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How Smart & Final CEO Dave Hirz Stands out in a Crowded Market

Holiday Baking means Brown Sugar Sweetening. Stock Your Shelves with the Quality of Domino® and C&H® Brown Sugars. Consumers start early with seasonal baking of gingerbreads, cakes and cookies for gift-giving. And when baking for special occasions, they rely on the highest quality ingredients for the best results. Wherever consumers are, Domino® and C&H® are the brands they trust. Domino® Light Brown and Dark Brown Sugars are key to adding moisture and a delicious molasses ﬂavor to baking, as are C&H® Golden Brown and Dark Brown Sugars. Be prepared for volume sales by providing holiday bakers the best in class.

Expanding our Portfolio

Creating Innovative Products

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Meeting Consumer Needs

The Only Time Beef Should Be Done Well Tosca knows the challenges of the supply chain, especially when it comes to fresh meat. That’s why we developed the first reusable container outfitted to kick shrink to the curb.

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Retail Leader SEPTEMBER/OCTOBER 2018 VOL. 8, NO. 6

President, Canadian Division & North American Grocery Jennifer Litterick jlitterick@ensembleiq.com

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

27 SOCIAL RESPONSIBILITY

The leader of the Plant Based Foods Association talks about the new dynamics in the food industry and the definition of milk.

30 FINANCE AND CAPITAL MANAGEMENT

A new financial reporting requirement takes effect soon that will have a huge impact on retailers.

8 6 EDITOR’S LETTER

Solving big problems and inspiring bold ideas matters now more than ever.

8 BRAND REPORT

Shoppers face abundant choices in an evolving brand landscape, and brand value is being redefined.

16 GROWTH AND BUSINESS DEVELOPMENT

New items drive sales, but onboarding products quickly is increasingly challenging. A new startup aims to fix that.

38 MERCHANDISING AND MARKETING

Category management is on the cusp of one of the biggest changes in its 25-year history thanks to the combination of innovative technologies that have given shoppers even more power.

40 RL RESEARCH REPORT

20 COVER STORY

New GMA CEO Geoff Freeman outlines the priorities to create a high-performing trade association.

A complete view of the market is required to develop effective growth strategies.

42 WHAT’S NEXT

Senior Sales Manager Theresa Kossack tkossack@ensembleiq.com 214.226.6468

EVENTS Vice President, Events Michael Cronin mcronin@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

The competitive dynamics of the retail industry have changed dramatically and so too have regulators’ approach to assessing antitrust risk.

16 Retail Leader.com SEPTEMBER/OCTOBER 2018

Senior Sales Manager Judy Hayes jhayes@ensembleiq.com 925-785-9665

Brand Marketing Manager Carly Kilgore ckilgore@ensembleiq.com

24 STRATEGY

Associate Brand Director Mike Shaw mshaw@ensembleiq.com Office 201-855-7631 Cell 201-281-9100

MARKETING

35 TECHNOLOGY AND INNOVATION

Beth Neumann, CEO and President of Starboard Cruise Services, is overcoming operational challenges to win in one of retail’s hottest sectors.

Retailers talk about differentiation and offering a distinct value proposition, but few bring it to life like Smart & Final.

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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

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letter from the

EDITOR

What’s your problem? Solving big problems and inspiring bold ideas is the mission statement of Retail Leader’s parent company EnsembleIQ. Here’s what that means and why it matters now more than ever. There were times this past summer when it seemed liked things couldn’t get any better for the retail industry. Americans were in the mood to spend thanks to record low unemployment, wage growth, still low interest rates and the wealth effect created by a booming stock market. The result was impressive second quarter gains by retailers who serve as bellwethers for the economy. Walmart’s U.S. same store sales increased 4.5 percent, the strongest in more than a decade. Target produced a 6.5 percent comp increase that was the strongest it had seen in 13 years. The Home Depot said its U.S. same store sales increased 8.1 percent. Those strong gains were achieved despite the continued growth of Amazon, whose North American sales increased 44 percent to $32.2 billion. Amazon’s success didn’t come at the expense of malls, those places that are supposedly dying. The nation’s largest mall operator, Simon Property Group, said occupancy at its 206 U.S. properties was nearly 95 percent at the end of the second quarter and lease rates paid by tenants and average sales per square foot were higher than a year earlier. Things were going so well at the midpoint of the year that the National Retail Federation increased its already bullish outlook for retail sales. The trade group now expects full year retail sales will grow at a minimum of 4.5 percent after initially forecasting growth in the range of 3.8 percent to 4.4 percent. So what’s the problem? The retail industry is one that perpetually looks ahead to the next quarter, season, year, or in some cases, the next decade. The strong sales seen lately are fantastic, but don’t be lulled into thinking the retail and CPG world doesn’t have plenty of big problems in need of bold ideas. I was reminded of this recently when a colleague working with a major CPG company asked some of the EnsembleIQ editors (Retail Leader’s sister brands include Progressive Grocer, Convenience Store News, Drug Store News, Store Brands, Chain Store Age, Shopper Marketing, RIS News, Apparel and Consumer Goods Technology among others) for our opinions on a list of top problems facing retailers. It didn’t take long to realize that the list of top problems is long, varies by company and is constantly evolving. There are some common challenges such as labor issues, wage pressures, diversity, food safety, compliance with an inconsistent regulatory landscape, an inability to pass through increased commodity costs, data security, ethical sourcing, shrink, driver shortages in the supply chain and executing omnichannel strategies profitably. And what retailer doesn’t have that nagging feeling they aren’t moving fast enough in a world disrupted by advancing technology. One of the industry’s biggest problems is actually a collection of seemingly little problems. The phrase “retail is detail” that emerged decades ago has never been more true because retail has become more complex. Increased complexity often means increased cost and that cost can take different forms since complexity introduces the potential for more things to go wrong. There are more opportunities to disappoint shoppers and in a world of extreme transparency more potential for an isolated incident in a store, with a supplier or employee to escalate into a major problem that impacts corporate reputation and sales. The list of problems shared by all retailers is long, but prioritizing them is a company specific exercise. Every retailer faces challenges unique to their size, financial performance, brand perception, leadership, value proposition, growth strategies and market position. The robust economy and the resulting consumer demand may have concealed some of the industry’s underlying problems, but they are there in new forms and great numbers, which is why inspiring bold ideas are needed now more than ever. RL

MIKE TROY Editor-In-Chief mtroy@ensembleiq.com

Retail Leader.com SEPTEMBER/OCTOBER 2018

> BRAND REPORT

SPECIAL REPORT: Why Brands Matter Now SHOPPERS FACE ABUNDANT CHOICES IN AN EVOLVING BRAND LANDSCAPE, WHERE WHAT IT MEANS TO BE A BRAND ICON, THE NATURE OF INNOVATION AND THE CONCEPT OF BRAND VALUE ARE BEING REDEFINED. > By Mike Troy

It was big news in the cereal aisles earlier this year when Lucky Charms revealed a major innovation. The iconic General Mills brand added a unicorn to the blend of colorful marshmallow shapes found in the cereal that has been described as “magically delicious,” since the 1960s. To make room for the unicorn, General Mills eliminated an hourglass shape from the roster of marshmallow shapes that includes hearts, stars, horseshoes, clovers, blue moons, rainbows and red balloons. The move helped General Mills grow Lucky Charms sales 20 percent, gain share in the cereal category and has been held up by General Mills Chairman and Chief Executive Officer Jeff Harmening as part of a larger product innovation strategy driving growth at the $16.7 billion global food company. “At the beginning of the year, we said we would grow our global cereal business in fiscal 2018 and we accomplished that goal,” Harmening said when General Mills reported results for its fiscal year ended May 27. “We grew retail sales and market

A sure sign of a brand’s iconic status is when it is instantly recognizable by its mascot.

Retail Leader.com SEPTEMBER/OCTOBER 2018

share in the U.S. behind strong marketing campaigns like Good Goes Round on Cheerios and Unicorn Marshmallow news on Lucky Charms. We secured increased in-store displays at higher price points resulting in improved merchandising performance, and we launched the biggest innovation in the U.S. category this year with chocolate peanut butter Cheerios.” Innovation comes Few brands are able to connect with in many forms in the consumers on as deep an emotional consumer packaged goods level as Coca-Cola, which the brand does with a refreshment lounge at the world, which is why it is Dallas/Fort Worth International Airport. help to take an expansive view of the word. Because let’s face it, adding unicorn shaped marshmallows to Lucky Charms is being rather generous with the definition. That’s largely due to the fact that innovation is so often used in grandiose terms, inspired by changes in the technology world where disruptive innovation changes people’s lives and spawns startups with billion dollar valuations that gave new meaning to the word unicorn. No one’s life will be changed by the shape of a marshmallow in box of cereal, but the move and how it was executed with marketing helped reinvigorate a brand in an otherwise growth-challenged category. It also helped General Mills deliver on an often heard expectation retailers have of major branded suppliers. “Just showing up as a brand isn’t enough anymore. You have to go to market very differently and you have to continue to innovate,” was the advice Walmart Chief Merchandising Officer Steve Bratspies shared in August at the annual meeting of the Grocery Manufacturers Association (GMA).

> BRAND REPORT Walmart needs brands to innovate because its everyday low price business model is dependent on brands remaining relevant with shoppers so Walmart can showcase its value proposition. “We sell brands for less, it is fundamental to our business model, but the only way shoppers know that is if they can compare prices on brands,” Bratspies said. “Brands are a fundamental part of how we go to market, they have been from the beginning and they will be going forward.” An expectation of innovation as the key to brand relevance is a topic Kroger Chairman and Chief Executive Office Rodney McMullen also addressed at GMA. “We believe that strong national brands give customers a reason to come to our stores. Brands that are investing and innovating to remain relevant will always have a place on Kroger shelves,” McMullen said. He was quick to qualify that statement by noting that customers drive the retailer’s product selection process and all merchandising decisions are based on customer behavior. “We use customer driven analysis no matter whether it is national brands or our own brands,” McMullen said. “Accordingly, we are not shy about telling the world we are using everything at our disposal to be relevant with our brands.” The strategy is working. Kroger’s own brands achieved their highest ever unit share in 2017 and sales reached $20.9 billion, which represents 17 percent of Kroger’s total sales of $122.7 billion.

WHOSE BRANDS MATTER? When the issue of whether brands matter is discussed, the question is really whether large national brands matter. That’s because private brands have steadily gained share for two decades while more recently smaller emerging brands have siphoned off demand by appealing directly to consumers and pursuing alternative distribution channels. “That question has been with us for quite a while,” General Mills CEO Harmening said, referring to a presentation he gave at Harvard in 1994 that addressed the topic of whether brands still matter. The answer today is even more of a resounding “yes,” than it was then, but it is qualified to a great degree by shoppers’ perceptions of brand and how they differentiate between different types of brands. For example, the Simple Truth brand Kroger launched in late 2014 now generates sales of more than $2 billion and is the largest natural and organic brand in the market. The brand has sufficient equity that Kroger believes it can be sold to consumers in China, which is why the retailer entered into a partnership with Alibaba earlier this year. Conversely, a brand such as Coca-Cola that is recognized globally by the mere silhouette of its signature bottle is challenged to find new ways to grow core carbonated beverages as consumer tastes and lifestyles change. “When brands really matter is when they are emotional,” said 10

Retail Leader.com SEPTEMBER/OCTOBER 2018

Retailers such as H-E-B (above) and Sav-A-Lot (right) call out brand assortments as a key element of their value proposition.

Jim Dinkins, President of Coca-Cola North America. “Millennials are actually more brand loyal than their parents.” Brands also matter when they apply new ways of thinking to a category. That’s what B&G Foods did in 2015 after it acquired the Green Giant brand of frozen and canned vegetables from General Mills. “We are a brand buyer and totally believe that brands matter,” said Robert Cantwell, President and Chief Executive Officer of B&G Foods. “Innovation within a brand is extremely important. Retailers want to hear about innovation.” In the case of Green Giant, that meant a shift in thinking from frozen vegetables as a side dish at dinner to more of an ingredient for meals. The brand introduced new cuts and formats that consumers wanted to use and it helped make frozen vegetables one of the company’s fastest growing categories, according to Cantwell. Changing how frozen vegetables are cut, much like adding a new shape to Lucky Charms, is the type of brand innovation that seems trivial but actually matters to shoppers whose behaviors drive brand relevancy and financial performance. The key is making sure other forms of brand innovation are occurring, namely in how brands engage with consumers. For example, the global media and communications firm WPP in its 2018 BrandZ report identified the world’s 100 most valuable global brands and described an evolving retail landscape where the way people shop and interact with brands physically and digitally looks very different than it did just 10 years ago. “As the marketplace becomes ever more complex, brands will only become more important,” according to David Roth, Chief Executive Office of WPP’s The Store and leader of the BrandZ research.

> BRAND REPORT

RELENTLESSLY RELEVANT (The top 50 brands in global consulting firm Prophet’s Brand Relevance Index.) 1

Apple

Costco

Amazon

Fitbit

Marvel

Netflix

Toyota

Android

Chick-Fil-A

Google

Honda

Samsung

TurboTax

KitchenAid

Microsoft

Spotify

Nike

Etsy

Lego

Food Network

YouTube

Ben & Jerry’s

PlayStation

Folgers

Disney

North Face

Pixar

NPR

Fisher-Price

Trader Joe’s

Bose

Clorox

Intel

Hershey

Keurig

Tide

Paypal

Ford

Sony

Southwest

Dove

Chevrolet

Pandora

Dyson

Band-Aid

Uber

Xbox

Adidas

METHODOLOGY To arrive at the ranking in its Brand Relevance Index Prophet surveyed nearly 48,000 consumers globally, including 12,694 in the U.S. The firm asked questions about 299 brands across 37 industries. Each survey participant rated up to five brands within a single category on 16 different attributes that correspond to the principles of customer obsession, distinctive inspiration, pervasive innovation and ruthless pragmatism.

Retail Leader.com SEPTEMBER/OCTOBER 2018

It is a challenging proposition because brands need to be present online, especially on mobile, and offline in traditional stores and other sorts of experiential venues, according to Roth. The consumer could be in any of these places, or in more than one of these places simultaneously or they could be at home cooking dinner while talking to Alexa or Google Home. In that case their shopping lists may be fulfilled by algorithm or paid search — unless brands speak to the consumer in a louder voice, with a meaningfully different proposition urging, “choose me,” Roth said.

