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Retail Leader MAY/JUNE 2018 VOL. 8, NO. 3

6 EDITORIAL

HOW COME I CAN’T…? So many things in our daily lives are faster, cheaper and better. But those attributes are never used to describe health care.

8 GROWTH AND BUSINESS DEVELOPMENT

ALDI ACCELERATES GROWTH. The German grocer’s onward march continues, and with few visible weaknesses competitors should be concerned.

12 HUMAN CAPITAL

GETTING COMFORTABLE BEING UNCOMFORTABLE. Nothing short of business continuity is at stake for retailers and suppliers who fail to achieve diversity — fast.

14 MERCHANDISING AND MARKETING

SPONSORED AUTHENTICTY. New standards of accountability and expectations of performance are transforming the growing field of influencer marketing.

16 SUPPLY CHAIN

SKIPPING THE TRIP. Promotion of home delivery will impact store traffic, but the alternative is losing share to competitors.

SVP, Group Brand Director Katie Brennan kbrennan@ensembleiq.com 917-859-3619

EDITORIAL Editor-In-Chief & Brand Director Mike Troy mtroy@ensembleiq.com 813-857-6512 Managing Editor Gina Acosta gacosta@ensembleiq.com 813-417-4149

20 COVER STORY

THE BUSINESS CASE FOR DIVERSITY. Ulta Beauty offers a differentiated business model and a rare approach to gender diversity.

32 TECHNOLOGY AND INNOVATION

MAGIC MAKER. Lolli & Pops’ formula of experiential stores, cutting edge technology and delightful service is a sweet lesson for retailers.

36 SOCIAL RESPONSIBILITY

THE MOST BEAUTIFUL STORE IN AMERICA. After opening a supermarket that helped revitalize downtown Cleveland the Heinen brothers are moving fast to serve shoppers in new ways.

38 FINANCE AND CAPITAL MANAGEMENT

PROFITING FROM TRUST. Taking a stand on social issues is fraught with risk.

42 WHAT’S NEXT

THINKING LIKE A STARTUP. Philosophy applies to trade associations too, says NACDS CEO Steven Anderson.

ADVERTISING SALES & BUSINESS Associate Brand Director Mike Shaw mshaw@ensembleiq.com Office 201-855-7631 Cell 201-281-9100 Senior Sales Manager Judy Hayes jhayes@ensembleiq.com 925-785-9665 Senior Sales Manager Theresa Kossack tkossack@ensembleiq.com 214.226.6468

MARKETING Brand Marketing Manager Carly Kilgore ckilgore@ensembleiq.com

AUDIENCE ENGAGEMENT Director of Audience Engagement Gail Reboletti greboletti@ensembleiq.com Audience Engagement Manager Shelly Patton spatton@ensembleiq.com

PROJECT MANAGEMENT/ PRODUCTION/ART Vice President, Production Kathryn Homenick khomenick@ensembleiq.com Creative Director Colette Magliaro cmagliaro@ensembleiq.com Custom Project Manager Kathy Colwell kcolwell@ensembleiq.com Custom Project Manager Judi Lam jlam@ensembleiq.com Production Manager Jackie Batson jbatson@ensembleiq.com Art Director Regina Loncala rloncala@gmail.com Subscriber Service/Single-Copy Purchases EnsembleIQ@e-circ.net Reprints, Permissions and Licensing Contact Wright’s Media at ensembleiq@wrightsmedia.com or 877-652-5295

Executive Chairman Alan Glass Chief Executive Officer David Shanker Chief Operating Officer & Chief Financial Officer Richard Rivera Chief Brand Officer Korry Stagnito President, Enterprise Solutions Terese Herbig Chief Digital Officer Joel Hughes Chief Human Resources Officer Jennifer Turner Senior Vice President, Innovation Tanner Van Dusen

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Retail Leader is published seven times yearly by EnsembleIQ: 8550 W. Bryn Mawyr, Chicago, IL 60631; Phone 224-632-8200 Fax: 224-632-8266. www.retailleader.com For address changes, send to Chicago, IL address or e-mail spatton@ensembleiq.com. © Copyright 2018


letter from the

EDITOR

How Come I Can’t…? Retail Leader’s parent company EnsembleIQ named a new CEO earlier this year. He promptly did what new CEOs do: assembled senior leadership, assessed our strengths and capabilities, and shared a vision to rally the troops. Walmart believes in helping people save money so they can live better. Kroger’s purpose is to feed the human spirit. Amazon’s vision is to be Earth’s most customer-centric company. At EnsembleIQ and Retail Leader, we believe in solving big problems and inspiring bold ideas. For more on what that means to EnsembleIQ’s new CEO, David Shanker, check out our conversation on pages 28 and 29. As an organization, we aren’t alone in wanting to solve big problems with bold ideas. I was reminded of this at the recent National Association of Chain Drug Stores (NACDS) Annual Meeting. Since I first attended this event 25 years ago, NACDS has been fighting a big problem: advocating for pharmacies and pharmacists and the value they bring to the health care delivery ecosystem. The challenge may be familiar, but NACDS has plenty of bold ideas. For more on that check out what CEO Steven Anderson has to say in this issue’s “What’s Next,” column on page 42. Anderson, NACDS and its members will be busy for many, many years because there are a lot of big problems in health care and retailers figure prominently in many solutions. Identifying big problems with health care is easy. Coming up with bold ideas isn’t that hard either. Because health care affects everyone there are lots of ideas in the big three opportunity areas of access, cost and outcomes. Many ideas are politically charged and contentious. Proposals get dissected and distorted in terms of winners and losers and who pays how much. When there are changes they tend to be incremental and costs always seem to go up. Because the current approach to fixing health care isn’t working, there was a euphoric moment back in January when Jeff Bezos, Warren Buffet and Jamie Dimon revealed the formation of a health care-focused joint venture. JP Morgan CEO Dimon, in his recent shareholder’s letter, said the goal is to “help improve the satisfaction of our healthcare services for our employees (that could be in terms of costs and outcomes) and possibly help inform public policy for the country.” This is the moment we’ve been waiting for, right? Something good has to come from the efforts of three of the world’s smartest and richest people bringing new vision and energy to the situation. Especially with Bezos involved. He’s CEO of a company that aspires to be Earth’s most customer-centric company and now he’s applying his vision to a sector of the economy largely untouched by the forces of customer centricity. Amazon is one of those companies that has created new consumer expectations other retailers have to meet. Its efforts and those of other innovators leads to a, “how come I can’t…?” mindset as people expect similar experiences from other retailers or sectors of the economy. Apply that thinking to the world of health care for a minute. How come I can’t use facial recognition and video calling to communicate with a doctor about an easily diagnosable condition, obtain a prescription, fill it at a nearby pharmacy and maybe even have it delivered by a terrestrial or aerial drone in less than an hour? How come I can’t know what health care products and services cost prior to receiving those services and who is going to be charging me for those services? The retail industry is all about price transparency, but not health care. Imagine if a shopper went to his local supermarket, had to choose from a list of items approved by a third party and then made a small payment at checkout. Months later the shopper receives multiple bills from manufacturers whose brands he wasn’t aware he purchased at prices negotiated by others and maybe a facility charge for accessing the store. So many things in our daily lives are faster, cheaper and better. But those attributes are never used to describe health care. That’s why my bold idea is for Bezos, Buffet and Dimon to expand their search for bold ideas by including more smart people. Walmart President and CEO Doug McMillon and CVS Health President and CEO Larry Merlo would be good, but why not add some technology innovators such as Apple CEO Tim Cook and Salesforce CEO Marc Benioff? If a group like this were to begin the quest for solutions by asking, “how come I can’t?” we might end up with a health care system that is faster, cheaper and better. The improvement can’t come soon enough for retailers who are expected to shoulder the ever growing burden of paying for employee health care. RL MIKE TROY Editor-In-Chief mtroy@ensembleiq.com

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> GROWTH AND BUSINESS DEVELOPMENT

Aldi Accelerates Growth THE GERMAN GROCER’S ONWARD MARCH CONTINUES AND WITH FEW VISIBLE WEAKNESSES, COMPETITORS SHOULD BE CONCERNED. > By Gina Acosta

W

Warm, soft lighting shines on the organic And yet the value of that small format, easyapples and asparagus. Boxes of gourmet to-shop store is in and of itself an undervalEuropean chocolates beckon near the aisle ued benefit to who they are.” of Mexican and Kosher foods. Shoppers Aldi, which includes Aldi Sud and Aldi pick up refrigerated Thai-style meal kits, Nord, today is one of the biggest retail designed to feed two people, and put them groups in the world, with more than in their new, oversized carts. Cruising 10,000 locations, businesses in 18 countries around an assortment heavy on organics and estimated 2017 annual revenues of $88 and premium foods, one might expect the billion, according to Kantar Retail. Aldi Sud shopping carts at this store to be labeled operates Aldi stores in the U.S. Aldi Nord “Whole Foods Market” or “Mariano’s.” But owns the Trader Joe’s chain, which has the shopping cart handles say “Aldi.” fewer stores than Aldi but is better known Welcome to the new Aldi. It’s nothing in the U.S. Concentrated in the eastern half like the old Aldi. The dingy floors, dim of the U.S., the company has been openlighting and long lines have been replaced ing stores in California and other western by a shopping experience that could be states since 2016. Jason Hart, CEO of Aldi U.S. called “Whole Foods lite.” At a recent Aldi Last June, Aldi announced a $5 billion opening in Tampa, Fla., characteristic of plan to remodel or expand its U.S. footAldi’s latest store design and merchandising approach, shoppers print by nearly 50% to 2,500 stores by the end of 2022. It ended strolled past fancy flat-screen signage focusing on fresh items. 2017 with approximately 1,750 stores, up from about 1,200 five Robust produce, dairy and bakery sections complemented the years earlier, and expects to have 2,000 stores in operation by quick and easy checkout lanes. the end of this year. The initiative — which will make Aldi the The new and improved shopping experience is part of the nation’s third-largest food retailer by store count, serving more retailer’s new value proposition for the U.S. consumer: Aldi is than 100 million customers per month — is bringing a modern betting $5 billion it can win over Americans by offering nicer design to new and existing stores, with open ceilings, natural stores that are bigger, but not too big, and a tailored assortlighting and environmentally friendly retail practices, such as ment of inexpensive quality private label products. The formula energy-saving refrigeration and LED lighting. represents a huge competitive challenge, although it is one that Aldi’s timing couldn’t be better. Its new format is expanding receives less attention than Amazon and the recent revelation at a time when time-starved, convenience-minded U.S. shoppers about having more than 100 million Prime members. are drawn to smaller format stores. Discount retailers such as Aldi and its aggressive plans for DOING ‘SMALLER’ BETTER growth have created a new competitive dynamic. And like AmaAldi’s key point of differentiation has always been price. On zon, it is altering shopper expectations around price, brand, asa basket of 30 typical household items, Aldi’s prices are on sortment, and service. It is a scenario that has played out in Europe average almost 17% lower than Walmart’s, according to a 2017 where competition from the likes of Aldi as well as Lidl is being study conducted by Customer Growth Partners. Aldi’s reliance credited as a driving force behind Walmart’s decision in April to on private label makes such comparisons inherently difficult merge its Asda divisions with Sainsbury’s. The deep-discounters but it also reveals a key insight that value conscious shoppers have disrupted the U.K. supermarket sector severely begging the trust the retailer as much, if not more, than the brand and are question of whether the U.S. market is next. willing to substitute. “Aldi is the most underappreciated solid performer in retail,” Aldi gets high marks from U.S. customer satisfaction surveys, said Diana Sheehan, VP, Retail and Shopper Insights Retail, Sales including the 2018 Harris Poll Reputation Quotient, in which Aldi and Shopper Practice, Americas, Kantar. “They have a unique value ranked tenth, behind notable companies such as Amazon, Wegproposition that is fundamentally founded in price-based value.

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Aldi’s new format showcases fresh and clearly conveys a value proposition that is problematic for many competitors.

man’s, HEB and Publix. Aldi has won more than 200 awards from BrandSpark International for its private brand products ranging from best new product, parent tested and approved products, gluten-free product and private brand wines. Beyond price and product quality, Aldi is looking to leveraging another key differentiator: size. The company’s expansion the U.S. involves opening larger stores that can accommodate expanded assortments, especially in the areas of fresh and Aldi’s premium own brands. Aldi has increased its average store size by nearly roughly 30%, communicating to developers a desire for 22,000 square feet locations compared to 17,000 square feet five years ago. In addition, as consumers have become more concerned with healthier eating, Aldi has made sure its private label range, which comprises 90% of the assortment, are on-trend. Aldi has been stepping up its assortment with new product lines that have quickly become customer favorites, including a fastgrowing organic selection, USDA Choice meats, the liveGfree gluten-free product line, the SimplyNature line of products free from over 125 artificial ingredients and preservatives, and the Never Any! line of meats free from antibiotics, added hormones and animal by-products. Aldi also now carries a full line of baby products, called Little Journey, which offers diapers, wipes, training pants, formula, organic food and snacks. Stores also offer an Aldi Finds section: an area with premium food and household products that are only in stores for a limited time. The Aldi Finds department, while not a unique retail concept, does bring a distinct treasure hunt appeal to the store experience and the limited duration of seasonally relevant offers encourages shopper frequency.

