Supermarket Disrupters Rattle the Industry

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\"AmazonConventional supermarkets — those mid-tier retailing behemoths — are beset on all sides by disrupters. Some of those disrupters are cloaked in technology, some aren’t; others are self-inflicted and emerging from within.

Let’s take a look at what the disrupters are doing to the biggest retailing industry of all.

To begin: the greatest disruption traditional supermarkets have faced in the 60 years or so they’ve been feeding America came a generation ago when Walmart got into the grocery business. Walmart’s go-to-market strategy changed everything, particularly how product was acquired and distributed. For the longest time, even as the threat grew, Walmart was ignored by the supermarket industry, largely because Walmart wasn’t — and isn’t — much of a marketer and had difficulty at the time with presenting quality perishables and still does.

But none of that really mattered because Walmart swamped supermarkets with such a significantly better pricing offer that it soon became the country’s dominant grocer.

Fast-forwarding to today, could a new supermarket disrupter be emerging in the shape of online grocery-delivery services? Maybe so, maybe not. The share of market going to delivery remains small — probably around 3 % — and it can’t possibly climb by more than a few percentage points for many years to come. That being said, the grocery market is so huge in the aggregate that 3% of it is something.

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Nonetheless, grocery-delivery services are certainly disruptive to conventional supermarkets, although the threat varies widely across the delivery world. Fresh Direct in the New York and Philadelphia metro markets may be the best in the delivery business, but it’s geographically limited. Peapod is promising and has considerable geographical reach, although it seems to be more of a logistical presentation than a marketing entity. It’s also creeping away from the pure delivery model by augmenting delivery with its increasing use of customer pickup points, which oblige shoppers to execute the expensive “last mile” of delivery themselves. Conventional operator Safeway is in the delivery game and doesn’t do too badly, but the service isn’t price-competitive, even with its own stores.

\"iStock_000017195057_Medium\"That leaves the hulking Amazon’s fledgling grocery-delivery offer dubbed Amazon Fresh, a spinoff of Amazon Prime. The latter is sort of a club that gives benefits to paying members, such as reduced-fee shipping, video streaming and membership in Prime Pantry. Prime Pantry members can select grocery product to go into a shipping box, holding up to 45 pounds of product. The box is delivered for a modest fee.

Is selling groceries by weight a good strategy? Let’s face it: No consumer thinks in terms of filling a grocery-shipping box by weight. What’s next? Will Amazon ask consumers to select product based on compatible package dimensions so they can fit into a box without dead space? Amazon’s questionable creative thinking may be a function of the fact that it is feeling its way forward as it tinkers with delivering product itself, in lieu of using common carriers. Amazon’s grocery service is clearly an exercise in logistics, at least for now.

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On the product side, it will probably take quite a while for Amazon to ramp up a convincing fresh product presentation.

Nonetheless, even now Amazon has advantages over its competitors. Because its product offer is so diverse, it can sell high-margin hard and soft lines and give grocery a free delivery ride. So the technology-driven delivery wolf isn’t right at supermarkets’ door, but it’s a disrupter waiting in the background, licking its chops.

Pricing Disruption

The clear and present technology disrupter facing supermarkets is consumers’ number-one tool of choice, comparison shopping by price. Consumers can comparison price shop at home or in the supermarket, forcing new pricing efficiencies on supermarkets.

It’s ironic that price-driven retailing is no doubt poised for a comeback, given that the original premise of the supermarket was based on low prices; but years ago, the supermarket industry may itself have set a big disrupter in motion by abandoning its everyday low price (EDLP) roots. The mantras of supermarkets in their earliest days were “pile it high, sell it low; fast nickels are better than slow dimes; the supermarket is the consumers’ buying agent.” It all meant that the supermarket aimed to present a well-curated range of product to be sold in modest spaces and at modest prices, all to plump up sales volume.

Later, the advent of must-have consumer brands shifted super-market strategies to high-low pricing characterized by overall higher prices, ornamented by a few weekly deep-discount specials. All that took big-box spaces. Consumers bought into the treasure-hunt aspect of high-low, but it had its downsides. First it eroded retailer-brand loyalty, and then it gave Walmart the opening wedge it needed.

Now it’s nearly too late. EDLP is very difficult to reinstate in a retail brand once it’s gone. It takes years to convince deal-oriented shoppers that they’re better off with EDLP than they are with high-low, even though weekly stock-up shoppers are. Retailer Food Lion has spent many years trying to return to its EDLP roots with only modest success.

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Similarly, high-low supermarkets made themselves vulnerable to price-driven operators in addition to Walmart. These low-low, small-box retailers include dollar stores along with Aldi and to some extent Save-a-Lot. In an interesting turn of events, Walmart has become vulnerable to those small-box retailers too.

To make matters even more challenging, this discount end of food retailing is expecting more company. In fewer than three years, German discounter Lidl, the world’s largest food retailer by any measure, is expected to roll out numerous stores along the US Atlantic seaboard.

Beyond hard discounting, there are options for shoppers less concerned with penny-pinching. Moving upscale there’s Trader Joe’s and beyond that, pricey Whole Foods. High-end food retailers tend to drive sales and profits by means of offering a high percentage of private label; in fact, Trader Joe’s range is almost entirely private label.

Finally, several major supermarket chains have been hobbled in recent times by their acquisition by investment funds. Capital investors seek out supermarkets because of their high cash flows, and then seek to increase cash by stripping out costs in the hope of flipping them quickly. The result is predictable, especially when the economy is sluggish: the acquired chains lose their appeal to shoppers long before they can be sold and possibly rehabilitated by new owners.

Big Data

All is not lost for supermarkets. There are several operators who do it right, ensuring that these icons aren’t completely fading into obsolescence.

Chief among the winners is Kroger, the nation’s largest conventional supermarket operator. It has some 3,600 stores producing sales of about $100 billion annually. Most of Kroger’s stores are large and high-volume supermarkets, although it also has a big fleet of convenience stores and hundreds of fine-jewelry stores.

Kroger, unique among supermarkets, makes good use of scanner-collected data as it’s analyzed by U.K.-based Dunnhumby. Data analysis is used to predict what price is best for sales, profitability and consumer retention. This has made Kroger to at least appear to be as well priced as Walmart, or close enough.

In general, supermarkets are notorious for collecting vast amounts of data, but never using it. Data analysis is often described by supermarket executives as “trying to sip water from a fire hydrant at full flow.” Yes, it’s difficult, but using it has given Kroger the means to succeed. Not incidentally, Kroger succeeds despite being publicly held and using a unionized labor force.

Other supermarkets are thriving by offering a full line of well selected product, high quality private label, pleasant shopping spaces, high service levels, and reasonable, if not ultra-low, prices. In that number are Publix and H-E-B. Wegmans succeeds by doing all that, plus offering restaurant-quality prepared food for consumption in the store or at home. Wegmans is without supermarket peer when it comes to its prepared-food range. The three retailers are privately held.

In sum, supermarket disrupters are gathering on all sides. Delivery services, pricing, big data, novel merchandising and customer service and capital investors are all going to force change on supermarkets. Will they adopt, or just get thinned out until the winners predominate? More pointedly, it could easily be argued that supermarket disrupters are speeding the process of natural selection in terms of what thrives and what gets factored out of the marketplace.



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