THE BUSINESS CASE FOR BRANDS National brand suppliers tend get a bad rap in an era when major retailers are able to launch multi-billion private labels and large CPG companies are considered successful if they are able to eke out low single digit organic growth. The result is an assertion that brands, large CPG brands anyway, don’t matter, which has led to depressed valuations of major food companies, according to Akshay Jagdale, an equity analyst with Jefferies who follows the consumer staples space. “We believe brands matter more now than ever before and as such we believe food stocks are undervalued,” according to Jagdale. The bear case against the consumer staples sector is that product lifecycles have shortened, sales declines are likely to accelerate, pricing power has eroded and margins are compressed. Jagdale holds a different view, which he contends is supported by evidence-based research. Under the “brands matter more than ever,” scenario he expects sales growth to improve, margins to expand and valuations to improve. Jagdale is such a believer in the brands still matter narrative that Jefferies held an inaugural conference by the same name earlier this year in New York. The premise of the event was to explore the types of branding ecosystems that are most effective in working across a diverse set of technology, analytics and marketing partners with an eye toward the implications for brand sales and profits. Other analytics firms come at the issue of brand from a different angle. The global consulting firm Prophet recently completed is fourth Brand Relevance Index, which seeks to rank the most relevant brands in consumers’ lives. No great surprise that companies such as Apple, Amazon and Pinterest were top ranked for the fourth year in a row while other brands debuted in the top 50 included Dyson, Folgers, Clorox and Ben & Jerry’s. To arrive at the ranking, Prophet surveyed people on metrics such as customer obsession, distinctive inspiration, pervasive innovation and ruthless pragmatism. “Today’s consumers are expert at ignoring the tens of thousands of brands that don’t interest them, but for their favorites, they go above and beyond what ‘rational’ people do,” according to researchers. The common characteristics of brands in the index — why they matter — is they have made it their mission to continually find new ways to engage and delight customers. That’s why Prophet calls them relentlessly relevant brands. RL

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EXECUTIVE INSIGHTS

Influencing the Influencers: Gain insight into reaching today’s challenging consumers. Consumers are in control more than ever. Though the economy is healthier, there are still gas costs, interest rates and other worries pressuring shoppers to make careful and deliberate purchase decisions. With innovation and a keen understanding of what consumers want, CPG brands and retailers, too, can connect, deliver and drive sales with even the most particular consumers. IRI’s John McIndoe notes there is opportunity for brands and retailers to influence key consumers and entice them to open their wallets. 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, and they have opinions and passions. Authenticity is critical with these shoppers. Value—products that meet key needs at reasonable prices—is THE key motivator of brand decisions. Q. The economy is healthier but consumers are still not comfortable spending. Why? A. Consumers are spending, but they’re very selective in what, how, when and where they spend their money. Consumers are very savvy, and they know they have virtually unlimited options in all of these areas, so creating marketing strategies that really resonate—products, pricing, distribution, promotion—has become an absolute necessity. Q. What are the financial attitudes and shopping behaviors affecting CPG growth? A. The CPG industry as a whole is struggling to find organic growth, but the non-food sector performance is actually lagging food and beverage. For one thing, consumers have to

eat! Consumers are selective, but they are spending. In the non-food sector, consumers are buying but they are also employing strategies—like stretching product usage, limiting use, and that is also placing downward pressure on volume. Other big influences on shopping behaviors today are channel blurring and the rise of e-commerce competition. E-commerce is showing huge growth and many of the fastest-growing online categories are non-food categories. Q. How can CPG brands and manufacturers entice consumers to spend? A. It’s really all about value. Brands need to understand what their consumers want—what benefits will entice them to open their wallets—and then build those attributes into the products and marketing strategy. Given these tendencies, products need to deliver. Brands should look across CPG aisles for benefits that move the needle and then wrap those benefits into their existing products or new product innovation. Marketing programs must tell consumers about them and how those benefits will make their lives easier, more rewarding and more exciting. Q. How can retailers help drive sales in non-foods, in particular? A. To entice consumers to open their wallets, retailers have to cater to their shoppers. They need to understand what is most important and provide it. Getting assortment right is a critical first step. Offer a comprehensive value spectrum to appeal to your shopper base with the right product mix—price, as well as benefits. Also take into consideration the omnichannel marketplace—use digital shelves to complement and supplement the brick-and-mortar shelf.

John McIndoe Executive Vice President and Chief Marketing Officer 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 alwaysevolving industry.

> GROWTH AND BUSINESS DEVELOPMENT

Charting a Growth Course THINK RUNNING A RETAILER ON LAND IS HARD? THEN YOU HAVEN’T SPENT TIME WITH BETH NEUMANN, CEO AND PRESIDENT OF STARBOARD CRUISE SERVICES, A MIAMI-BASED RETAILER WITH MORE THAN 700 STORES LOCATED ON A GLOBAL FLEET OF 90 SHIPS. THE FORMER AVON AND KRAFT EXECUTIVE IS OVERCOMING A HOST OF UNIQUE OPERATIONAL CHALLENGES WHILE SIMULTANEOUSLY ELEVATING THE SHOPPING EXPERIENCE TO WIN IN ONE OF RETAILING’S HOTTEST SECTORS. > By Gina Acosta

Beth Neumann remembers the last time she took a cruise before becoming CEO and President of Starboard Cruise Services. It was the 1980s and among the highlights of a voyage in those days were midnight buffets, shuffleboard and smoke-filled nightclubs. “Before I started at Starboard I hadn’t been on a cruise in 25 years. But then I walked on a ship for the first time and I thought, ‘Wow, they have come a long way.’ It’s entirely different now,” Neumann said. One of the biggest differences is retail has become a key aspect of the cruise experience on vessels that are the equivalent of floating cities, with some capable of accommodating upwards of 4,000 passengers. Those passengers are on vacation and in the mood to spend money, but persuading them to open their wallets, whether at sea or on land, requires offering a superior customer experience. Where things get tricky for a retailer like Starboard is coping with a wide range of unique operational challenges such as brand and product assortment by ship, how to design a supply chain that has to go through layers of Beth Neumann, CEO of Starboard Cruise Services regulation, the size and

Retail Leader.com SEPTEMBER/OCTOBER 2018

layout of an on-board store and the level of omnichannel service to provide. Despite an abundance of challenges associated with creating a retail experience at sea, Neumann and the Starboard crew appear to be deftly managing the complexity while simultaneously pursing strategies familiar to terrestrial retailers. Starboard is now the leading retailer in the cruise industry and the preferred retailer for 10 cruise line partners, according to Neumann. As the cruise industry continues to expand, she’s convinced Starboard is well positioned for further growth thanks to an experiential approach grounded in entertainment, discovery, guest-to-guest connections and exceptional hospitality. “When I first walked on a cruise ship I thought, ‘This is a super powerful way of selling.’ And I started hearing the stories of engagements with guests. What we call the ‘Starboard Way’ is delivering the value proposition of entertainment and social connection in a way that makes people feel special and brings them a memory,” Neumann said. “As retail has moved away from just being a transactional thing where people come and just want to buy something, we want to offer an experience in which our teams are connecting for real with customers.”

SET SAIL FOR GROWTH From an organizational standpoint, Neumann is the retail equivalent of the captain of every ship that Starboard operates on. The former vice president for the $3 billion global fashion and home group with Avon, Neumann became CEO of Starboard in 2013. The company was founded in 1958 in Miami as Florida Export Tobacco, selling duty-free items at Miami International Airport. In January 2000, it was purchased for about $300 million by the French luxury goods conglomerate LVMH Moet Hennessy Louis Vuitton. Today, the company is well positioned to capitalize

Starboard operates a variety of retail concepts, including The Market (below) which offers a range of general merchandise, as well as specialty stores (right) with familiar brand names.

each company being very entrepreneurial. They are long term thinkers,” Neumann said. “We benefit from being owned by LVMH in terms of training and especially as we’re developing people talent. The other big benefit for me and the management team is that when we’re looking to glean more consumer insights around the world LVMH has deep experience there.”

CONNECTING WITH CONSUMERS on continued growth of the cruise industry. Passenger volumes this year are projected to total 28 million, a 10 million passenger increase from just a decade earlier, according to industry trade group Cruise Lines International Association. Starboard is already the largest operator in the space, compared to competitors Harding Retail and Dufry, and by 2020 Neumann said Starboard will operate more than 360,000 square feet of selling space on more than 90 ships offering more than 750 brands. “What’s interesting about this industry is you can predict exactly what the growth is because you know five years out which ships are being built. The cruise lines are doing quite well and for us as a retailer,” Neumann said. Although Starboard does not release financial results, LVMH reported a whopping 28% increase profit from recurring operations to more than $5.4 billion in the first six months of 2018. Revenue increased 10% to $25 billion. The “selective retailing” segment of LVMH that includes Starboard Cruise Services, as well as beauty retailer Sephora and duty-free airport retailer DFS, saw revenue increase 15% to about $7.3 billion; profit from recurring operations increased 39% percent to $711 million. “LVMH’s philosophy is very much about each CEO at

When Neumann talks about the vision for Starboard it is from a customer experience standpoint. Starboard focuses on making retail a bigger part of the cruise vacation, and it does that by connecting with guests in a non-retail sort of way. The retailer hosts events such as liquor tastings, makeovers in the beauty shop, and seminars on jewelry. And the shops themselves are more engaging, with highly trained staff, interactive displays and technology like tablets to keep guests entertained and informed. For example, Neumann says a liquor store doesn’t need to look like a liquor store. It should look like a place where you have fun and can have an experience, like a bar. “We really want to be known as a place of discovery, entertainment and ultimately the place where the guest will bring home that memory that will be the joy of their vacation. We talk about our pillars for service, which include: The connection with the consumer has to be fun. It’s got to be about learning something new. On some ships we do watchmaker classes where guests learn what it takes to be a watch maker. It’s got to be social, connecting guests with others who are like minded. And there’s got to be high service,” Neumann said. But the Starboard Way is just one piece of a multipronged plan to build a world-leading retailer that offers a superior customer experience. The company SEPTEMBER/OCTOBER 2018 Retail Leader.com

> GROWTH AND BUSINESS DEVELOPMENT

Starboard has retail operations on approximately 90 ships, including Royal Caribbean’s Mariner of the Seas, a vessel with a capacity of more than 4,000 passengers.

has specific strategies when it comes to promotions, merchandising, supply chain and employee training to deliver on its value proposition. “There’s a couple ways that we can interact with guests. We have a retail magazine we distribute. We also do promotions on (in-room) television, so we can do brand storytelling that way. And we send guests hand-written thank you notes and invitations to events. But generally we are about getting our people interacting with guests on board in sort of a fun interesting way,” Neumann said. The retailer specializes in flash sales, and these aren’t the sort of flash sales familiar in the e-commerce world. Starboard works with the cruise ships and with brands to offer flash sales at certain time periods during the cruise, say, on the last day of sailing for example. “Generally it’s really accessible fun things like $10 accessories, and $10 dollar accessories will include everything from fun hats and bags and scarves to little clutches or watches. We work with brands to do some of these special events. We do a lot that is personal and high-touch promotion,” Neumann said. The retailer promotes the flash sales on a voyage schedule that every passenger receives, or during general announcements on board the ships. Neumann says key is to be careful not to engage in promotions that are seen by guests as too intrusive. 18

Retail Leader.com SEPTEMBER/OCTOBER 2018

ASSORTING FOR VACATIONERS One of the more challenging aspect of being a cruise retailer is optimizing assortments by ship, itinerary duration, ports of call and the demographics of passengers on a particular sailing. There may be a lot of families on one cruise who will want more food and value merchandise. Another ship may have more affluent travelers while others cater to millennials looking for bargains on brands. “We are retailers at sea. You have to be a few miles out to sea to buy from us. And that’s what allows the tax- and duty-free benefit for our customers. Our target market is all income levels, from high to low,” Neumann said. “I always say I’ll sell memories from five dollars to five hundred on any ship. Half of our business comes from 1% of the people on the ship, the other business comes from about 50 percent of the people on the ship.” Starboard has a variety of shops on its ships, from high-end boutiques to candy shops to a new mass concept called the Market, which has a wide assortment including food, general merchandise, apparel and jewelry. Starboard works with more than 750 suppliers or brands and the retailer’s biggest category is fine jewelry offered at a range of price points. Watches are the second biggest category with other major categories including leather goods, beauty, fashion jewelry, spirits and food.

Influence Offline CPG Purchase Behavior with Digital Media

IT CAN BE DONE I

n CPG and other industries, digital media spending has been experiencing impressive growth during the past several years. Across many of these industries, marketers have been able to measure and monitor online movement and actions to understand where shoppers are going and what they are buying, and to strategically deploy digital media strategies that will effectively influence purchase behavior â&#x20AC;&#x201D; at least in the online realm. Some offline industries have also had the technology and expertise to craft effective digital media strategies that move the needle for their businesses. Unfortunately, though, this has not been the case for CPG manufacturers and retailers. Until now.

There is no question that the explosive growth of e-commerce throughout the past decade has indelibly changed consumersâ&#x20AC;&#x2122; shopping behaviors, purchases and trends, as well as the way retailers and CPG brands do business. Notably, an estimated half of CPG market growth is occurring online. Still, despite day-of delivery options and consumers being able to get essentially anything theyâ&#x20AC;&#x2122;ve ever dreamed of online, the fact remains that 95 percent of CPG purchases are still made in brick-and-mortar outlets. While CPG purchases are likely to remain predominantly offline in the near future, digital is influencing 77 percent of retail decisions, even in the largely offline CPG world. DIGITAL MEDIA

It is absolutely critical that CPG brands and retailers wring maximum efficiency and impact from their digital advertising expenditures.

Data, technology and analytic horsepower have grown and evolved, and now they have come together to give CPG manufacturers and retailers the insights they need to change the game. Deterministic data — actual purchase data from FSP databases — can now be integrated with demographic and modeled solutions to paint an incredibly accurate picture of imminent buyers — even offline CPG buyers. This knowledge allows marketers to develop programs that will deliver the right message to the right shoppers at the right time and in the right location. These purchase-based audiences generate three-tofour-times sales lift potential. Yes, these digital media strategies that have “grown up” in other industries dominated by online sales are now available to CPG companies and retailers. The future is here.