TURNING THE SHIP The majority of Aldi’s existing fleet of more than 1,750 U.S. stores in 35 states are around 15,000 square feet and were built to stock 1,000 SKUs with a limited fresh offering. The newer stores, such as the one in Tampa, can be as large as 25,000 square feet and stock

around 1,400 SKUs. The company thinks American consumers are migrating toward small, nimble stores instead of sprawling warehouses and supermarkets that take longer to navigate. “Aldi’s format is really about modern convenience,” said David Ciancio, Global Customer Strategist at dunnhumby. “The smaller curated assortment of around 1,400 SKUs, the simplicity and the value is really attracting customers.” Aldi leveraging consumer trends is nothing new. The company doubled its footprint in the U.S. in the 2000s to more than 1,000 stores during and after the Great Recession, at a time when many U.S. shoppers were buying based on price and were getting really comfortable with the idea of private label being “just as good as national brands.” According to the Private Label Manufacturer’s Association, private brands now make up 17% of total grocery sales in the U.S. Aldi was one of the first grocers to understand that private label brands can provide premium value. Meanwhile the upside for private brands in the U.S., according to IRI, continues to be huge. “There’s a lot of headroom in the U.S. for private label to increase its market share,” said Fernando Salido, EVP, Shopper Analytics Consumer & Shopper Marketing Solutions at IRI. “And when you think about which groups are most likely to adopt private brands, it’s the millennials and Gen Z who did not grow up with national brands. And these people make up 47% of the U.S. population. Multicultural growth is also a key driver of future consumption trends. Aldi is focusing on these products trying to attract these populations.” Aldi is also leveraging another trend supported by recent shopper behavorial data. “The smaller format is the future of retail. Shoppers are making more trips but buying fewer products per trip, smaller baskets with more visits. The research shows that shoppers are saying that having 45,000 or even 100,000 SKUs, as in a traditional supermarket, is too confusing, too difficult to shop. And if they need more ketchup, there’s always the endless aisle online,” Ciancio said. Aldi’s assortment strategy not only benefits shoppers but also MAY/JUNE 2018 Retail Leader.com

9


> GROWTH AND BUSINESS DEVELOPMENT

A focus on quality has helped Aldi win numerous awards, which it prominently communicates in stores.

the retailer. Fewer SKUs help cut operating costs and generate faster turn. “We pioneered a grocery model built around value, convenience, quality and selection, and now Aldi is one of America’s favorite and fastest-growing retailers,” Aldi U.S. CEO Jason Hart is fond of saying in press releases touting the company’s expansion. A sign of the aggressiveness of Aldi’s plan to grow market share was evident at the new Tampa location: The company built the store in the parking lot of a new Costco warehouse. One of Aldi’s strengths that has eluded many discounters is its ability to draw affluent shoppers (like Costco members) despite its limited assortment. Aldi has accomplished this by cultivating an image of a retailer focused on quality rather than low cost. “If you look at the cars of shoppers in an Aldi parking lot, it’s higher end cars,” Ciancio said. “They are hitting the higher end shopper more than traditional retailers realize. They are winning on quality all over the world. They are winning taste tests and quality tests at a remarkable pace.” Yet redesigning its store format and opening new locations are only part of Aldi’s growth plan. The retailer is also laser-focused on innovations such as contactless payments, online grocery delivery and Big Data.

NO-FRILLS DIGITAL? With Aldi already moving beyond its no-frills discount roots via fancier stores and enhanced product ranges, digital innovation is the next step along the path of evolving its value proposition. And, like some of the changes before it, the added cost and complexity would appear to be at odds with the everyday-low-cost model of discounters. But like the rest of the retail world dealing with the same operational challenges, it’s innovate or perish. “Although they continue to drive traffic to stores, they have partnered with Instacart,” Kantar’s Sheehan said. “Which means they are evaluating the U.S. market and acknowledging that they are going to have to compete digitally. In terms of what they will do with online grocery, 10

Retail Leader.com MAY/JUNE 2018

it’s not click and collect vs. delivery vs. direct to home. Most retailers, including Aldi, will have to offer one or two of those options.” To wit, Aldi launched Instacart service last August in Atlanta, Dallas and Los Angeles. Based on what Aldi CEO Jason Hart called an “overwhelmingly positive” response the relationship with Instacart was extended to Aldi’s 200 Chicago area stores in March. In another major technology initiative that positions the company to serve the preferences of future generations, Aldi rolled out contactless payments. It is a popular method of payment in Europe but has been slower to take hold in the U.S. Because of its growth plans, Aldi also announced an expanded multi-year relationship with Nielsen last year that includes integrated analytics data around shopper panel, custom retail analytics and advertising effectiveness. The agreement makes Nielsen Aldi’s preferred data and analytics provider just as its growth necessitates access to increasing amounts of effective shopper and advertising data.

HOW TO COMPETE New research from dunnhumby’s Dave Ciancio is helping retailers and manufacturers understand what to expect and how to prepare for Aldi’s expansion. “Aldi knows that consumers are shopping using a number of lists and splitting their shop among various retailers. Aldi recognizes this two or three-list shopping behavior. And they want to capture the first stop shop around the essentials, and they are getting it,” Ciancio said. “They are affecting traditional retailers with that drop in visits. They are grabbing 3% to 5% of the sales volume from traditional retailers. And they are particularly impacting those retailers within about one mile of an Aldi store.” It is a key reason why Aldi along with Lidl are, according to dunnbumby’s forecasts, expect to account for a combined 10% of U.S. market share by 20121. Aldi has certainly made a big bet on its value-priced and tailored assortment winning over American consumers. But as other retailers expand and enhance their private label assortments and a growing percentage of center store categories shift online, Aldi has some vulnerabilities that will need to be shored up. “Aldi will need to overhaul its online offering,” said Ryne Misso, Director of Product Marketing at Market Track. “They could maybe sweep up a delivery startup or another tech startup. They are also lacking a rewards or loyalty offering. When Amazon, Walmart and everybody else catches up to Aldi on the private label front, they will have a big e-commerce problem on their hands.” Aldi’s strengths clearly outweigh it weakness at this point, and to the extent the company does have vulnerabilities it has also shown itself to be an astute operator capable of moving quickly to close competitive gaps. RL


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> HUMAN CAPITAL

Getting Comfortable Being Uncomfortable NOTHING SHORT OF BUSINESS CONTINUITY IS AT STAKE FOR RETAILERS AND SUPPLIERS WHO FAIL TO ACHIEVE DIVERSITY — FAST. > By Mike Troy

T

The topic of diversity and inclusion is familiar in the retail industry. It’s been talked about for decades, goals have been set and commitments are discussed in corporate social responsibility reports. Nevertheless, a quick glance around the room at any industry event, especially those geared toward senior executives, reveals a sea of homogeneity. Within the overall industry, the lack of gender diversity is especially noticeable in the field of supply chain and logistics.

Caroline Wanga is a self-described “supply chain girl” who now serves as Target’s Chief Diversity and Inclusion Officer.

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Maybe that’s to be expected considering many of those in senior leadership got their start running warehouses or operating truck fleets, which weren’t particularly appealing professions for women 20 or 30 years ago. The world of supply chain has changed a lot though. It is a more data and technology driven profession, but the lack of women persists. For some context, there was no waiting to use the women’s bathroom when the Retail Industry Leaders Association (RILA) held its annual supply chain conference earlier this year in Phoenix. If the first step toward solving a problem is recognizing one exists, then the retail supply chain world took a major step forward when RILA unleashed Caroline Wanga on attendees at its supply chain conference. Wanga serves as Target’s Chief Diversity and Inclusion Officer and she put the gender diversity issue in sharp focus for an audience of largely middle-age white executives whom she encouraged to stop worrying about self-preservation. “Gender diversity is a business imperative that left unaddressed will render us irrelevant. We are in crisis,” Wanga said. “We are at a level of urgency related to our business staying alive by serving changing demographics.” If that message sounds alarmist it was by design and also in sharp contrast to the normal fare at an event where conversations among attendees tend to focus more on operational matters such as port congestion, new trucking regulations or omnichannel supply chain complexities. Wanga can have those conversations too. She is a self-described “supply chain girl” who got her start in the industry at a Target distribution center in the eastern Texas town of Tyler. “I didn’t know what the hell I was doing when I walked in that distribution center in Tyler, Texas,” Wanga said. “The point is, if Target would have allowed the fact that I was a woman to minimize my potential, to not sponsor me and not support me, I wouldn’t be in front of you today.” Wanga spent the first five years of her 14-year Target career in the supply chain area. First in the distribution center and then at Target’s Minneapolis headquarters on the distribution, planning and engineering team focused on Target’s perishable distribution centers. She then moved


Attendees at RILA’s annual supply chain event showed their commitment to increased gender diversity at next year’s event.

into the human resources area and a series of rapid promotions led to her current role. It is a position from which she makes a forceful business case for diversity internally at Target and externally. And she minces no words when describing the business imperative, considerable risk-taking and self-sacrifice required of entrenched leaders. “It will require things that are going to take you outside of what you comfortably have been doing for however long you have been in this business. If your path to a commitment in gender parity has connected to it an assumption of comfort, you are setting yourself up for failure,” Wanga said. “It is going to be a constant state of discomfort. It is not going to be easy, short or immediate. You might not even live to see the impact of your actions.” Nevertheless, it is a commitment that has to be made so the retail industry can continue to serve ever changing consumer demographics. And as part of that commitment leaders need to apply the same type of metrics and performance standards used to manage other aspects of the business such as product sales or on time deliveries, according to Wanga. “It has to become part of how you lead and run your business everyday,” Wanga said. “If you look at metrics every day on how your business is performing you should do the same thing on how you are performing on diversity recruiting and gender parity.” Target has done that. And while the company isn’t perfect, it fares better on diversity than most of its peers. It has also become more committed than ever before, which is something borne out in numbers that show 36 percent of Target’s board members and the C-suite team are female, according to Wanga. Forty percent of Target’s supply chain leadership team is female. “Where we need to agree is on the destination to creating gender parity in supply chain. Where we don’t have to agree is on the many paths that help us get there,” Wanga said. Whatever path a company takes it requires adopting a view that a person’s individuality is non-negotiable. On this point, Wanga is particularly forceful because she lived through the experience with Target. A native of Kenya, she moved with her parents to Minneapolis at the age of 10. She went on to attend a small historically black college in east Texas and connected with Target when the company came on campus for a recruiting event. When she was hired, rather than become like everyone else in the organization, which she called the business case for homogeneity, Wanga

retained her identity and Target is the better for it. “Who you are is what helps the business we are in be successful. The combination of your dimensions of difference, your experiences and the perspective you offer, requires you walk into the organization and unleash and weaponize your dimensions of difference to be able to drive the business. That’s hard as hell,” Wanga said. “Stay who you are based on the truth of your experiences and you don’t adjust who you are for the organization. You change the organization until you find the one that works with who you are.” What that looks like for companies operating in the real world is ownership for diversity, inclusion and gender parity has to be extended beyond human resources and into the business functions, according to Wanga. Such a decentralized approach improves the prospects for success because then the business function “owns it” as part of their strategic objectives. The best way to test whether such an approach is functioning, she said, is to ask HR a question about diversity and the business a question about diversity and see if they give the same answer. Or an answer at all. “(Diversity) is not an HR initiative. This should be a part of your business strategy. This is the thing you should be most afraid of taking your business apart,” Wanga said. Diversity as a business continuity imperative was a theme emphasized throughout a presentation that, by design, pushed those in attendance outside their comfort zone. Some may have even felt threatened or got a sense from her remarks that for women to gain men must lose. That’s not the case at all however, as Wanga noted in response to a question, because gender parity is about everyone having an equal chance. “One of the things I hate about the D and I (diversity and inclusion) industry is no one ever asks the straight white man what he needs and he is constantly excluded and villainized in the conversation,” Wanga said. “That’s crap and it needs to stop.” RL MAY/JUNE 2018 Retail Leader.com

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> MERCHANDISING AND MARKETING

Sponsored Authenticity NEW STANDARDS OF ACCOUNTABILITY AND EXPECTATIONS OF PERFORMANCE ARE TRANSFORMING THE GROWING FIELD OF INFLUENCER MARKETING. > By Mike Troy

I

Influencers have always been with us, they just didn’t used to be called that. Think restaurant and movie reviewers from the golden age of newspapers. A few choice words from select individuals could make or break a new eatery or film. Digital technology and social media platforms gave anyone with an opinion about anything a way to be influential and share their views with the world. It didn’t take long for savvy marketers to recognize the potential of the new age influencers as an affordable, effective and measurable way to engage with and influence consumer behavior. No wonder then that nearly 40 percent of marketers who participated in a recent survey by the San Francisco-based influencer marketing platform Linqia said they expect to increase their influencer marketing budgets this year. About 35 percent were unsure, but the survey of 181 marketers was conducted in 2017 when some budgets weren’t final. Only 5 percent said they expected to spend less. The increased spending is due to the fact that influencer campaigns work, according to those surveyed. More than 90 percent of those who used an influencer campaign in 2017 said it was effective. And by effective, the most common measurements cited were engagement (87%) and clicks (59%). However, as influencer campaigns mature, marketers are also looking for larger and more extensive programs to have a bottom line impact. For example, product sales as the measure of effectiveness increased to 46 percent in 2017 from 34 percent in 2016. Conversely, the survey showed the metric of “reach” dropped 11 percent to 50 percent last year. The other notable change in the world of influencer market-

ing relates to leadership of influencer programs and who owns the budget. “Not unlike other forms of media, influencer can live in multiple places, but we are starting to see companies create actual titles and departments specifically for influencer programs,” said Daniel Schotland, COO of Linqia. “Influencer started in PR but it is definitely Daniel Schotland, COO of Linqia moving toward media. PR is really all about controlling the message, but influencer is about providing guardrails that let influencers tell the story in their own way to resonate with their own audience. To some degreee. Those two are slightly at odds with each other even though the desired impact may be the same. The way you think about them is very different.” That explains why there has been a big shift in ownership to those in the functional areas of advertising/media, up to 38 percent from 26 percent and a corresponding decline in ownership by PR/ communications, down to 15 percent from 31 percent. The growing size of programs and their objectives are also means they are better suited to be managed by advertising and marketing functions, according to Schotland. This is especially true as the field of influencer marketing has matured, influencers have grown more sophisticated and fraud and regulatory considerations have arisen. There have been documented INFLUENCER MARKETING IS INCREASING... cases of influencers acquiring followers to increase their value to marketers and the Federal Trade How budgets will change in 2018 Commission has become more active. The FTC has had a wary eye on the influencer space for a decade, but last fall it took decisive acIncrease 39% tion around the obligation of influencers to disclose sponsorship affiliations. Newly revised and lengthy Decrease 5% guidelines are designed to provide influencers Stay the Same 21% and influencer platforms clearer direction around acceptable behavior with a form of consumer comNot Sure/ 35% munication that is still relatively young. Don’t Know While there are plenty of gray areas in the 0% 10% 20% 30% 40% guidelines, as Schotland and others in the influencer space have noted, there is a sort of checks SOURCE: 2017 Linqia, Inc.

