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FRANK RACETTE CONSULTING .COM

THE FUTURE OF GROCERY

Advocacy for Consumer centricity and strategy for mutual benefit. By : Francois Racette

The following will offer an overview explanation of grocery retail practices as well as the opportunities presented for retailers, consumer brands and consumers to mutually benefit from one another. First, we’ll explore facts and figures about the industry, then move on to current practices and some of the issues involved where finally we will end on our recommendation and view on the future of grocery. The goal of this article is to be informative and ultimately have consumer brands, retailers and consumers “speak” the same language and mutually benefit.

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Did you know (General Info for Consumers) ? Did you know that the average consumer in North America spends approximately $5,000 a year on groceries? To put it in perspective; that is 125 months of telephone usage (at $40 a month) or almost 149 full ups if you drive a Prius based on a price of $2.814 / gallon , the average national gas price (USA) on october 25th , 2010. It’s safe to say, “that’s a lot of money!” In exchange for our dollars grocers and consumer brands attempt to give us various incentives to make us save on our weekly purchases. The best examples of such incentives are the weekly flyers and the newspaper coupons. Let’s explore both promotional strategies. Flyers are designed to give us a brief overview of what is available at our local grocery store. Psychologically, they also imply that the advertised products are on sale. The fact, however, is that these advertised products often simply highlight products that are at regular prices. As educated consumers, most of us are instinctively aware of this. Think about it! How often do you see a flyer and tell yourself “Ahhh, that is a good price!”, or the opposite, “That is expensive!”

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“In 2009, 3.3B coupons where redeemed in the USA for an estimated $1.94B in redeeming fees” Coupons on the other hand fail to deliver the maximum value they promise. In my opinion, the reason is because redeeming a coupon is an expensive proposition for the consumer brand that emits them. Substantial costs are associated with redeeming these coupons. For instance, a $1 coupon cost approximately $0.59 cents to redeem. This means that every time a $1 coupon is redeemed it cost $1.59 to the consumer brands. In 2009, 3.3 Billion coupons were redeemed in the USA for an estimated $1.94B in redeeming fees to consumer brands. It is important, however, not to fool ourselves, because at the end of the day consumers are the ones paying for these fees since prices are adjusted to absorb this promotional strategy. We’ll explore other marketing tactics later on but for now it is useful to ask WHY? WHY do consumer brands and grocery stores need to advertise to us so much and why do we have to pay for it?


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Margins Margins Margins. According to the FMI (Food Marketing Institute) the average gross profit is between 1% to 3 % for grocery stores. For consumer brands the picture is also extremely bleak. 70% to 85% of all new grocery products launched in the USA will fail. This means an enormous financial and environmental loss since most of these products won’t be sold. It is hard to estimate the actual financial loss but we can attempt to make an educated guess. In 1990, 3,274 new brands were launched in the USA. The average supermarket in 1990 carried about 30,000 SKU (each SKU represents a product). By doing some quick math we realized that 3,274 are about 11% of the SKU’s (Stock-keeping Unit) carried per supermarket. In 2008, a supermarket carried about 45,000 products , a 50% increase from 1990. We’ll assume that similarly to 1990, 11% of those SKU’s (Stockkeeping Unit) are new brands representing 4,950 SKU’s. Considering that 70% to 85% of all new products fail we can safely estimate that at least 3,465 (70%) of new brands launched failed. keep this number in mind as we will revisit it in a few moments. Now let’s consider slotting fees. Slotting fees are fees charged by the retailer to the consumer brand to carry their product and put it on the shelf. These fees vary enormously and are extremely difficult to estimate so we’ll base it ourselves on the FTC (Federal Trade Commission) 2003 estimate to give an idea of the current fees. The FTC (Federal Trade Commission) estimates that to obtain national distribution, new brands face slotting fees of $1.4 million to $2 million per SKU (Stock-keeping Unit) up to as much as $16.8 million in order to introduce a small product line of 4 items in all supermarkets nationwide. Placed in context, based on estimates of return on investment, reports suggest that slotting fees for some manufacturers can require, on average, 16 years to obtain a profitable return. That being said, according to a “A.C. Nielsen