Optimizing Digital Media: Building a Playbook to Drive Offline Sales with Online Strategies eMarketer shows CPG digital ad spend growing from $9.51 billion in 2018 to $15.85 billion in 2022, an average annual growth rate of 10.9 percent. While digital media growth overall in the United States outpaces CPG media spend growth, CPG advertisers are expected to grow their digital media spend faster than total digital ad spending. Ultimately, CPG advertisers will make up a larger portion of digital media spend. Given this increased marketing spend, margin pressure from the growth of e-commerce and private label, and the prevalence of zero-based budgeting, it is absolutely critical that CPG brands and retailers wring maximum efficiency and impact from their digital advertising expenditures.

CPG + Consumer Products Industry Digital Ad Spending $15.85B $14.39B $12.89B $11.27B $9.51B

8.9%

9.0%

9.1%

9.2%

9.3%

2 0 18

2 0 19

2020

2021

2022

$ in billions

% of total digital ad spending SOURCE: EMARKETER; MARCH 2018

While consumers frequently shop for CPG items in a store, they also spend a lot of time online researching products, often on social media, where their impressions of brands form easily. The time consumers spend online provides valuable opportunities to engage and influence even those actions they take offline. These are impressions that can ultimately drive loyalty in addition to catalyzing online and offline sales.

DIGITAL MEDIA

Marketers in other industries have embraced digital marketing, complete with the ability to frequently optimize based on real-time purchase activity to engage and influence shoppers. But until recently, CPG brands and retailers have struggled against

innate challenges, such as the largely offline nature of CPG purchases and the fact that such purchases are often made days or weeks after ad exposure, which makes it quite difficult to measure the impact of that exposure. Historically, brands and retailers have not had the ability to make vital connections at scale because of the anonymity of buyers in the offline world. Today, e-commerce vendors know who is buying, what, when and how often.

E-commerce Spurs Better Use of Offline Sales Data Retailers have collected frequent shopper program (FSP), or loyalty card, data for years but have historically tread lightly on mining or activating on the data because there have long been privacy concerns surrounding it. Times have changed. Consumers have developed expectations that brands communicate with them based on prior interactions. In fact, in her 2018 internet trends report, Kleiner Perkins Caufield & Byers partner Mary Meeker reveals that 79 percent of consumers are comfortable sharing their personal data in exchange for receiving clear personal benefit — in this case, more relevant discounts and communications.

Even though 95 percent of CPG purchases are made at brick-andmortar outlets, three-quarters of shopping trips begin online.

Due to this shift in sentiment, along with advancing technology and analytic knowhow, brands and retailers have improved access to FSP and other data, honed the ability to generate near-real-time insights that have the potential to drastically raise the bar on marketing programs, and can more precisely communicate with customers. Using these data, CPG and retail advertisers can dig deeper and influence consumers and their behaviors, and, ultimately, their purchases — even offline purchases. The growth of e-commerce has served to heighten competition for share of CPG spending. Online retailers have a significant amount of insight into how their customers shop and what they buy. The need for brick-and-mortar retailers to fight back against growing — and insight-driven — competition has pushed many of these traditional retailers to take a look at ways to take greater advantage of data to better reach, communicate with and influence shoppers.

Deterministic Solutions Target the Right Buyers at the Right Time Deterministic data is changing the playbook by enabling highly accurate digital marketing programs. Deterministic data is collected with consumers’ knowledge and permission in exchange for value provided to the consumer, and, especially when combined with other available data, including panel and point-of-sale (POS) data, is helping CPG manufacturers and retailers better collaborate to provide meaningful experiences for their existing and potential consumers. At any given time, deterministic marketing programs can use data to accurately identify who is in the market to purchase — as online commerce advertisers have been able to do for some time — allowing brands to target buyers with the right message about the right product at the right time and on the right channel. In measurement, the combination of panel, POS and FSP data brings the best of all worlds together. Advertisers receive granularity based on the scale of the FSP data

DIGITAL MEDIA

PURCHASEBASED AUDIENCES DELIVER 3-TO-4 TIMES LIFT VS. DEMOGRAPHIC TARGETING STRATEGIES.

while feeling confident in the accuracy of the results, based on proper use of other data sources to adjust for any inherent loyalty-card bias. Purchase-based targeting is critical to most digital marketing efforts. For instance, an online travel site sees its highest performance when targeting individuals who have previously purchased on that site or recently shopped the site. Yet most CPG campaign targeting leverages proxies, such as demographic variables or content, likely because offline transactions have previously been hard to bring into the digital marketing ecosystem. Even though 95 percent of CPG purchases are made at brick-and-mortar outlets, targeted online advertising can be extremely powerful in making impressions and inspiring purchases and repurchases. Retailers’ willingness to allow brands to better leverage accurate deterministic FSP data is bringing an important capability to the CPG community, and to no one’s surprise, brands see better marketing return as a result. At-scale data and analytics on known buyers create a strong foundation for effective and measurable digital marketing programs. Benchmarks show that purchasebased audiences in CPG outperform the sales lift of other forms of targeting (e.g., demographic) by three to four times, proving that purchase-based audiences work and that prior purchase is a great predictor of future intent. In CPG, intent is best signaled after a purchase is made, because insights and analytics can very accurately predict when that item will need to be replenished. IRI’s Consumer & Shopper Marketing teams have spent decades studying the frequency with which people buy for every category. Combined with deterministic purchase data at scale, this expertise creates a CPG-specific twist on remarketing. A brand can leverage IRI Purchase Cycle Verified Audiences to deliver the right message (e.g., confirmation, reminder, winback, etc.) based on when the target consumer will need to shop again for a particular consumable item. This knowledge gives CPG marketers and their retail partners an advantage over marketers in other industries.

Purchase-Based Targeting Drives Lift 3-4x Sales Lift 120%

100%

% Veriﬁed

80% 60% 40%

20%

-$0.11

-$0.09

-$0.07

-$0.05

-$0.03

-$0.01

$0.01

$0.03

$0.05

$0.07

-20% $/HH Sales Lift Behavioral

Demo

Keyword and Contextual Search

Purchase-Based Targeting SOURCE: IRI MEDIA CENTER OF EXCELLENCE ANALYSIS

DIGITAL MEDIA

Some Retailers Are Turning Their Own FSP Data Into Insights and Media Programs; Plenty of Upward Potential Remains Several of today’s leading retailers have programs in place that harness the power of their own FSP data. These programs give their retailers a broad understanding of what’s happening under the roofs of their own retail outlets. The hurdle here is recognizing that because these programs only take into consideration the retailer’s own FSP data, the picture being created is limited to such retailers’ own stores. In today’s world, winning requires a 360-degree view of purchase behavior. In other words, high-performing retailers and their suppliers must understand not only what shoppers are buying in those retailers’ own stores, but also what they are buying outside those retailers’ walls and where they are making those purchases.

In-flight optimization can boost campaign lift by up to 80 percent.

To get a holistic picture of the market and opportunities that lie within, brick-and-mortar retailers and CPG brands are leveraging companies like IRI that have huge pools of FSP data (IRI has data from more than 350 million loyalty cards in the United States) and powerful technology platforms, such as IRI Liquid Data™, that can quickly integrate data to extrapolate valuable insights. And because IRI looks across retail outlets to get a full picture of consumer behavior, retailers gain insights at the national brand-campaign level — not just from a single retail banner — and the 360-degree picture is complete. A retailer with this view has a strong, competitive edge in the marketplace.

In-Flight Optimization: Achieve 80 Percent Increases Quickly and consistently honing marketing programs is essential to maximizing return on ad spending (ROAS). In the digital world, most brands have gotten used to optimizing their digital campaigns daily or even more often. The ability to optimize CPG campaigns midflight — as frequently as weekly — has typically been out of reach for CPG brands and their digital media investments, largely due to the delay between serving an impression and learning a purchase was made. The good news is that CPG brands have many more ways to optimize their media in flight today than ever before. Audiences, for instance, can be updated weekly to suppress recent buyers. Similarly, due to the scale of IRI’s deterministic data, campaigns can be optimized within the first few weeks to enhance performance. Results can be broken out by campaign, creative, publisher, ad placement, execution and other factors.

DIGITAL MEDIA

Digital media provides incredible opportunity for CPG brands and retailers to message consumers, reaching them at the right time to drive brand awareness and purchase behavior.

That scale also enables IRI Lift™ to be used to effectively measure shorter and smaller campaigns from lower-penetration brands as well as large digital multichannel campaigns. Through in-flight optimization, IRI has seen as much as 80 percent increase in the uplift of a campaign.

Integrating Deterministic Data with Modeled Insights Irons Out the Rough Spots and Brings Clarity, Efficiency and Impact to Digital Marketing Programs As detailed in IRI’s point-of-view paper, Media Measurement: Dynamic Campaign Measurement Leads to Outsized Sales Uplift, tying ad exposure to CPG purchase behavior has, until recently, been complicated by a variety of factors: Multiscreen viewing by consumers fragments exposure and complicates the creation of “common currency” measurement that is consistent across all screens. The sheer volume of advertising exposure is huge, leading consumers to tune out ads that don’t resonate; advertising waste is pervasive. Point-of-sale fragmentation makes it more difficult to accurately assess which ads have driven purchase behavior and where. Lack of scalability of analytic and visualization applications that link ad campaigns to sales uplift has driven a surge in one-off efforts, driving up cost and compromising analytic consistency. Data integration is not streamlined or automated, so some processes remain manual and prone to mistakes and overspending. But through IRI’s Liquid Data platform and IRI Lift, which together enable the integration and analysis of data from more than 350 million frequent shopper program cards, retailers can quickly and easily integrate and harmonize disparate data. By determining which digital media is most effective with target audiences and tying media exposures to actual offline purchases down to the specific product and household level, retailers can swiftly identify digital media optimization opportunities.

Act Quickly and Confidently to Get One Step Ahead Digital media provides incredible opportunity for CPG brands and retailers to message consumers, reaching them at the right time to drive brand awareness and purchase behavior. Bridging the gap from the online world into offline CPG is the next great frontier.

To build a road map to execute, win and grow through collaboration and personalization, contact IRI. www.IRIworldwide.com IRIMedia@IRIWorldwide.com

Technology has already enabled great advancements. Though traditional brick-andmortar CPG manufacturers and retailers have historically struggled with making digital marketing programs efficiently work in their favor, today there are ways to get ahead of those offline purchasing moments. By connecting traditional modeled consumer and market insights with deterministic solutions — FSP data, specifically — brands and retailers have the ability to not only catch up to what the rest of the industry is doing but also go one step further: getting ahead of consumers’ needs and wants, then delivering messages and products that lead them along the path to purchase. Impactful digital media programs: Offer true personalization. Effectively connect the dots between consumers’ multiscreen viewing and omnichannel shopping habits. Are accurately targeted (for time and place). Capture shopper attention with high-relevance, high-value messaging.

DIGITAL MEDIA

Deliver comprehensive and prescriptive results quickly, allowing for in-flight adjustments to messaging, media and other campaign elements.

CASE STUDY:

FOCUSED TARGETING TECHNIQUES A large alcoholic beverage company recently put digital media strategies in play in a digital campaign focused on driving sales by leveraging IRI In-Flight Conversion (IFC) Verified Audiences, targeting specific buyer segments based on recent deterministic behavior and executing weekly in-flight optimization of the target segment. Results were strong and productive!

Key Data Points: What happened?

Insights: So what?

The campaign delivered a robust $/HH uplift of 12.5% ($0.08) and a ROAS of $0.91 (Interim: $1.03). The strong uplift was driven by increasing penetration (8.1%).

The campaign generated total incremental sales of $1.25 MM by driving new buyers to the brand.

Sales uplift across both IFC ($0.09) and non-IFC ($0.08) was comparable. IFC had a higher ROAS ($1.18) compared to non-IFC.

Although both performed well, the optimization strategy helped the IFC campaign drive 80% more ROAS than non-IFC.

98.4% of the households targeted were not previous brand buyers. The competitive segment’s performance was stronger than other segments.

Apart from optimization strategy, the campaign’s targeting strategy seems to have worked well for it.

The campaign performed exceptionally well, surpassing benchmark performance across the CPG category.

Allocating high impression share (17.5%) for competitive segments was a good strategy. SOURCE: IRI MEDIA CENTER OF EXCELLENCE ANALYSIS

The strong sales lift was primarily driven by increasing penetration during the campaign.

While bringing in new buyers, the campaign also appealed to existing buyers in equal measure, thereby prompting repeat purchases.

% Lift by Key Consumer Metrics Brand Holiday Campaign

% Brand Buyers (among exposed HHs) Buyers

12.5%

1.6%

8.1%

3.5%

98.4% Non-Buyers

51% Lift Confidence % $/HH Lift Contribution

$/Household

Penetration

Occasions

$0.08 99% 100%

0.12 pts. 99% 65%

0.09 99% 30%

All listed results are statistically significant at 80% confidence. Change in dollars per purchase occasion is not significant (below 80% confidence).

Existing Brand Buyers New Brand Buyers

49%

SOURCE: IRI MULTI-OUTLET RETAILER LOYALTY CARD PANEL, 11/8/2017 – 1/31/2018, LAG PERIOD 2/1/2018 – 2/25/2018 DIGITAL MEDIA

In-flight audience optimization worked well for the campaign. Optimized audiences outperformed non-optimized audiences, delivering 80 percent more return on ad spend.

$/HH Lift by Tactics Brand Holiday Campaign $0.08

% Lift % of Impressions ROAS

HH Penetration Lift by Tactics Brand Holiday Campaign $0.09

0.12 pts.

$0.08

Total

IFC

Non-IFC

12.5% 100%

13.4% 65% $1.18

11.6% 35% $0.66

% Lift % of Impressions

0.13 pts.

0.12 pts.

