From Recession to... Who Knows?
As the economy stumbles out of recession, CPG retailers are trying to make sense of new opportunities–and pitfalls. • Which consumer behaviors are likely to persist beyond the recession? How are retailers betting on the future with market moves? And how do they cater to consumers' digital preferences? • Retail Leader surveyed CPG retailers about five industry trends: mergers and acquisitions, market bifurcation, store formats, post-recessionary shopper behavior and health/wellness.
MERGERS AND ACQUISITIONS
M&A activity in the retail sector last year reached its highest level since 2006, the last pre-recessionary year. Some of the major recent deals include:
- The acquisition last March of Safeway by Cerberus Capital Management, for an estimated $9 billion, forming a company of some 2,400 grocery stores.
- Kroger's acquisition of Harris Teeter, an upscale banner of 212 stores based in Matthews, N.C., for an estimated $2.5 billion.
- Sobey's purchase of Safeway's Canadian operations in June 2013 for US$5.7 billion. The 213 stores will strengthen Sobey's presence in western Canada.
- Also in Canada, Loblaw's purchase of Shoppers Drug Mart for US$11.4 billion last March. The combined company has 2,400 stores across Canada, including 1,800 pharmacies.
- Bi-Lo Holding's purchase in May 2013 of 165 stores in the Southeast from Belgium's Delhaize Group for $265 million.
In the Retail Leader survey, 22 percent of respondents reported that their companies had made either an acquisition or divestiture in the last 90 days.
The economic recovery has been as notoriously slow for grocers as it has for many others, partly because the recession drove many consumers to buy food from nontraditional channels like dollar stores. That behavior will likely persist, says Charisse Jacques, a partner with consulting firm Kalypso.
"Now that consumers are really shopping, [grocers] are not, in my opinion, seeing the improvements that they would have expected to, so they really need to think about it," Jacques says.
Meeting cross-channel competition may be part of the motivation for acquisitions like Loblaw's purchase of Shoppers Drug Mart. Shortly after the deal was made, Loblaw began stocking Shoppers outlets with some of its private label brands (and vice versa). Loblaw also is test-marketing the sale of fresh produce at selected Shoppers stores.
Acquisitions can help grocers diversify in another way: Buying their way into markets, geographic or demographic, where they don't normally operate. Kroger's purchase of Harris Teeter is an example of both.
The purchase will give Kroger a footprint in North Carolina that will allow it to compete with established banners like Publix. Perhaps more significantly, it's a departure from Kroger's middle-market niche. Kroger has made acquisitions throughout its history, but most of these, like the 18-store acquisition of Scott's Food & Pharmacy in Indiana in 2007, were of mid-market stores. In addition to more upscale merchandise, Harris Teeter has a strong click-and-collect program–something that could help Kroger neutralize, at least on a regional basis, the advantages enjoyed by Amazon and other competitors.
It's mostly a question of acquiring a retailer with a good customer base, whatever the reason, Jacques says.
"Some of the unique grocers or stronger regional grocers, they become really good acquisition targets because a lot of them do have a strong and loyal customer base," she says.
One of the longest-running trends in consumer preferences is "market bifurcation," the tendency of consumers to gravitate toward extremes of the price/value continuum. This tendency has been exacerbated by the recession and the increase of income inequality in the U.S.
Bifurcation will probably remain as a factor in consumer markets even as the economy recovers, according to a report by PwC and Kantar Retail.
"Some shoppers will pay significantly more for specific ingredients, faster delivery, sustainable attributes, or higher product quality," says the report, "Retailing 2020: Winning in a Polarized World." "On the other hand, some will trade down to lower cost products with none of those features."
Middle-income consumers have always been squeezed, and they're getting it especially hard these days, says Todd Hale, SVP of consumer and shopper insights at Nielsen.
"Slow population growth and stagnant wage growth are big drivers behind the limited growth we are seeing in the fast moving consumer goods arena we track," Hale says, mentioning the loss of manufacturing jobs and the entry of millennials into the workforce as aggravating factors.
Market bifurcation means that CPG retailers, no matter where they fall on the price/value continuum, will have to figure out how to appeal to shoppers at one or both extremes, Hale says.
One way to do that has been through private label products, which have mirrored the bifurcation of the general market. A report from Rabobank, "The Rise of the Hybrid Consumer," predicts that sales of standard food products will drop 10 percent by 2017, while premium food products will grow 5 to 20 percent and value products will grow 5 to 30 percent in that period. The report names private label development as a major factor in this phenomenon: "Private label now not only facilitates down-trading but also increasingly allows consumers to trade up to the premium food category."