“We can also estimate that at minimum $6.9 Billion was wasted on failed products.” survey”, more than one-third of the respondents indicated they’ve paid less than $500,000 in slotting payments for their latest national product introduction. Having this data at hand we can estimate that in 2008, $9.9 Billion was spent on slotting fees (4050*2 million). We can also estimate that at minimum, $6.9 Billion (4050*70%*2 million) was wasted on failed products. This money wasted on failed products obviously does not include manufacturing fees, shipping fees, R&D (research & Development) fees, advertising fees etc. It simply includes only in-store product placement fees, AKA slotting fees. But! Slotting fees are not only limited to new brands according to one analyst , slotting fees is a part of the promotional allowances that probably run about $50 billion per year in payments from food manufacturers to food retailers. (Alexender 2003) It may seem like a lot and it is, considering the tiny gross margins (1% to 3%) as well as the outrageous failure rate. Slotting fees are in essence the retailers’ insurance policy that they will make some money with new and existing products. What troubles me is the reason why so many new brands fail, which inevitably affects the price to consumers. WAIT FOR IT......... The reason why most new brands fail is because they lack the proper market research. They use the real-world as their market research laboratory. IMAGINE THE WASTE!!! There is a solution but before we introduce it, we should talk about the retailer’s side of things and what is happening as we speak to try to gage the effectiveness of in store advertising, which in theory should lead to increase sales.

Slotting allowances and fees describe a family of marketing practices that involve payments and other incentives (e.g., free product or services) given by manufacturers to downstream channel members to stock, display, and support their products (Bloom, Gundlach and Cannon 2000) In Short Slotting fees are fees to be on the shelf.

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Retail and Instore Advertising Let’s start by a few definitions. CPM Cost Per Thousand is a methodology of selling advertising. A CPM of $10 means that an advertiser must pay $10 for every 1,000 impression made. ROI: is a termed used to figure out if an investment was successful or not. It is determine with a numerical value. To determine the ROI (Return on investment) there is a simple calculation:

The Issue with grocery stores (in my opinion) is that there is no ACCURATE way to determining the CPM (Cost Per Thousand) and the true ROI of most in-store advertising. However, there is no denying that in-store advertising is where it’s at. In fact, 74% of purchased decisions are made instore and 30% of brand decisions are also made instore. Knowing this, it is no wonder why retailers and consumer brands have been trying to crack the code to in-store advertising. “Cracking the code” would mean increased sales; however, it does not imply a reduction in failure rates.

If advertising could have a double purpose and serve both as advertising and as a market research tool, POS Display & POP Display: Point Of Sale and then great consumer insights could be gained and a possible reduction in failure rates could be observed. Point of Purchase displays are displays that are at In my opinion, this is one of the main reasons why close to the cash or in the isle. They are used to “feature” a product. The two terms are often the traditional CPM (Cost Per Thousand) model is flawed, when it’s applied in an in-store environment used interchangeably so we won’t try to it does not provide the evidence of the impression, make a huge difference between them. Here are therefore an advertiser is charged without the proof examples of POP and POS displays. of the exposure that was paid for. . Furthermore, since no evidence is currently provided, it is difficult to truly determine the ROI (Return on Investment) since there is no way to determine that an impression is DIRECTLY responsible for a purchase. I am not saying that ROI (Return on Investment) cannot be obtained in the present situation; simply that it is not optimal.

SKU: Stock-keeping Unit is unique identifier for each distinct product and service that can be purchased.

