Willard Bishop: Use private label, cost control, smart negotiating tactics to grow market share
by Terrie Ellerbee/associate editor
Traditional supermarkets are losing market share as consumers move to other formats, like supercenter and dollar stores, according to consulting firm Willard Bishop in its The Future of Food Retailing 2011 report.
Traditional grocery formats, including limited assortment and fresh, saw a 2.6 percent increase in dollar sales to $479.9 billion in 2010, but overall traditional market share declined 0.8 points to 46.8 percent.
Traditional supermarket market share should continue to decline, dropping an expected 3.0 percent in the next five years to 43.8 percent.
Non-traditional grocery store formats like dollar and drug stores saw sales increase 6.4 percent to $387.5 billion, with a 0.7-point bump in market share to 37.8 percent.
By 2018, Willard Bishop predicts that non-traditional grocery market share will surpass that of traditional grocery.
Food inflation will be significant for the next three to five years, driven by rebounding commodity costs, the report states.
Add in the near-certain continuation of high levels of unemployment/underemployment and the pass-through of cost increases to consumers, and the long-term consequences for traditional retailers are not good.
But retailers “can benefit disproportionately” in the current economic environment if they limit price increases while maintaining margins through smarter assortments and prices, communicate their value well and enhance private label assortments, according to the report.
Jim Hertel, managing partner, and Craig Rosenblum, business development partner at Willard Bishop, took a look back at the last few years and made predictions for 2015 as they discussed the report during a webinar hosted by Michael Sansolo, Sansolo Solutions LLC, on June 15.[gn_pullquote align=”right”]
Where Is Market Share Going?
The Future of Food Retailing report by Willard Bishop looks closely at market share gains and losses of various formats within grocery retail in 2010, and predicts their fate over the next five years:
- Limited Assortment (Save-A-Lot, Aldi) grew the fastest in 2010 in terms of dollar sales, with a 14.4 percent jump in sales to $27.1 billion across more than 3,500 stores.
Prediction: Limited Assortment stores are expected to maintain strong sales growth momentum over the next five years at a rate of 12.5 percent annually.
- Fresh Format (Whole Foods, The Fresh Market) had the second-largest dollar sales increase, up 10.8 percent in 2010, to $9.0 billion. Willard Bishop sees this format enjoying “strong sales performance in the foreseeable future.”
Prediction: Fresh Format will experience strong sales growth at the rate of 9.4 percent annually.
- Dollar stores continue their rapid rise in both sales, up 8.8 percent to $21.5 billion, and market share, which increased 2.1 percent. “This trend should continue as this channel adds more stores and expands its food selection,” the report states.
Prediction: An annual growth rate of 2.2 percent.
- Wholesale Club sales increased 8.2 percent to $85.6 billion. Its market share grew to 8.3 percent of the retail food industry. Costco and Sam’s Club had same-store sales increases of 4.0 percent and 3.9 percent, respectively.
Prediction: A growth rate of 4.0 percent and a slight increase in market share to 9.1 percent by 2015.
- Super Warehouse sales were up 6.9 percent to $19.7 billion. “As store count remains static, it does not appear that retailers view this large-size format as a strong growth vehicle,” the report states.
- Supercenter sales grew 6.3 percent in 2010 to reach $174.5 billion, while store count increased 4.1 percent to more than 3,500 stores last year. Market share grew 0.3 points to 17 percent.
Prediction: Supercenters will continue their aggressive sales growth at a rate of 5.9 percent per year into 2015, increasing market share from 17.0 percent today to 20.3 percent by 2015.
- Mass (Walmart, Kmart, Target) format sales increased 6.1 percent to $45 billion, and its market share grew 0.1 percent to 4.4 percent.
Prediction: “Mass will continue to experience a large decrease in annual sales of 7.0 percent into 2015, and a decline in market share to 2.7 percent as more conventional Mass stores are converted to Supercenters.”
- Convenience Stores had in-store sales growth of 4.4 percent in 2010.
Prediction: Convenience store sales will continue to increase at a rate of 2.4 percent for convenience with gas and 2.0 percent for convenience without gas. Market share will increase slightly from 13.2 percent in 2010 to 13.5 percent by 2015 for convenience with gas, and will be flat for convenience stores without gas.
- Drug store sales were up by 3.9 percent to $56 billion.
Prediction: An annual growth rate of 3.4 percent.
- Military sales declined 2.4 percent to $4.9 billion.
Behind commodities cost increases
Several factors are pushing commodities prices upward, according to the report.
Emerging market consumers desire a more protein-centered plate, and meat requires more grains to produce. The per-person food intake is growing from 1,000 to 2,000 calories a day as people in China and India and other emerging countries have more wealth, Hertel said.
Recent volatile weather incidents also are a factor. After a 17-year “winning streak” of good weather, bad weather in the U.S., Russia and Australia has impacted supplies.