It's possible for a "middle of the road" retailer to cater to both sides "by understanding their shoppers at both ends of the spectrum and responding with formats, assortment and value that matters most to them," Hale says, naming Kroger as an example of a grocer that has done well catering to "both sides of the economic divide."
On the other hand, high-end grocers often can offer products and amenities that lower-end ones can't. Hale cites the millennial generation, struggling with low employment and high college debt, as candidates for "affordable indulgence"–little luxuries that high-end grocers are more likely to be able to furnish.
The respondents to the Retail Leader survey seem to be taking a middle-of-the-road approach. The majority, 67.5 percent, said they don't make either low price or high quality a consistent priority. High quality was the priority for 27.5 percent, while low prices were for only 5 percent.
Walmart and other CPG retailers have been trying out different sizes like a customer in a shoe store.
Introducing new formats has increasingly been an ongoing strategy for some of America's biggest retailers. Walmart added its third new format with its prototype Walmart To Go convenience store/gas station, opened in its headquarters city of Bentonville, Ark., last year. This goes with its Walmart Express (15,000 square feet) and Walmart Neighborhood Market (38,000 square feet) formats.
Other retailers are also trying out new formats. Kroger is testing a 7,500-square-foot format called Turkey Hill Market, in addition to its c-store chain, Turkey Hill Minit Mart. Target is opening CityTarget, urban stores about two-thirds the size of a regular Target but with a full selection, this summer in Chicago, Los Angeles and Seattle. It also is trying out a 20,000-square-foot store, its first ever at that size, called TargetExpress, on the bottom floor of a complex being constructed near the University of Minnesota.
In the Retail Leader survey, 37.5 percent of respondents said their company recently opened, or plans to open, a store with a different format in terms of size and product selection, while 47.5 percent said their competitors are doing so.
But Walmart is the major retail player most actively involved in trying out different formats. The company plans on up to 200 new Neighborhood Markets and about 100 new Walmart Expresses this year. (The Walmart To Go c-store is only a prototype at this time.)
It's a potentially effective way for Walmart to meet cross-channel competition from c-stores, dollar stores and even small independents, whose major advantage is getting shoppers in and out fast. But setting up the new formats, especially Express, simply as competitors in these channels may not be a winning strategy, says Stephen Springham, senior retail analyst for Planet Retail.
One concern is that "rather than act as a bridgehead for urban expansion, Express will instead be used as an infill in rural and light suburban areas–a response to dollar stores and drugstores," Springham says. "A defensive, rather than offensive, strategy, if you will."
Springham says that Walmart is "thinking from the top down" with smaller-box stores, seeking to make them into satellite versions of its Supercenters. That has partly to do with its strategy of using Supercenters as the last step in the supply chain for the smaller-box stores. But doing it that way is impeding Walmart from locating the smaller stores in urban cores, Springham says: "It will have to do so without hanging onto the apron springs of Supercenters."
Small-format stores are not untrammeled successes. Perhaps the most spectacular failure was Fresh & Easy, a small-market chain in the American Southwest that Tesco was forced to divest last year in a bankruptcy sale. More recently, Loblaw's in Canada gave the early hook to Nutshell, a concept for 9,000-square-foot stores oriented toward organic and natural merchandise. Nutshell was snuffed before even a pilot location was opened, partly due to Loblaw's subsequent acquisition of Shoppers Drug Mart.
Nick Hodson, VP at Strategy& (formerly Booz & Co.) and a former head of strategy at Safeway, says small stores often don't generate enough traffic or enough economies of scale to be viable.
"The reality is, when you have that small store, you find that [shoppers] don't come in in the incredible numbers needed to make it economic," Hodson says.
|Source: Retail Leader 2014 Trends Survey|
The recession may have technically ended years ago, but consumers are still cautious.
In its annual "American Pantry Study," Deloitte reports that 79 percent of consumers responding to its survey believe that "the U.S. economy is currently in a recession," and 80 percent believe that the economy has fundamentally changed and "this is the new normal."
And they're shopping like it. In Retail Leader's survey, 43.9 percent of respondents said most of their customers have retained almost all of the shopping patterns they developed during the recession, and another 48.8 percent said they retained at least some. These behaviors include reduced purchases of high-end items (cited by 70 percent of respondents), increased use of coupons or other discounts (50 percent) and increased sales for private label (42.5 percent).
