CHAIN Acquisition is another approach that allows retailers to not only ensure supply but also tighten quality control. It also improves their ability to reduce prices for consumers. To date, relatively few retailers have taken steps in these directions. One is UK grocer Morrisons, which acquired a flower grower as well as meat and seafood processing facilities. In the U.S., Whole Foods has forged partnerships with small growers, supporting them through low-interest loans and the promise of shelf space for product test runs.
INVEST IN ORGANIZATIONAL CAPABILITIES Until now, supermarket retailers have not typically built elaborate buying functions for produce, opting instead to develop selective relationships with farmers and cooperatives. Usually these relationships are managed from a headquarters that is a significant distance from the suppliers, which sets up the need to use brokers and wholesalers as intermediaries — again, on a selective and transitional basis. Thus, the responsibilities of a typical produce-management team can get blurred. In some cases, the same team responsible for finding new produce sources and maintaining relationships with an existing grower base also manages supply-chain flows and shippers to make sure fresh foods arrive on time. Frequently they also have input into overall merchandising strategy and participate in end-to-end category management. Splitting and specifying these roles would enable managers to focus on what they do best. Grocers will need, for example, superior capability in the management of supply-chain lead times and warehouse flow management. Only in this way can they build a reputation for the freshest available produce without spiking holding costs or waste. To influence outcomes directly, retailers need to position talent further up in the value stream. If they change the way they collaborate, suppliers will get earlier demand signals, retailers will adapt their sales and operational processes to be more forward looking and simultaneously more responsive to volatility, and — best of all — costs will go down, quality will go up.
IMPLICATIONS OF INVESTING IN THE VALUE CHAIN The competitive advantages of this kind of investment across the produce supply chain are easy to name. In response to volatility, a new agility is introduced. Time Giacomo Tortora
to market shrinks. Targeted promotions are enabled, driving shoppers into stores. A sustained reputation for quality drives sales and burnishes the retail brand, increases supply availability and supports improved margins. With these benefits comes imThe time has proved understanding of the flow of fresh come for grocers food across a complex value constellation, including full cost transparency. Risks to invest in to supply security are reduced; so is food waste. Actors at every point in the supply their upstream chain can be integrated through enhanced capabilities information sharing and unified planning. The opportunities this creates for prodto gain better uct innovations — and for exclusive access control of the to those innovations — create additional competitive advantage. Retailers might value chain be able to structure relationships to make themselves first to market on key items. that will enable Operating closer to sources of supproduce to ply is not risk free. Retailers will need to consider the strategic and operational imremain the star of plications of both their existing business model and the model they wish to build. the increasingly Are they prepared to make an investment experiential in analytics to unlock currently hidden value? Do they have the expertise required retail show. to conduct fact-based negotiations with suppliers? Are there agronomy experts inside the organization who speak the language of growers? How will a supplier’s existing customer base react once it is owned by a potential competitor? To give themselves a better chance of long-term success, retailers will do well to test new upstream strategies on a small, local scale. Centers of excellence will emerge inside grocery retailers, which would be something new in the industry, and a tremendous boost to innovation. There is competitive urgency to getting this right. Grocery margins are razor thin, as they always have been. Food prices are under deflationary pressure, and many major chains are struggling. In an operating environment like this, building capabilities close to the source of supply, while not free of risks, is a potent and smart growth strategy. RL John Piatek and Giacomo Tortora are principals in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. SUMMER 2017 Retail Leader.com
> FINANCE AND CAPITAL MANAGEMENT
Who Pays BEST A NEW STUDY FROM RESEARCHERS AT RUTGERS SPOTLIGHTS A MAJOR PAIN POINT IN RETAILER AND SUPPLIER RELATIONS. > By Mike Troy
W Rudolf Leuschner
When retailers and suppliers talk about partnership and collaboration the focus tends to be on two areas: merchandising and marketing initiatives that drive sales or operational matters of making sure products are in the right place at the right time. Overlooked in these conversations is how and when retailers make — or don’t make — payments to their trading partners. Retailer payment practices can vary widely and though suppliers seldom discuss the issue publicly they are quick to fume privately about terms, fees, chargebacks and invoicing practices. To explore what is arguably the most important aspect of a retailer and supplier relationship, two professors with the Center for Market Advantage at Rutgers Business School surveyed 630 supplier company representatives knowledgeable about the procurement and payment practices of their retailing clients. The firstof-its-kind study was conducted by Rudolf Leuschner, an assistant professor in the Rutgers department of supply chain management, and Sengun (Shen) Yeniyurt, an associate professor in the university’s marketing department. The pair created a payment practices satisfaction index by exploring seven key areas with survey participants asked to assign a ranking of one to five based on their level of satis-
Retail Leader.com SUMMER 2017
faction with seven payment practices metric that included: Length of payment terms. Track record, or history, of on-time payments. Invoice adjustments such as reserves, charges and holds. Visibility of approved invoices. Payment dispute resolution. Offering of alternative funding options. Overall satisfaction with retailer’s payment process. The study sought to examine the 50 largest U.S. retailers, however four retailers were excluded (Seven Eleven, Health Mart Systems, L Brands and Bi-Lo) from the ranking because the researchers were unable to obtain an adequate number of supplier responses. According to Leuschner and Yeniyurt, it has become increasingly common in several industries to increase the length of the payment terms. Traditionally, the norm was 2/10 net 30, meaning the full payment was due 30 days after receipt of the invoice, with a two percent early-
Retailer payment practices can vary widely and though suppliers seldom discuss the issue publicly they are quick to fume privately about terms, fees, chargebacks and invoicing practices.
pay discount for payments within 10 days. Now, some companies have extended terms to as long as 120 days, according to the researchers. “Within the retail industry we see a shift towards longer payment terms, although there are still a number of retailers paying in 30 or 45 days. This lengthening of the payment terms has obvious advantages for buyers as it expands accounts payables and increases cash on hand. However, it can put great stress on suppliers if not managed carefully,” according to the study. “Additionally, some large firms are working on shortening the accounts receivable cycle. They tend to do this at the same time that buying firms are working to extend their payables, which creates tension between the buying firms and their suppliers.” According to Leuschner and Yeniyurt, payment practices in the retail industry are a big deal with huge implications for suppliers. As large retailers are streamlining their supply chains, their suppliers have increased difficulty in financing their operations. This difficulty of obtaining funding can have severe implications on profitability, cash flow, and working capital, with cash flow difficulties even leading to bankruptcies and supply disruptions, according to the study’s authors. “Until recently, the field of supply chain management was primarily concerned with sourcing, making, and delivering. Nowadays, for many firms, maintaining a strong cash flow is big challenge and funding is a priority,” according to the study. “Thus, firms are looking to their supply base beyond sourcing partnerships, towards funding.” The study describes a scenario where expectations to carefully manage cash flows means senior managers are increasingly focused on working capital management even as small and medium sized enterprises and non-investment grade firms find it difficult to finance their working capital requirements. However, small and medium sized firms constitute a large portion of the supply base for larger retailers. “Although large companies generally have investment grade ratings, enjoy easier access to capital and get more favorable financial terms, they still find the idea of raising additional capital by utilizing their supply chains very attractive,” according to the study. RL Leuschner is the founding Co-Director of Rutgers Master of Supply Chain Management program and the curriculum coordinator for the MBA program at Rutgers Business School. Yeniyurt also serves as the founding Co-Editor-in-Chief of Rutgers Business Review.