But perhaps the major cause of cost increases in some commodities is the use of corn as fuel rather than food. Almost 40 percent of corn crops are used for producing alternative fuels instead of feeding people.
A 45-cent-a-gallon subsidy plus a 54-cent-per-gallon tariff on imported ethanol are set to expire at the end of this year. On June 16, the U.S. Senate voted to eliminate the billions of dollars in subsidies for biofuels, but it remains to be seen whether the White House would allow that, as it has indicated support for them in the past.
Hertel said speculators have played a part in rising prices as well.
“As we talk to some of our manufacturer clients who employ economists to be able to understand, and, quite frankly, hedge their positions in commodities, they’ll identify two things—one of which is there is a lot of speculation, a lot of speculators involved, and therefore a lot of price fluctuations on a month-to-month basis. But almost without exception on the fundamentals and the long-term trends, everybody’s expecting prices to go up,” Hertel said.
Problems arise when the Consumer Price Index rises far above the Producer Price Index, as happened just before the recent market meltdown, Hertel said.
Two things happened—one was people got nervous about the state of the economy and began trading down. They traded down from national brands and started to convert at least some of their purchases to private brands, he said.
The second is that retailers sought to meet the need and changed their assortments to offer more private label products.
As a result, from mid-2008 to mid-2009, the Consumer Price Index, as it related to food and beverages, took “an unprecedented plummet,” Hertel said. “National brand manufacturers who had taken price increases in the year prior, basically up until the middle of 2008, were confronted with share losses, and they didn’t exactly take a price decrease, but they promoted heavily enough in order to maintain share.”
In the last year and a half or so, cost pressures built and manufacturers began to pass increases along to retailers. The Consumer Price Index now is again rising faster than the Producer Price Index.
“When the economy doesn’t appear to have the wind at its back, at least here in the United States,” Hertel said, “the question on the table is ‘Are we starting to see a rerun of a movie we saw just three years ago?’”
Economic pressures change shopper habits
Rosenblum said that many people now view high unemployment and underemployment rates as “the new norm that we may all have to get used to for quite some time.”
Some jobs are coming back, Rosenblum said, but they aren’t keeping pace with the number of workers who need them. There also are a significant number of people who have rejoined the workforce, but have taken jobs that pay much less than their previous ones.
“Personal income has certainly become stagnant or is going down,” Rosenblum said during the webinar. “If you look upon the gas increases and other economic pressures that folks are facing out there today, if food inflation is going to hit the market at a point of somewhere between 3 and 4 or 5 and 6 percent, the yearly food cost that a family is going to have is going to go up, somewhere between $300 and $600 a year.
“Add that with gas and other expenses and we’re seeing that families will now have to spend somewhere between $100 or $200 more on a monthly basis—with less in their income and in their purse than they had a year ago,” Rosenblum said. “In the end a shopper is still only going to have $100 or less than $100 to get the same number of groceries to feed their families that they have had over the last couple of years.”
The question is whether consumer prices will continue to rise and greatly outpace producer prices, as was the case three years ago. Rosenblum said retailers and manufacturers have of late seen “an opportunity to pass along these core cost increases, and I would submit to you that this is not a way to heal your income statements or your overall company financials or become healthy.
“We also know as traditional grocers continue to pass along, shall we say, these price increases, national brand prices will hurt retailers and manufacturers alike.”
Economic pressures feed changes in shopper habits, and this trend continues to drive private label share growth. Some retailers recognize the opportunity. Rosenblum referred to Supervalu’s recent announcement that it would pool all of its private label products under one name, Essential Everyday, to “further make it easier for our shoppers to understand how to trade down and how to stretch their dollars.”
Rosenblum said nontraditional retailers like Walmart, Family Dollar and Aldi are capitalizing on the opportunity “to grab share and work across the store to draw those commodity shopping experiences.”
Traditional retailers can combat the “grab of commodity pricing” by expanding the number of categories that have value tier private labels within their stores, he said. That gives the commodity shopper a way to stay in the traditional store and still stretch their dollar.
“We’re seeing it certainly move from a handful or a dozen categories within most traditional grocers to anywhere up to 40, 50 categories,” Rosenblum said. “And we’re seeing the portfolio of private label brands grow from … a couple of hundred into the thousands and 1,500s.”
A 3-pronged approach to battling increases
Hertel said that along with optimizing private label offerings, traditional retailers must get “much more creative” when negotiating with their manufacturer trading partners and use all of the “price image enhancement levers” at their disposal.
This is the three-pronged approach Hertel and Rosenblum suggest will help traditional retailers in today’s economic climate.
To get more creative when negotiating prices, retailers should first understand manufacturers’ cost structures.
“One of the things that we’re hearing from manufacturers and retailers alike is that the presentation of price increases is really being met with almost, if not indifference, close to a welcoming attitude,” Hertel said. “That is to say people aren’t really thinking about the ways that they can push back on those cost increases, or price increases.