To add to this less optimal problem, all the data (information) provided is not real time, so reaction can only be taken on past events thus ignoring the current situation. In other words, by the time some information gets analyzed, it’s already too late. To end this, in 2006 a P&G (Procter & gamble) study was proposed to determine once and for all the actual effects of in-store advertising, its effectiveness with various advertising mediums in-store. The $1 million project, which took place over four weeks in May, relied on infrared sensors to track store traffic. To have significant data, the study will need to be replicated in many other markets and environments, making it an extremely costly endeavor. This should demonstrate the need to understand the true effect of in-store advertising. Traditionally, the way consumer brands and marketers have been monitoring their results is by doing live testing of campaigns and comparing the effectiveness of each, in order to have the campaign with the ultimate result. For example, let’s imagine a new Crest toothpaste. Two stores are

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selected, store “A” and store ”B”. Both have similar demographics and consumer traffic. Both also have the same advertising. In Store “A” the toothpaste is $1.29 and in store “B” it’s $2.29. At the end of the research period, sales from both stores are compared. Surpassingly, Store “B” had more sales. It is therefore determine that $2.29 will be the price of the new toothpaste. I’ve simplified enormously and have made a ton of assumptions; hopefully you understand the basic premise.

they can choose the channel, time slot and even know what kind of show is playing at the time their ad will come on. For instance, it would make no sense to advertise while a typically male dominated show is playing. That logic, however, cannot be applied in a grocery-store environment. Ads cannot be up Mondays and Thursdays between 6 pm and 9 pm when the proper target market visit. Let’s assume that the target market represents 1000 customers that visit the grocery store 2 days a week. How is it justified that the CPM (Cost Per This methodology of market research is well Thousand) price is then on the 6000 unique visitors established as an accurate way of doing market the store receives every week? That is like saying research. It should be noted that similar focus group that an ad during American idol should have the test are made before launching a product, the issue same worth as an ad during prison break or is that consumers in focus groups are not always desperate house wives. It does not have the same honest and the information gathered does not worth; it does not have the same market. always represent the reality. One of the main issue with these methodologies is that when it comes to Furthermore, if we ignore the over pricing and in-store advertising, the variable affecting the assume that the price is based on the 1000 visitors perception and relationship between product that fall within the target market, the question is, and consumer is so grand that ultimately the results what is the true audience? For instance, Nielson uses lead to a 70% to 85% failure rate. In other words the People Meter (PPM), a tool that is used to what affects the purchase of a product is not measure the viewing habits of TV and cable only it’s price and where it’s sold but it is also the audiences. No such tools currently exist for grocery price of all other products, the advertising of all stores. Therefore there is no tangible data on other products, the stocking of all other products statistically representative impressions. etc. As a result of the current model, consumer brands The fact that this month, Company “A” (Crest) has learn about very little consumer insights, since the a POS (Point of Sale) display at the cash and advertising does not return live data. Since no live Company “B” (Colgate) the competitor, has a data are offered proving the value of in-store display in the isle, will have a different effect than if advertising and its different implementations. POP, Company “B” (Colgate) has a display at the POS, floor ads, etc. cannot be properly assessed. cash and Company “A” (crest) in the isle. Furthermore, every SKU (Stock-keeping Unit) in Therefore, certain in-store advertising the store also has negative, neutral or beneficial implementation may be dramatically undervalued effect on Company “A” (crest) advertising message or overvalued. In any case, the sheer amount of and by the same, extends Company “A”’s (crest) advertising that confuses clients and the lack of brand and sale. WHY? Because every product is proper data is, in my opinion, one of the major competing for the consumer’s golden $$$. causes of product failure. In fact, this challenge is so important that P&G (Procter & Gamble) created the position of Director of First Moment of Truth (FMOT), to produce instore displays that can command a shopper's attention. But what happens when other firms are doing the same strategy? My theory is that as shoppers, we build a relative “immunity.” Please read my article, titled “Advertising game theory metrics, The Impossible game” for my personal take on the matter. To further illustrate the issue with in-store grocery advertising and the CPM (Cost Per Thousand) model let’s compare it to television. In television, if a brand wants to advertise a new feminine product

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This should be of concern not only for retailers and consumer brands who face lower profit margins but also for consumers since this inefficiency results in higher prices.