Supplier Satisfaction Scorecard Retailers’ Payment Practices Ranked on Scale of 0 to 100 Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46
Retailer Dollar Tree Whole Foods Market Family Dollar Stores Hy-Vee H-E-B Grocery Publix Super Markets Costco Ross Stores Supervalu Sherwin-Williams Wegmans Food Markets Aldi Ace Hardware Staples Trader Joe’s TJX J.C. Penney Co. BJ’s Wholesale Club CVS Caremark O’Reilly Automotive Gap WakeFern / ShopRite Rite Aid Albertsons Dick’s Sporting Goods Nordstrom Amazon.com Meijer Target The Home Depot Dollar General Wal-Mart Stores Walgreens Best Buy Menard The Kroger Co. Safeway Giant Eagle Lowe’s Companies Kohl’s Toys “R” Us AutoZone Macy’s Ahold Delhaize (Stop & Shop) Sears Holdings Bed Bath & Beyond
SOURCE: Center for Market Advantage at Rutgers Business School
Index Score 89.063 82.146 82.143 79.722 78.571 78.247 78.054 77.556 75.649 75.000 74.206 73.539 72.269 68.687 68.214 67.471 67.397 66.964 65.363 65.306 64.935 64.286 63.992 63.903 63.333 63.031 62.168 61.429 61.310 60.464 60.357 60.295 58.481 56.349 56.303 56.201 55.238 54.911 53.231 52.798 51.939 51.339 50.466 50.000 45.220 42.437
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6/6/17 11:14 AM
> FINANCE AND CAPITAL MANAGEMENT
Perception and Reality HEADLINES ABOUT THE DEMISE OF PHYSICAL RETAIL HAVE BECOME COMMON, BUT THE 37,000 PEOPLE WHO GATHERED IN LAS VEGAS IN MAY SEE THINGS DIFFERENTLY. > By Mike Troy
The narrative that malls are dying and retail overall is struggling gained more momentum earlier this year when Macy’s, J.C. Penney and Sears announced store closings. Several companies in the always volatile specialty and teen apparel segments went bankrupt and there were also notable bankruptcies from Marsh supermarkets, electronics and appliance retailer HHGregg, and off price department store chain Gordmans. So there would appear to be a huge disconnect when Tom McGee, CEO of the International Council of Shopping Centers (ICSC), offers a favorable description of the industry’s fundamentals. “Were not trying to spin things in any unsubstantiated way. The fundamentals of the retail real estate industry are strong and supported by facts,” McGee said. Those fundamentals, things like net absorption, project completions, space availability and rent growth, are indeed favorable, which has a lot to do with the reaction of developers and retailers in the wake of the recession. Developers slowed the pace of new construction and retailers stopped expanding in reaction to the extreme financial situation that emerged in 2008. While new space was slow to come online, as the economy improved retailers looking to grow found limited availability and higher rents. The result is strong occupancy rates, especially at well-located properties and grocery anchored centers, and lease rates that on average are around an eight-year high and projected to rise further this year, according to CBRE, the world’s largest commercial real estate services and investment firm. “There are still plenty of retailers expanding and you see many more international retailers coming to the U.S.,” said Brandon Famous, CBRE’s Senior Managing Director and Retail Leader for the Americas. As for the mid-tier department store closings, those aren’t exactly unwelcome events because it means mall owners can adjust rents to market rates. “Owners can refresh a tired mall. It gives them an opportunity to create something special.” Famous was among the record number of 37,000 attendees at ICSC’s global retail real estate convention known as RECon, which McGee described as having a mood of “focused optimism.” In other words, although the fundamentals of the industry are strong, there are trends impacting retail real estate that represent challenges and opportunities. “There is a big demographic shift happening in the country
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that isn’t fully appreciated,” McGee said referring to Millennials who outnumber Baby Boomers and are entering their peak spending years. The shopping center industry, which is still department store centric, “is evolving toward the needs of the Millennial generation. Malls and shopping centers have always been community Tom McGee, President and centers that offered goods and CEO, International Council of services and they continue to Shopping Centers fulfill that value proposition, but the desires and what the folks in the community want has changed so the focus is becoming less product driven and more experience and service driven.”
FOOD RULES A key milestone in the evolution of the retail industry occurred in March 2016. The role of food and the prevalence of dining options in retail centers was a trend underway for at least a decade, but last year was the seminal moment when food away from home sales exceeded food at home sales. “More and more landlords are looking at food and beverage operators for their retail properties,” said Stephen Taylor, Vice President of CBRE’s Retail/Restaurant Practice Group. He cites key trends as the growth of food halls and chefdriven concepts while casual dining chains are under pressure and intensifying competition in the fast casual space. “We are doing more food in malls and that will start a transformation,” said Stephen D. Lebovitz, President and CEO of CBL & Associates Properties. The company owns, holds interests in or manages 123 properties of which 80 are regional malls or open air centers, and recently acquired five Sears and four Macy’s locations it plans to put to better use. “You have to create the type of convenience that works for the shopper,” Lebovitz said regarding the company’s strategy to evolve its malls to suburban town centers by adding dining options, entertainment, value and off-price concepts, health and wellness, services and non-retail uses.
CBL is not alone in its desire to add food, which is why there are some aggressive forecasts around how the tenant mix in shopping centers is going to change. For example, JLL projects that by 2025 the amount of space dedicated to food within existing properties will reach 20 percent, up from 5 percent a decade ago. In terms of retail tenants, food is clearly the hottest segment right now but so are value and home, according to Greg Maloney, President and CEO of the Americas Retail Group at JLL, a global professional services firm that manages 4.4 billion square feet of space. “We never used to talk to grocers and now we talk to them all the time. Just think about all the different ways people eat,” Maloney said. In addition to the changing tenant composition, Maloney also sees “massive structural change,” related to the location of retail properties because many of the places built 30 years ago are now in the wrong places.
Roughly 100 retailers exhibited at RECon to share their growth plans and do deals.
GROCERY ANCHORED Amid the ongoing transformation of retail, a pillar of relative stability has been the grocery anchored shopping center where, despite recent headwinds, operators are looking to expand. “We are seeing a lot of interest from tenants,” said Matthew Harding, President and COO of Levin Management, an owner and operator of 95 properties encompassing 13 million square feet in the Northeastern U.S. “You can’t stick your head in the sand, because retailers are closing stores and there are now fewer retailers per category, but there are also lots of retailers and entertainment concepts looking to expand.” He cited specialty and ethnic grocers who are able to thrive in the Northeast because of the diverse population as examples, including Filstop, a Filipino grocer, Aqui, a Hispanic grocer, H-Mart, an Asian concept and Seabra, a supermarket focused on Portuguese and Brazilian foods. Beyond such niche players, there were plenty of growth oriented retailers among the exhibitors filling all three halls of the expansive Las Vegas Convention Convention Center where RECon was held. There were roughly 100 retail companies represented on the show floor including notables such as Walmart, Kroger, TJX Companies, Wawa, 7-Eleven, Dollar General, Dollar Tree/Family Dollar, CVS, Ahold, Save-A-Lot, and Home Depot, along with foodservice concepts and fitness centers. These companies were present to tell their own growth stories to brokers, leasing agents and developers who help facilitate their expansion. One such company is Phillips Edison & Company, which owns and operates 346 properties containing 40 million square feet. Its properties are 93 percent occupied and include as tenants major grocers including Kroger, Publix, Albertsons, Safeway, Ahold and others. “We are in a pretty good environment right now with strong demand for space, but it has been a tough time to be a grocer because of deflation,” said Jeff
Edison, a partner and CEO of the firm. “We would love every one of our grocery tenants to offer click and collect and gas because it ties into their sales and makes shoppers more committed to the retailer.” The way Edison sees it, Walmart went from zero to 25 percent of the food market over the course of several decades and supermarkets survived. Now comes Amazon, a company probing the food space for 10 years, with hardly any impact. “You have to keep your eye on the Internet but you can’t blow it out of proportion,” Edison said. Ron Wheeler, CEO of The Sembler Company, owner and operator of primarily grocery anchored centers encompassing 28 million square feet, isn’t blowing the Internet out of proportion. However, he does have his company focused on food, health, beauty, fitness, wellness and restaurants, or as he puts it, “all things that you can’t have similar experience with on the Internet.” “We are a 50 year old company but our focus the last few years has been grocery anchored development and acquisition,” Wheeler said, noting the company’s centers are at 95 percent occupancy. “I don’t have a crystal ball. All I can do is stay as abreast of the trends as possible because what we think is going to happen doesn’t always happen.” Because the company is near full occupancy it has been able to adjust rents upward, but Wheeler doesn’t want retailers getting over extended on rents if demand for space outstrips supply. “The canary in the coal mine is when a grocery anchored center starts to have rents in the high $30s,” Wheeler said. Another concern he has is the lack of new retailers to occupy spaces in the 20,000-sq.-ft. to 50,000-sq.-ft. range. “Retailers are looking for smaller spaces than they SUMMER 2017 Retail Leader.com
> FINANCE AND CAPITAL MANAGEMENT
Value retail continues to be the industry’s hottest segment, with Dollar General, Dollar Tree and Family Dollar alone accounting for approximately 2,000 new stores.
have before so it is going to be bumpy to replace some tenants,” Wheeler said.