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Retail Leader.com MAY/JUNE 2018


and balances system in place based on the forces of authenticity and transparency. “Influencers have been successful in generating an audience of followers because there is something that resonates with their audience whether it is sponsored or organic,” Schotland said. “An influencer isn’t able to keep their audience if they are not talking about the points of interests or passions their followers have. There also has to be a balance between the percentage of content that is sponsored versus organic.” If the sponsored percentage is really high an influencer would potentially lose followers turned off by the notion that much of the content is paid. How much is too much is hard to say, but Schotland noted that, “influencers need to do a good job of mixing in their non-sponsored posts to keep their audiences engaged.” If they don’t, or if FTC suspects outright deception, influencers have been warned. The agency last fall in conjunction with the release of new guidelines made an example out of a pair of influencers active in the online gaming world who were widely followed on social media. The FTC reached a settlement agreement after determining the influencers had been promoting a company they owned without disclosing the affiliation and had been paying other influencers to make positive comments without disclosing the financial connection. “Consumers need to know when social media influencers are being paid or have any other material connection to the brands endorsed in their posts,” said then Acting FTC Chairman Maureen Ohlhausen. “This action, the FTC’s first against individual influencers, should send a message that such connections must be clearly disclosed so consumers can make informed purchasing decisions.” The agency also sent a shot over the bow of the influencer world when around the same time it sent warning letters to 21 social media influencers regarding Instagram posts it believe violated influencer rules, known as enforcement guidelines, first published in 2015. The retail and CPG world may not be the West West that some corners of the Internet are, but large companies have reputations at stake and can ill afford to be seen employing questionable marketing practices. Especially since such questionable practices can be easily amplified by very influencers brands are attempting to influence. Accordingly, the Linqia study showed that 87 percent of respondents require influencers disclose sponsored counted to comply with FTC regulations. As for the 13 percent who aren’t in compliance, keeping up with regulations can be a moving target. Seventy one percent of those surveyed said they are up to date with current guidelines, a big improvement from only 55 percent in 2016. RL

MARKETERS ARE TAKING CONTROL... Areas of functional responsibility for campgains 38%

Advertising/Media 17%

Brand Marketing PR/Communications

15%

Shopper Marketing

15% 11%

Content Marketing 5%

Other Product Marketing

0% 0%

10%

20%

30%

40%

WHAT SUCCESS LOOKS LIKE... How ROI is measured 90%

Engagement 59%

Clicks

55%

Impressions

54%

Conversions

50%

Reach

46%

Product Sales 29%

Audience Alignment 2%

Other

0%

25%

50%

75%

100%

WHO IS USING WHAT... Marketers rank the most important social platforms 92%

Instagram 77%

Facebook

71%

Blogs 42%

YouTube

39%

Pinterest 26%

Twitter

22%

Snapchat Other

1% 0%

25%

50%

75%

100%

SOURCE: 2017 Linqia, Inc.

MAY/JUNE 2018 Retail Leader.com

15


> SUPPLY CHAIN

Skipping the Trip AGGRESSIVE PROMOTION OF HOME DELIVERY WILL IMPACT STORE TRAFFIC, BUT THE ALTERNATIVE IS LOSING SHARE TO COMPETITORS MOVING FAST TO OFFER AN INCREASINGLY IN-DEMAND SERVICE. > By Mike Troy

N

Never have so many retailers been so eager to incur huge technology costs and upend operations to provide a service that encourages shoppers to avoid coming to stores. Yet, that is what is happening across the nation as retailer after retailer touts the availability of home delivery services alongside click and collect, which for many conventional retailers served as their gateway to the digital age. The shift is noteworthy because store traffic, alongside transaction size, has long been a metric retailers measured and touted as an indicator of success. However, 2018 likely will be remembered as the year store traffic became a much less reliable indicator of success due to customers’ evolving expectations of retailers’ service offering. That’s because as satisfaction grows with alternative fulfillment methods such as click and collect and home delivery the universe of physical-first shoppers from whom trips are available to be captured will inevitably decline. Market share and transaction size will matter more even as stores retain their central role in how most retailers are satisfying shoppers who opt to engage digitally. “Stores are an incredible asset for us,” said

Udelv CEO Daniel Laury’s autonomous delivery vehicle has made more than 100 deliveries from Draeger’s stores in the San Francisco area.

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Matt Thompson, Kroger’s Vice President of Digital Business, echoing a familiar sentiment of many retailers. The importance of stores to Kroger’s digital offering occurred in 2014 with the acquisition of Harris Teeter and its 150 store ClickList operation. Since then, Kroger has embraced click and collect and increasingly home delivery. Kroger added 40 ClickList locations in 2016, another 450 in 2017 and will add 500 more this year, according to Thompson. “We’ve never seen a category with such rapid adoption,” he said recently at the Home Delivery World retail supply chain event. Kroger also relies on roughly 1,200 of its physical stores to fulfill home delivery orders in nearly 50 markets. “By the end of the year we will have full delivery in all of our major markets,” Thompson said. Other retailers are moving fast to offer and expand digital methods of engagement, which are universally reported to be popular, although no publicly held grocer has yet provided meaningful customer usage metrics to substantiate such claims. “Everything we do now is next day delivery, but we are looking to do same day quickly,” said Valery Ciarimbola, Senior Director of E-Commerce Operations with Giant Eagle, the Pittsburgh-based operator of more than 200 supermarkets. “The first three deliveries are free and then $4.95 after that. The magic number of delivery orders to keep (customers) sticky with us is five or six.” Giant Eagle fulfills home deliveries out of 36 stores currently, has more than 50 click and collect locations branded as Curbside Express and expects to add another 20 this year, according to Ciarimbola. Applied Predictive Technologies helped Giant Eagle build a predictive model that allowed for the prioritization of locations. At SpartanNash, the Grand Rapids, Mich.-based food company whose retail division operates 145 stores, click and collect and delivery are expanding rapidly. Matt Van Gilder, Manager of E-Commerce Operations with SpartanNash, said a click and collect service branded as Fast Lane launched last July and is now available at more than 50 stores. Orders for home delivery are fulfilled from six stores. “We are very happy with the growth we see week over week,” Van Gilder said, noting that the service is helping capture new customers and 50 percent of sales are incremental. The incrementality is key because SpartanNash


Target and Safeway are among the major retailers encouraging customers to use home delivery.

does all its own deliveries and Van Gilder concedes profitability is a challenge due to the last mile expense. “We love the benefit of owning the customer experience all the way to the end.”

THE SCALABILITY CHALLENGE As click and collect and home delivery demand grows, physical stores and the supply chains that support them are asked to perform functions for which they were never intended. This reality is not lost on supply chain executives who understand shipping merchandise from a distribution center to a store, filling store shelves and then picking orders from shelves increases product touches, which adds costs and magnifies operational weaknesses. “E-commerce has revealed that out of stocks are worse than imagined,” said Scott DeGraeve, COO of Locai Solutions and a former Peapod executive, citing the prevalence of product substitution as an indicator. Nevertheless, retailers eager to get into the omnichannel grocery game have rushed to crowd-sourced solutions providers such as Instacart, Shipt and Postmates. Reliance on third parties to pick orders for delivery or click and collect from physical stores emerged as an expedient solution for many retailers. It offered a way to shift the last mile expense burden to shoppers, but the long-term viability of relying on stores as fulfillment centers is suspect, according to some. “Click and collect using store inventory at some point becomes unscalable,” said Andy Lockhart, Vice President of Integrated System Sales with TGW, a provider of material handling equipment

used in automated distribution centers. Among the top operational challenges associated reliance on store inventory to fulfill digital orders are store crowding, order accuracy, out of stocks, product substitutions and allocating dedicated store space for order storage, according to Lockhart. He believes the more scalable solution, is to decentralize fulfillment by leveraging dark stores, a common practice in European markets where grocery e-commerce has a higher penetration rate. Another option is fulfillment centers purpose built to handle digital grocery orders. Such a decentralized approach results in better pick rates, consistent substitution protocols and improved cold chain compliance, according Lockhart. Sharing a similar view is Lee Hnetinka, CEO of Darkstore, a San Francisco-based company that claims to operate the nation’s largest third party fulfillment center network enabling one hour and same day deliveries. “Our urban fulfillment model is not that much different than Amazon. We are simply forward stocking product to get it closer to the end consumer,” Hnetinka said. Darkstore operates 82 locations nationwide ranging in size from 20,000 square feet to 150,000 square feet capable of offering same day deliveries in 40 cities.

FULFILLMENT ANYWHERE Home delivery may be popular, but it is costly and it becomes even more costly when no one is home or unattended packages are stolen. Here again Amazon has emerged as a first mover to address a challenge with the supply chain. The company offers a service called Amazon Key In Car that allows Prime members who own General Motors or Volvo vehicles equipped with cloud-connected technologies to select their vehicle as the preferred delivery methods upon checkout. Don’t drive a GM or Volvo? No problem. A start up called Phrame makes a nifty license plate holder that From Publix in the southeast to Raley’s on the west coast, retailers’ in-store communications alert shoppers they can skip the trip.

MAY/JUNE 2018 Retail Leader.com

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> SUPPLY CHAIN Walmart expects to offer home delivery to 40 percent of U.S. households by year-end, in addition to grocery pick up service at 2,200 locations.

can give a delivery person access to a key to open the trunk and place a package inside. “We turn the car trunk into a mobile locker,” said Charlene Consolacion, Co-Founder and CEO of Phrame. Granting a delivery person access to a vehicle is one of those things that would have sounded crazy a few years ago, and maybe still does to most people today. However, availability of such services shows how quickly consumer behavior can change when presented with fulfillment solutions that over time become the new normal. “People want to be able to accept packages when they are not home,” said Herve Letourneur, Vice Preident of Products with August Home, a company that make a smartphone controllable lock that fits over a homeowner’s existing deadbolt. The technology gives delivery people access to place packages inside the home, a use case widely thought to be one of the motivators behind Amazon’s decision to acquire Ring, a manufacturer of doorbells that gives users the ability remotely monitor video to see who is at their door. “No one wants to have Amazon or Walmart own their lock. We provide universal access to about 200,000 homes,” Letourneur said. He adds that, “a lot of customers are not comfortable with this yet,” but the same thing was said five years ago about home rental and ride sharing services. “It’s all coming.” The other thing that’s coming is autonomous delivery vehicles. The business case is simply too strong and the technology is advancing too quickly for it not to happen. That is the view of Daniel Laury, CEO of Udelv. His company has been testing a vehicle in the neighborhoods of San Mateo, about halfway between San Francisco and San Jose, that makes deliveries from the upscale Draeger’s supermarket. Since 18

Retail Leader.com MAY/JUNE 2018

launching in early 2018, the orange Udelv vehicle had made more than 100 deliveries by April which was good enough for Laury to order a second vehicle. “Autonomous delivery vehicles will dramatically cut the delivery cost and significantly enhance the customer experience,” Laury said. The problem Udelv solves for retailers is cost and for retail customers it is convenience. Laury said the driver is the largest component of delivery cost, accounting for roughly 65 percent, followed by fuel at 10 percent depending on gas prices. An autonomous electric vehicle address both because, “you are guaranteed to save half the cost if you replace the driver with a computer and gas vehicles with electric vehicles.” From a customer experience standpoint, much like with an Uber or Lyft driver, those expecting a delivery can monitor the arrival of the vehicle on their phone. Once the vehicle arrives curbside or in the driveway the order is retrieved by unlocking the cargo area with their smartphone. “If after four minutes a customer hasn’t retrieved their order they are sent a push notification about whether they would like to reschedule,” Laury said. “This is not science fiction.” It only sounds like it is, which is something retailers should be used to by now as innovation continues at a rapid pace. RL

A shopper at Home Depot ponders the purchase of a Ring device. Amazon acquired the home security company in February to address the supply chain challenge of unattended deliveries.


Artificial Intelligence Opportunities in Retail

Today’s retail industry is far more fragmented and competitive than ever. Multiple store formats and an arsenal of digital tools are making shoppers more educated about choices. Digital channels also continue growing. This is particularly true in grocery, where heavy hitters like Amazon and Walmart continue to eat into the market share of traditional chains. The landscape has also become more diverse, with a variety of household types and lifestyles having very different needs than the mom-dad1

with-kids target that dominated generations past. This is compounded by a burgeoning ethnic population, with each group having a distinct profile in every area from language and food to shopping style and economic status. Add to this revitalized inner cities, which are attracting young Millennials in droves, and the result is a seismic melting pot that never stands still.

>

Read more


Retailers and their suppliers need real-time, in-depth knowledge to attract diverse shoppers. But the advent of distinct devices, sensors, and machine-to-machine communications has made data sets so large that timely manipulation, management and analysis present significant logistical challenges for companies using onhand data management tools or traditional data processing applications. Other entities have incorrect or outdated legacy data. This is compounded by the difficulties many companies face in recruiting the talent needed to implement complex technology tools, analyze the data and make effective recommendations.

or images. AI uses predictive patterns to help understand desires, motivations and actions across both physical and digital channels. This lets retailers and suppliers enhance many functions, such as executing more targeted and personalized marketing campaigns and improve trade promotion efforts. AI can also automate forecasting of inventory needs, more accurately predict out-of-stock incidences and ultimately help optimize supply chains.