Total

IFC

Non-IFC

8.1% 100%

8.3% 65%

8.0% 35%

SOURCE: IRI MULTI-OUTLET RETAILER LOYALTY CARD PANEL, 11/8/2017 – 1/31/2018, LAG PERIOD 2/1/2018 – 2/25/2018

HOW IT WORKS:

IRI LIFT METHODOLOGY ASSESSES MEDIA PERFORMANCE BY LINKING AD EXPOSURE TO OFFLINE SALES AT THE HOUSEHOLD LEVEL. 3: Create test/control groups

Collect media exposure data at the household level via an IRI partner.

Send exposure data to IRI matching partner to create a common HH ID and load into IRI frequent shopper program sales database.

Identify non-exposed households to comprise the control group matched to the exposed group on IRI ProScores™ and category spend.

4: Calculate diagnostics

IRI FSP HHs

5: Run Generalized Linear Mix models Analyze uplift due to media exposure across key metrics such as sales, penetration and occasions via GLMM/ANCOVA methodology.

www.IRIworldwide.com

Test HHs

Control HHs

6: Project lift to total U.S./ROAS QC/Validation

QC/Validation

Calculate descriptive statistics on media delivery and consumer behavior.

Exposed HHs

QC/Validation

2: Match HH databases QC/Validation

1: Collect exposure data

Extrapolate uplift to the total United States from the sample population via statistical adjustments, and calculate ROAS.

IRIMedia@IRIWorldwide.com

“There’s two categories that we are very focused on for the future,” Neumann said. “One is destination products, locally important products. And the other area that is definitely emerging is kids. There is an opportunity for more growth in kids.”

business, and it’s working,” Neumann said. Many of the Starboard shops have at least two salespeople per store, and each ship has a general manager, assistant managers and a shopper host catering to special guests. Many of the retailer’s employees are foreign-born, which makes sense, since more than 50 percent of cruise SUPPLY CHAIN AT SEA guests are global citizens. How to get merchandise on board a ship, where to store “We have ships in the Mediterranean for instance it and how to replenish stores is one of the more unique where we need to have five different languages spoken. operational challenges Starboard faces. Although a lot I’m actually amazed at how many languages many of of the company’s supply chain practices follow the same our staffers speak,” Neumann said. She says the company principles of land-based supply chains, the constraint doesn’t really have any recruitment challenges, because that’s different is that ships move and they there are people hankering for an oppormight be in port only once. tunity they likely wouldn’t be able to find “If a guest really “So we have to really think about how in their home country. “People want to see many times we can replenish a ship. There are wanted an item the world. So I wouldn’t say that we have a some ships we have to replenish more because difficult time with recruiting. There’s a lot and we were sold they have very little storage space. And a of people who want to get on board ships.” category like spirits has to have fireproof Starboard puts new hires through out, then we would storage space, with fire doors. So for instance rigorous training to get them up to speed figure out a way to on the kind of merchandise it sells. It also Australia is a big market where there’s a lot of liquor sales on those ships so we’ve got hires product specialists who already have get it to the guest to replenish quite often because the storage that expertise. It teaches new hires what it’s doesn’t even come close to what’s required,” like to live and work on a ship. But more after the cruise.” Neumann said. than anything, Neumann says, new Star—Beth Neumann The other piece of the Starboard supply board employees are taught not to sell. chain puzzle is the ships are only in port for a “The way we greet shoppers is that few hours. “So you’ve got to have incredible port relationwe don’t assume they are there to buy. We greet them in ships and understand ports, customs, all of these rules order to connect with them,” she said. and regulations around it are very, very unique. So we SMOOTH SAILING AHEAD have very specialized people who understand customs, Another focus for Starboard is driving revenue once the border patrol and have built relationships globally and guest leaves the ship. Because Starboard is a duty-free reit matters. It matters at every port who’s bringing your tailer, it cannot sell on land, but it does do some shipping goods on. If you miss a shipment, it’s not like you can to guests after the cruise is over. just get the goods onto the ship the next day. That ship “If a guest really wanted an item and we were sold out, may not be coming back to that port for three months,” then we would figure out a way to get it to the guest after Neumann said. the cruise,” Neumann said. The supply chain challenges mean a retailer like StarAnother focus for Starboard is launching a proprietary board has to be nimble and have the right talent in place. loyalty program. The company’s current loyalty program The company has one permanent warehouse in Miami is intertwined with the cruise line programs, but it is but uses other warehouses around the world as well. moving to a loyalty program in China with its own brand. SEEING THE WORLD Overall, the long-term outlook for Starboard is sunny When it comes to human capital, Starboard focuses its skies and calm seas, Neumann said. As the Asia cruise training and education on teaching “the Starboard way” market continues to grow at a rapid pace, so does Starand what it means to deliver entertainment and social board, currently operating 10 ships in the market and connection. soon to add more. “We give our teams a sense of entrepreneurship, of “I think the biggest thing for us is continue to be the owning the shop, owning the business. Because when leader in Asia, to continue to be the leader in new ships. you’re on a ship you are disconnected from the home And that’s where we know we can add the most value. We office. So we try to create that culture within the team that are also focused on continuing to evolve what experience you know this is your shop. This is your business, how means. And deliver this incredible experience that comwould you drive revenue? So we hold the team on board bines entertainment, discovery and memories together,” accountable to come up with ideas and drive their own Neumann said. RL SEPTEMBER/OCTOBER 2018 Retail Leader.com

> COVER STORY

Different! By Design RETAILERS TALK ABOUT DIFFERENTIATION AND OFFERING A DISTINCT VALUE PROPOSITION, BUT FEW BRING IT TO LIFE LIKE SMART & FINAL. > By Mike Troy

The phenomenon of channel blurring is common throughout the retail industry, but no company takes the concept to the extreme as much as Smart & Final. The $4.6 billion company is a major regional competitor to other retailers of food and consumables, but good luck neatly classifying it as a club, supermarket, discount, hard discount format or food wholesaler. In reality, Smart & Final combines merchandising, marketing and operational elements of all those channels to create what it describes as a value-oriented food and everyday staples retailer that serves household and business customers. What that looks like to shoppers is a footprint of 322 small format stores in eight Western states operating under the banners of Smart & Final, Smart & Final Extra! and Smart Foodservice Warehouse Stores. Founded nearly 150 years ago in Los Angeles when the city had only 6,000 residents, the company derives its names from J.S. Smart and H.D. Final, who founded the Santa Ana

Grocery Company and merged with the Hellman-Hass Grocery Company founded in 1871. That legacy, while notable, matters little to shoppers today in the “what have you done for me lately,” world of retail. No one knows that better than Smart & Final President and Chief Executive Officer Dave Hirz. He joined the company in 2010, three years after it was acquired by Apollo Management. In 2012, Smart and Final was acquired by Ares Management, then the company went public in 2014. The food retailing veteran spent much of his career with Kroger’s Food4Less and Ralph’s divisions prior to joining Smart & Final in 2010. He served as President of Food4Less from 2007 to 2010, President of Ralph’s from 2004 to 2007 and President of Food4Less from 1999 to 2004. “I’ve never seen change happen so fast, but I probably would have said the same thing 20 years ago,” Hirz said of the retail industry. “I don’t think anyone is as innovative as they would like to be. I think all of us think we are little bit behind, but at Smart & Final we are in a pretty good position.” Having a highly differentiated strategy helps, but the company is also aggressively embracing technology and moving fast to integrate its physical and digital operations with some impressive results. More than 85 percent of Smart & Final stores offered online delivery at the end of the second quarter and online sales increased more than 100 percent from the prior year, which Hirz concedes is off of a small base. The average online ticket is higher than the in store ticket and the ticket is even higher for shoppers who engage with the company using the retailer’s newly launched app. “The rate of adoption of delivery is incredible how fast it is growing,” Hirz said. It helps that Smart & Final has been focused on upping its technology game by investing in all manner of systems upgrades to keep pace with shifting shopper preferences. The company is spending $29 million this year on a range of technology upgrades, according to Hirz. “I’m fortunate to have a really talented CIO who is leading the charge with an incredible team that is bringing new technologies on board all the time,” Hirz said. “There is more investment from us and a lot of our competitors in technology over the last several years than there has been historically. We announced about a year and a half ago that we slowed down store growth a bit so we could take some of that capital and invest it in technology to upgrade systems and to roll out our digital infrastructure.”

BEING DIFFERENT Dave Hirz, Chairman and Chief Executive Officer, Smart & Final.

Retail Leader.com SEPTEMBER/OCTOBER 2018

Smart & Final’s digital moves mirror those of the supermarket

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> COVER STORY

world where click and collect and home delivery have quickly gained acceptance. But that’s where the similarities to traditional grocers ends. Smart & Final stores offer many of the same product categories, with an emphasis on perishables. However there are no expensive service departments to operate, which is consistent with a low operating cost and low price model. “Our core customer is a value customer,” Hirz said, noting that Smart & Final prices are typically lower than conventional supermarkets by double digits. “Value is important whether you make $30,000 a year or $100,000 a year.” Another thing that’s important is convenience, which is why Smart & Final stores tend to be smaller, on average about 25,000 square feet. This also helps with the company’s expense structure, which looks more like a typical warehouse club. During its most recent fiscal year, Smart & Final’s gross margin rate was a Costcolike 14.74 percent and its expense rate was 13.59 percent. However, Smart & Final claims to offer twice as many club sizes as club competitors but it doesn’t enjoy the financial benefit of charging a membership fee. Smart & Final also borrows from the business model of limited assortment, private label centric retailers such as Aldi and Lidl. Most of its stores offer about 16,000 Skus and that is after a decade long initiative to add roughly 4,000 mainly perishable items and rebrand stores as Smart & Final Extra! The transformative effort launched in 2008 essentially repositioned and remerchandised nearly the entire real estate portfolio. Larger stores were given expanded assortments and where possible existing stores were expanded or relocated. By the end of the last fiscal year, the company had completed conversions of 102 stores and opened 92 others so that 194 of its 260 stores, nearly all of which are located in California, were operating as Extra! stores.

Exterior messaging at this Los Angeles area Smart & Final store educates shoppers about key tenets of the retailer’s value proposition.

Retail Leader.com SEPTEMBER/OCTOBER 2018

A major store transformation and re-merchandising effort a decade in the making has resulted in stores operating under the Smart & Final Extra! banner generating nearly 40 percent of sales from perishables.

The Extra! transformation bumps up the contribution of the perishables department to 37 percent of sales in Extra! stores compared to 29 percent of sales in legacy Smart & Final stores.

PRIVATE LABEL GROWING National brands matter at Smart & Final, but the retailer’s fastest growth is coming from private label. “National brands are still really important,” Hirz said, “but what we tell branded suppliers all the time is they have to continue to innovate. That is why you see so many of the big companies buying up natural and organic operators.” Smart & Final’s natural and organic brand, Sun Harvest, is also its fastest growing and highest margin private brand. But the company’s largest brand is called First Street and recent moves have seen the company consolidate many of its smaller private label brands under the First Street banner, which now accounts for more than 80 percent of private label sales. Private label overall already accounts for 28 percent of sales at Smart & Final stores, but Hirz sees that figure heading higher thanks to recent moves in addition to brand consolidation. For example, Michelle Narain, a 16 year veteran of Albertsons and Safeway, joined Smart & Final in May as Vice President of Private Label. “She has been a great supplement to our private label team with some great ideas that are going to take us to 32 percent private label penetration in a couple years,” Hirz said. That’s not at the level of private label centric retailers such as Aldi or Trader Joe’s but it puts the company well ahead of most mainline supermarket and discount competitors such as Walmart or Target. “Our private brands really create loyalty because when a customer finds a product they love there is only one place they can get it,” Hirz said. The company currently offers about 3,000 private label items but the assortment continues to grow with more than

100 new items, many in large club sizes, added during the first half of the year. “We have a strategic sourcing department that is out bidding every week to make sure we are getting the best quality at the best price,” Hirz said.

A NOT SO SECRET WEAPON The warehouse club aspect of Smart & Final’s business model fully reveals itself in a format called Smart Foodservice Warehouse Stores. As the name suggests, food service customers account for 90 percent of sales at a $1 billion division that has quietly expanded at a faster pace than its parent company. There are currently 63 Smart Foodservice Warehouse Stores with locations in Washington, Oregon, California, Idaho, Montana, Nevada and Utah and plans for a total of four new locations this year. However, judging from some key personnel moves and a mid-year rebranding more expansion is in store. Most notably, the division changed its name to Smart Foodservice Warehouse Stores from Cash & Carry Smart Foodservice. The

change to a nameplate acquired 20 years earlier may seem subtle but is designed to eliminate potential confusion around what the banner stands for when entering new markets. “The updated name better reflects our mission and provides a much clearer message to current and future customers about the products and services we offer. This new name is a much more accurate reflection of who we are and what we do,” said Derek Jones, President, Smart Foodservice Warehouse Stores and Executive Vice President, Smart & Final. Jones joined Smart & Final in April 2017 after spending the previous 11 years with SpartanNash, the Michigan-based grocery distributor and retailer. Prior to SpartanNash, Jones held operational roles with Walgreens, Office Depot and Walmart. More recently, Jones was given added responsibility to oversee all of Smart & Finals supply chain activities. Another key indicator of the company’s food service aspirations is the addition of a real estate executive to secure future locations in California and beyond. California is a very attractive market because of the population density, according to Hirz, but that also makes it arguably one of the nation’s most competitive. That’s why a company like Smart & Final, lacking the scale of larger national competitors, requires a highly differentiated approach to serving shoppers. RL

LEADING BY EXAMPLE Many senior retail executives get their start working in stores. Some as part-time employees while still in high school or after graduating from college. Either way, every successful retail executive understands the importance of spending time in stores to gain first hand insight into what is or isn’t working and to connect with employees who interact with shoppers on a daily basis. Smart & Final President and CEO Dave Hirz is no exception. He began at the lowest rung working in retail along with most of Smart & Final’s other senior executives and operaSmart & Final CEO Dave Hirz is among the company’s home tional leaders. He makes it a point to be in stores every week office employees who spend two days working in stores each year and laments that he isn’t able to spend as much time as he as part of a program called Engagement Days. would like in stores. Soon enough, Hirz and other home office employees will be spending time in stores the day before Thanksgiving. That’s when they participate in a program called Engagement Days. Twice each year — the other day is July 3 — home office employees pitch in on the front lines to perform whatever tasks are needed. The program is consistent with the retailer’s servant leadership culture, which espouses the view that senior leaders and all of those who work at the company’s headquarters are there to support stores. It’s why the company refers to its headquarter as the Store Support Center. It is just one example of a corporate culture that is as unique as the store format and value proposition Smart & Final offers shoppers. “It takes a lot to create a culture with an engaged workforce in an environment where you try to set yourself up to be an employer of choice,” Hirz said. “It tough because there are so many options for people who are looking for work.” It helps that the average hourly wage at Smart & Final stores is $17 an hour and more than $20 an hour at Smart Foodservice stores, but other intangibles help differentiate the company as well. For example, the company offers education opportunities through its Smart University program that reimburse employees who are going to school. It also operates the Smart & Final Education Foundation which awards half of its scholarship dollars to associates attending four year schools and the other half to their children. Additionally, there is a Smart & Final foundation focused on other types of giving.