WINNERS AND LOSERS A strange mix of strong industry fundamentals, digital angst and the fact that all real estate is local, have made it challenging for those in the retail real estate world to accurately gauge the long term outlook. “The big question today is about malls and who will be the winners and losers. The values for anything other than A malls have moved down so the other big question is how deep is the demand for re-tenanting,” said Richard Latella, Executive Managing Director and Retail Practice Leader, Retail Valuation and Advisory with Cushman & Wakefield. “There will be more bankruptcies and closures, but it’s not the end of retail, just a major structural shift.” Latella leads a team of 75 people at Cushman & Wakefield whose job it is to understand all of the countervailing forces affecting retail and assign values to properties the same way a property appraiser does during the sale of a home. He’s in the camp that views retail and retail real estate as a highly resilient industry that knows how to adapt and will benefit from department store closures. “The department stores are paying virtually nothing for rent and we have moved beyond the time when a mall needs them as anchor tenants,” Latella said. New anchors have emerged that offer a way for center owners to repurpose space and add value for other tenants. Entertainment uses such as theaters and recreation are the most often mentioned uses. “We live in the experiential world,” said Greg Silver, CEO of EPR Properties, a REIT focused on entertainment, recreation and education uses, some of which are suitable for malls and other types of shopping centers. He also cautions that adding entertainment or other experiences isn’t a silver bullet for a center with underlying problems. “Entertainment makes good properties better, but it doesn’t fix bad locations that result in bad properties.” 30
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“Retailers are becoming smarter about their real estate decisions,” CBRE’s Famous said, noting the company’s Forum Analytics group can forecast within 10 percent a retailer’s sales for a location under consideration. They have to be smarter, because as David Green, Vice Chairman of Colliers International, said, “it is a really, really challenging and interesting time.” In his role at the global real estate services company with operations in 68 countries, Green understands it is important to discern between macro and micro issues when evaluating the retail world. “You can’t look at the entirety of retail and make assumptions. The macro doesn’t always affect the micro,” Green said. In other words, while there are certainly overarching trends affecting retail generally — the growth of e-commerce and shifting buying patterns — other trends impacting the industry need to be layered on. For example, some retail properties that cater to tourists have been negatively affected by the strong dollar, which reduces foreigners’ purchasing power. Retailers’ costs have also increased in many areas and low interest rates have pushed up the prices of many of the assets held in REITs that generate income. “You don’t normally have a convergence of so many factors affecting retail,” Green said. “We are in a phase of disruption and repurposing.” On that point, there’s no argument from ICSC’s McGee, who expects next year’s RECon will be bigger and better than this year’s as the industry continues to evolve, shifting away from the traditional “mall” emphasis to a new way of thinking. “I sometimes think the word retail real estate can be a little bit limiting because it has really become consumer real estate and all the things that includes such as goods, services, entertainment, food and beverage — all those things consumers want,” McGee said. “The word retail can conjure an image of only a store.” RL
RECon set another attendance record this year with 37,000 people on hand to network and discuss the future of physical retail.
> TECHNOLOGY AND INNOVATION
TECH INDUSTRY INNOVATORS ARE REIMAGINING MOBILE AND ENVISIONING A HANDS-FREE FUTURE. > By Marc Millstein
Predictions about the future and the influence of technological innovations seem to know no bounds and often sound implausible. However, the futuristic notions of technological advances have to be taken with all seriousness considering that many of the things that are taken for granted today were unimaginable a decade or more ago. Today, extremely rapid advances in artificial intelligence, machine learning, robotics, natural language processing, and other fast maturing technologies are expected to overturn common practices by retailers and consumers in fundamental ways. As visionaries imagine and create new technologies, some implications for the retail and consumer goods world include the following scenarios: The executive suite and other management levels will shrink, perhaps dramatically, as certain positions will no longer be required for making key strategic and tactical decisions. Advanced analytics and machine learning will precisely identify emerging sales trends, accurately track and analyze product movement, and in near real time determine most profitable next steps with near 100% precision.
Use of wearables will continue to surge but so too will implanting smart chips into the body to provide a wide range of powerful benefits, as well as risks. The merging of technology with the human body will provide instant access to encyclopedic quantities of information, new ways to communicate, purchasing power, security and other functions. The practice of implanting chips into the body for such functionality is already taking place in other countries and will soon take hold in the United States. Robotics will enhance and take over even more activities now performed by humans, including providing customer service, restocking store shelves preemptively, and bolstering security inside and outside the store, among many other services. The impact of robotics on the supply chain and in warehousing is well known and well established. Now it is coming inside the store in a big way. Putting aside the fact that Apple sold 50.7 million iPhones in its second quarter ended April 1, after selling 78.3 million of the devices during its holiday quarter, smartphones will eventually become as distant a memory as floppy discs and rotary phones. The mobile
devices that today capture so much attention will be replaced by much smaller “devices,” that are driven by natural language processing and immense processing power. They will no longer be hand-held. As unlikely as this later point seems at the moment, folks like Facebook founder Mark Zuckerberg openly discussed a smartphone-free future recently at the company’s annual F8 developer conference. Facebook is betting on a future of where augmented reality use cases are prevalent and impact everyday lives with smartphones giving way to other types of wearable devices. Such a change would create amazing new possibilities and challenges for retailers who have already struggled with how to win and make the right investments during the past decade or more of radical technology-driven change. These changes have spanned the rising dominance of online shopping, the need for advanced analytics to drive nearly all aspects of the business and the sweeping impact mobile devices on customer shopping behavior. But much more is coming and coming quickly, according to retail executives and industry leaders. The impact of change in the next three to five years is projected to be several orders of magnitude greater that anything before. “There is a company in Scandinavia already embedding chips in employees’ hands for access control, as a security badge, to pay for purchases,” said Greg Buzek, president, IHL Group, an analyst firm based in Franklin, Tenn. “ Special forces also is testing implanting a chip into the brain so that a Navy SEAL who would have had about two hours of intense concentration at any one time can now have 20 hours a day of that level of focus. I believe we will go that way. A bit scary but we are going into that direction.” Special forces may appear to be far away from the business of operating retail stores, but is it really? Many of the technological innovation companies now take for granted were developed by and for the military. Now, the speed of Greg Buzek SUMMER 2017 Retail Leader.com
> TECHNOLOGY AND INNOVATION Ronny Max
development to real-world application is accelerating, shortening the progression from unthinkable to reality. A senior executive at one of the country’s largest retailers is more than Bob Graham convinced that the power of analytics and machine learning already available will lead to the elimination of some executive board and other management positions. “If Blackrock can replace stock-pickers with machine intelligence, we can probably replace merchandisers with machine intelligence as well as long as systems are in place to verify that execution is perfect,” the executive, who asked to remain anonymous, said. “In the executive suite you are going to see fewer merchandisers and a much smaller hierarchy. There may even come a time when executives are no longer needed — at least not in the way they are today,” he added. On the other hand, a much greater percentage of executives and management will be needed for technology, for ensuring regulatory compliance and for managing the business impact of the Internet of Things, he said. “The percentage of technology people as a percentage of enterprise management positions will continue to increase as an even greater speed, while the number of executives overseeing traditional roles will decrease. It is inevitable,” he added. Ronny Max, author, Behavioral Analytics, and founder, Silicone Waves, an analytics knowledge company, pointed to natural language processing as a major upcoming game changer. Natural language processing will propel the ability to harness the power of the Internet of Things — the interconnection and communications between appliances and devices — and equally or even more the possibility of humans to much more easily leverage devices for a myriad of purposes. “Natural language processing will allow people to speak to devices or machines to gain knowledge, to pay for purchases, to place or change orders, to do so many tings. And it is coming, coming soon,” Max said. 32