Many successful high volume retailers and consumer packaged goods (CPG) organizations have turned to artificial intelligence (AI) to navigate the muddle. At the simplest level, AI machines or systems imitate human behavior in intelligent ways that can augment productivity and optimize business performance. AI applications include machine learning, natural language processing (NLP) and robotics. AI allows retailers and manufacturers to gather customer insights in an automated fashion and predict next actions based on previous patterns

Types of Artificial Intelligence

With artificial intelligence (AI), machines mimic or replace intelligent human behavior, like problem solving or learning. They “sense,” “comprehend” and “act” in accordance with the real world. In essence, machines learn from experience and make recommendations, learning and improving over time.

AI applications fall under three key areas Machine learning. Machines automatically analyze large amounts of data and “learn” using rule-based algorithms that identify patterns and trends. As an example, this could mean combining 100,000+ data points from 75 million customers regarding shopping patterns and other habits. Natural language processing (NLP). NLP is a machine’s ability to understand, analyze and generate human speech. A computer listens to a natural language spoken (or written) by a person, understands its meaning and responds by generating natural language to communicate back (as opposed to a computer language like Java or SQL). NLP can allow retailers to request detailed information about a specific store, product, shipping method or other topic without touching a PC. Robotics. Involves full-scale automation of tasks traditionally performed by humans. Warehouse picking and packing, for example, can be performed by robots.

2


AI’s Growth

Machine learning first became a scientific discipline in the late 1990s. But it did not seriously take off until the 2000s. Growth was fueled by access to huge amounts of real time Big Data and the emergence of algorithms that make sense of that data for productive output. AI is continuing to grow, touching more industries and functions every day.

in recent years, e-commerce has reached new heights by using machine learning to make functions more comprehensive and specific. User choices and information can be crossreferenced in numerous ways. Customers can locate merchandise faster, more products are sold per transaction and there are fewer abandoned carts.

To date, much AI retail activity has revolved around machine learning in e-commerce, particularly for search analysis, product recommendations, promotions and analyzing consumer sentiments. Amazon is regarded as a pioneer here, and it is widely estimated that 25% of its sales are generated through recommendation-based product views and previous purchases. Today, Amazon is even marketing its easy-to-use, highly scalable search and other machine learning technologies to outside parties.

Now, retailers and suppliers are applying AI to areas outside e-commerce. Demand forecasting that incorporates machine learning, for example, allows online and offline retailers to generate more precise forecasts than traditional time series approaches. Machine learning also facilitates warehouse management by helping to alleviate the over- and understocking scenarios that can erode a retailer’s bottom line. When applied to trade promotions management, AI could help suppliers improve timing, tracking and other aspects of retail marketing investments.

Other e-commerce companies have used search and recommendation tools for some time. But

 etail and consumer goods R are among the top five industries in which AI is being applied1.  2017, the global AI In market was estimated at $2.4 billion. It is expected to grow at a CAGR of 50% to over $59 billion by 20252.  4% of CIOs plan to invest 6 significantly in cognitive or AI technologies over the next two years3.  y 2030, AI will drive B Global GDP gains of $15.7 trillion (14% higher) through productivity and personalization improvements4.

1 2

3

PWC 2017 data Statista

3 4

 eloitte’s 2016 Global CIO survey D PWC 2017 data

NLP is also making inroads by providing conversational answers in areas including category management through deep analytics, data mining and visualization at department, planogram and product levels.


Top AI Applications in Retail AI is gaining an important place in retail with growth expected to reach $40 billion by 2025, up from an estimated $6.46 billion today. It is being driven by an increase in customer-centric initiatives, more social media advertising and heightened demand for virtual assistants5. Among retailers, 16% already use some form of AI, while 20% plan to add it over the next 12 months; another 18% hope to implement it more than a year from now6. Following are the leading AI, machine learning and NLP application areas in retail.

AI in Personalized Marketing Retailers typically use marketing automation software or campaign management solutions to target customers. Applied to CRM data, tools divide customers into groups according to shopping behavior, demographics, preferences or other criteria. The problem is that rules are chosen based on the marketer’s human assumptions and leave significant room for error. The process also leaves out potentially useful criteria, and it can be hard to segment customers who do not correspond to pre-designated buckets. Since information is historic, shopping behavior, income and other factors are prone to change.

by analyzing individual pieces of data simultaneously, and information can be used to send highly personalized offers to customers. But retailers believe personalization still has a way to go, even though 39% say it is extremely important7. Most retailers (54%) gave themselves a low rating for executing personalization strategies at an omnichannel level, with just 4% rating themselves as high overall. The biggest hurdle, said 69%, is lack of appropriate technologies, followed by managing across channels (47%). Analyzing store point-of-sale and e-commerce transaction history became the standard for classifying and targeting consumer groups. Now, advances in Big Data and AI are giving rise to highly personalized campaigns and other initiatives without major human intervention. These engagement tools factor in customer purchase history, browsing behavior, social media activity and overall channel engagement. The biggest difference is that today’s initiatives target people on an individualized basis, and with AI, retailers can do this at scale. Personalization can grow revenue 5% to 15% and increase efficiency of marketing spending by up to 30%8.

Machine learning examines a full set of data, identifies patterns and organizes it into “clusters” of similar data. Assumptions and stereotypes about what is important are bypassed. Rather, information is determined by the analysis. Trends and connections are established that might have been overlooked

Initiatives involving AI in personalized marketing* 25% 35%

18% 28%

Currently part of initiative Plan to incorporate in next 12 to 24 months

Social sentiment analysis

Elastic personalized search

* Figures are based on AI initiatives that are currently in the pipeline or are being planned in the next 12 to 24 months 5 6

ReportsnReports mediapost.com, October 9, 2017

7 8

Source: 2018 EIQ Retail Innovation Survey

RIS News, “Closing Big Gaps in Personalization,” October 2017 Harvard Business Review

4


AI in Trade Promotions Management In promoting products, CPG companies have historically made substantial investments with retailers to boost revenue and/or increase market share. Today, trade spending represents more than 15% of CPG companies’ total revenue9 and continues to grow. Consequently, spending volume has increased dramatically, and trade promotions have become more complex and harder to manage.

According to the Trade Promotions Management Association’s website, the industry has been reluctant to adopt new technologies. Roughly 60% of companies still use manual processes and spreadsheet applications or proprietary software. Thus they lack real-time, accurate and meaningful insights for planning, managing and optimizing trade promotions. AI and analytics can provide promotion-related insights and guidance to channel managers, category/brand managers and financial teams to help allocate trade fund dollars more wisely and alleviate margin erosion.

What is more, it currently takes the average business user four weeks to understand if a trade promotion was effective10. Yet 72% of promotions fail to break even11, and many new products fail.

Improve promotion precision with NLP By layering on NLP, consumer goods companies can facilitate experimentation with trade promotions criteria. They can verbally ask, for example, how results could differ if a promotion is run in July versus August. The answer is immediate and does not require using a PC or running massive calculations. And they avoid expensive risks.

NLP also recognizes natural, written language. Using sentiment analysis, it can determine whether consumer reactions to products are positive, negative or neutral. Given the hordes of posts consumers make daily on social media, blogs, e-commerce sites and other platforms (including CPG companies’ own social media sites), manufacturers have a wealth of information to draw from.

Given the time and money invested in Research & Development, this feedback can go a long way when it comes to trade funds marketing, determining actionable price points, tweaking items and recognizing market voids that could be filled by new products. And it can yield results faster and at a lower cost.

MarketsandMarkets.com predicts the NLP market will roughly double, reaching $16 billion by 2021 at a CAGR of 16.1%12.

Initiatives involving AI in trade promotions management* 37% 27%

30% 32%

Currently part of initiative Plan to incorporate in next 12 to 24 months

Pricing optimization

Promotion optimization

* Figures are based on AI initiatives that are currently in the pipeline or are being planned in the next 12 to 24 months 9

5

 rade Promotions T Management Association, 2017

10

 onsumer Goods Technology, C “Tech Trends 2017: Redefining Trade Promotion”

11

 ielsen price/ N promotion survey, 2017

12

Source: 2018 EIQ Retail Innovation Survey

“ Natural Language Processing Market by Type Technologies by Deployment Type, Vertical & by Region - Global Forecast to 2021,” July 2017


AI in the Supply Chain also be facing a multitude of challenges related to warehouse and DC management. In order to ensure successful execution, companies need to take an end-to-end view of the supply chain, managing the relevant trade-offs and synchronizing planning and logistics to drive value. Adoption of machine learning in mapping varied demand patterns and scenarios for more effective inventory optimization and channel allocation could become an important step in timely replenishment and efficient logistics.

Machine learning has an important place in the supply chain, particularly when it comes to demand forecasting. With traditional planning methods, demand forecasts are not always accurate. This leads to out of stocks, overstocks and products being returned to vendors. It also creates unhappy customers and makes retailers unable to attain financial goals. Machine learning helps forecast inventory, demand and supply in that predictions are not based solely on historic data. Rather, the technology predicts what will sell, driving enhanced forecasts based on real-time data using demographics, weather, performance of similar items and even online reviews and social media. Predictions can be made by store, SKU, size, color and other criteria. Machine learning even helps identify and correct data errors and risks in the supply chain, elevates insights from the Internet of Things devices in the field and plans logistics. This optimizes delivery of merchandise while balancing supply and demand, making human analysis unnecessary. Issues stemming from inventory management or, more broadly, supply chain planning can have a profound effect on logistics operations. For example, a retail company that is developing an omnichannel strategy struggles to manage the complex trade-offs between demand forecasting, inventory orders, channel allocation and logistics costs and capacities as it tries to respond to customer demand. Retailers may

Initiatives involving AI in supply chain management* 33% 31%

52% 22%

41% 24% Currently part of initiative Plan to incorporate in next 12 to 24 months

Demand forecasting

Inventory planning

Replenishment

* Figures are based on AI initiatives that are currently in the pipeline or are being planned in the next 12 to 24 months

Source: 2018 EIQ Retail Innovation Survey

6


AI in Assortment Planning Historically, planning a retail assortment involved looking at the previous year’s sales data to see what performed well and what did not, then factoring in new fads and trends to come up with the right mix. The result would be a combination of brand new items that followed the latest fad, a few timeless perennials and some of last year’s mix for those customers who were not quite ready for a change. The problem is, the consumer population and its tastes and habits are a constantly moving target. The teens who shopped this retailer last year may have gone off to college. Or, if the target was working professionals, changes in the job market may have impacted their spending habits. Whatever the reason, historic data talks about yesterday’s customers.

This is particularly valuable for retailers. They can determine how the same or similar items are performing elsewhere, give them a ranking and decide if they want to order them, how many to order, how long to feature certain items, what stores to offer them in and other criteria. As a measurement tool, online reviews are particularly valuable. Unlike a focus group or other study, they voluntarily come from individuals who have actually purchased a product. And consumers take them very seriously:

If two similar products have the same rating, shoppers will purchase the one with more reviews13.

AI-influenced algorithms can predict the most relevant items to add to a retailer’s inventory by analyzing the product assortments of competing retailers and brands, then comparing those products to the demographics and shopping history of that retailer’s customers—in realtime. Some tools can even predict the ebb and flow for each particular product over the next 30 days, including demand changes by both percentage and item count.

97% of shoppers say reviews influence their buying decisions; 92% hesitate to buy anything if no customer has reviewed it14. 73% of shoppers say written reviews impress them more than star or number ratings15.

Machine learning can also be used to “read” customer reviews on social media or e-commerce sites. A machine learning algorithm can be taught to categorize posts or look for text patterns, and AI can even detect foul language and fraudulent reviews.

Initiatives involving AI in assortment planning* 47% 21%

46% 26% Currently part of initiative Plan to incorporate in next 12 to 24 months

Merchandise management

Customer/consumer insights

* Figures are based on AI initiatives that are currently in the pipeline or are being planned in the next 12 to 24 months

13

7

 sychological Science study, P August 21, 2017

14

 an & Fuel Digital F Marketing Group

15

Deloitte

Source: 2018 EIQ Retail Innovation Survey


Conclusion

AI is still in its infancy. By 2020, however, 85% of customer interactions will be managed by AI16. Thanks to Amazon and other cutting-edge retailers, AI has already made major inroads in e-commerce, particularly when it comes to more pinpointed product recommendations. This online personalization trend will only intensify as e-commerce continues to grow, customers become even smarter and more demanding and AI applications like visual search and NLP digital assistants become more widely understood and applied. In some other areas mentioned in this report, AI has a long way to go in terms of uniform and consistent adoption. But with the cost of bringing products to market and the high failure rates, retail and CPG companies in particular have much to gain by applying the technology to trade promotions management and personalized marketing. AI is also gaining ground in assortment planning, supply chain management and product development where an endless loop of forecasting continually adjusts inventory levels. This alleviates inconsistent inventory buys, overstocking, understocking and consequent margin erosion. It also creates happy, loyal customers who keep returning due to more relevant assortments and new products, thus ultimately driving overall shopper satisfaction.

Symphony RetailAI is the leading global provider of Artificial Intelligence-enabled decision platforms, solutions and customercentric insights that drive validated growth for retailers and CPG manufacturers, from customer intelligence to personalized marketing, and merchandising and category management, to supply chain and retail operations. More at www.symphonyretailai.com

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EnsembleIQ is a premier business intelligence resource that exists to help people and their organizations succeed. We empower retailers, consumer goods manufacturers, technology vendors, marketing agencies and a vast ecosystem of service providers by leveraging an integrated network of media and information resources that inform, connect and provide actionable marketplace intelligence.