SEPTEMBER/OCTOBER 2018 Retail Leader.com

> STRATEGY

A Modern Approach to M&A

THE COMPETITIVE DYNAMICS OF THE RETAIL INDUSTRY HAVE CHANGED DRAMATICALLY AND SO TOO HAVE REGULATORS’ APPROACH TO ASSESSING ANTITRUST RISK. > By Elizabeth M. Bailey and Alexis James Gilman

There was a time when a quick estimate of market shares might have been enough to provide a reasonable assessment of antitrust risk for a potential combination between two brick and mortar retail chain stores. Not anymore. Today, reliance on simple market shares for risk assessment can leave the wrong impression about how the U.S. antitrust agencies review a merger of two retailers. This can be especially true for brick-and-mortar retailers that are looking to forge a path forward through the growth in e-commerce, high-profile bankruptcies or a sense that the marketplace is over-stored. The playbook for evaluating competitive concerns from a potential combination of two brick and mortar retailers has evolved considerably. In recent years, the Federal Trade Commission (FTC) has reviewed proposed transactions between well-known retailers, including Office Depot/OfficeMax (2013), Dollar Tree/ Family Dollar (2015), Albertsons/ Safeway (2015), Walgreens/Rite Aid (2017), Bass Pro Shops/Cabela’s (2017), and 7-Eleven/Sunoco (2018). Public statements from recent transactions investigated by the FTC confirm that the agency is using more sophisticated data-driven tools during investigations with important implications for future deal activity. As the tools used by the U.S. antitrust enforcement agencies have evolved, so too must the tools used to

Elizabeth M. Bailey

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gauge antitrust risk at the pre-deal stage. These risks include the potential for a long and costly antitrust investigation, including compliance with a Second Request (a giant subpoena for documents, data, and other information from the merging parties), the potential that divestitures may be required to resolve competitive concerns raised by the agency, as well as the possibility that the agency may seek to block the transaction entirely. That’s why brick and mortar retailers contemplating a merger need to adjust their thinking about pre-deal risk assessment. A modern approach involves five key areas, including:

1. CONSUMER SUBSTITUTION PATTERNS Consumer substitution patterns—not market shares—are central to assessing the antitrust risk of a potential merger. In an investigation, the FTC is trying to figure out whether the consolidation will “substantially lessen competition.” Naturally, a key aspect of answering that question is to determine how closely the two retailers compete with one another. Closeness of competition is evaluated along a variety of dimensions, including geographic proximity as well as similarities in pricing, promotion, and product assortment. The closer two retailers are along these dimensions, the more likely it is that the FTC will conclude that consumers view them as close substitutes. A before/after analysis is a standard practice at the antitrust agencies for assessing customer substitution patterns and whether the proposed transaction is likely to give rise to competitive concerns. Given the depth and breadth of data that retailers track, as well as retailers’ familiarity with A/B style “before” and “after” testing, assessing customer substitution patterns using the modern analytical tools used by the FTC in a merger review is straightforward for most retailers. One of the most common types of before/after analysis used by the FTC is to compare the parties’ store-level sales before and after a competitor store opens nearby. In undertaking this type of analysis, the agency is attempting to develop evidence to answer questions related to consumer substitution patterns, such as: How big of a hit to sales does the store suffer when a com-

petitor store opens nearby? Is the hit to sales from entry bigger for some categories of products than others? Is the hit to sales bigger when one specific competitor (e.g., one of the parties to the proposed transaction) enters compared to other competitors? Is the effect of the competitor store’s entry temporary or is the hit to sales sustained well beyond the grand-opening? In general, if the hit to sales from entry by a variety of competitors are all similar, then it is more likely the agency will conclude that consumers do not view the parties to the proposed transaction as particularly unique or especially close substitutes in the marketplace. The same is true if the hit to sales from the entry is small. And if the decrease in sales is only temporary, then the agency may conclude that consumers tried out the new store when it first opened, but did not find the new store to be a good substitute and quickly reverted to their original shopping destination. While this type of information may seem more daunting than simple market shares, in our experience, retailers often consider before/after event analyses in the ordinary course of business. Many of these internal analyses also compare before/ after outcomes to a control group, such as comparable stores that did not experience entry or exit. With A/B style experiments widely used by retailers, these types of entry and exit analyses are relatively common to find in-house as part of ordinary-course analyses of consumer shopping behavior. In a FTC merger review, the impact on sales from a competitor’s entry are translated into consumer substitution patterns, which are referred to, in antitrust jargon, as “diversions” or “diversion ratios.” The amount—and value—of that diversion provides a numerical measure used by the FTC to assess how closely the parties to the proposed transaction compete. The agency views “high” diversion ratios as indicating that those two retail chains are close competitive alternatives for consumers. Consequently, antitrust risk typically increases if the FTC, using its own analytical framework, would likely find high diversion ratios between the parties to the proposed transaction. Other types of evidence can also be valuable. For example, loyalty-card information can be useful, especially for assessing how far consumers travel to make purchases and whether the merging retailers (and other competitors) are drawing customers from the same geographic area. Evidence about the extent of customers’ cross-shopping across multiple retailers is also useful, but must be interpreted with care. While cross-shopping often reflects consumers’ ability and willingness to substitute purchases of the same goods across different retailers, such cross-shopping could well reflect that consumers satisfy different needs at different retailers or through different channels of sale. For example, the FTC has taken the view that conventional supermarkets are a limited constraint on grocery stores such as Whole Foods because cross-shopping reflects consumers purchasing different products at each type of grocery store (e.g., buying canned goods

at Safeway but fresh products at Whole Foods) not consumer substitution patterns (e.g., switching seafood purchases between Safeway and Whole Foods).

2. ONLINE COMPETITION Online sales as a percentage of overall retail sales continues to grow significantly. Few brick and mortar retailers have escaped at least some competitive pressure from e-commerce retailers. The constraint from online retailers, however, is not the same in every retail setting. Nearly everyone buys online these days, but not everyone considers buying everything online all the time— or even most of the time for certain types of retail purchases. That has implications for the antitrust analysis of retail mergers. In some retail settings, like the retail sale of office supplies (Office Depot/OfficeMax) and children’s toys (Toys ‘R Us), the FTC has credited online competition as a constraint on brick and mortar retailers. But in other retail settings, like the sale of tailored men’s suits (Jos. A Bank/Men’s Wearhouse) and supermarkets (e.g., Albertsons/Safeway, Ahold/Delhaize), the FTC has not viewed online retailers as a significant constraint on brick and mortar retailers despite the growth of online sales. Therefore, determining how much credit the antitrust agency is likely to give online retail competition is critical. Information readily available on retail dashboards as well as data from loyalty-card use can be helpful in assessing how likely it is that online competition will be given full credit. Retailers can also ask themselves these questions: At the point of sale, how often are prices matched when a customer holds up their smartphone showing the same product at a lower price? If local brick and mortar stores are price checked and mystery shopped, are online retailer websites similarly price checked and mystery shopped? What percentage of sales are made online, and are brick and mortar sales declining in relation to online sales? Did a new online entrant significantly affect brick and mortar retail sales?

3. PRICING STRATEGIES Understanding the business rationale for the choice of pricing strategy is a central issue in the antitrust agency’s competitive assessment of a proposed transaction. While zone-level or store-level pricing may be driven by differences in costs to serve, the FTC Alexis James Gilman

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> STRATEGY A Retail Merger Shopping List for Pre-Deal Antitrust Risk Assessment FOCUS ITEM

KEY QUESTIONS

Before & after tests

Does entry by particular retailers have a significant impact on store sales?

Point-of-sale and loyalty card data

How frequently do consumers shop in-store and online? Do purchases differ by channel?

Omnichannel versus zone pricing

Are pricing decisions based on the presence or absence of particular competitors?

Cross-shopping

Do customers substitute by purchasing the same items at different retailers? Or do they buy different items at different retailers?

5. “Hot” documents

What do ordinary course documents say about competitors, competitive responses, and market shares?

Why does the deal make business sense? Do the synergies lead to benefits for consumers?

Synergies

typically considers prices, pricing policies, and price zones that vary locally based on the presence or absence of key competitors to be a major factor in their antitrust analysis. A price zone allowing for higher prices when a competitor (or type of competitor) is absent, or lower prices when the competitor is present, is likely to affect how the agency defines the relevant set of competitors and is almost always a critical factor in the agency’s ultimate assessment of the competitive effects of the merger itself. National and omnichannel pricing—in which prices and promotions do not vary across stores, e-commerce, and hardcopy mailings such as catalogs—may mean there are different competitive constraints compared to localized pricing strategies. Indeed, it is not uncommon for parties to a proposed transaction to point to their national-pricing policies to explain why the transaction will not change pricing in any local area where the parties both have stores. But even here, the reason for the choice matters. National pricing may be driven by a desire to provide a singular experience because many consumers purchase across multiple stores and through multiple channels—both in-store and online. A decision to use national pricing may also be driven by vigorous competition from omnipresent e-commerce alternatives. National pricing may also stem from vigorous competition from thousands of diverse mom-and-pop retailers across the country. Those are benign to affirmatively helpful facts for parties that propose to merge. National pricing, however, is not a silver bullet. If the reason for national pricing is that the other party to the transaction has a nationwide, or nearly nationwide, footprint of stores, making nationwide pricing an efficient way to price against that key competitor, national pricing may raise antitrust scrutiny. In short, during a merger review, expect that the FTC will assess whether the transaction is likely to eliminate a competitive constraint that would lead to higher prices across the board.

4. EFFICIENCIES AND TRANSACTIONRELATED STORE CLOSURES The ability to lower costs often motivates a potential combination. That’s almost always a good thing because it is important 26

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to be able to articulate a strong pro-competitive rationale for the proposed transaction. The focus of the antitrust agency’s investigation is not on how the consolidation will benefit the merging parties, but rather: “How will the transaction benefit consumers?” A merger premised on lowering costs and passing those savings on to consumers through lower prices is viewed favorably by the FTC. But not all synergies are inevitably pro-competitive. While cost synergies are often viewed as pro-competitive, synergies that stem from transaction-related store closures can create a red flag. The FTC may view store closures as having no pro-consumer benefit, or as reducing consumer choice, and may even view closures as an attempt to eliminate cannibalization that reflects meaningful pre-merger competition. Therefore, transaction-related stores closures to address being over-stored, whether characterized as a revenue synergy or a cost synergy, require careful pre-deal consideration, including whether those stores would have closed even in the absence of the transaction.

5. TRADITIONAL TOOLS AND EVIDENCE One thing that has not changed over time is the use of the traditional investigation tools and types of evidence. In retail merger investigations, these include: documents discussing competition and efficiencies that are submitted with the merging parties’ premerger notification Hart-Scott-Rodino filings; interviews of competitors of the merging parties and other industry participants; and the merging parties’ ordinarycourse documents focusing on how the merging parties assess competition, their competitors, and, yes, their market shares. Although the modern economic tools are often more relevant for predicting the agency’s ultimate assessment, “hot” documents and unfavorable third-party testimony can extend an investigation, result in the agency requiring store divestitures as a condition of approving the merger, and may even appear in a complaint seeking to stop a transaction entirely. In short, these traditional tools and pieces of evidence still matter for pre-deal risk assessment. The five areas described here represent a modern, pretransaction risk assessment approach that is aligned with the analytical tools the antitrust agencies rely on when reviewing a merger. Using a ruler when a precision tool kit is required can lead to unfortunate surprises. Further, reliance on simple tools may dissuade potential partners from pursuing a transaction that might appear problematic on first blush, but in fact would be unlikely to raise competitive concerns. The tools described here play a key role in assessing internally the competitive issues that may arise during the antitrust merger-review process and that affect the ultimate outcome of that review. RL Alexis Gilman is a partner in Crowell & Moring’s Antitrust Group in Washington, D.C. From 2014 until 2017, he served as the Assistant Director of the Mergers IV Division in the Bureau of Competition of the Federal Trade Commission, which investigates retail mergers. Elizabeth Bailey is an economist and academic affiliate at NERA Economic Consulting in San Francisco where she handles retail mergers and acquisitions.

> SOCIAL RESPONSIBILITY

Plant-Based Pride The plant-based foods movement continues to gather momentum as consumers explore and embrace new ways of eating. Already a more than $3 billion market segment, the plant-based food category’s rate of growth has attracted a lot of interest from retailers and suppliers ranging from startups to major CPG companies. Representing the interests of those operating in the space is the fledgling Plant Based Foods Association. Created in early 2016, the PBFA is led by Executive Director Michele Simon. She spoke with Retail Leader about PFBA’s mission, new dynamics in the food industry and the definition of milk. > By Gina Acosta

Retail Leader: Why did the plantbased industry need an association? Michele Simon: I’ve spent my entire career learning about the importance of having a political voice and how important policy is in the food industry sector. At the time that I founded the Plant Based Foods Association, there wasn’t really anyone representing this particular industry sector. Yet every other sector of the food industry, whether it’s the soda industry or the sugar industry, had a political voice. And plantbased foods has become a much bigger part of the food industry. So it was kind of a combination of having a personal interest Michele Simon in and eating these types of foods combined with my experience and the importance of policymaking that made me realize there was an opportunity here and a real need for this sector to have a collective voice. RL: Can you elaborate on your experience with policy-

to be heard as well. And there is already some of that going on in the form of the natural and organic industry and we’ve seen some of the fruits of that labor. It’s a natural time for the plant-based foods sector to be represented. Every animal group, meat group has a lobbying arm. Our members are busy making alternatives to those foods. RL: Speaking of meat alternatives, sales of these products are growing rapidly and creating new marketplace dynamics. What’s your outlook for plant-based foods overall?