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Asked about mobile phones and how people will communicate in the near future, Max said wearables — she believes glasses — combined with natural language processing that can “read” and respond to human speech will replace smartphones and the need to hold anything in the hand. “I personally think it will be glasses. I think the power of the voice, combined with virtual reality and machine learning, means that people will be able to use their voice to see a picture of what they want to buy, to see details, ingredients, envision scenarios, whatever,” she said. “It is already happening.” Bob Graham, vice president, information technology at BevMo, the wine and beverage category killer based in northern California, similarly pointed to speech, artificial intelligence and machine learning, and the emerging ability for analytics-based solutions to learn and hence to make smarter and smarter decision as the next disruptive movement in the food retailing world. “Intelligent platforms are now developing an awareness to make decisions and that ultimately will make decisions better than human,” Graham said. Machine learning and artificial intelligence is already making businesses much more productive on the back end in areas such as processing and forecasting, he said. But that analytics power is impacting the store also in areas such as assistance for staff associates and personalized service for shoppers. “That is where robotics and artificial intelligence can do a phenomenal job, and hence the adoption will happen much quicker than, say, cloud computing. I think it is going to happen virtually overnight,” Graham added. Kelly Stickel, CEO and founder of Remodista, a social think tank on global retail disruption, also pointed to the Internet of Things as a key change agent already transforming retail. “I think a lot of our customer points of entry will come through Internet of Thing devices. Omnichannel retailers will continue pushing messaging out, but customers will have 100 ways to receive what they want,” she said. The impact of the Internet of Things will come at retailers in three areas, she predicted: the back-end and the ways in which products and orders are better processed and fulfilled; in-store and digital, and the potential for more powerful store experiences; and third, customer wearables and the technologies around product expansion,” said Stickel. “The future of retail is about higher touch point experiences — for great customer engagement moments. Mobile coupled with wearables and IOT will connect the dots,” she noted. Asked specifically about wearables and smartphones, she replied: “There is no reason we should need to be holding anything that takes our hands away,” Stickel said. “It could be on the arm — a bracelet? Or a projection from your glasses! Or something on your skin! Also, voice will be huge. There is no reason for something to have to translate what we say. Instead, devices will understand our voices and respond to provide us with what we want or are asking for,” she said. While predictions about the future can seem outlandish to those living through a period of considerable distruption, one lesson from history is that which can be imagined has a way of coming true. And oftentimes sooner than expected. RL
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> TECHNOLOGY AND INNOVATION
De-Mystified CONTROVERSIAL AND MISUNDERSTOOD, DYNAMIC PRICING IS HERE TO STAY AND GUESS WHAT? SHOPPERS DON’T MIND. > By Cheryl Sullivan
Retailers are being hit by the awareness that always-on customers, who are price loyal rather than retailer or brand loyal, do price comparisons 24/7. This has prompted a surge of interest from retailers on the topic of dynamic pricing. With Amazon adjusting thousands of prices daily, retailers can no longer allow long lead times or take a set-it-and-forget-it approach to pricing. Dynamic pricing is one of the hottest, but also one of the most controversial and misunderstood, topics among retailers. There are plenty of misconceptions about what “it” is, which means setting the record straight is a good starting point for an effective evaluation. For example, some common misconceptions associated with dynamic pricing include: Changing the price of a single item several times a day. Only raising prices or, conversely, reflexively changing prices to match or come in below a certain competitor’s price.
An automated price bot used in a silo — that ensures a mindless race to the bottom. Only being applicable to online retailers. Some brick and mortar retailers do not realize dynamic pricing is a viable option. Being theoretical, optional or a nice-to-have. Believing shoppers will view more frequent price changes negatively. The reality of dynamic pricing is quite different. For starters, one of the biggest myths is that it is theoretical. It isn’t. It is here and growing rapidly in adoption. Amazon has been using dynamic pricing for years and more and more retailers are adopting the approach. When dynamic pricing is combined with price optimization built on artificial intelligence and machine learning science, it can monitor the market shifts that influence shoppers’ price sensitivity levels. That ensures prices are maintained that 34
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will be considered fair and be in line with what shoppers are willing to pay. At the same time, the outcome is one that respects a retailer’s pricing policies to achieve strategic and financial objectives.
UNDERSTANDING ELASTICITY However, because shoppers’ price elasticities can vary considerably an even greater challenge is placed on the retailer. The beauty of dynamic price optimization is that it can determine a shopper’s price elasticities at an item and store level across the retailer’s entire assortment. At the same time, it understands each category’s strategy, such as margin enhancing, basket driving or revenue generating to balance price increases and decreases across the assortment to deliver results that are optimal to both the shopper and the retailer. Interestingly, and counter to what many assume, shoppers have a strong sense of fairness and they are comfortable with the idea of dynamic price optimization and the use of data science to change prices. A March 2017 consumer study conducted by Forrester Consulting on behalf of Revionics revealed two key findings. First, 78 percent of shoppers felt it moderately fair to very fair for retailers to use data science to increase or decrease prices as long as those prices were fair and aligned with something they were willing to pay. Second, only 6 percent felt it wasn’t fair at all to leverage data science to set prices. This widespread acceptance by shoppers of dynamic pricing in retail can be attributed to the pervasive usage of dynamic pricing in industries such airlines, hotels, sports and rideshare services. These industries have groomed shoppers to become accustomed to high-frequency price changes just as they have reshaped shoppers’ other expectations of retailers when it comes to store experience, ease of payment and customer service.
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> TECHNOLOGY AND INNOVATION
However, in the context of the retail industry it is important to understand what dynamic pricing truly is: a handsoff approach that systematically determines what the “right” price changes are and rapidly executes them. It is intended to run within specific user-defined thresholds and will not exceed them. In the event an optimal price recommendation wants to exceed these predefined thresholds, dynamic pricing employs alerting and exception management capabilities. This triggers human intervention to review and either reject or approve the recommendation. It is equally important to understand that dynamic pricing is not equivalent to changing the price of an item several times a day. It is changing the price of an item only when it is necessary to keep it in alignment with the shopper’s price sensitivity and perception of a retailer’s price image, while also achieving the retailer’s defined strategic and financial objectives. Even Amazon only changes their price on any given item one or two times a day. It’s the fact that Amazon changes prices on so many items within its massive assortment that contributes to the volume of price changes attributed to it.
WHAT IT’S NOT Dynamic pricing is not simply adjusting prices to match or come in lower than a price offered by a competitor. In fact, the recent Forrester shopper study reveals that relatively few shoppers are enticed by price-matching policies, with only 17 percent saying they buy products based solely on the cheapest price and the same percentage saying they would demand price-matching on products they wish to purchase. Another misperception is that dynamic pricing is confused with price bots. It is important to know that these are separate capabilities. Price bots are merely a data collection method, using intelligent algorithms to match competitive assortments, collect and bring back the competitive pricing and assortment data. Dynamic pricing consumes this data, along with numerous other critical data sources such as shopper behavior data, market basket affinities, seasonality, transaction data, weather, and many other data sources to recommend and execute intelligent price changes. Another myth that needs to be toppled is the assump36
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tion that dynamic pricing is just for online commerce. Unlike many retailers, who still struggle with implementing a truly integrated omnichannel strategy, shoppers do not see channels. Shoppers instead see a single path to purchase, seamlessly switching channels as they do their research, comparison-shop, assess social media input and ultimately purchase an item. Interestingly, and again contrary to popular belief, shoppers do not expect consistency between online and in-store. The Forrester study revealed that generally shoppers expect lower prices online versus in-store for major retail categories. A notable exception is grocery, where most respondents expected prices to be the same or lower in-store as opposed to on-line. It is true that brick-and-mortar retailers have far more constraints when it comes to executing frequent price changes. Unlike the online world where price updates are handled systematically, in-store is a different beast that traditionally requires expensive and costly in-store labor to execute price changes. Increasingly, however, dynamic pricing is being adopted in brick-and-mortar stores where electronic shelf labels (ESLs) are present. It is worth noting, though, that even the most automated ESL-using retailers typically change prices at most nightly. They are not executing price changes while shoppers roam the store. Not even the most tech-savvy shopper wants to experience a different price at checkout than was promised when the item was selected at the shelf.
THE WAY FORWARD Retailers have learned the hard way that shoppers are highly price sensitive and loyalty to any retailer, brand, or product can be fleeting. Shoppers have complete price transparency and expect complete flexibility on where they purchase and where the item is fulfilled, which has created a competitive landscape that has never been more hostile. Some retailers are struggling to remain relevant and responsive to their shoppers and others are failing. Still others don’t help themselves by engaging in never-ending price wars and excessive in ineffective promotions, causing margin erosion and declining market share. The time has never been more right for retailers to seek a sustainable competitive advantage. Retailers have no choice but to become more responsive to the fast-changing behaviors of today’s millennial and tomorrow’s generation Z shoppers. Those who combine the power of price optimization with the automated, machine-learning approach of dynamic pricing continue to grow more responsive to shoppers through the delivery of fair prices and appropriate price changes at just the right time. RL Cheryl Sullivan is Chief Marketing and Strategy Officer for Revionics, a provider of profit optimization software that enables retailers to leverage predictive analytics and demand-based science to build shopper-centric, responsive merchandising strategies.