Gartner

8


Caetlyn Roberts Ahold Delhaize

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> COVER STORY

The Business Case for Diversity ULTA BEAUTY BROKE INTO THE FORTUNE 500 THIS YEAR THANKS TO A DIFFERENTIATED BUSINESS MODEL AND A RARE APPROACH TO GENDER DIVERSITY. > By Mike Troy

I

In her nearly five years as President and CEO of Ulta Beauty Mary Dillon has led her company to some impressive accomplishments. On her watch, Ulta’s store count has more than doubled to nearly 1,100 units, sales have nearly tripled to $5.9 billion and e-commerce sales have grown from $96 million to $569 million. The growth has been profitable too with net income up 221 percent to $555 million compared to the fiscal year ended prior to Dillon’s arrival as CEO in July 2013. Shareholders have rewarded Ulta’s financial performance with a stock price that has increased roughly 160 percent — triple the S&P 500 return during the comparable period — even after Ulta shares pulled back about $50 after topping $300 last summer. The success is due to a differentiated business model that promises “all things beauty, all in one place,” a nationwide network of stores located off the mall and well-positioned to gain share in a fragmented market, and a popular loyalty program that will surpass 30 million members this year. However, no assessment of Ulta’s success is complete without recognizing that the company is a true outlier in the retail industry and larger business world. For starters, Dillon entered an exclusive club this year when she became one of the approximately 5 percent of female executives to lead a Fortune 500 company. In addition, more than 90 percent of Ulta’s 37,000 employees are women and during the past five years the company’s growth has enabled it to promote 6,000 women to management roles. The predominance of women in store associate positions is understandable given Ulta’s merchandise assortment, salon services offering and mostly female customer base. More noteworthy then is the composition of Ulta’s board and C-suite. Sixty percent of Ulta’s corporate officers are women, 50 percent of Dillon’s 55 person senior leadership team is female and 50 percent of the retailer’s 12 member board are women. If ever there were a case study for gender diversity, Ulta Beauty is it. However, having a female CEO and gender parity among the board and senior executives doesn’t guarantee success. Ulta has a rock solid strategy

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and highly differentiated approach to serving the U.S. beauty market. “We use the phrase all things beauty all in one place for a reason. We have the largest collection of beauty categories, brands, products and price points that you can get anywhere,” Dillon said earlier this year during a presentation at Shoptalk. “Beauty is a great place to be and we are in an industry that is always going to be important to peoples’ lives.” Ulta could be just getting started despite its impressive performance to date. The company contends it has only about a 4 percent share of a highly fragmented market valued at $138 billion. Ulta’s share of the $82 billion beauty products segment is 6 percent and in the $56 billion salon services segment that is even more fragmented it has only a 1 percent share, according to the company.

FOUNDATION FOR GROWTH Ulta was founded in 1990 as a discount beauty retailer at a time when prestige, mass and salon products were sold through distinct channels. Nine years later, Ulta got its first female CEO when Lyn Kirby joined the company and began executing the “all things beauty, all in one place,” strategy, although it was not called that at the time. When Kirby left Ulta in 2010, former Office Depot executive Chuck Rubin was named CEO in September 2010. He was in the role for only 18 months before leaving to become CEO of Michaels Stores. That led Ulta to Mary Dillon who was serving as CEO of U.S. Cellular at the time. Hiring an executive from a wireless carrier might have seemed an odd choice, but the bulk of Dillon’s career previously had been spent in retail and consumer goods roles. Prior to U.S. Cellular, she was global chief marketing officer for McDonalds and prior to that was president of PepsiCo’s Quaker Foods division. She had also served on the Target board beginning in 2007. Dillon may not have conceived of the “all things beauty, all in one place,” strategy, but she has taken execution of the distinctive value proposition Mary Dillon, CEO of Ulta Beauty


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> COVER STORY FRAGMENTED MARKET = GROWTH OPPORTUNITY Ulta Beauty plays in the specialty beauty segment and currently has a 4% share of market valued at $138 billion. INTERNET

HAIR SALONS

HOMESHOPPING

GROCERY

DIRECT RETAILING WAREHOUSE CLUBS VARIETY STORES

SPECIALTY BEAUTY

BEAUTY AND PERSONAL CARE SPEND BY CHANNEL

SPECIALTY APPAREL & OTHER DEPARTMENT STORES

DRUGSTORES

MASS MERCHANDISERS

SOURCE: Euromonitor Intenational. “Beauty and Personal Care in the US.” April 2017

to a new level. Ulta routinely adds new brands — including its own — at the low end and the high end to deepen its appeal to core customers referred to as beauty enthusiasts. With such a wide-ranging product offering the company is never overexposed to weakness in any particular area or hot trend. Dillon has pushed Ulta aggressively into digital as well and like many retailers reports that omnichannel customers are its most valuable, spending the most and staying sticky to the brand. Last year was Ulta’s best ever digital performance with sales up 65 percent to $569 million accounting for roughly 10 percent of total company sales. Those sales are largely incremental too, according to the company. The biggest advantage in Ulta’s arsenal is a loyalty program called Ultamate Rewards. The year prior to Dillon’s arrival the program had 10 million members, but has since exploded to more than 30 million this year. Ulta makes signing up easy since anyone who makes a purchase can join without having to open a credit account, although that option is available. Late last year, a new “diamond” tier was added to recognize customers who spend more than $1,200 annually — which isn’t hard to do in the beauty category — who then earn rewards at a higher rate similar to how most airline and hotel programs reward their most loyal customers. “We have a great loyalty program that provides tremendous opportunity. The customer expects you to use the data they provide to develop very personalized interactions and experiences with them. The customer is happy giving the data if they get value in return,” said Eric Messerschmidt, Ulta’s Senior Vice President Strategic Marketing, CRM and Loyalty who also spoke at Shoptalk. “If you want to have a relationship, you better recognize the guest’s birthday, her anniversary with the program and when a new product comes out that you think she might be interested in you want to tell her about it and also put the right samples in her bag to surprise and delight.” 22

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THE NEXT FIVE YEARS It is conceivable that Ulta could double its store base over time, although the company has provided no such direction. Ulta declined Retail Leader’s request to speak with Dillon or respond to written questions, but more details on the company’s long term vision will come this fall when Ulta hosts an annual investor conference. The company’s current projections, shared with investors in 2016, envision a range of between 1,400 and 1,700 stores. However, Ulta ended last year with nearly 1,100 locations and with plans to add another 100 stores this year it will soon hit the low end of it store expansion range. Although Ulta expects greater growth in e-commerce, that doesn’t negate the need for more stores. One look at its store location map reveals opportunities to increase penetration in existing markets and enter new ones. Stores are vital to Ulta’s future due to the offering of salon services that generate invaluable traffic and provide an experience that can’t be replicated online. There are also abundant real estate opportunities for the typical 10,000 square foot Ulta Store and the retailer’s solid financial footing makes it a desirable tenant for shopping centers. A new store requires a net investment of about $1.6 million and within five years annuals sales of the typical store are approaching $5 million. Of course, competitors are sitting still and Ulta isn’t sneaking up on anyone these days, with some of the easy market share gains already had. For example, Ulta’s ascent has corresponded to weakness in the department store channel and Macy’s in particular. Macy’s spent the past five years rightsizing its department store fleet, which now numbers about 650 locations compared to nearly 800 five years ago. During that time, its sales declined to $24.8 billion from $27.9 billion. Roughly $3 billion in revenue went to competitors, including Ulta Beauty, since Macy’s generates 38 percent of its sales from the broad categories of women’s accessories, intimate apparel, shoes and cosmetics. However, Macy’s remains a formidable player that understands beauty is an enduring category, which is why in the midst of deteriorating fundamentals at its core business it acquired the upstart Bluemercury beauty chain in 2015. Macy’s has since expanded the concept’s freestanding locations, adding 37 new locations last year to end with 137 total. Ulta’s future share gains from mass merchants could also be under pressure. Food, drug and mass retailers account for roughly half of the $82 billion beauty products market where Ulta figures its share is about 6 percent. Retailers such as Walmart, Target, Walgreens and CVS Health operate a combined 25,000 stores that may not offer Ulta’s breadth of assortment but are certainly more convenient and routinely being refreshed with fixtures and lighting to improve the experience and assortments optimized to reflect the latest trends. Ulta also faces a challenge on the high end from Sephora, the beauty retailer supported by the resources and prestige of its $50.9 billion parent company and leading global luxury goods purveyor LVMH Moët Hennessy Louis Vuitton. Sephora currently operates 370 U.S. stores and 590 locations inside J.C. Penney stores. Specifics about Sephora’s growth plans are hard to come by, but the brand falls into the second largest of LVMH’s five divisions known as “selective retailing,” which generated 39 percent of its 2017 revenues of $15.9 billion from the U.S.


Leading HEALTH & WELLNESS August 25 – 27, 2018 Colorado Convention Center Denver, CO tse.nacds.org


> COVER STORY Perhaps more concerning about Sephora is its status as the preferred destination for younger shoppers. In its semi-annual spring survey called Taking Stock With Teens, Piper Jaffray research showed Ulta was the second most popular beauty destination after Sephora. The good news for all beauty retailers is that the survey of 6,000 teens showed beauty spending hit a new high for females at $368 per year led by skin care, up 18% year-over-year.

TOP BEAUTY DESTINATIONS

INNOVATION AHEAD Future generations of shoppers will have very different expectations of a retailer like Ulta, which is why Dillon says, “We are never done with innovation and there is a lot more to come.” The company is an early adopter of digital innovations and its app features a functionality called Glam Lab that allows for the virtual try on of make-up. Next up is a partnership with Spruce Labs, makers of a digital assistant device that give employees Internet access and simplifies checking in for and scheduling salon appointments. Ulta also works with Google Express to make sure online orders to 95 percent of the nation are fulfilled in as little as two days. Despite all that Ulta has going for it, 2018 is shaping up to be Dillon’s most challenging year. Same store sales are forecast to be weak relative to Ulta’s three year string of double digit gains. And the company faces all the same headwinds as other retailers related to cost pressures of an omnichannel business model, continuous reinvestment in stores and technology and rising wage rates. The most positive development of 2018 is the impact of federal tax reform, which Dillon regards as a game changer and gives the company a unique opportunity to deploy the benefits received to improve its long term posture.

1

Sephora

44%

2

Ulta

28% 11%

3

Target

4

CVS

3%

5

Walmart

3%

SOURCE: Piper Jaffray Companies 35th semi-annual Taking Stock with Teens survey.

“(Tax reform) enables us to accelerate certain investments to drive growth and innovation,” Dillon said during Ulta’s fourth quarter earnings call. In addition to employee training, wages and store experience upgrades, Ulta also plans investments in AI and data capabilities to increase personalization for loyalty members. “We’ll increase investments in digital innovation to drive guest experience enhancement designed to drive engagement and education, as well as increase sales through our e-commerce business,” Dillon said. “We’ll also enhance our capabilities to both identify and incubate new brand opportunities that will further evolve our assortment and take full advantage of the changing landscape of brand creation, and we’ll accelerate our services strategy with the continued rollout of the new salon model and the addition of a new skin services model.” Such investments will take time to impact sales and profits, but don’t be surprised to see Dillon and Ulta many notches higher on the Fortune 500 list in the years to come. RL

SAME STORE SALES PRESSURE LOOMS

Ulta Beauty’s same store sales are forecast to decelerate to a range of 6% to 8% in 2018 as the retailer laps an impressive string of 12 consecutive quarters of double digit increases. 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

16.7% 16.6% 15.2% 14.4%

11.7%

11.1% 11.4% 9.2%

8.4% 6.7%

Q1

8.7%

10.3%

10.1%

9.6% 9.5%

8.8%

6.8%

Q2 Q3 2013

Q4

SOURCE: Company Reports

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14.3%

12.8% 12.5%

Retail Leader.com MAY/JUNE 2018

Q1

Q2 Q3 2014

Q4

Q1

Q2 Q3 2015

QUARTERS

Q4

Q1

Q2 Q3 2016

Q4

Q1

Q2 Q3 2017

Q4


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PersonalizationIQ is the must-attend event of the year. To be part of this event, contact Retail Leader Editor and Brand Director Mike Troy at mtroy@ensembleIQ.com or 813-857-6512.


Retail Pulse

the heartbeat of the marketplace

Benefits-driven Innovation

IRI’s Non-Food New Product PacesettersTM deliver function and frill, pleasing a range of consumer needs and desires.

C

onsumers are looking for solutop-selling launches in food and beverage tions to problems, and they’re versus non-food sectors has not changed. also looking for wellness-plus And certainly there are plenty of prodexperiences. Based on these ucts making a splash and driving growth desires, IRI’s 2017 Non-Food through benefits-driven innovation. New Product Pacesetters feature many products that bring healthier-for-you indulgences that Which Brands captured top spots? are functional but improve experiences. These The top non-food launch of the year was products often take otherwise inane and routine introduced by L’Oreal. Garnier Whole Blends tasks and make them more enjoyable — shamis a gentle haircare line that is enriched with poo that keeps hair strong but also is pampera natural blend of select ingredients to help SuSan ViamaRi, ing, laundry detergent that powers away stains restore the health and beauty of hair. The IRI Vice President of Thought and provides uplifting odors, for example. brand earned $121.8 million in year one, Leadership, Marketing Innovation is the lifeblood of CPG, tapping into consumer focus on products that however, the pace of innovation is down as a are more natural but still powerful. whole. The decline in non-food is slightly more accelerThe second non-food brand is a new entrant into the ated than food and beverage. Still, the overall share of CPG marketplace. Biofreeze is an external analgesic rub that was originally only available through healthcare professionals. Now that the brand is available in CPG aisles, Composition of Top-Selling Launches consumers can soothe minor joint and muscle pain with Has Remained Virtually Unchanged this natural, topical analgesic that uses the cooling effect of menthol. The brand earned $78.1 million in its first year. Share of New Product Pacesetter Dollars The number-three non-food brand is another haircare line by CPG Segment 2013 vs. 2017 that marries nature with science to provide a blend of signaNon-Food ture ingredients that help revive dull hair with every wash. Beverage Herbal Essence Bio: Renew earned $74.7 million in year one. Food The number-four brand is one of three cookware lines that made the top-10 ranking. Red copper earned $53.1 million in its first year as a revolutionary non-stick ceramic cookware made of ultra-tough copper. And number five is Tide Simply Plus Oxi, which simplifies the laundry process by providing tough stain and odor removal without the need to pretreat. The brand earned $52.1 million in year one. The rest of the top 10 non-food launches also demonstrate the benefits of natural ingredients, powerful clean and simplified experiences across non-food aisles. These are strong and clear demands of consumers today, who expect a lot of their products. They’ll spend to have this 2013 2017 dimension, and they’re typically willing to try something new if it delivers across their needs and desires. Source: IRI New Product Pacesetters TM

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Retail Leader.com May/June 2018


Data & Insight Provided By

Top 10 Pacesetters: Non-Food

2018 2017

2

5

Non-food launches exemplify the power of natural ingredients; benefit fusion brings power, indulgence and experiences.