MS: It is a really exciting time. We did an analysis with Nielsen that shows the plant-based foods industry grew 20 percent since last year with sales that topped $3.3 billion. I was actually surprised to see growth was that high. It’s a sign that the industry has arrived.

making and the role that plays in the food industry?

RL: What do you mean by “arrived?”

MS: I have done some lobbying in California at the state level and I have also been involved in some federal issues. And then throughout my career I’ve really been an advocate for healthy eating and shining a light on how important food policy is to what’s called our “food environment” and public health. So, you know, the food choices that we are faced with every day and how they are very much impacted by our agricultural policies, our nutrition policies and of course our economic system. I’ve done a lot of work understanding that and some of the negative ways that the “dark side” of the food industry has really undermined public health. And so learning about that definitely made me realize that the growing healthy food industry sector needed

MS: There are people who might have thought that veganism or plant-based diets were just a trend. But that has now been proven wrong because of the growth figures now climbing over several years. And I think what it really points to is the incredible explosion of new innovative offerings on the market. It’s no longer just a niche market. Now we’re seeing just many more types of products that are helping entire categories grow. It’s a wonderful situation of a “rising tide lifts all boats.” RL: Where do you see plant-based food sales headed? Can last year’s 20 percent growth rate be maintained over the next five or 10 years? SEPTEMBER/OCTOBER 2018 Retail Leader.com

> SOCIAL RESPONSIBILITY

capitalized and you know they’re already in the market. Then we have the established brands that have really helped put plant-based foods on the retail shelf. Those are members like Tofurky, for example. They are plant-based companies that have been around the world and are now growing along with the rest of the market because of the mainstreaming of their products. The third type of member is the bigger players that see this plant-based trend and want to be part of it. They realize they have to keep up with that shifting consumer interest and people wanting to eat better. That would be a company such as Campbell Soup Company. RL: So where do you hope to grow. Do you have a membership number in mind?

Shoppers at this on-trend King Soopers store near Denver are alerted to the presence of plant-based alternatives.

MS: Well obviously some of the sales growth is driven by newness. When you have a relatively new category that people are just getting into then there’s going to be more growth. If you take a category like plant-based milk, last year we only saw 3 percent growth in that category. And that is a mature category. But this year the growth in plant-based milk is 9 percent. So even that category, which obviously has been around a while, is showing above-average growth. Because again there are new entrants to the market and there’s more innovation from the companies that have been around a while to kind of keep up with the competition. So I think the answer is we’re going to continue to see a lot of growth because of the innovation and because we’re just getting started. As long as we have this magical combination of consumer interest in healthier foods and these companies that are making great tasting innovative products we will continue to see growth.

MS: We’ve grown our membership from 22 companies in 2016 to 115 now. Part of our challenge is that while we are established as the industry voice we still represent a number of smaller companies that pay lower dues. So while we have a few companies that are at the top tier of our membership we still represent a number of smaller companies that are important at their present size. Our three biggest member companies are Campbell Soup, Morningstar Farms, which is the brand under Kellogg, and Blue Diamond Growers. We want to have a good diverse representation, which I think we do have and we want to keep that going. We like the smaller companies. We have a great number of medium sized companies as well. There are a few companies that we would like to have join us so we would like to find ways to reach out to them and show them what we have to offer. I think mostly what we want to do is help ensure the continued success of the sector. We are well positioned to grow along with the industry and bring on new companies because we’ve done a really good job of positioning PBFA as the voice of this growing sector. We are fortunate to have a handful of foundations and individual donors that are passionate about our mission and have been donating money to us. We just need more resources to match the likes of the milk lobby and now increasingly the meat lobby. RL: Speaking of milk, there are some issues with what can be called milk. Talk about the biggest issues your members are facing and how PBFA is representing their interests.

RL: What does the composition of your membership look like today?

MS: A lot of our members get help from us on the policy front. Labeling is obviously our number one issue right now because some members are trying to figure out how to label a plant-based product. This is a challenge for the industry as a whole. Our members know that we are representing them in the policy arena with these labeling challenges, particularly now with milk.

MS: We have three types of member companies. There are the startups that are really just excited, you know. They’re going to make it because they know what they’re doing and they’re well

RL: How do you even define what milk is, and what meat is, and how do you make your labeling case to the FDA?

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MS: On the milk issue, we formed a Standards Committee on how to define milk. We drafted various versions of standards and then came up with a document that creates a minimum standard for composition of milk, and what is required to be in a product labeled milk. And then we came up with labeling conventions, which are voluntary recommendations to the industry on how to go about labeling their products. And then we’re going to turn the meat category and you know that may pose new challenges. So I’ll let you know how it goes in a year. The most important thing here that we don’t need an act of Congress, we don’t need the FDA to dictate how these products are labeled. Obviously there are some basic rules of the road that our members are already following. Words can’t be misleading. The nutrition facts must be right. The disagreement is around the use of certain terms that the animal food industry thinks that they own when in fact they don’t.

help the everyday consumer that’s just looking to cut back on meat or looking for an alternative because their child allergic to dairy or whatever the reason is. We know that the growth is coming from the mainstream consumer that is cutting back. Because we have a philosophy that we are welcoming to all, I think that is why we’re able to attract the likes of Campbell Soup. Of course, those are the conversations we had when they were considering joining. There’s room for everyone in this movement. And yes it is a movement, and our member companies may be motivated by different reasons. We have companies that are full-on vegan and partner with animal welfare groups. And then we have other companies that just want to sell more veggie patties. They are not necessarily promoting a cause per se but they understand the marketplace opportunity.

RL: What happens when you have members disagreeing on these issues?

MS: We are busy defending members’ ability to use words like “milk” in the proper context and clearly communicating to consumers what these products are. And on the retail side, we’re starting to conduct outreach with two major retailers and our plan by the end of this calendar year is to have one shopper marketing campaign in partnership with a major retailer in roughly 100 stores as a pilot project. We’ve developed our own marketing materials that we’re offering for free to retailers who want to partner with us. So we’re paying for the marketing, the messaging and the POS advertising campaign — everything that would go along with a shopper marketing campaign. Parallel to that we’re developing relationships with other retailers to see what role we can play in helping to educate them about the category. We’ve gotten very good feedback from retailers so far. They don’t want to be left behind when it comes to this growing consumer trend. RL

MS: We work it out. We had this year long process of a committee and we went to all of the major players in the milk category that were not on the committee and that’s why it took a year. No not everyone agrees, but the good news is we came to agreement. I think we came up with a pretty good solution. Nobody thought that we shouldn’t be able to call the plant-based products “milk.” And some of the bigger companies that maybe take a more conservative approach were actually the most vociferous in defending the use of the term. People are very passionate about this stuff. And sometimes people in the milk industry think they have a corner on their passion for dairy and I get why they’re passionate about their industry sector. Maybe their parents owned a dairy farm for 30 years or whatever. I get it. It’s great they have that passion and they’re defending their turf. That doesn’t negate the passion that our members have for making a product that bears resemblance to milk and just happens to be made from soy, almonds, cashews or whatever. Consumers aren’t buying these products in droves because they think that they’re buying cow’s milk. They’re buying them because they taste good and they like it on their cereal or in their smoothie and they provide some other benefit they aren’t getting from cow’s milk.

RL: What are your key policy initiatives for next year?

RL: So how do you reconcile your activist mission on behalf of plant-based foods with the practices and missions of the large, traditional CPG firms? MS: Well clearly we haven’t exactly scared them away. I mean for a company like Campbell Soup to join, we’re doing something right. We’re not a bunch of radical vegans here. Our whole philosophy is to be open to companies like Campbell Soup that want to join to grow that particular sector of their food portfolio. We’re not telling them to stop selling chicken soup. We’re just saying, “Okay we can help you sell more pea protein milk.” And we have the same philosophy with consumers. We want to

The plant-based movement continues to gather momentum along with organics. Retailers such as Natural Grocers are exclusively focused on the categories.

SEPTEMBER/OCTOBER 2018 Retail Leader.com

> FINANCE AND CAPITAL MANAGEMENT

Accounting for DISRUPTION A NEW FINANCIAL REPORTING REQUIREMENT TAKES EFFECT SOON THAT WILL HAVE A HUGE IMPACT ON HOW RETAILERS ACCOUNT FOR LEASES, MAKE RELATED FINANCIAL DECISIONS AND COMMUNICATE WITH INVESTORS. HERE’S WHAT RETAILERS NEED TO KNOW TO BE READY FOR 2019. > By Kristin Jones

The retail industry is no stranger to disruption. Ongoing challenges, such as changing consumer preferences, and the advent of e-commerce are simply facts of life for modern-day retail executives. A lesser known change of major importance soon to challenge the industry is the new lease accounting standards (ASC 842) put forth by the Financial Accounting Standards Board (FASB). ASC 842 was approved several years ago, but it takes effect January 2019 for public companies and January 2020 for private companies. ASC 842 is a big deal for the retail industry because it requires retailers to record traditionally “off- balance sheet” operating leases onto their balance sheet. Since retailers have found the use of leases to be a cost-effective method for investing in stores, point-of-sale systems, distribution centers, and transportation equipment, the new ASC 842 standard will certainly have a significant impact. By some estimates, 35% of global retail entities will see their debt increase by more than 25%, with a median increase in debt of almost 100%. Bringing leases onto the balance sheet can impact retailers in a myriad of ways, from budgeting and forecasting, to growth and acquisition planning; and if not calculated properly can put a company at material risk. As such, retail executives throughout the organization, including board members, need Kristin Jones to fully understand the

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new rules and proactively implement tools and processes that will help them mitigate financial statement risk. It will also be critical to understand how much additional debt will be added to their balance sheets.

FINANCIAL IMPACTS AHEAD The implications of ASC 842 promise to be far-reaching. For example, consider a retailer interested in securing institutional financing to fuel growth plans. If the retailer uses leasing as a financing tool, the company may find that the increased ASC 842 liability impacts how lenders view their debt to equity and debt service coverage ratios. Any debt covenants impacted would need to be uncovered and quantified as soon as possible, along with identifying strategic alternatives. When it comes to budgeting and forecasting, impacts to the balance sheet need to be pointed out and explained to bankers and investors early on in the process to avoid any misunderstanding. It must be shown that the underlying business has not changed, with emphasis on how the new accounting rules impact financial ratios that banks and investors traditionally rely upon. Timing is key. ASC 842 rules are effective for public business entities beginning after December 15, 2018 for the calendar period beginning January 1, 2019, whereas private companies have until after December 15, 2019, for the calendar period beginning January 1, 2020. If investors and/or banks inadvertently compare a business’s public retail business to a private entity, or vice versa over the next year, the conclusion drawn would be off. Therefore, it is important to ensure comparisons are accurate.

MANAGING MATERIAL WEAKNESSES One of the biggest common concerns retailers have with ASC 842 adoption is risk of material weakness or misstatement. As with any computation that ends up on financial statements, the

proper accounting controls must be in place. The chalGovernance — Appoint a cross-functional task lenge CPA firms, accounting departments, and tax departforce or team run by a project planner who has the auments run into is trying to interpret the ASC 842 written thority to manage day to day details and report back. standard for the first time. Current State — Have the task force or team asPrior to ASC 842, lessee retailers were not required to sess the current state, and document all technological, record operating leases on their balance sheets. Thereoperational and financial aspects of ASC 842. fore, there exists a lack of documentation, process, and automation, all further complicating adoption of this new Improvements — Identify operational improvestandard. Documentation and in some cases even the ments and efficiencies that can be achieved as part of lease agreements are not always easily accessible. In many the ASC 842 adoption, as well as, any new financial cases the processes and decision making surrounding lease controls and workflows. management has been decentralized making fact finding, especially for the broader staff outside of the Lease vs. Buy — Review the accounting and finance function, even more “Without the correct current leasing strategy and whether difficult. Gathering all relevant information documentation, a moving from a lease arrangement to a for each lease is the first step to ASC 842 fixed asset approach (with tax depreimplementation and compliance. member of the ciation as a benefit) would be better. Without the correct documentation, a member of the retailer’s staff may overlook retailer’s staff may Automation — Analyze how and not record a critical lease component. existing systems can be improved and Or an untrained staff person may incorrectly overlook and not tasks automated. Deterclassify an operating lease as a finance lease, record a critical lease manual mine if a specialized ASC 842 lease or vice versa. As with any financial transacaccounting software system would tion, putting a system in place that centralcomponent. Or an be beneficial, and if so, if it would izes data and assists in lease classification is a untrained staff person need to connect to your existing ERP key second step toward mitigating financial system? statement risks. may incorrectly Since noncompliance may be flagged by Timing — What is the impleauditors and disclosed to investors as a mate- classify an operatmentation plan and when is your rial misstatement, retailers must fortify their ing lease as a finance internal compliance deadline? When lease management process. When looking do you plan to go live? Will the for an accurate, comprehensive solution for lease, or vice versa.” relevant lease documents and data managing ASC 842 compliance, key criteria be gathered in time? How and when includes a system that has built-in document will the ASC 842 disclosures be prepared? These are management with versioning, a full audit trail of decisions just some of the questions that are critical to ensurmade, and proper permissions control to reduce risks. ing compliance. A system that specializes in ASC The devil is in the details. The balance sheet can be 842 can automate this process, and thereby, reduce impacted in multiple ways, such as by lease modifications financial statement risks. that require re-measurement of the right of use (ROU) asset and/or liability, or by impairments. Some assessment Ensuring your company has the resources and tools questions to ask are: Will your staff know when these events necessary to compile and calculate comprehensive and happen, and when a re-measurement is required? Will accurate leasing data will not only assist in meeting they know how to compute the balance sheet impact? If compliance requirements, but also help executives not, putting a system in place that automates event alerts, adopt policies that will position them for long-term determination, and re-measurement when required, is a strategic success. In a world that depends on agility powerful way to mitigate financial statement risks. and lean operations, such payoffs are more than worth AN ASC 842 ACTION PLAN the effort. RL As visibility is gained into how the new ASC 842 rules Kristin Jones is a Senior Product Manager at Bloomberg will impact retail businesses, companies should consider Tax, comprehensive provider of global research, news and the following strategic steps to put themselves ahead of technology services to tax professionals. the financial curve: SEPTEMBER/OCTOBER 2018 Retail Leader.com

> FINANCE AND CAPITAL MANAGEMENT

A New Formula for Retail Rents

AS SHOPPER BEHAVIOR CONTINUES TO EVOLVE, SHOPPING CENTER OWNERS ARE EXPLORING NEW WAYS OF CALCULATING RENTS THAT ARE LESS DEPENDENT ON SALES. > By Mike Harris

Could the evolution of U.S. retail stores into showroom-type spaces, whether operated by clicks-to-bricks retailers or mainline chains with advanced multichannel strategies, ultimately alter the traditional landlord-tenant rent structure? Consider some of the directions in which retail already appears to be headed. Tenants have long used retail locations to facilitate transactions. In this centuries-old model, a retailer shows potential customers its physical goods; the customer decides to buy; money changes hands; and the customer takes the purchase home. It’s a rubric in which stores are integral to the supply chain; all at once, they function as:

Sales and marketing showrooms with product displays and sales staff; Transaction hubs with registers and point-of-purchase opportunities; Mini-warehouses for inventory storage, shipping and receiving; and Logistics centers for product delivery and returns. These separate uses are now beginning to break apart. Inventory storage is becoming less and less essential at retail stores, an accelerating trend that began years ago as chains started moving inventory to warehouses located outside of expensive retail submarkets. The logistics function is being fulfilled by fast and efficient delivery services, such as same-day parcel companies, ridesharing delivery and, in pilot tests, even drones. And of course, the transactional component is increasingly handled online.