> SOCIAL RESPONSIBILITY
Diversity SCORECARD TARGET, KROGER AND WALMART OUTPERFORM PEERS, WHILE COSTCO, AMAZON AND ALBERTSONS LAG. > By William C. Wertz
It is common for retailers to make bold pronouncements about the importance of and demonstrate a commitment to diversity and gender equality. Whether it is an executive speaking at a conference, providing financial support to diversity organizations or a corporate social responsibility report, diversity is an area where there is unanimous alignment among retailers. Diversity is a hugely important societal issue that has implications for how shoppers perceive retailers and major retailers in particular. Corporate reputation is one thing, but diversity also affects how retailers manage operations, which in turn affects overall business performance. Retail Leader wanted to assess the state of diversity in the retail industry, but found there to be no single report or study of the issue that could serve to benchmark the state of affairs. This lack of information is noteworthy because there tends to be a general assumption that minorities and women are underrepresented among the ranks of senior retail executives. Simple observations indicate this is true, but quantifying the state of diversity is another matter. A logical place to turn for industry data are two of the retail industry’s largest trade groups — the Retail Industry Leaders Association (RILA) and the National Retail Federation (NRF). However, neither of the organizations whose membership is broad-based maintains statistics on the ethnic composition of their members’ labor force, including executive ranks. Retail Leader also checked with major consulting firms and diversity focused organizations, neither of whom were able to provide data on the state of diversity. Data is available on the national level but it offers little insight into the senior executive situation. Bureau of Labor Statistics data shows the number the number of blacks, Asian and Hispanic workers employed in retail companies mirrors closely the number employed in the workforce as a whole. This is hardly surprising considering U.S. Census Bureau figures show that people of color currently make up nearly 40 percent of the American population and that women constitute a majority of 51%. Since the retail sector is one of the nation’s largest employers it would be reasonable to assume that overall retail employment closely tracks the U.S. population, and that in fact is the case. The most recent BLS data show the overall national workforce as 11.7%
DIVERSITY SCORECARD 2017
Percentage of Executive Management Positions at the Top 10 U.S. Retailers by Race 25%
HOME DEPOT 13%
LOWE’S AMAZON 0% CVS 0%
SOURCE: Company reports and Retail Leader research.
DIVERSITY SCORECARD 2017
Percentage of Executive Management Positions at the Top 10 U.S. Retailers by Gender 42%
SOURCE: Company reports and Retail Leader research.
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> SOCIAL RESPONSIBILITY At a high level, the numbers show an industry still struggling to move women and people of color into key positions of responsibility that is reflective of the composition of their overall workforce.
black, compared with 12.1% in retail. Hispanic employment overall is 16.4% vs. 16.8% in retail, and Asian employment overall and in retail are identical at 5.8%. In the absence of data on the ranks of senior executives, Retail Leader set out to create a diversity scorecard for the nation’s 10 largest retailers. Just as these companies scorecard their suppliers on a host of metrics, we wanted to assess the diversity of major retailers’ senior executive teams however they choose to define the size of that team. (See methodology on page 38). At a high level, the numbers show an industry still struggling to move women and people of color into key positions of responsibility that is reflective of the composition of their overall workforce. Currently, no black, Hispanic, Asian or woman heads a top 10 retail company, although there have been some notable exceptions in recent years. For example, Rosalind Brewer, a black female, served as CEO of the $57.4 billion Sam’s Club division of Wal-Mart Stores, Inc., until she left her position in early 2017. The highest ranking black male executive of the past decade was Aylwin Lewis, the former CEO of Kmart who became CEO of Sears Holdings when Sears and Kmart combined. He left the company in 2008. Individually, the largest retail companies assert that they are making their management teams more diverse. For example: Walmart: The nation’s top retailer established a diversity office in 2003 and in its most recent report, CEO Doug McMillon stated, “I’m proud of the intentional work we’ve done over the past decade to broaden our talent pool and diversity of our leadership ranks.” The company noted that 22% of its corporate officers in 2015 were “people of color,” a slight decline from the 23% reported the previous year, but up from 20% reported in 2012. Corporate officers is a broader universe of executives than the 40 senior-most executives Retail Leader used to calculate Walmart’s score. Kroger: The retailer’s 2016 Sustainability Report indicates that the company “is committed to fostering an environment of inclusion where diversity is appreciated as a competitive advantage.” It noted that 21% of its exempt associates were “people of color,” but did not specify the percentage of company officers who were nonwhite. Costco: The nation’s third largest retailer has a diverse workforce and a spokesman said, “Our mission is to foster a climate of inclusion to take advantage of that diversity.” The company said three of its 38 executives, senior officials and managers, or 8% were “people of color.” All are men.
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Home Depot: In its 2016 Diversity and Inclusion Report, Home Depot did not provide specific percentages of “people of color” in its executive ranks. However, Ann Marie Campbell, a black woman who is Executive VP of U.S. Stores, said, “Just as we value a diverse mix of products and services to compete in the marketplace, we also value diversity in our workplace. Looking ahead, I am excited to lead the team that will continue driving an inclusive environment.” Walgreens: A commitment to continuously improving diversity and inclusion has always been part of the Walgreens DNA, and those values remain central to cultural beliefs, according to the company. Kathleen Wilson-Thompson, a black woman and Walgreens’ chief human resources officer, said, “We want to create an innovative and agile talent pool, one that’s diverse and fosters a powerful cross section of thoughts and ideas.” Walgreens said 34% of its managers overall are “people of color.” Target: Target scored highest in terms of racial and ethnic diversity on its self-identified 12 person executive management team. “As champions of diversity and inclusivity, we’re making our business stronger, building our talented team,
DIVERSITY SCORECARD METHODOLOGY Obtaining a clear picture of gender and ethnic diversity at major retailers is a challenging proposition compounded by varying classification and disclosure practices among companies. To compile the diversity index of the 10 largest U.S. retailers, Retail Leader probed company web sites, press releases, regulatory filings and other publicly available documents and reports for lists of senior management as defined by the companies. Some companies listed senior vice presidents and above, while others listed executive vice presidents and above which caused a variation in the total number of executives the companies regarded as part of their senior leadership team. The executives on each list were categorized by Retail Leader as being male or female, non-Hispanic white, black, Hispanic or Asian. Such determinations were based on primary research supported by third party sources deemed reliable. Given the sensitivity of the information and to ensure accuracy, each of the ten companies was given the opportunity to verify the categorized lists as being an accurate representation of their senior management team. Seven of the ten companies provided this verification. Three companies — Costco, Lowe’s and Amazon — were willing to confirm the names of executives on the list but declined multiple requests to identify individual executives by gender or ethnicity for purposes of calculating the scorecard.