Biofreeze

3 External Analgesic Rubs

Hair Care

$

$

78.1

M

Tide Simply Plus Oxi

6

Laundry Detergent

$

8

52.1 

Herbal Essences Bio:Renew

74.7

1

$

4

9

Copper Chef

121.8

Red Copper

$

M

7

53.1

M

Simply Straight Hair Appliances

44.4

$ M

10

Maui Moisture

44.4

M

all Powercore Pacs

Culinary

Hair Care

Laundry Detergent

$

$

$

42.7 

M

M

Culinary

Select by Calphalon

$

Hair Care

1

Culinary

M

Garnier Whole Blends

40.2

M

36.8

M

Source: IRI Market Advantage™, new products that completed their first year in calendar year 2017

Mighty, but Still SMall

New product launches aren’t the behemoths they once were, or at least not nearly as often. In the non-food sector, median launch year-one earnings were $17.8 million. Overall, there has been a downward trend noted for several years, and that movement continues. Across combined food/beverage and non-food aisles, 20 percent of even these top-selling launches earned less than $10 million in their first year, while 60 percent earned less than $20 million.

One of the reasons why: Consumers are looking for new products that really help them express their individuality. Products don’t win as often with mass appeal. They need to address key needs and individual desires of consumers, and getting it right drives trial as well as ever-important repeat behavior. This year’s non-food New Product Pacesetters hail from all areas of the store and prove that benefits-driven innovation will win with today’s highly informed, particular albeit willing, consumers. RL

May/June 2018 Retail Leader.com

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> TECHNOLOGY AND INNOVATION

Winning with

DATA

EnsembleIQ’s hunt for a new CEO led it to an executive with deep experience in data and analytics, which makes sense given how both areas dominate the retail world. David Shanker joined EiQ, parent company of Retail Leader, as CEO in February and brought to the role a diverse background in data, research, marketing and innovation. Shanker previously served as CEO of the Americas at Lightspeed, the digital data collection arm of Kantar and also co-founded and served as CEO of digital startup PinchMe. Earlier in his career, he held key roles at online research pioneer OTX Research and spent nearly a decade at IRI. Shanker spoke with Retail Leader about technology-driven disruption, shiny pennies, failure and his vision for establishing EiQ as the industry’s leading provider of business intelligence and growth enablement solutions. >By Mike Troy Retail Leader: As a veteran of the retail and CPG space, what excites you today about the state of the industry and where we are heading? David Shanker: There are several macro trends that make this a very interesting time. There is an explosion of big data that can be leveraged in a lot of different ways. And from some of my prior experience, leveraging behavioral and attitudinal data together offers really great insights and that is what we are doing at EnsembleIQ. Technology is playing a huge role in everything and with machine learning we are seeing progress made in how we do business with one another and how we think about going to market as brands and understand consumers at a deeper level. The convergence of e-commerce and brick and mortar is also very interesting. It is clear that pure play ecommerce without some brick and mortar footprint may not be the best possible choice. Amazon has certainly voted in that direction with the acquisition of Whole Foods. At the heart of those macro trends is technology, which is changing everything we do. Great companies need to adjust and adapt and leverage technology to change and disrupt the industry. RL: What about concerns? There are a lot changes happening in terms of shifting consumer behaviors around where and how shoppers make purchases, how they interact with brands and how traditional trading partners interact with one another.

DS: One of my concerns is the shiny new penny concept. Everyone races to the new penny and tries to do things before they really understand and think about and discuss all of the 28

Retail Leader.com MAY/JUNE 2018

implications. Before we put a lot of energy and effort and money behind new initiatives we need to understand the implications. I have seen many companies run very hard at that shiny new penny and sometimes they are running in the wrong direction. RL: Doesn’t that create a conundrum for the industry and business leaders who need to move fast to capitalize on opportunities?

DS: It does. Every company wants to act with speed and lack of speed can kill but at the same time too much speed can kill. What’s important is to modulate the speed and make sure to understand the implications of something new and the changes that are going on and then being thoughtful and purposeful about things and how we go about doing them differently. RL: There is a high sense of urgency among many companies to be the first mover.

DS: That’s okay as long as you understand the implications. You can have a company culture of being first with the understanding that you may fail more often than not. That is okay if that is how you go to market and you understand and can live with the benefit and the risk. My view is we can’t race at every shiny new penny. Because technology can be so enamoring you just have to be prudent about the directions you go in. RL: How did you develop that philosophy? Is it something you learned the hard way?


DS: Earlier in my career it was easier to race to new things and not spend time thinking about the implications. As I have gained experience, I’ve come to better understand the importance of being thoughtful and purposeful. I love speed and having first mover advantage and will always try to take first mover advantage, but experience has made me wiser about thinking through the implications of being the first mover. Have there been failures along the way? Absolutely. I don’t think anyone in business can be really successful without having failed and looking back at those failures and learning from them. I’m okay with failing personally and with teammates failing, with one caveat; let’s learn from it, try not to make the mistake again, pick yourself up and then move forward again as fast as we can. RL: What was your perception of EnsembleIQ prior to joining the company and how has your view changed since joining as CEO in February?

DS: Prior to joining, my perception was great brands and great people. It was a common theme I had heard and knew because I had been a reader and customer of some of the brands. The good news is the quality of the people has exceeded my expectations — we truly have an excellent team — and the brands are as phenomenal as I knew they would be. The big opportunity we have to grow our brands is by focusing on innovation, building the innovation DNA into our culture to help re-invent the brands, grow and become something unique and different in the industry. I love our brands and what we are going to focus on is continuing to innovate and expand and challenge ourselves to think about our brands differently than we have in the past.

DS: We have a lot of innovation occurring in different buckets around the company that need to be better integrated and exposed to our clients. I am excited that we have established an Innovation Practice led by Tanner Van Dusen who is the right person to harness the innovation and lead us in the right direction. We are going to rally around Tanner and EnsembleIQ will build a much larger culture of innovation. RL: A year from now, how do you want EnsembleIQ to be thought of by retailers, suppliers and solution providers?

DS: I am hopeful and expect that EnsembleIQ will be seen as the leading provider of business intelligence and growth enablement solutions in each of our core verticals of retail, CPG, technology and hospitality. I want us to be seen as a company that is very receptive to our customers’ needs and one of the companies that our customers think of calling first when they have a challenging business issue. RL: The retail industry is full of challenging issues. DS: It is and when companies have challenges and they are calling people, I want to be on that short list of people they reach out to. RL

RL: Amid all the change going on in the industry, where do you see a company like EnsembleIQ adding the greatest value?

DS: We are going to add the most value by utilizing the vast amounts of information and data that are part of our ecosystem. We are sitting on a literal goldmine of data that we must better leverage to help our customers better deliver their message and activate with their customers on an almost one-to-one basis. We also have an opportunity to better understand what is important to our clients and go out and acquire data to merge with our existing behavioral data sets. RL: You’ve been involved with some pretty innovative companies. How would you assess the current state of innovation at EnsembleIQ?

David Shanker

MAY/JUNE 2018 Retail Leader.com

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> TECHNOLOGY AND INNOVATION

A Frictionless Future COMPUTER VISION AND MACHINE LEARNING SOLVE THE CHALLENGE OF WHO TOOK WHAT AND RECEIPT ACCURACY AT THE AMAZON GO STORE. EXPECTATIONS OF CONVENIENCE WILL NEVER BE THE SAME. > Mike Troy

T

The demise of the cashier has been a long time coming. First came self checkout systems that steadily gained popularity as the user interface improved. They are now widespread and continuing to expand even as leading retailers roll out app-based scan and go systems that leverage smartphones as scanner and payment devices. A new milestone in the advancement of the frictionless checkout experience occurred in January at the unveiling of the Amazon Go store in Seattle. Shoppers scan themselves into the store, take what they want and leave. The 1,800 square foot space is filled with thousands of cameras and sensors capturing data that runs through complex algorithms to determine who took what so customers receive an accurate receipt after they walk out. The complex technology and code required to make Amazon Go go wasn’t easy to develop but it was easier for Amazon than other retailers who don’t have thousands of technologists focused on machine learning. Strangely enough, because most of those at Amazon have been exclusively involved in e-commerce operational issues related to category management, space utilization and replenishment of high velocity products is where some of the challenges have been. “We are the opposite of a lot of folks because the physical part of retail is new to us,” Gianna Puerini, Vice President of Amazon Go, said earlier this year at Shoptalk. “The store associates spend the vast majority of their time keeping the shelves stocked.” Some of the employees also have to let customers know it is okay to just leave.

Redefining the future of convenience at Amazon falls to Dilip Kumar, Vice President of Technology, and Gianna Puerini, Vice President for Amazon Go, the 1,800-sq.-ft. cashier-less store Amazon opened in January 2018.

30

Retail Leader.com MAY/JUNE 2018

“We even wrote above the (exit) door, ‘you’re good to go. Thanks for shopping,’” Puerini said. “Watching customers pause and ask and then see the excitement when they get to just leave has been fun.” While the store experience is new, it is not hard to imagine how those who frequent Amazon Go in Seattle or other locations, which are rumored to be in the works, will come to expect a more streamlined payment experience from other physical retailers. As for what happens to cashier jobs, a concern heard with the advent of self-checkouts, Puerini said Amazon’s view was that checkout isn’t the best part of the physical shopping experience, but physical shopping is fantastic. “We just said let’s put people on tasks that add more value,” Puerini said, adding the store has a kitchen full of cooks, employees stocking shelves and greeters at the entrance to help shoppers understand the new experience. She leads the business side of Amazon Go, including operations, product development, design construction and prepared food and meal kits. Her colleague, Dilip Kumar, serves as Vice President of Technology for Amazon Go, and explained how the main challenge with the store was making sure technology was transparent to shoppers. “We kept coming back to what sets of technologies tend to use and leverage use machine learning the most. How best to leverage computer vision and bring it to bear to the problem of who took what in a grocery store setting,” Kumar said. Amazon avoided an RFID solution because it didn’t want to want to incur the operational burden of tagging items and instead created a “just go” solution that was seamless. To do that required understanding and interpreting video and pushing the boundaries of computer vision because of a grocery environment where there are a lot of visually similar items, according to Kumar. The cashier-less approach taken by Alibaba in China is different and relies on facial recognition and RFID. A concept called Futuremart now open in Alibaba’s corporate campus in Hangzhou offers an assortment of general merchandise products equipped with RFID tags. Readers detect when products leave the store and Alibaba’s Happy Go facial recognition system detects a person’s identify and is linked to their payment method. Discounts can be earned by smiling. The company’s Alipay division has also begun testing Smile to Pay facial recognition with a KFC healthy food format called KPRO in Hangzhou. The system takes two seconds to scan a customer’s face and they also input their phone number to complete the transaction. RL


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> TECHNOLOGY AND INNOVATION

Magic Maker

O

LOLLI & POPS’ FORMULA OF EXPERIENTIAL STORES, CUTTING EDGE TECHNOLOGY AND DELIGHTFUL SERVICE IS A SWEET LESSON FOR RETAILERS. > Gina Acosta On a perfect spring day that seemed to be tailor-made for Instagram, dozens of children and adults in Atlanta stood outside, looking at their smartphones, waiting. The weather had finally turned beautiful after a cold winter, so one might think they were pausing to take turns snapping selfies in the sunshine. But, in fact, they were just biding their time, waiting for the upscale Perimeter Mall to open. When the doors opened, many shoppers headed to Lolli & Pops, a fast-growing candy retailer based in San Francisco that is convinced delighting shoppers and leveraging technology are keys to physical retail’s bright future. “People walk in and leave the store very happy,” said Sid Gupta, CEO of Lolli & Pops. “Candy elicits a very emotional response. And then when I looked around at how everyone else was selling candy, I asked myself, for such an emotional product, why is everyone selling candy in such an un-emotional way? I thought we could sell candy in a better way.” At a time when people in the industry talk about right-sizing their brick and mortar operation, Gupta talks about how quickly he can expand his store footprint.

Under his leadership, Lolli & Pops has experienced remarkable growth since its founding in 2012. The company Lolli & Pops Inc. now has 47 stores under its namesake banner, and 12 stores under the Candyopolis banner. It plans to open 30 more Lolli & Pops stores this year, which would make it the leading specialty candy store chain in the United States. The success of Lolli & Pops would seem to fly in the face of many retail and CPG trends, from healthy snacks overtaking the confectionary category, to candy sales declining or moving online. But plain old-fashioned candy is, in fact, still a strong seller, and much of it is still an impulse purchase transacted in physical stores.

INDULGENCES STILL MATTER When it comes to food, yes, it’s true, many American consumers are “putting their health first.” As a result, sales of everything from better-for-your snacks to organic eggs to kombucha are on the rise. While food retailers are scrambling to install juice bars and kombucha taps in response, the snack industry is awash in mergers, acquisitions and efforts that aim to turn candy makers into “innovation snacking powerhouses,” as Hershey puts it. But hard candy, chocolate and other sweet snack categories are still growing. “The candy category is a $30 billion retail category and it’s never been down, since it started being tracked during the Great Depression,” Gupta says. “Candy is not dying. The way we consume candy is very different from other foods. We consume it infrequently. Candy is a treat consumers eat in moderation and it’s very well woven in our traditions.” Gupta is right. The confectionery category was up 2% over the past 52 weeks through January 2018, according to data insights firm IRI, and annual sales have grown 2%-4% over the past five years. In the grocery industry, confectionery continues to see above-average gains, up 3.3% over the latest 52 weeks, led by chocolate, up 4%. Mintel, in its latest chocolate confectionery study, projects 19% growth in candy sales through 2020. It’s clear that Americans still love a good indulgence. But not just any piece of candy. As consumers look to moderation, the perceived quality of the sweet or salty snack is ever more important. It’s something that Gupta says led him to found Lolli & Pops.