A NEW ROLE FOR RETAIL STORES What will remain at the end point of this disaggregation? Arguably, the best part of traditional retail—a satisfying customer experience enhanced by total brand immersion. Elements of the shift are visible even at big-box stores like The Home Depot, which no longer need to carry surplus inventory of bulky appliances and home furnishings. Instead of walking in to pick up a new dishwasher or area rug (and then try to find a way 32

Retail Leader.com SEPTEMBER/OCTOBER 2018

Mike Harris

to get it home), customers touch and feel display models or view product photos while discussing specs with an on-site expert—all as a prelude to ordering online via an in-store system (or their own mobile device) for subsequent home delivery. For retailers, carrying less in-store inventory translates into reduced need for storage, shelf and floor space. Less “showroom inventory” allows shoppers to see a wider variety of merchandise within the same, easier-to-navigate store. It’s no longer strange to see showrooms at malls. Nobody walks out of a Tesla Motors showroom with anything more than a fond memory and perhaps a selfie. Traditional office tenants like Accenture could even justify taking retail space to create brand awareness among shoppers with the right demographics. Over time,

this could lead landlords to pursue very different to “buy now.” Instead, the goal would be to in“Imagine leases tenant rosters. troduce potential customers to brands or deepen priced, not based Striking the right balance of diverse retail and existing relationships. Freed from mundane tasks non-retail operators could bring new challenges. like running registers or stocking shelves, highon dollars per No longer will this mean simply deciding between, touch brand ambassadors could focus on providsquare foot or say, clothing or electronics tenants, or between ing the kind of personal service today’s consumers restaurants and home furnishings chains. Now and that creates true long-term value. percentage of sales, covet landlords may need to decide whether new Eventually this shift could be a game-changer categories will complement existing retail, enterbut instead on the for retail rent structures, as well as current undertainment, nightlife and dining options. It is not writing practices for investors and lenders. Cost to Acquire a hard to imagine, for example, some of today’s top What could that look like? In the Software Internet advertisers, such as Wayfair, Expedia or as a Service (SaaS) world, in which third-party Customer (CAC) American Express, creating highly interactive and providers host customer apps online, marketers personalized spaces at retail and other properalmost always pay more for each new customer or even on a ties. These quasi-storefronts would be wired with than the revenue they generate from a first-time price-per-lead beacon technology, digital signage and even sosale alone. If this type of pricing were to pervade called “sentiment analysis” (essentially, using tech retail real estate, the entire concept of a rent-tobasis.” to understand customer mindsets and attempt to sales ratio would be upended. predict mood and behavior). Imagine leases priced, not based on dollars per square foot Taking this next step will require landlords to look carefully at or percentage of sales, but instead on the Cost to Acquire a the customers of each tenant and the ways in which those customCustomer (CAC) or even on a price-per-lead basis, whereby ers spend their time, not just their money. retailers literally pay for just the footsteps into their stores. Retail Some retail REITs are already starting to do precisely this when rent structures could eerily resemble Pay-Per-Click advertising, chasing deals with clicks-to-bricks retailers where marketing data allowing tenants to leverage typically “online only” tactics like plays a prominent role from the outset. On the landlord side, customer retargeting. the idea is to collect dramatically more and better customer and Theoretically at least, marketers working for established property data and then share this with tech-savvy tenants. Owners brands could justify substantial budgets for acquiring customers are tapping location-enabled mobile apps, shoppers’ (anonymous) below the retailer’s average CAC. Already, e-commerce execucell signals, AI-driven cameras and other data pools. Reciprocally, tives are thinking in such terms: At a retail forum this past August digitally native retailers could also share their voluminous data in New York, the VP of marketing for Eloquii, an e-commerce (clickstream data, browse and purchase history, per-page dwell fashion retailer, reportedly stressed the importance of factoring in time and more) with landlords, deepening the symbiosis. “the lifetime value of a customer, evaluating first-party data and If this model proves successful, other inline tenants will surely the value of physical stores in bringing in new customers.” follow suit. For properties in the best markets, that could mean an Keep in mind, virtually all businesses have online ad budgets, increase in smaller-footprint stores focused on experiential sales and extending this concept to non-retail industries could eventuand marketing. The net effect? These high-traffic properties could ally lead to leases that broadly mimic traditional marketing agreebecome important influencers in the eyes of tenant marketing ments. If so, there could be a surge in demand for retail space, no teams. This, in turn, could create incentives to carve out budgets longer the domain of the purely transactional consumer. geared toward using retail real estate to bolster the brand and win This is not to suggest that the entire retail landscape will be customer loyalty—and new customers altogether. transformed at once. The shift would likely start at leading-edge tenants located at the highest-profile properties. Places like THE END OF PERCENTAGE RENT? Westfield Century City in Los Angeles, which just underwent a Under this scenario, functions such as inventory storage, transac$1 billion redevelopment, draws huge crowds and is a celebrity tion-processing and logistics will be lower-profile, or even absent, hotspot (with its own elevator for VIPs) seem like locations ripe among a growing subgroup of tenants. Instead, the focus will be for this concept to take hold. on leveraging experiential marketing to capture what these operaRegardless of the timeline for such an evolution, the potential tors wanted all along: more customers. This could lead to some consequences are worth considering now. If American retailers radical changes in which tenants occupy premier locations based continue to move toward wired, experiential showrooms, the on considerations related to traffic and customers rather than change is bound to have lasting implications on site selection, sales-per-square-foot. The advantage here: Landlords are already design, traffic patterns, investments and, ultimately, rent. exploring ways to handle percentage rent in an era in which pinMike Harris is Managing Director of CREModels, a provider of finanning sales to specific locations can be tricky, if not impossible. This cial modeling, due diligence and technology consulting across all sectors new approach represents a potential solution. of commercial real estate. Tenants may find themselves focused less on getting customers SEPTEMBER/OCTOBER 2018 Retail Leader.com

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> TECHNOLOGY AND INNOVATION

Winning with NEW NEW ITEMS DRIVE SALES, BUT ONBOARDING PRODUCTS QUICKLY, EASILY AND ACCURATELY IS INCREASINGLY CHALLENGING. THE NEWEST STARTUP TO COME OUT OF THE XRC LABS ACCELERATOR AIMS TO FIX THAT. > By Mike Troy

The gross margin improvement claims made by Evan Silver, Founder and CEO of Toronto-based Simplista, sound almost too good to be true. That tends to be the case with startups in the retail and consumer goods world where bold claims about innovative solutions are common. “Our solution is a listing platform that helps retailers onboard new products in days, not weeks and not months,” Silver said. “By getting new products to shelf at a more rapid pace we are giving retailers additional weeks in which to sell their highest margin products.” The speed to shelf — be it a physical or digital shelf — is critical for retailers of all stripes, but especially so for those focused on food and consumables who need to ensure product availability aligns with demand generation efforts. While overall gross margins in the grocery business average about 25 percent, Silver contends gross margins on new products are around 35 percent. That’s why he built a cloud-based solution that accelerates the new product onboarding process so retailers gain a greater share of new item sales at higher gross margin rates. “It’s all about getting item data right the first time in real time. The product information comes in once and it comes in right,” Silver said. It would be easy to dismiss Silver’s claims as entrepreneurial bluster, except for the fact that Simplista isn’t a typical startup. While the company is among a group of 10 startups at XRC Labs, the New York-based retail and consumer goods accelerator founded in 2015, Simplista’s solution has already been battle-tested by one of the world’s largest retailers. Canadian retailer Loblaw, with roughly 2,400 stores and 2017 U.S. dollar sales of $36.6 billion, has been running the Simplista solution since 2015, according to Silver. His consulting company won a contract from Loblaw the prior year to build the solution that today serves as the gateway for 7,000 suppliers to make new product introductions and changes. Simplista’s promotional materials assert that Loblaw’s use of the solution has enabled the retailer to achieve millions in annual profit lift. “I’ve spent the past two years ensuring that the technology is productized, hardened and ready for the market,” Silver said. “As the founder, I provided the seed capital. The technology is built and sitting up in the cloud. We are certified with Microsoft and we are co-selling with them in the marketplace. We will be looking for our seed round of funding around

November and then we will go into series A in 2019.” Whether in Canada or the U.S., retailers have similar challenges with new product onboarding and item file maintenance that Silver believes are not addressed by typical product information management (PIM) systems. “In today’s world, in order to get an item listed that may have as many as 2,500 attributes requires teams of people across multiple divisions with roughly 30 touchpoints. And that’s just for one item,” Silver said. The complexity introduces the potential for errors and because there are a lot of moving parts the process can take longer than is ideal to maximize sales. For example, traditional PIMs tend to be repositories for product attributes, or what Silver calls the “what,” of the product onboarding process. However, there is also the “how” of product movement within a retailer’s supply chain, the “when,” of product flow and the “who,” of whether goods are received by individuals, warehouses or stores. “Simplista takes the what and marries it with the retailer’s how, when and who information and then in real time we post that to the back end systems,” Silver said. “We don’t consider ourselves a PIM. We are not a repository of data, but rather an end to end solution that goes all the way from the supplier side to the retailer and into their back end system.” Silver is optimistic about Simplista’s entry into the U.S. as an enterprise solution because larger retailers bring many thousands of new items to market every year, consumers are demanding increased transparency and regulatory compliance continues to grow. “The tsunami is coming so it is imperative that retailers get their hands around the data situation. We are purpose built for the future of the retail industry,” Silver Evan Silver, Founder and CEO, Simplista. said. RL SEPTEMBER/OCTOBER 2018 Retail Leader.com

> TECHNOLOGY AND INNOVATION

The C-suite Role Every Retailer Needs THE EVOLUTION OF THE RETAIL INDUSTRY HAS GIVEN RISE TO ALL SORTS OF NEW TITLES, INCLUDING THAT OF CISO, A KEY C-SUITE POSITION ESSENTIAL TO PUSH BACK AGAINST THE GROWING SOPHISTICATION OF GLOBAL BAD ACTORS EAGER TO EXPLOIT VULNERABILITIES OF THE RAPIDLY EXPANDING DIGITAL ECOSYSTEM. > By Suzie Squier

Suzie Squier, Excutive Director of the Retail Cyber Intelligence Sharing Center (R-CISC).