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> SOCIAL RESPONSIBILITY and working toward a more equal society,” according to Laysha Ward, a longtime executive and black woman who serves as Executive Vice President and Chief External Engagement Officer. CVS: None of the senior executives on CVS executive management team are people of color. However, the company noted that it serves millions of people every day and for the company to thrive it is important to have a workforce that reflects its customers and the communities they live in. “We can’t always control what goes on outside our company walls, but we can and will stay committed to our Purpose and Values. As a senior leadership team, we can and will maintain our culture of respect and our appreciation of diversity and inclusion at CVS Health,” said Lisa Bisaccia, EVP and Chief Human Resources Officer for CVS Health. “To sustain breakthrough innovation, we must seek out, listen to and leverage everyone’s voices and ensure that every individual feels equally valued, respected and appreciated.” Lowe’s: The dedication to diversity and inclusion at Lowe’s “grows from the steadfast values of our employees and extends to every corner of our company. Recruiting, developing and retaining a diverse work force ensures a welcoming customer experience, enhances partnerships and strengthens community involvement,” according to a statement on the company’s Web site. Amazon: As a predominately online retailer, Amazon is often compared with other high tech companies that have been criticized for their lack of minorities and
women in the workplace. And rightly so since none of its 14 member executive leadership team are people of color. The company has maintained that the educational system is partly to blame because young women and minorities are not encourage to pursue math, science, technology and engineering. “We are working to develop leaders and shape future talent pools to help us meet the needs of our customers around the world,” Amazon says on its web site. “We believe that diversity and inclusion are good for our business, but our commitment is based on something more fundamental than that. It’s simply right.” Albertsons: “A diverse workforce can capture a greater share of the consumer market,” said Jonathan Mayes, Alberton’s senior vice president of public affairs, government relations, philanthropy, sustainability and diversity affairs. “It helps businesses more effectively market to consumers from different racial and ethnic backgrounds, women and others.” Mayes cited a McKinsey & Co. demographic study that looked at 366 publicly traded companies in a range of industries. In the grocery business, he said, the companies in the top 25% for racial/ethnic diversity were 35% more likely to have higher-than-expected financial returns. The McKinsey study also found that for every 10% increase in racial and ethnic diversity on the senior executive team, earnings before interest, taxes, depreciation and amortization (EBITDA) rose nearly 1%. “In other words, they performed better, and it’s measurable, it’s not anecdotal,” Mayes said. RL
WALGREENS PROMOTES SUPPLIER DIVERSITY To help achieve diversity among its supplier base Walgreens Boots Alliance this summer is hosting an innovative summit with industry partner ECRM (Efficient Collaborative Retail Marketing). During the all-day event scheduled for July 19 plans call for nine Walgreens category managers to have private meetings with up to 17 selected suppliers. To ensure the in-person meetings are successful, ahead of the summit ECRM will host two webcast presentations in which Walgreens representatives will discuss the company’s diversity program. Walgreens representatives will also outline the category managers’ expectations to help participating suppliers to better prepare for their Rona Fourte in-person meetings.
Retail Leader.com SUMMER 2017
“Since the formalization of our program in 2007, we have worked with many diverseowned businesses in the community,” said Rona Fourte, Director of Supplier Diversity for Walgreens. “The ECRM Diversity Summit builds on this commitment and we look forward to meeting suppliers with new innovative offerings to enhance the selection of items that our customers value as we champion everyone’s right to be happy and healthy.” The format of the event — retailers and suppliers holding multiple pre-arranged meetings — is one that ECRM pioneered roughly three decades ago. The concept has been refined over the years to focus on specific merchandise classifications or opportunity areas such as seasonal or front-end. Applying the concept in a retailer specific way to an area like supplier diversity makes perfect sense since Walgreen representatives will be able to host meetings with roughly 150 suppliers.
VISIONS FOR THE FUTURE THE CATEGORY MANAGEMENT FRAMEWORK THAT REVOLUTIONIZED RETAIL TWO DECADES AGO IS ADJUSTING TO NEW MARKETPLACE DYNAMICS AND HUGE INCREASES IN DATA VOLUMES. > By Mike Troy
Today’s category managers are inundated with new sources of shopper insights, marketing methods, ways of collaborating and competitive issues. The fundamentals of category management as a business process remain intact as do some persistent challenges related to data management. However, the new age of extreme shopper empowerment and the now disjointed path to purchase opens up a new world of opportunities as well. There are roughly 160 digital touch points along the typical shopping path where shoppers are giving off signals from the time they enter the market until they make a purchase, according to Kevin Hartman, head of analytics with Google. Every day, Hartman said, there are 4.5 billion Facebook likes, 4 billion YouTube videos watched and 3.5 billion Google searches, just to mention a few of the major sources where consumers offer insights into their behavior. “All of these things are signals that consumers are giving out, information that is helping them along their path to the
decisions they are making that marketers could use,” Hartman said during a presentation in May at the Category Management Association’s annual conference. Hartman gave attendees plenty to think about, from mindboggling descriptions of Google’s processing power to machine learning’s potential to the explosion of marketing technology companies. Thanks to a dramatic reduction in the cost of computing power, Hartman said there are now an estimated 3,500 companies participating in the marketing technology space compared to fewer than 200 in 2011. Because Google sits on a vast repository of data and insights, Hartman could have dazzled CMA attendees with gee whiz statistics all day. Instead, the one nugget of information he shared that had attendees buzzing throughout the even was reference to a recent report from the McKinsey consulting firm. “We are 1 percent along the way to how technology will impact our personal and business lives,” Hartman said in reference
CatMan 2025 was the topic of a power panel discussion moderated by Michael Sansolo, far left, at the Category Management Association’s annual conference. Other panelists included, from left to right, Scott Chencinski, Chief Director of Merchandise Financial Planning and Analytics, Meijer; Tasha Tandy, Senior Director for Health & Wellness and Consumables, Walmart; Andrew Nadin, Chief Marketing Officer, Schnucks; Dave King, Senior Manager of Store Environments, Walgreens; Michael Wiltgen, Director of Visual Merchandising, Sally Beauty; and Kerrie Lopez, Senior Manager of Category Management with Jet.com.
SUMMER 2017 Retail Leader.com
> STRATEGY to the McKinsey report. “We are not even started. This hasn’t even begun. We are going to experience things that we can’t even fathom today.” Putting aside the fact that assigning a percentage to the impact that technology will have if the impact of technology is unknowable, Hartman’s comment drove home the point that technology is dramatically affecting all aspects of retail, “All of these things including category manageIt was a recurring theme are signals that ment. throughout an event themed as, consumers are giving “Bridging Traditional & Digital: Creating New Paths to Sucout, information cess.” It was also the focus on that is helping them considerable attention during a retailer panel discussion on the along their path to topic of, “CatMan 2025: Vision the Future.” the decisions they forTackling that subject were six executives from Meijer, Jet.com, are making Walgreens, Schnucks, Walmart that marketers and Sally Beauty. The diverse shed light on how they are could use.” panel thinking about the opportunities presented by the proliferation —Kevin Hartman, of insights from structured and head of analytics at Google unstructured data sources, optimizing assortments in an omnichannel environment and driving demand with consumers for whom transparency and authenticity are key motivators. As the group pondered the future, a recurring theme was data and the need for better standardization because data is the basis for strategy and execution, in stores and online. “Product data needs to be more robust that what we have worked with in the past,” said Dave King, Senior Manager of Store Environments with Walgreens. He mentioned such things as product attributes, ingredients, interactions, usage information and even recipes as the type of information that needs to be accessible to shoppers and the retailer’s analysts. The type of information that Walgreens has long sought for its own planogram development should be customer facing and much of it is already because Walgreens offers the capability for shoppers to scan shelf tags and obtain additional product info. Improved data standardization is also something Kerrie Lopez, Senior Manager of Category Management with Jet. com, sees as a key enabler of future success. “It’s kind of insane how different data can be,” Lopez said, bemoaning the amount of time she spends slicing and dicing information in the fresh categories she manages. Getting the data right, so to speak, is only the first step in a future category management process that must 42
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be faster and yield shoppers insights that are actionable, according to Tasha Tandy, Senior Director for Health & Wellness and Consumables with Walmart. “Whatever we are doing we have to do it quickly,” Tandy said, echoing a point that has become a new mantra at Walmart. “Shopper insights are such a big part of what we do and there is a tremendous amount of information available, but the challenge comes from taking action on the information otherwise it is just an interesting fact or tidbit.” With so many new data inputs informing the category management process, the natural tendency to rely on what worked in the past to produce future results must be avoided, according to Andrew Nadin, Chief Marketing Officer of Schnucks, a St. Louis-based operator of 100 supermarkets. “Some of the tools that we have are unbelievable, but we don’t use them to their full capacity,” Nadin said. Doing so in the future is a must to serve shopper who increasingly expect instant gratification. “The level of convenience that customers requires in this day and age is outrageous,” Nadin said. Inevitably, it seems, whenever a conversation turns to the topic of big data and analytics the phrases artificial intelligence and machine learning aren’t far behind. The terms tend to be used interchangeably and are seen as key to extracting the type of behavioral information retailers can use to drive sales. “Every week I am contacted by a solution provider that wants to demo a machine learning capability,” said Scott Chencinski, Chief Director of Merchandise Financial Planning and Analytics with Meijer. As with others on the panel, he notes that data governance is a huge and growing issue that will have a tremendous impact on the application of category management. With expectations high for what machine learning will deliver, it helps to understand what it is. And who better than Google’s Hartman to offer a use case and definition. “As consumers, we rarely do what we say we’ll do. We don’t know why people decide the things they do and when you ask them about the choices they made it rarely yields the right answer,” Hartman said. That’s where machine learning comes in and Hartman makes a distinction from artificial intelligence (AI). He describes AI as an overarching term that refers to any technique that enables computers to mimic human intelligence using “if-then” type rules and decision trees. Machine learning is a subset of AI that includes statistical techniques so machines improve with experience and generate predictive analytics. Taking things a step further, Hartman described “deep learning” as a subset of machine learning composed of algorithms that allow software to train itself to perform tasks, such as speech and image recognition, by exposing multilayered neural networks to vast amounts of data. The data-driven future of category management has arrived and Hartman encouraged CMA attendees to follow no one, develop partnerships and not look for a case study to show the way. Lastly, he said, “trust your instincts,” a somewhat surprising recommendation from someone whose role as head of analytics at Google makes him one of the world’s biggest data geeks. RL
A Letter from the President and CEO Leslie G. Sarasin
We seek to name those concerns bearing potential to affect the food retail industry within the next five to ten years, especially those anticipated in some way to contribute to redefining the way we operate.