PASSIONATE PURVEYOR

Lolli & Pops CEO Sid Gupta says the candy category is alive and well despite consumer health and wellness trends.

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Gupta is an accidental retail disruptor, although he did always have an entrepreneurial itch, he says. After growing up in the San Francisco area and going to college in Chicago, Gupta worked on Wall Street in investment banking and private equity. A few years later he left and started looking for things to do. He discovered a distressed chain of 11 candy stores, called Candyopolis, based in Oklahoma City. At the time, he admit-


Between the vast assortment, the cheery staff and the samples, there is a sense of magic at Lolli & Pops. In a sign of just how important delighting customers is, the company measures success with “happiness counts,” or how many people have been delighted on a daily basis.

tedly knew nothing about running a retail company. But it was a small business, he thought to himself, and he was sure he could make something out of it. So he brought his electrical engineer father out of retirement and they both moved to Oklahoma City together to learn about running a retail business. During this time Gupta also earned an MBA from Stanford, where he ran the business with his dad (who remained in Oklahoma) from his dorm room. The time at Stanford allowed Gupta to really think about where retail was going. He took an exploratory trip to Europe and zeroed in on the experiential model of retail there. On that trip he learned the two key insights that would become the core value propositions for Lolli & Pops: delightful service and experiential retail.

HOW TO DELIGHT One step into a Lolli & Pops store and it’s impossible not to feel that inner delight. The retailer sets a compelling stage with a store design featuring pastels, ornate molding, vintage typography and delicious displays supporting the star of the show: a mouth-watering assortment of specialty chocolates, colorful candies, chilled novelty sodas, and other treats from around the world. A lot of the assortment is the same in every store, so guests in Texas and Georgia know they can count on the same products, Gupta said. But at the same time, the assortment is constantly changing and guests are constantly being exposed to new products. “We have a huge innovation engine running both on sourcing products and on bringing new products to market,” Gupta said. About 80% of the assortment at Lolli & Pops is name brand, while the rest is private label. Gupta says the company has launched about 200 private label products over the past year. And as the company develops even more of its own products, he takes great care to balance being on-trend by offering vegan, gluten-free and other popular candy options. Complementing the store’s impressive assortment are employees whom Gupta calls “magic makers,” dressed in bow ties, striped aprons and straw boater hats. Staff immediately greet and engage customers as they enter the store, and offer samples. In fact, Lolli & Pops employees have the okay from management to open any product in the store and share it with customers. From the looks on customers’ faces that Saturday in Atlanta, it’s obvious that the generous sampling policy is creating delighted shoppers one taste at a time. The company also conveys delight with its packaging. The company’s products come in packs designed to look like a gift. Between the vast assortment, the cheery staff and the samples,

there is a sense of magic at Lolli & Pops. In a sign of just how important delighting customers is, the company measures success with “happiness counts” or how many people have been delighted on a daily basis. “Last year we had 4 million guests. When we think about that, we get really inspired by the idea of growing that? And one day we could touch 100 million people? So how do we do that?” Gupta said.

A SWEET PARTNERSHIP One way the company plans to do that is with technology. Lolli & Pops is working to leverage tech to improve and learn about customers’ in-store experience. Not just any technology, but facial recognition. The retailer has been working with Intel Corp. to develop a customer loyalty program that uses facial recognition to pull a profile on each customer as he or she enters the store. Intel has been installing entrance-facing cameras at Lolli & Pops stores and arming associates with tablets that are synced with a camera so when loyalty members enter the store they can be offered recommendations based on their previous purchases. Technology is also helping the business ensure that its sales clerks are engaging with customers regularly. “You can’t have an imbalance of employees to customer. So we have focused on how to use AI and deep learning to predict guest traffic and improve scheduling. We are working with a startup in San Francisco to leverage that,” Gupta said. For its e-commerce operations, Lolli and Pops focuses mainly on gifting. It has a limited assortment of gift-focused products online. But Lolli & Pops leverages its physical assets, the in-store information it collects, to determine what products should be sold as gifts online. It is this kind of retail model that makes the company so successful. While lots of innovation swirls about the candy industry, from small brand growth to big brands attempting to position themselves as healthy snack purveyors, the rapid growth of Lolli & Pops proves there is still a place for old-fashioned, brick and mortar food retail. As long as the right ingredients are in place. RL MAY/JUNE 2018 Retail Leader.com

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> SOCIAL RESPONSIBILITY

The Most Beautiful Store in America THREE YEARS AFTER OPENING A SUPERMARKET THAT HELPED REVITALIZE DOWNTOWN CLEVELAND THE HEINEN BROTHERS ARE MOVING FAST TO LEVERAGE DATA AND SERVE SHOPPERS IN NEW WAYS. > By Mike Troy

C

Cleveland-based Heinen’s Fine Foods’ decision to open a store in an old bank building three years ago was not the type of move a larger company would have made. The financials didn’t add up and the space presented all sorts of operational challenges. However, the 23-store Heinen’s chain is a family owned company with deep roots in Cleveland and a vested interest in the viability of Cleveland’s urban core. Those factors allowed the company to move fast and push aside bottom line concerns to open a store best described as stunning, impractical and essential. Brothers Tom and Jeff Heinen, third-generation owners and co-presidents of the food retailer, gave new meaning to the phrase “giving back to the community,” in 2015 when they decided to open a supermarket in an old bank building. The space was poorly configured for food retailing, had bad ingress and egress for deliveries and it had sat empty for nearly 25 years. The Heinen brothers also knew going in that a supermarket in downtown

Cleveland would take years – if ever – to turn a profit due to downtown Cleveland’s limited population density. Despite all of the negatives, the Heinens went for it in a total, from-the-gut move, inspired by their family’s near century long connection to the community. The thinking was a supermarket could serve as a catalyst for continued residential growth of Cleveland’s urban core and converting the bank to the supermarket would salvage a magnificent piece of architecture. “There were many, many people who believed downtown Cleveland could not continue the growth pattern of increased residential living without a food store option,” said Jeff Heinen. Downtown Cleveland was enjoying some renewal momentum before the opening of Heinen’s showpiece. There were about 12,000 people living in downtown when the Heinens made the decision to open the store, well below the 20,000 residents Jeff and Tom said is typically need to support a profitable grocery operation. By the time the store opened the downtown population had grown to 13,500 and today there are about 16,000 residents with further growth expected. “As lifelong Clevelanders, we understood (a grocery store) was important to continue the momentum of people living downtown. It was our give back to the city of Cleveland because Cleveland has been good to Heinen’s,” Jeff Heinen said. “As a small, family run business we can make decisions like that. This wasn’t a great business decision. This was a great decision for the city of Cleveland.” The store could prove to be a wiser decision than the brothers first thought. That’s because operating a store in downtown Cleveland in an unconventional piece of real estate is causing the Heinens to develop some new operational and analytics muscles that will be useful as the company contemplates openings in other urban areas. As Tom Heinen pointed out, the retailer now operates four of its 23 stores in Chicago, a market where a small format could create new growth Tom (left) and Jeff Heinen gave new meaning to the phrase “giving back to the community,” with their downtown Cleveland store. Now the brothers are moving fast on the insights front with data partner dunnhumby.

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opportunities in more densely populated areas. First-time visitors to Heinen’s Currently, Heinen’s downtown Cleveland store Chicagoland stores are are awestruck by the grand located in the suburban rotunda’s ornate railings, communities of Glengilded details and stained view, Bannockburn, glass ceiling. Barrington, and Lake Bluff. However, those areas are pretty similar to Cleveland area stores in that they are well north and northwest of downtown Chicago and in the case of Lake Bluff only “This wasn’t a great 10 miles from the Wisconsin border. According to Tom business decision. Heinen, the company’s store in downtown Cleveland gives the company, “a way to experience urban markets so if and when we decide to go into downtown Chicago This was a great we have a lot better idea about designing and operating as opposed to suburban families. One decision for the city stores there based on our learnings in Cleveland.” of the early insights based on purchase of Cleveland,” The company has no imminent plans to make such behavior was the need to add a hot a move, but were it to do so, it is hard to imagine the bar to accommodate the demand for —Jeff Heinen, Co-President and company could find a more challenging real estate prepared meals and meal solutions owner, Heinen’s Fine Foods project than what it dealt with in downtown Cleveland. that are much greater in the urban For example, to deliver goods to the store trucks navigate a store. The company takes things a step further than the obvious narrow alley that has one way in and one way out. Merchandise use case to plan meals and incorporate ingredients based on is dropped on one of two loading docks shared with tenants in trends and other behaviors revealed by consumption and urban adjacent buildings. From there, a freight elevator is only able lifestyle patterns. to move two pallets at a time to a basement stockroom that “We are not really headed to creating Blue Apron style meal doubles as a food preparation area. Products then have to be kits as much as we are looking to create meal solutions for brought back upstairs to either the first or second level via elevacustomers where they have choices of entrees and side dishes to tor or stairs. The entire process is much more labor intensive choose from and we are going to pair them more effectively than than in a typical suburban location configured with operational we do now,” Tom Heinen said. efficiencies in mind. While Heinen’s faces many of the same competitive chalWhile the Heinens have found ways to cope with the operalenges as other retailers and some unique one related to their tional challenges of the unique location, the retailer has also downtown Cleveland store, persuading employees to work at the become a more aggressive user of data to manage assortments unconventional location wasn’t one of them. The store is staffed geared to new consumption patterns, pack sizes and shopper by 90 people and 55 of those positions were filled by employees frequency. Heinen’s has long used data to inform assortment who volunteered from other stores, according to the brothers. decision-making but now the company is entering a new era “As a company we believe we invest way more time, energy and of leveraging data through a partnership with dunnhumby to money into developing the knowledge and skills of our people drive personalization and pricing decisions. Heinen’s, like many than the average retailer and food retailers for sure,” Jeff Heinen smaller retailers, is part of the “democratization of data,” movesaid. “We see people as one of the ways we truly create a differentiment that gives the company the type of data collection and ated shopping experience so it is very important strategically that analytical abilities once reserved for larger organizations with our people have the knowledge and skills to do that.” big IT budgets. Tom Heinen added, “We view people as an asset to be lever“Being small when you deal with big data is actually an adaged, not a cost to be minimized.” RL vantage,” explained Tom Heinen. “Big companies are like driving a cruise ship. We are in a speedboat and can change very quickly. Take a video tour of Heinen’s Cleveland store with What has really leveled the playing field for smaller companies is Tom and Jeff. Visit www.RetailLeader.com to watch good data driven decisions.” the latest installment of The Prophets of Aisle Six Leveraging data is especially important at the Heinen’s presented by dunnhumby. The first-of-its-kind series downtown Cleveland store because it is such a unique format. was created to explore how food retailers are using data and innovation to reshape their businesses and The store is small at 27,000-sq.-ft. compared to the typical the customer experience. 42,000-sq.-ft. Heinen’s suburban location and being in an urban area also means serving a higher concentration of Millennials MAY/JUNE 2018 Retail Leader.com

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> FINANCE AND CAPITAL

Profiting from Trust TAKING A STAND ON SOCIAL ISSUES IS FRAUGHT WITH RISK, BUT IT IS ALSO ESSENTIAL TO AVOID, “NO BRAND’S LAND.” > By Mike Troy

T

These are strange times in the world of government and media with public trust in both institutions at an all-time low, according to global communications firm Edelman’s 18th annual Trust Barometer study. The landmark research conducted last fall surveyed 33,000 people in 28 countries and found the U.S. overall had the largest drop in trust. “We have seen throughout the 18 years all different types of themes. The thing we saw this year was a huge crisis in trust in the U.S.,” said Jamie Kieffer, Managing Director of Client Strategy with Edelman. The thing with trust, Kieffer noted, is it tends to be a zero sum game. Meaning when one sector is up, another is down. After the financial crisis, for example, Edelman’s trust barometer showed business took a hit while trust in government increased. “As humans we need to trust in something so if there is a bad actor in one sector trust tends to shift,” Kieffer said. That didn’t happen last year however as trust in the four institutions Edleman tracks - businesses, government, media and non-governmental organizations – experienced the largest drop in the U.S. of any of the 28 countries surveyed. “There has been an absolute trust crash in the United States,” Kieffer said. What is more troubling is when researchers looked at the 15 percent of respondents who met criteria around education, income level and media consumption to qualify as the “informed public,” trust scores were even worse. “The more you know and seek to know the less you trust. Among this thought leading segment of the population we have the lowest level of trust of anywhere in the world. We have lost trust in every single institution,” Kieffer said. Much of the degradation of trust is the result of the media, which sank to the lowest level ever in the survey with people no longer trusting where they get their informaIn the midst of a global trust crisis, tion. The implications for Jamie Kieffer, managing director of client retailers and brands are strategy at Edelman, urges companies to stand for something. huge because trust has

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long played a key role in shoppers’ decisions about which retailers to frequent and which brands to buy. “If you are feeling an undertow it is real,” Kieffer said earlier this year when he shared key insights from the trust barometer research with senior brand and retail executives in attendance at the annual Path to Purchase Summit in Chicago. There are three key areas where the issue of trust can be addressed, including: Own your story: In a world of low trust businesses and brands can be the answer, according to Kieffer, but the way stories are told has to be different than it was in the past. “If you think you are powerless as a business in a world of little trust nothing could be further from the truth,” Keiffer said. The key is to tell stories from a position of authenticity as opposed to marketing because people see right through marketing, an interesting admission coming from a career marketer with more than 20 years experience on the agency side with Leo Burnett and more recently on the client side. Kieffer joined Edelman, a highly respected communications firm, in the fall of 2015. There is a realization that people know they are living in bubbles, but that has given rise to a demand for technical experts, which means opportunities for brands. “Tell your stories, tell them rigorously and clearly and make sure they are accessible. Don’t just tell stories and put them on your web page, bring your storytelling to the world and become your own media company,” Kieffer advised. Engage on your terms: Closely correlated to owning your story, engaging on your terms means looking at communication channels currently in use and recognizing the sources of information trusted today are very different. “Look at the channels you are currently using and ask the question, ‘where do people want to hear from you?’ What you will find is people almost two to one will believe your social media over your advertising,” Kieffer said. “People want to hear from your leadership and even more importantly they want to hear from your employees.” The best thing to do is prioritize social over advertising and let the CEO, other senior executives and front line employees speak. “Time and again we feel there is no better spokesperson for a company than a well-informed employee. There are folks who bleed whatever color your logo is. Find them and engage them,” Kieffer said. Take a stand and do something: Potentially one of the trickiest areas of trust, Edelman’s research shows that more than


ever consumers believe brands can do more to solve social ills. Keiffer called that finding “kind of crazy,” because it is a shift in expectations around the role of government and brands. “Governments were created for the purpose of solving social ills and brands are commercial enterprises that are supposed to make money for shareholders. That is the opportunity,” Keiffer said. “People are expecting brands to do things to solve social ills and they are buying or boycotting brands based on the stand brands take on social issues.” For example, Millenials are the first generation ever that says they will take less money to work for a company that shares their values and they are applying a similar mindset to their spending behavior. Of course, playing it safe on issues and doing nothing is always an option and brands likely won’t see an immediate impact, but they are also likely over time to end up in a place Kieffer called, “no brand’s land.” The risk from such an approach that might actually be perceived as safe is greater risk if competitors are more vocal and active about their beliefs and rewarded by shoppers.