Retail Leader.com SEPTEMBER/OCTOBER 2018

Companies in every sector today are “always on” with links throughout the supply chain. Always on connectivity means that businesses are also always vulnerable to cyberattacks. This is why all type of businesses, especial those in the retail ecosystem, need to establish the role of Chief Information Security Officer (CISO) — and why the role must be part of the C-Suite. This role must integrate with all aspects of the business, from product development, to marketing and the sales floor — whether that’s in a physical store or on a web site. A retailer’s website is the sales floor of the digital environment and potential vulnerabilities are everywhere. How does one monitor the entrances and exits, detect unwanted visitors and respond to critical threat incidents? Theft is no longer just about merchandise, but about stealing company data and personal information from employees and customers which is of greater value to cyber criminals that physical merchandise. It is about the things we cannot see but require access to know. And the stakes are higher in any business if a bad actor suddenly gains unwanted access: loss of billions of dollars, elevated risk of stolen identity data, national infrastructure vulnerabilities. The risk and consequences to the business from a cyberattack are shared across the organization; so too, should ownership of managing this risk. In the retail sector, an online presence is a major, and sometimes the only, conduit for service delivery, so the role of the CISO in building trust in the retailer’s community is of great value to the business - and this trust is a shared interest of the entire landscape of retail, providing consumers the confidence that they are conducting business safely online. The CISO is the key individual in an organization tasked with understanding the risks to business operations and is positioned to align security investments, resources and protection strategies with an organization’s mission, while

addressing compliance issues for each industry sector. These strategies not only protect the systems, but the data contained within them — how it’s stored and how it moves throughout the enterprise and in some cases is shared with partners. Each company’s risk tolerance is different, as is each company’s crown jewels, depending upon its type of businesses and organizational goals. This is why it is critical to have a CISO at the leadership table: to understand the business and risks to business operations, and to be a part of the conversation of any business strategy from the beginning. CISO’s also need to regularly engage with their peers in much the same way asset protection executives at competing retailers often work together against a common enemy. That’s the main reason why the Retail Cyber Intelligence Sharing Center (R-CISC) was created four years ago. The R-CISC functions as platform where CISO’s and other top executives faced with the enormous responsibility of safeguarding their organization’s data work together on cyber issues that matter most in building confidence for conducting commerce online. Cyber threat intelligence can be used to further the alignment of security resources and investment strategies by identifying and mapping known threats to vulnerabilities, key systems or processes that are priorities for the business. Our members share intelligence about threats in a secure forum in order to better strengthen their companies and help to secure the entire sector. For example, a recent R-CISC study of top threats and concerns identified phishing, credential compromise and account take over (ATO) as the top challenges. Accordingly, investment and security strategies for common threat vectors utilized by these threats

are a priority. By sharing best practices on how to mitigate these risks, R-CISC members become stronger individually and strengthen the industry as a whole. The retail industry is changing at an unprecedented rate with disruptive technologies presenting both opportunities and challenges. Retailers with CISOs involved with business discussions are better able to Retailers face keep pace with and stay ahead many common of the security challenges in their environcyber-security ment. Membership in the R-CISC is a great step toward meeting these challenges because threats and their members of all sizes have the ability to share odds of safeguarding data improve when cyber intelligence on incidents, threats, vuldigital security nerabilities and associated threat remediation. experts work It’s why more than 250 CISO’s and their peers together. will gather in Denver October 2-3 for the R-CISC Retail Cyber Intelligence Summit. Interest in this event has gain momentum every year for one very important reason. Participants understand they are stronger together in an environment where cyber threats increase daily and become increasingly sophisticated. RL Suzie Squier is Executive Director of the Retail Cyber Intelligence Sharing Center (R-CISC), home of the Retail ISAC. She has been connected to the R-CISC since its inception, leading the effort to build the organization in 2014. SEPTEBMER/OCTOCBER 2018 Retail Leader.com

> MERCHANDISING AND MARKETING

A NEW ERA FOR Category Management CATEGORY MANAGEMENT IS ON THE CUSP OF THE BIGGEST CHANGES IN ITS 25-YEAR HISTORY THANKS TO THE COMBINATION OF INNOVATIVE TECHNOLOGIES THAT HAVE GIVEN SHOPPERS EVEN MORE POWER. >By Tom McDonald

When the Category Management Association (CMS) gathered earlier this year in Nashville for its annual conference there was special buzz in the air. The art and science of category management is changing in profound ways, which is why the theme of the event was Understanding the Interconnected Shopper and speakers focused on how digital and e-commerce are impacting the category management role. The conference detailed the changing landscape for category managers and provided expert assistance to improve their work, which is a key role for CMA. Looking forward, we see category management roles being impacted in five key areas as the discipline of determining optimal assortments evolves. These include people, data, analytic tools, analytic process and a shift to dynamic presentations.

PEOPLE

Tom McDonald, Chairman of the Advisory Board and Best Practices Team Leader, Category Management Association.

Retail Leader.com SEPTEMBER/OCTOBER 2018

Category Managers continue to experience tremendous change in the skills and training needed to perform their roles. Historically, approximately 60 percent to 65 percent of a category manager’s time was spent handling the shelf — the assortment and placement of items to maximize sales. Changing shopper habits due to the rise of e-commerce has increased the need for deeper insights into the shopping journey. In the future, category managers will spend up to two thirds of their

time analyzing the shopper to glean insights to drive loyalty and sales. Category managers will need to develop shopper insights expertise, financial acumen, product supply expertise and IT skills to thrive in the future marketplace.

DATA A key skill area to develop is turning an abundant supply of data into actionable information. The data sources to analyze include Retailer POS, syndicated data, household panel data, marketplace ads and coupons, retailer loyalty cards, e-commerce data and the increasing pool of social data. Earlier this year, the CMA introduced the Shopper Insights Management Association (SIMA) to help category managers navigate through all the data. Some of SIMA’s key activities will be to help provide best practices, case studies and develop white papers on turning data into actionable insights. To help on the e-commerce data front, the CMA combined with The Partnering Group to release an industry white paper on the E-Commerce Leadership Model. The paper helps companies navigate e-commerce data to develop strategies and tactics to drive sales and profits.

ANALYTIC TOOLS Another emphasis of the CMA is exposing members to the analytic tools necessary to win today and in the future. There have been tremendous advances in space planning software which have allowed manufacturers and retailer to dramatically reduce drawing time. For example, categories that used to take more than 13 weeks to draw planograms can now be accomplished in two to three days. The ability to harness this technology will allow category mangers the time needed to develop the new skills highlighted earlier. Also, the space planning companies have solutions that are holistic from data preparation through assortment to clustering stores to drawing onto execution that includes product supply. There are solution providers focused on making practitioners more efficient and effective every day by saving time through automation and macros that greatly reduce key strokes. These innovations allow needed time for category managers to focus on marketplace analysis and solving their difficult business issues.

Other advances in key analytic tools include the simplification of standard reporting, same store testing analytics to answer what tactics work best, and the use of virtual reality to drive the business. The CMA certified training partners show manufacturers and retailers how to use on line and live training to develop the skills needed to succeed in the future. Our crowd sourcing partners are able to demonstrate how to harness technology to understand shoppers and in store conditions. Each of these analytic tools save time and money for the category manager, while increasing the skills necessary to drive results in the future.

ANALYTIC PROCESS

The role of category managers continues to evolve with more time spent analyzing insights and less time determining on shelf assortments.

Cat Man 2.0 is part of the analytic process For those who aren’t using data visualization software, it’s used to create a comprehensive plan that meets shopper needs time to choose a solution and incorporate it into your category to produce better results for retailers and manufacturers. The management process. The visuals allow your insights to come process looks to enhance the workflows created in Cat Man 1.0 to life and tell the story you want. by highlighting the key industry changes — an abundance of As CMA looks ahead to 2019, the organization will be even new data, emergence of e-commerce, smart phones and innomore focused on the changing landscape of category managevative technologies. Cat Man 2.0 puts a framework on how to ment and shopper insights. We’ll gather in Las Vegas integrate the changes to drive insights and the at Caesar’s Palace Feb. 25-27 for the CMA/SIMA 17 workflows allow a category captain to use the “The days of 50 conference to explore the dynamics of the three right tool at the proper time to deliver insights different shopper trips — bricks and mortar, on-line that drive the business. slide decks that direct to home and on-line for pick up. The manuThe Partnering Group and CMA White PowerPoint facturers and retailers that understand the drivers of Paper enhanced the process with focus on how these distinct trips and the shoppers’ motivation for to get started in the complicated and competisomeone into each will be the ones that increase loyalty and sales. tive landscape of e-commerce for CPG. The submission are The ability to place the right sales fundamentals — 10 retailers and 12 manufacturers that helped pricing, assortment, promotion, shelf and marketus with the paper are passionate about how gone. Today’s ing — against each shopping trip is key to delivering to remove waste from the e-commerce system shopper satisfaction. Convenience and personaland the need to get to best practices. The paper presentations ization are crucial factors in shopper’s purchase introduced a five-step process: Define-DiscoverDesign-Develop-Deliver that will allow retailers are dynamic and decisions. They want the right price on the item they want on the exact timing they want it. CMA/SIMA and manufacturers to put together strategic and can answer a is focused on helping our members deliver on those tactical plans for e-commerce. By following the shopping needs. 5D process a category manager can become an person’s quesThese are exciting times in the world of category expert on e-commerce data. tions on the fly.” management, which is on the cusp of the biggest PRESENTATIONS changes in its 25-year history. The combination of —Tom McDonald The days of 50 slide decks that PowerPoint innovative technologies with a constantly changing someone into submission are gone. Today’s retail landscape has given vast powers to the shopper. presentations are dynamic and can answer a person’s quesThe retailers and manufacturers that turn their abundance of tions on the fly. Solution providers today offer analytic tools data into actionable insights will influence the shopper and that seamlessly update presentations with a click of the mouse. win in the future. RL Other solution providers offer capabilities such as data visualization tools that bring a story to life with the flexibility to tailor Tom McDonald is Chairman of the Advisory Board and Best Pracgraphics to the individual. tices Team Leader with the Category Management Association. SEPTEMBER/OCTOBER 2018 Retail Leader.com

THE RL RESEARCH REPORT The CPG retail ‘Blind Spot’ is growing

Omnichannel Consumption

Percent of Dollar Sales outside observable POS data universe

40.7%

39% 34%

A COMPLETE VIEW OF THE MARKET IS REQUIRED TO DEVELOP EFFECTIVE GROWTH STRATEGIES.

26.1%

Q2 ’15

Q2 ’16

Q2 ’17

Q2 ’18

Loyalty is under pressure Average number of retailers shopped for food and beverage

6.7

Food

3.8

Fast Food

3.5

Gas & Convenience

2.2

Mass

Dollar

1.7

Drug

1.3

Online

Loyalty varies by category Average unique retailers visited per department 10.4 9.2 8.1

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Retail Leader.com SEPTEMBER/OCTOBER 2018

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Retailers and manufacturers have long been challenged to determine shopper preferences based on data points such as price, brand, and location. Today these efforts are even more challenging and complex thanks to the disruptive nature of online marketing, which has opened up new channels of promotion and purchasing. One of the biggest challenges retailers and manufacturers looking to understand the buying trends of consumers face is a massive “blind spot,” that prevents them from seeing the activity in e-commerce and convenience oriented channels. This blind spot limits understanding the full scope of shoppers’ behavior and thus the effectiveness of strategies developed to target them. Also contributing to the difficulty of accurately forecasting shopper needs is the splintering of retailers that consumers visit for their grocery items. Consumers today make multiple trips to satisfy their needs and those trips span brick-and-mortar retailers and e-commerce companies alike. This shift is likely to continue in the future as buying options and fulfillment methods proliferate. The new omnichannel model of buying that now exists in the market has led to lifts in overall grocery spend and shifts in retailer loyalty, despite the prevalence of retailer loyalty programs. This distribution of consumer dollars across a wider array of retailers has created new opportunities for companies to target shoppers, but a 360 degree view of behavior is needed. Without it, the impact of blind spot competitors on shopper behavior will distort retailers’ efforts to understand marketplace dynamics and develop growth strategies against specific shopper segments. RL

SAVE THE DATE

Where leaders collaborate to meet the challenges of the evolving retail landscape and honor the best of the best at the Shopper Marketing Celebration.

May 15-17, 2019 Fort Lauderdale, FL. Path2PurchaseSummit.com

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Produced by:

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Building a New GMA

PRIORITIES TO CREATE HIGH-PERFORMING TRADE ASSOCIATION > By Geoff Freeman Change is transforming the food, beverage and consumer products industry at an extraordinary pace. The implications are significant — for the industry as a whole, for individual brands, and for consumers and policymakers. Since the announcement of my selection in June as new president and CEO of the Grocery Manufacturers Association (GMA), I have been speaking with member companies (both past and present), policymakers, critics, allies, and experts across a range of complex issues. At least three things are clear: industry leaders are committed to a new path forward; the need for a strong, contemporary trade association has never been greater; and a transformed GMA can be the most effective advocate and leading voice of our industry. My previous experiences at the American Gaming Association and the U.S. Travel Association have proven that an active, engaged trade association can effectively lead industries in Washington, D.C., and state capitals across America. By uniting members behind a common set of priorities, proactively pursuing policy opportunities through research-based advocacy, and removing barriers that limit industry growth, trade associations can play a pivotal role in shepherding welcomed and needed disruption. At the American Gaming Association, we launched a multiyear, research-driven campaign to demonstrate gaming’s broad support across the political spectrum and the industry’s role in promoting economic growth, job creation and tax benefits in the 40 states where gaming is legal. That campaign generated the tailwinds needed to drive the industry’s major win when the U.S. Supreme Court cleared the way earlier this year for legalizing sports betting — a multi-billion dollar growth opportunity for the gaming industry. In 2009-10, when the burdensome and inefficient airport screening process became an obstacle to travel for millions of business people, the U.S. Travel Association created a Blue Ribbon Panel — led by former Homeland Security Secretary Tom Ridge — to analyze how to maximize security and efficiency. The effort led to the creation of the TSA PreCheck program — a hugely popular endeavor that allows more than 1 million Americans to use expedited security screening at the nation’s airports. This was a win-win-win that strengthened America’s security, improved the screening experience for travelers and created new growth opportunities for the travel industry. GMA must similarly seize opportunities to help drive a new era of innovation. I know the question foremost on the minds of those watching today is, “how?” At the GMA Leadership Forum in August, just a few weeks after I started in my new position, I outlined four priorities to create a high-performing, modern trade association.

Retail Leader.com SEPTEMBER/OCTOBER 2018

First, we will develop and implement a clear, compelling strategy to guide GMA’s activities and focus our efforts on programs that deliver the greatest return to our members. We will shift from defense to offense, articulate a single, powerful voice for our industry, Geoff Freeman and seize opportunities for growth through a better policy environment. Second, we will reorganize, transforming GMA into a lean, focused, entrepreneurial association that can see around corners, spring into action, and deliver results. We will create an integrated public affairs operation that combines government affairs, communications, and new research and ally development into a powerful industry advocate. Third, we will create a new leadership structure. The GMA Board of Directors will be empowered to engage strategically, leading a transparent, inclusive and rigorous governance process that unites our industry on high-stakes issues and clear priorities. Fourth, we will deliver greater value to our members. GMA will be right-sized as an effective science and advocacy organization; we will diversify our revenue streams to become financially secure; and we will establish a new vision for the organization that prioritizes activities with a significant return on member investment. The new GMA will be nimble, agile and proactive in communicating our industry’s tremendous economic impact and social contributions to the nation, states, and communities. We will meet consumer demands for greater transparency through innovations such as SmartLabel®, a digital tool that gives consumers easy access to more product information than could ever fit on the package label. SmartLabel® is now used by more than 40 major companies for more than 32,000 food, beverage, personal care, household, and other products, spanning hundreds of brands in retail stores. GMA is in the midst of a rebirth. Change is difficult to embrace and takes time to achieve. My pledge to GMA’s member companies and our staff is to move as quickly as possible in the short term to reposition GMA for success in the long run. By transforming GMA, we will build a powerful advocacy organization that unites a great industry, communicates its value to America, and seizes new opportunities for growth. RL Geoff Freeman is president and CEO of the Grocery Manufacturers Association.

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