“We think it’s critical to get smart on what’s really happening from the manufacturer’s cost structure and make sure that the cost increases are in fact justified.”
Hertel said retailers should understand and accept that most, if not all, manufacturers have developed a profit and loss statement for each retailer. They have a good idea where they are making and losing money and where they will invest, he said.
“It’s the sharp retailers who really understand where are the costs, intentional or unintentional, that they are being assessed or being accounted for by their manufacturing trading partners,” Hertel said. He said retailers should approach manufacturer trading partners in a “spirit of genuine collaboration.” Retailers could offer to help lower the manufacturers’ cost regarding their business with them, and in turn ask the manufacturer to invest more resources with them.
“It’s a tried and true approach,” Hertel said. “It’s worked for decades for some retailers. It’s not adopted broadly enough in our view.”
The retailers Willard Bishop does business with seek to gain “a disproportionate amount of vendor resource investment in them.”
Those vendor resources come in the form of promotional funds/markdown dollars, but there are non-direct investments that retailers can leverage, too, like manufacturers’ personnel and intellectual property.
“There’s a huge amount of shopper insights and other type of insight work, research work that can be leveraged, and I think the key to making sure that you unlock it and grow that pot of vendor resources is to make sure that you’re using it to drive a mutual return on investment,” Hertel said. “Think of yourself as nothing more than an investment opportunity, as if you were hedge fund or a mutual fund, and your job is to seek a disproportionate amount of investment based on the return on investment that you provide back.”
Rosenblum talked about six dimensions of price image and how retailers can get credit from their shoppers for low prices. The first three “price image enhancement levers” are shelf prices and promoted prices, as well as known-value items that retailers believe are the most important to all of their shoppers.
The fourth is expanding private label to satisfy commodity shoppers who are looking for the cheapest price per ounce or per pound. This gives them the opportunity to buy private label products in every category.
The fifth price image enhancer is merchandising. As retailers cut costs, Rosenblum said direct store delivery (DSD) manufacturers and their labor are doing the merchandising.
“While that’s great from a labor perspective in the store, it isn’t necessarily so great from a price image standpoint when one of the big DSD manufacturers is not on promotion and they’re showing, shall we say, unattractive higher prices on whether it be a large bag of chips or cookies or soda that don’t necessarily put forth the best price image for you as a retailer because you don’t control the pricing on that end,” Rosenblum said.
Lastly, price communication is the most important of the six price image enhancers.
“It’s really about educating your shopper,” he said, and making it easier for them to understand how “‘a smart shopper like me can do really well in this store.’”
Teach them how to use the shelf tags, ads, website and special offers inside the store to get the items they need at a price they can afford.
Private label plays a huge role in enhancing a retailer’s price image, but beware price gaps between national brands and private label, Rosenblum said.
“One of the things that we know private label provides retailers is the opportunity, if they manage price gaps, to really drive some per-unit penny profits,” Rosenblum said. “If we do not pay close attention to those price gaps, very quickly we find that the gaps between national brands and private label get out of whack in a hurry and there’s margin left on the table.”
He also said that price shielding, or putting a comparable private label product on sale against a national brand on promotion, “works not actually for the benefit of the private label, not just to the benefit of the national brands, but to the benefit of the category and the retailer … this is truly a collaborative opportunity that benefits the category and the store as a whole.”
Rosenblum said private label also is an opportunity to drive loyalty and differentiate your store.
“When you think about what Target has done, they’ve truly enhanced their shopper value equation and their uniqueness in the mind of their shopper as a way that private label truly makes them different or better or a more enjoyable place to shop than competitors within the marketplace.”
Manufacturers: Rethink approach to retailers
“There are opportunities for manufacturers to do a better job understanding the retailer’s point of view, understanding the pressures that the retailer is up against and leveraging some of that intellectual property to help the retailer identify mutual benefits,” Hertel said.
He suggests that manufacturers understand how retailers’ price images developed and how their categories can impact it. Manufacturers should understand how their product portfolio fits within the retailer’s pricing hierarchy.
“Are they known value items, are they in the basket or perhaps not known, or are they really background items? As you start to think about the recommendations or bringing forth price increases to the retailer, understand that and then start to be able to position the price increase within that,” Hertel said.
That’s always a “tender conversation,” he said. Make pricing suggestions in the context of enhancing the retailer’s price image.
“If there are opportunities, whether it’s through merchandising programs or in-store communication programs, to help focus the value that your categories and products provide on the non-price element, merchandising plans, price communication activities, other opportunities to leverage assortment to help improve price image, focus on those,” Hertel said. “You’ll be doing good for yourself and you’ll be doing good for the retailer as well.”
To purchase the webinar, visit www.foodinstitute.com/foodretailing2011.cfm.