“People want to financially reward companies for doing the right thing because we live in a world where trust is a scarce commodity,” Kieffer said. “This is not about chasing issues. Don’t chase issues, find your calling.” The latter means having an authentic position based on beliefs. That’s what Chobani founder, Turkish immigrant and entrepreneur Hamdi Ulukay did when he started his company, hired people who happened to be immigrants and paid a living wage. “He did not say immigration is going to be my issue. He built a company based on values of giving back, treating people with respect and doing a lot of charitable work. When immigration came up as an issue, he had a point of view on it, but he was speaking on it based on the values of his company,” Kieffer said. People could agree or disagree on the issue of immigration, but Ulukay didn’t start by picking an issue, taking a position and then risk losing half his customers. He spoke about the values and benefits he saw from treating immigrants with respect, according to Kieffer. “When you find your calling, it’s not about giving up all your profits and becoming a charity,” Kieffer said. RL

TRUST DECLINES IN 10 OF 15 SECTORS Percent who trust each sector, and change from 2017 to 2018

54

Y-toY Change

0

es rvic e s l cia an Fin

60

62

62

62

62

63

63

63

66

-3

-4

-4

-3

-1

+2

0

-2

-3

nt G ve ge oti me CP era n m v i e o a t t b ter Au nd En da o Fo

on shi Fa

66

67

68

70

-2

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75

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TRUST DECLINES IN NINE COUNTRY BRANDS

Trust in companies headquartered in each country, and change from 2017 to 2018 Significant declines for brand U.S.

Y-toY Change

34

36

50

50

50

56

57

60

-1

62

63

65

66

68

61

0

-2

-1

-3

-1

0

43

32

32

-1

+1

+2

+1

-1

-5

+2

+1

+1

-4

ia Ind

o xic Me

zil Bra

ina Ch

rea Ko S.

. U.S

ly Ita

ain Sp

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. U.K

SOURCE: 2018 Edelman Trust Barometer

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MAY/JUNE 2018 Retail Leader.com

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Powered By

The RL ReseaRch RepoRT Primary Grocery Source 4% 2% 5%

8%

44%

9%

Discount super center Traditional supermarket Club store Discount supermarket Specialty supermarket Convenience store Farmers’ markets

28%

54% 36% 19% 16% 12% 9% 8% 7% 6% 6% 5% 5% 4% 4% 4% 3% 3% 3% 2% 22%

Better-for-you Attribute Wants 20% 16%

High in protien Healthy fats No high fructose corn syrup Low Calorie Lower overall/total fat No preservatives

15% 14% 14% 14%

No trans fats

13%

Low cholesterol

13% 13%

High fiber Low sugar Lower saturated fat No MSG whole grain Lower sodium Nutrient-dense Low carb

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They’re young and most are not in the workforce yet, but they should be on your radar: Gen Z, those born between 1998 and 2016*, are a dynamic group of young consumers forming their own shopping habits. Even more than their Millennial counterparts, Gen Z was born straight into the digital world so it’s no surprise they are more likely to do things like creating digital grocery lists, heading to YouTube for recipe ideas, and shopping at less conventional food stores. Gen Z is one of four new reports in Datassential’s Generations of Change Keynote series. Here are a few key insights from the research: *Born between 1998 and 2016, these consumers are the youngest generation and are ages 2 to 20 in 2018 (ages 13 to 20 were surveyed for this study)

Publications/Websites Used youTube Buzzfeed Allrecipes Food Network Magazine New york Times Bon Appetit edible Martha Stewart Living yummly Food & wine Chow Cooking Light Cook’s Illustrated every day with rachael ray eater Cook’s Country Garden & Gun epicurious Saveur None of these

Discover Gen Z

retail leader.com May/June 2018

13% 13% 13% 13% 12% 11% 11%

Gen Z shops everywhere Even while most of Gen Z lives at home with their parents, they are becoming more independent and doing some of their own shopping. They are on a limited budget, so price is a factor in how they choose where and what to shop for. They frequent many types of stores, especially discount supercenters and other nontraditional stores like convenience stores, club stores, and farmers markets. They’re less likely to make many visits to different sources as they may not be the primary shopper for their household. TasTe & value rule Great taste, affordability, and value are top priorities for Gen Z. They tend to ignore some of the betterfor-you attributes on product labels — fewer than half as many Gen Z consumers think better-for-you attributes are important. Take labels like high in protein for example — 40% of the whole population wants items with this call-out, but only 20% of Gen Z are interested. Or take no high fructose corn syrup: 38% of the population prefers this attribute while just 15% for Gen Z. The same results are found across the board — low calorie, no trans fats, low cholesterol, whole grain, etc. (add chart) DevourinG DiGiTal meDia Gen Z loves taking advantage of the digital world, finding inspiration for meals to make on YouTube, Instagram, and other channels. YouTube is their first source for food information. Instagram is also a major platform they turn to and their use of it skews far heavier than the overall population. Gen Z is also a generation open to using technologies like grocery store apps and automated checkout. In fact, 56% of Gen Z prefers self- checkout. They are also twice as likely to take digital grocery lists with them. RL


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> WHAT’S NEXT...

Thinking Like a Startup

H

PHILOSOPHY APPLIES TO TRADE ASSOCIATIONS TOO. > By Steven C. Anderson, IOM, CAE

Having just returned from the National Association of Chain Drug Stores’ Annual Meeting, I want to share some of the thinking that is guiding NACDS, and that is transferable throughout the retailer and supplier ecosystem. What matters most now is the constant transformation of a business, of an association, and of an industry — because the consumer is under constant transformation, too. In his new book, The Anticipatory Organization: Turn Disruption and Change into Opportunity and Advantage, Daniel Burrus presents helpful perspective on the need for transformation and the practice of creating it. Burrus says that agility is not enough in times of rapid change. He says it is possible for organizations to anticipate the future, to develop strategy, to execute, and to win. This book is about identifying things that are nearly certain to happen — the “hard trends.” To state the obvious, one of the hard trends in retail today is the need to satisfy the consumer’s desire to obtain the products that they want and need — and in the way that they want to receive them. This involves a mix of technology-enabled processes, as well as vibrant in-store experiences. From the standpoint of public policy, which is one of the primary areas of focus for NACDS, one hard trend is that some of the greatest opportunities to advance pharmacy patient care result from demonstrated effectiveness in meeting public health needs. That was the case with the expansion of pharmacist-provided vaccinations following pharmacy’s success in helping to prepare for flu outbreaks in recent years. That is the case now with developments in point-of-care testing for flu and strep. This discussion of “hard trends” can be highly effective as individual companies chart their course, and as retailers and suppliers collaborate on programs designed to meet consumers’ needs together. Another author provides interesting perspectives on how best to develop strategy, and how best to execute, in light of these “hard trends.” Jim Collins, the author of highly actionable books, including the iconic Good to Great, published a related monograph titled Good to Great and the Social Sectors — Why Business Thinking is Not the Answer. Its perspectives are informative for associations and businesses alike. Collins urges that “we must reject the idea — well-intentioned, but dead wrong — that the primary path to greatness in nonprofits and associations is to become ‘more like a business.’” He reminds us that not all businesses are great. He says that discipline in planning, people, governance and resource allocation is a greatness concept, which applies to associations, too. NACDS has chosen to use some new words and guiding

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principles to talk about its role, and they relate in many ways to the thinking of Burrus and Collins. NACDS is committed to acting more like a startup, and a think-tank. Both are big on collaboration and listening, which make it possible to solve problems, and meet needs. Retailers and suppliers must collaborate, and they must listen to each other and to consumers, to survive and Steven C. Anderson, IOM, CAE to thrive. One of the ways that NACDS acts as a think tank and as a startup is through our “Access Agenda” — which encompasses our government affairs and public policy work, and our thought leadership on how best to address complex and related societal issues. Here is our case: Pharmacies provide access to better healthcare every day; and we are here to provide access to health and wellness policy solutions. The Access Agenda is about taking the accessibility and the trust of pharmacies and pharmacists, and putting them to work even more for the American people. The Access Agenda has three parts: tough defense, aggressive offense, and working as partners for stronger and safer communities. Tough defense refers to preserving patients’ access to pharmacy care. Aggressive offense refers to enhancing access to newer pharmacy services. Working as partners for stronger and safer communities refers to serving as part of the solution to the opioid abuse epidemic, and engaging in communities to help solve societal needs. The Access Agenda is how NACDS has chosen to position itself to confront the “hard trends” described by Burrus; to pursue the “greatness” described by Collins; and to listen and collaborate like a think tank and startup. This approach is quite similar to the service standards and credos identified by retailers and suppliers to unite team members — and partners — for the common pursuit of satisfying the wants and needs of today’s changing consumer. Whatever the vision, the key is to harness change and translate it into a strategy for transformation. RL Steven Anderson is President and CEO of the National Association of Chain Drug Stores.


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VIAMARI EXECUTIVE INSIGHTS SUSAN VICE PRESIDENT OF THOUGHT LEADERSHIP, MARKETING

A glimpse at the minds and personalities of IRI’s thought leaders. Q. What is most impacting the new product process today? A. Changing population demographics are really changing the new product development process. We’ve been talking about millennials for a while now. Today, these consumers have jobs and money — they have opinions and passions. And they are really changing the game. Authenticity is critical with these shoppers. Value — products that meet key needs at reasonable prices — is THE key motivator of brand decisions. And brands that can make true connections will earn their money and loyalty. Q. What are key attributes common in this year’s New Product Pacesetters? A. The overriding themes in CPG today are natural, powerful and simple. In food, consumers want options that are healthy or indulgent, but there is a major blurring between the two as consumers seek healthier-for-you indulgences. Top products make eating quick and easy, but not boring! In non-food, products that fuse new — and sometimes unexpected — benefits to better address high-demand needs and wants, like antiaging, are really resonating with shoppers.

It’s that time of the year — the release of IRI’s New Product PacesettersTM! This year’s 22nd annual analysis of top CPG launches of the year celebrates leading products and brands and dives deep into the trends among the leaders to reveal insights into what’s driving valuable demographic groups to choose new products. The report explores a significant shift taking place in the marketplace today, as millennials flex their diversity and spending power to push new product development trends in new and exciting directions. Here we have IRI’s Susan Viamari, vice president of thought leadership, marketing, as she shares insights on trends, some of the attributes that make new products skyrocket, the power of millennials and where opportunities lie in new product development.

Q. Millennials continue to impact the CPG market in a significant way. How do they affect new product success? A. As we looked at buying patterns around this year’s top launches, we saw that 40 percent of this year’s top-selling launches over-index with millennials shoppers, meaning millennials account for a disproportionate share of sales across this year’s biggest launches. This still relatively new group of shoppers is really driving the trend to more targeted innovation. Millennials are the ME generation! They want brands that help them express themselves. They want to make a difference in the world — and they will buy products that help them do so. They may be financially insecure today, but they’re feeling pretty good about tomorrow — and they want experiences. Millennials already account for about one-third of CPG spending — by 2022, that will mean they spend about $240 billion annually on CPG products! Also, in our new annual new products survey, data indicate that millennials are far more likely to consider themselves avid new product adopters, when compared with older shoppers, because they embrace new products as opportunities to enjoy new and different experiences. Q. What are the attributes of your dream new product in food and beverage? And in non-food? A. I definitely jump on products that fit the more natural profile. I really try to follow a diet that is healthy, but also quick and easy because time is precious. And on the non-food side, I truly believe in brands that follow eco-friendly practices. We have one planet, and we need to do what we can to keep it healthy! Q. What book is on your nightstand? A. All But My Life, by Gerda Weissmann Klein — it is an amazingly powerful story of survival and gratitude. Q. What is the last website you visited? A. I have spent the past three months exploring websites of most of this year’s Pacesetter brands. I always chuckle when I think about how this impacts my cookie patterns! Chicago-based IRI is a technology-driven big data and analytics company at the forefront of the consumer buying revolution. IRI delivers the world’s largest set of market, consumer purchase and integrated media data to CPG, retail and OTC healthcare companies around the globe. As a result, its clientele reaps the benefits – growing their businesses and in turn further growing a giant and always-evolving industry.


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RL - May/June 2018  

RL - May/June 2018