Retail Leader.com summer 2017
Buying the Luxury of Time to Think
friend observed recently that he feels like his 45 rpm life is being played on the 78 rpm setting. Now, I know that only those of you as old as I am will get his reference, but his observation put into words what many if not most of us feel — that everything moves faster these days. Whether we’re talking about issues, opportunities or information, they are all coming at us at an unprecedented pace, allowing for less reaction time, requiring quicker decisions and forcing us to set our strategies more rapidly. The luxury of reflection and leisurely consideration is disappearing as we seek to do business in a world requiring us to stay two steps ahead or risk quickly finding ourselves three paces behind. So while it may feel a bit ironic in the context of a future coming at us faster than ever before, among the challenges we must get better and quicker at mastering is forecasting the issues coming our way, so we can be as prepared as possible to face them. In fact, the only way we can buy ourselves the necessary time to dedicate due consideration and careful scrutiny to an issue is to recognize it when it presents itself as a mere glimmer on the horizon headed our way. Consequently, we at FMI have redoubled our efforts at identifying emerging issues. We seek to name those concerns bearing potential to affect the food retail industry within the next five to ten years, especially those anticipated in some way to contribute to redefining the way we operate. And while we must identify these concerns now because they will come at us quickly, we also recognize that doesn’t mean they necessarily can be easily or quickly addressed. We must identify them now so we can begin the necessary research, cultivate the needed resources and develop the relationships required to discover the opportunities within the challenges presented by each issue.
FMI’s senior staff team met several weeks ago for an emerging issues brainstorming session. From the various areas of expertise represented by this group of leaders, we identified more than 140 issues, both large and small, that have potential to be game-changers for some aspect of food retail operations. We then, taking into account their overlap and interrelatedness of the issues, sought to break them into five larger, more encompassing categories. The five high-impact areas we identified (and a brief description of them) are: Artificial Intelligence — The ways in which
technology will transform the food industry and alter the role of humans throughout its processes;
Workforce — The impact of global changes on hiring, training, management, and corporate culture; New Marketplace — Rethinking what the
marketplace will look like and the role of the physical store;
Food Production — Shifts in food pro-
duction caused by global changes, whether technological, environmental, values—based, or otherwise; and
Emerging new consumerism — Defining value for consumers beyond just cost, taste, and convenience.
We are now in the process of vetting our thinking with our members— including the FMI Board of Directors — as a reality check that the horizon issues we’ve identified match the thoughts, considerations and experiences of those who — on a daily basis — live the fast paced, ever-changing world of food retail. FMI
January 26 - 29, 2018 • National Doral Miami • Miami, FL
Secure Your Place in the Future of Food Retailing The FMI Midwinter Executive Conference brings the industry’s key decision-makers together all in one place.
The annual FMI Midwinter Executive conference is an invitation-only gathering of the food retail industry’s leading stores, wholesalers, independent operators, suppliers and manufacturers. At the core of this premier event is an up-to-the-minute education program that provides members of our industry with the knowledge required to grow a business in today’s rapidly changing food retail environment.
The Unsung Grocery Heroes By Carol Abel, vice president, education program development, FMI
he entrepreneurial spirit of the food retail industry is embodied in the role of the store manager. Arguably, no other industry position is so in tune with the community, so motivated by the personality and determination of an individual or so resilient in the face of competition. It’s this commitment to people, community and financial dexterity that we celebrate annually as the FMI Store Manager Award. Store managers typically have more than 15 years of experience in the industry, so they are effectively entrenched in the company’s brand, its core tenants and the values that they impart on the community. What’s more, they are emotionally invested in these companies; more than 90 percent of grocery store managers report loving their job, according to surveys we’ve
conducted with the Retail Feedback Group and Harold Lloyd1. Our awards program scrutinizes store managers’ impact on sales growth; their ability to effectively communicate to store associates company and store goals and objectives from a sales and customer service perspective; the success of their relationships with colleagues and their panache for leading and mentoring; and their execution of programs to improve overall customer service and better their communities. Many of the people we celebrate each year have overcome significant obstacles to reach company and professional objectives. The future of food retail arguably resides with leaders like the 11 we celebrate this year, so it would be wise to continue to invest in their success.
Food Marketing Institute’s 2017 Store Manager Award Finalists Luis Ernesto Lopez Almanza, Walmart Mexico, Torreon, Coahuila, Mexico
Everything starts with Luis Ernesto Lopez Almanza’s relationship with his associates and the goals they work together to achieve. Each day begins with a 10-minute review of the previous day’s numbers and how they fit into daily and monthly goals. He follows that with a meeting with all his direct reports where they go over the figures in more detail and make plans for how to achieve more success in the days and weeks to come. Finally, he is constantly on the sales floor, interacting and communicating with both his associates and his customers. Jeff Brasel, Skogen’s Festival Foods, Appleton, Wisconsin Brian Amsberry, Hy-Vee, Inc. Peru, Illinois
Brian Amsberry manages what is for Hy-Vee a mediumsized store in Peru, Ill, a small city with a population of about 10,000. Yet he and his team manage to consistently break company-wide sales records. How and why does Amsberry accomplish these sales? His laser-like focus on customer service. Sally Angulo, Fry’s Food Stores, The Kroger Co., Phoenix, Arizona
Sally Angulo had success with Store 698 in Phoenix even before it opened. She held a town hall meeting with a theme of “USS Inspiration” for the more than 400 new associates before the grand opening where she told them of 10 important lessons, starting with “Be on time” and ending with “Don’t ever quit, don’t ever give up.” Senior managers thought so highly of the town hall they have now carried it over to every new store opening. 46
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From practically his very first day as manager, Jeff Brasel has made daily routing a priority, moving through the store to tell everybody “Good morning” even before he takes off his coat. His goal is to have a conversation with every associate every day. He does that by routinely eating lunch in the breakroom — which he renovated recently, adding a snack vending machine, Keurig coffee machine, comfortable seating and fresh paint — and arriving sometimes as early as 4 a.m. to help stock shelves.
FMI Store Manager Survey, Spring 2014, Harold Lloyd Presents & The Retail Feedback Group
Gary Casterline, ShopRite of Hunterdon County, Phillipsburg, New Jersey
When Gary Casterline learned a competing grocery store was opening near his ShopRite of Greenwich in Phillipsburg, N.J., he didn’t flinch. Even when the company anticipated a 10-percent decline in sales, Casterline simply went to work to remind customers how much his store had to offer them. Defying expectations, Casterline’s store suffered no drop-off in sales. In fact, it boosted net income by 67 percent and decreased shrinkage by 8 percent, repairs and maintenance by 13 percent and supply expenses by 7 percent. Thanks to a focus on staff safety, worker’s compensation costs were down 18.7 percent. Pete Gardner, Kings Supermarkets, Boonton, New Jersey
Pete Gardner not only managed his team and his Kings Supermarket through what can sometimes be a nightmare scenario — a major renovation while the store remains open — he managed to boost the store’s bottom line and substantially reduce shrinkage during the renovation. Gardner motivated his associates to deal positively with the renovations and keep the customer uppermost in their minds. Clive Gould, SPAR Glenacres, Kempton Park, Johannesburg, South Africa
Clive Gould’s store motto at SUPERSPAR Glenacres in Johannesburg, South Africa, is “Best in Fresh” and it has led to financial success. Gould’s SUPERSPAR Glenacres faces stiff competition with 12 similar food retailers within a mile and a half. His tools for dealing with rivals include fresh products and a clean store. An especially intense focus is put on constantly replenishing the store’s fresh products and a major renovation in 2015 has gone a long way toward projecting a clean, fresh image and enhanced offerings. Cindie Jones, Giant Food, LLC, Washington, DC
Having started with Giant 32 years earlier as a bagger, Cindie Jones knew what to do: Take it one step at a time. She takes that same approach with her team associates. Jones works to give them the tools to look at their jobs in terms of the larger storewide and companywide goals. She guides every assistant manager and every associate to understand their role in accomplishing the store’s goals, helping them to break down their department’s objectives into simple, concrete tasks. Ricky Myers, D&W Fresh Markets, SpartanNash, Grand Rapids, Michigan
Ricky Myers makes every day seem a like a grand opening with new promotions all the time that focus on the superior quality of its produce (more than 300 organic items and 411 bulk options), meats, seafood, artisan bread program and deli (with more than 300 different specialty cheeses). Before the new competitor opened, he held meetings with every single one of his 175 associates to address the new sales and customer service initiatives, obtaining a personal commitment from each of them that they were with him in the battle.