"Basically, price drove almost every other consideration down the ladder of importance," says Christopher Studach, creative director at King Retail Solutions. "Most people were in survival mode, or felt they were. The fear factor was huge–and still is. We are not that removed to allow time to heal those wounds."
There are some aspects of post-recessionary shopping behavior that go beyond mere consumer caution. The recession introduced many shoppers to private label products, and in many cases, the first impression was a good one.
"The massive growth of private label products may have been due to the recession, but it's not why it is sticking around," Studach says. "Shoppers have found that these products, aside from offering a manageable price-point, can also taste good! And to retailers, they are a key way of differentiating–so important to competition."
The recession also coincided with the growth of digital technology in all aspects of retailing. When it comes to saving money, the digital realm extends beyond e-coupons; it's changing the fundamental nature of shopping. Comparison shopping can be done with only a few taps on a phone.
King Retail Solutions
"Retailers can't hide behind the curtain anymore," Studach says. "It is very hard to play pricing games with today's digitally savvy customer (virtually everyone)." In addition, the ready availability of digital information raises what Studach calls "the BS meter" of the average shopper: "We all have grown less trusting, more suspicious of any offer. We check everything, and take very little at face value. This is why the huge desire for full transparency through the entire supply chain."
As the recession recedes, shoppers will retain their desire to economize, but will blend in other priorities as well.
"While some of that economizing behavior has permeated our beings, we are also driven by a desire to break free of that fear," Studach says. "Whereas low price was the driver during the recession, it is now fair value and deals for higher goods that drives customers."
HEALTH AND WELLNESS
Catering to consumers' desire for health and wellness shapes many of the decisions CPG retailers have to make: what kinds of products to sell (or not), how to display them, how to reach out to customers, which health aspects of products to emphasize.
Meeting health and wellness concerns can be frustrating for food manufacturers and retailers, because it's a moving target. The ultimate goals–losing weight and generally enhancing health–remain constant for many consumers, but the means to get there can be faddish. Remember the low-carb craze of 10 to 15 years ago?
Average ratings, from 1 ("not at all important") to 10 ("very important"), for health claims:
|Source: Retail Leader 2014 Trends Survey|
Even when a food fad peaks and flattens, food retailers can still take advantage of it with alertness and proper timing, says Laurie Demeritt, president of The Hartman Group. The low-carb diet sought to replace carbs with protein, and while it may have passed its peak, the boost to protein remains, Demeritt says.
"I think what we've seen really last is that consumers see protein as a real positive," she says. "Protein is seen as good for energy and muscle development, and they're looking for alternative sources of it. So even though the low-carb fad in and of itself is gone, sort of the hangover from that that still sustains is that all things protein are good."
Health concerns now seem to be a mix of old and new. Asked to estimate the importance to their shoppers of various health claims, respondents to the Retail Leader survey put "GMO-free" and "gluten-free" first and third, with "low salt" coming in second.
Gluten-free is a dominant trend now, but who knows how long it will last? Retailers should look beyond to the larger implications of consumers wanting food that they feel is generally more pure, less processed and has less "bad stuff" in it–whether that means carbs or anything else.
"What I think is interesting about gluten-free, whether it stays or it goes, is that it's symbolic of consumers saying, 'There's certain things that I don't want in my products because I don't feel they're helpful,'" Demeritt says.
Of course, food isn't the only retail sector where health is a concern. It's the raison d'être for drugstores, which were the scene of a major health retailing initiative in 2013: The decision by CVS Caremark to phase out the sale of tobacco products in its stores by Oct. 1. The first major drugstore company to do so, CVS will take an estimated $2 billion a year hit in sales. Attorneys general in 24 states sent letters in April to Walmart and Walgreens asking them to follow suit.
Health outreach initiatives seem to be gaining popularity. In the Retail Leader survey, 20 percent of respondents said they hired in-store dietitians in the last 12 months, and another 12.5 percent said they established in-store cooking or nutrition classes.
For health outreach efforts to have any chance of success, they have to involve actual people ready to interact with customers, not just a bunch of brochures in a rack, Demeritt says.
The Hartman Group
"What consumers really want to see is, show me how to make something really interesting for dinner tonight," she says. "Have some sort of activity going on with humans, not just putting a bunch of brochures on a shelf."