FRANK RACETTE CONSULTING .COM

Recommendations for consumer centricity and strategy for mutual benefit By now it should be obvious that the current situation is less then ideal for consumers, consumer brands and retailers. So why is consumer centricity important and how can everyone benefit ? Consumer centricity should be at the focal point of every consumer brand and retailer. As it stands we experience a false sense of consumer centricity whereas corporate interest clouds the judgement resulting in products that either have no fit with the current market have the same fit as everyone else with no “real” distinguishing characteristic except for marketing hype or is simply not positioned within the right markets. In Any case over production and a lack of market research is at the center of the problem.

various fees. (PE) & (NPL)

4. Reduce visual clutter (PE) & (NPL) 5. Reduce failure rate (PE) & (NPL) 6. Affordable (PE) & (NPL) 7. Easy to deploy (PE) & (NPL) 8. Quick adoption (PE) & (NPL) 9. Scalable (PE) & (NPL) 10.Accountable (PE) & (NPL) 11.Minimum maintenance (PE) & (NPL)

1. Over production. The marketing machine of most

How can smart consumers take this information and actually save time , save money and ultimately even reduce the amount of waste ?

2. Lack of market research: Not knowing your customer and

We believe that smart consumers, you should have a voice and it is only by voicing our voices on what we like what we don’t like, what we understand or may not understand that the system will change.

consumer brands falls victim of it’s own success. Saturation is the culprit in not delivering the message. what they want is a big NO NO. It is the first lesson of Marketing 101, however as the pressure piles up it has sadly been made necessary to release products with out the proper market information in order not to loose market share in the market place. However this frenzy leads to the demise of 70% to 85% of all new bands. Consumer centricity demands that brands be build for a particular market segment to answer a particular need as opposed to gain market shares.

We’ve outlined key points to deliver consumer centricity and leading to mutual benefit to everyone involved in the supply chain from consumer brands to advertisers, retailers and consumers. Any in store Promotional Effort (PE) and New Product Launch (NPL) should address the following points:

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Grocery retailers

1. Increase revenues of advertising and sales (PE) 2. Increase costumer satisfaction and traffic (PE) 3. Market research to increase revenues from advertising . and

We’ll close with two famous quotes from Francis Bacon that I think are extremely relevant here :

1) A wise man will make more opportunities than he

finds . ( by coming on fight for your right to save . com you have made the decision to find one resource to help you find opportunities) 2) Knowledge is power. Take the knowledge you acquired apply it and start changing the world by changing your habits and enabling consumer brands and retailers to grow with you.

Consumers: 1. Add time and monetary value (PE) 2. Be personal (PE) 3. Adaptable / intelligent (NPL) 4. Scalable (NPL) & (PE) 5. Non Intrusive (PE) & (NPL) 6. No obligation (PE) & (NPL) 7. Based on needs and wants ( relevant) (PE) 8. Minimum learning curve (PE) & (NPL)

Keep on Visiting us at : FrankRacetteConsulting.Com for more Tips, Tricks and knowledge Bits.

Consumer Brands 1. Serve double purpose ( advertising and market research) (PE) & (NPL) 2. Provides data to reduce failure rates (PE) & (NPL) 3. Measurable (PE) & (NPL) 4. Accountable (PE) & (NPL) 5. Scalable (PE) & (NPL) 6. Targeted (PE) & (NPL) 7. Affordable (PE) & (NPL) 8. Convert into Immediate sales. (PE)

© FRANK RACETTE CONSULTING .COM 2011

If you have any questions or comments feel free to email me at me@frankracetteconsulting.com

Before you quote anything from this article please contact me as I may have updated information for you.

The Future of Grocery frankracetteconsulting.com  

Advocacy for Consumer centricity and strategy for mutual benefit. This paper offers an overview explanation of grocery retail practices as...

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