Danny Guerra, Fiesta Mart, #53, Irving, Texas
Danny Guerra’s unique informal style of leadership resonates throughout the store and the company. In his daily meetings with his management team, he shares company goals and new ideas to meet customer expectations. As he moves about the store during the day, whenever he sees managers huddling with their associates, he joins in. Guerra even encourages customers who are nearby to join the discussions as well and offer their advice on how to make Fiesta Mart a better store. John Snavely, Food 4 Less, The Kroger Co., Coachella, California
Why was the yearto-date Overall Satisfaction score for John Snavely’s store 91 percent? Why is the Associate Insight score of 92 percent among the top five stores in the company? Finally, how did his 2016 EBITDA increase by 2.96 percent and shrinkage go down 1.29 percent? Snavely did it first and foremost by communicating constantly with his associates, the community they serve and other store managers in his district. He follows leadership guidelines he learned that have caused him to be highlighted as one of the most outstanding store managers in the Food 4 Less chain over three consecutive years. Summer 2017 Retail Leader.com
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The RL ReseaRch RepoRT FUN FACTOR:
Do consumers think shopping is “fun?” The news sounds bleak if you listen to the latest on store closings and how the in-store experience is dying, with many citing a disconnect in shopper experience. However, that view would be wrong, according to Market Track’s most recent Shopper Insight Survey. In a survey of 1,200 primary household shoppers with equal representation across age and gender, it is clear that people still enjoy shopping, both in-store and online, although there is variability by age groups. This speaks to areas of opportunity in both instances and the necessity to focus on the overall shopper journey. Driving traffic on a normal week: The top figure on the right shows the disparity in age groups when it comes to shopping. Nearly 80% of shoppers in the 18-20 group find shopping to be “fun,” while there is a steady decrease as you get into the older demographics. For those who say shopping is not fun, the primary reason is they would rather shop online and would prefer to avoid crowds. Most who said they did not find shopping fun said they have never enjoyed shopping, while some are turned off by retail being less focused on the customer experience. The thrill of the hunt: In terms of the type of shopping people like to do, Holiday tops the list with 41% indicating they enjoy looking for the perfect gift for people on their list. Shopping for apparel was another area people indicated they enjoyed the act of either going in-store or online to find the latest styles. Online or in-store? Both: Interestingly, the “digital native” audience of 18-20 year olds prefer going in-store, while people in their 20s and 30s would rather shop online. There is a lot of opportunity for cross-channel experiences with the majority of respondents saying they like both equally. eighty-three percent say that information online influences their in-store purchases. we are in the age of the channel-less shopper and both are critical parts of the shopper journey. optimizing interactions in each situation is key to building loyalty and brand affinity.
Do you think shopping is fun? (Respondents who answered “yes” by age group) 80%
28% 20 10 0 18-20
60 and over
What type of shopping do you find to be most fun? 40%
Holiday Shopping for apparel Grocery shopping Shopping for beauty items Shopping for shoes Back to school Shopping for health related items
Do you think shopping in-store or online is more fun? 40%
Shopping in-store Shopping online I like them both equally 40%
32% 32% 30
36% 33% 30%
60 and over
Summer 2017 Retail Leader.com
> WHAT’S NEXT...
Becomes A Category
CPG CATEGORIES ARE POISED FOR DISRUPTION AS CANNABIS COMES OUT OF THE SHADOWS. Regardless of whether you are for or against legalization, adult adoption of cannabis has arrived at an inflection point with huge implications for the retail and CPG world. More than half of the U.S. adult population has consumed cannabis at some point in their lives and in the established recreational markets of Colorado, Washington, and Oregon, roughly one third of adults legally purchased cannabis during the past year. Perhaps most noteworthy is studies showing that nearly 100 million U.S. adults would consider using cannabis if it were legal. Current and potential consumers defy traditional stereotypes, transcending generations and socioeconomic status. With recent legalization in California, Nevada, Massachusetts, and Maine, more than 1 in 5 U.S. adults now reside in a state where recreational use of cannabis is legal. This represents a 300% increase from 2016, and means more than 35 million adults can legally consume cannabis. In Colorado, there are more cannabis dispensaries than Subway and McDonald’s restaurants combined. In Washington, there are more dispensaries than 7-Elevens; and in California, there are more than 2,000 medicinal dispensaries preparing for the recreational marketplace to be established. In 2017, there are more than a dozen states considering legalizing recreational use of cannabis. The upshot here is that legal cannabis soon will become the largest new CPG category most of us in the industry have ever experienced. This phenomenon is a threat and an opportunity to retailers when considering the basic needs consumers look to satisfy through consumption of cannabis: Social: to facilitate and enjoy interactions with others Experiential: to heighten experiences Medicinal: to manage pain and treat health conditions Holistic health: to reduce stress and promote personal wellness Habit breaking: to quell addictions or habits
These are some of the same need states satisfied by other categories such as beer, wine, spirits, sleep aids, internal analgesics, tobacco, smoking cessation, skin care, herbs, supplements, teas, energy drinks and prescription medications. These categories are mainstays of the grocery, drug, mass and convenience channels. Customers use these categories for social, experiential, medicinal, holistic health, and habit breaking purposes — the same reasons 50
Retail Leader.com SUMMER 2017
> By Rich Maturo
they use cannabis. In many instances, cannabis not only offers a viable alternative to a CPG product, but does so with perceived additional benefits to the consumer, such as lower cost or fewer side effects. Whether it’s reducing caloric intake by shifting some beer purchases to cannabis, or a desire to treat a muscle ache with a natural product as opposed to an OTC pain reliever, CPG categories are facing a new, formidable competitor as cannabis enters the category mix of customers. It’s not just an assumption that cannabis will impact CPG sales, it is already happening. However, the impact often goes unnoticed since only four states currently have established legal marketplaces for recreational use representing just 5% of the US population. But the warning signs are clearly there. As new adult-use states and particularly California come online, the impact will become more apparent and more substantial. Because cannabis impacts brands disproportionately, some products will be highly impacted while others will experience much less of an effect. The challenge for CPG retailers is that cannabis changes the product assortment paradigm since it cannot legally be sold by a CPG retailer. That means tried and true solutions like bringing in new SKU’s or reallocating space are not viable ways to handle customer shifts to cannabis. Further complicating matters: many impacted categories drive store visits so the impact of a shift is not only about the loss of a single category sale but rather the loss of an entire basket. The situation is concerning, but retailers are incredibly resourceful and extremely resilient. They already have established DSD operations, currently sell highly regulated products, and are experts in marketing, assortment, merchandising, CRM, and cultivating positive customer shopping experiences. They also have an established footprint in the marketplace with significant visit frequency that can be leveraged to compete. Whether through investment or acquisition, driving change in regulations, or offering new complementary products, CPG retailers are extremely well positioned to adapt to the risks and opportunities presented by the cannabis industry’s expansion. The near-term focus should be on gaining a better understanding of the evolving cannabis marketplace and familiarization with customer attitudes and behaviors toward cannabis use. Armed with this knowledge, retailers will be better equipped to formulate effective strategies regardless of the nature or speed of consumer adoption. RL Rich Maturo is Co-Founder and Chief Innovation Officer of Cannabiz Consumer Group, LLC.
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