The Road to Restructuring
On June 10, 2015, natural and organic grocer Whole Foods Market introduced the official name for the newest member of its family. The name, 365 by Whole Foods Market, "celebrates our belief that fresh healthy foods can be readily available to more people in an affordable way every day…365 days a year," Jeff Turnas, president of the new unit, wrote that day on Whole Story, the retailer's blog. "It also tips our hat to our popular 365 Everyday Value brand, which our shoppers seek out for quality, transparency and great value—the same attributes to come with our smaller store format."
Fast-forward to May 4, 2016. In a company news release, Whole Foods announced it had signed six new leases for its 365 by Whole Foods Market stores, bringing the total to 19. News of those leases (for stores in Akron and Toledo, Ohio; Bloomington, Ind.; Decatur, Ga., and North Hollywood and Long Beach, Calif.) came as the company prepared to debut the first 365 by Whole Foods Market on May 25 in the Silver Lake neighborhood of Los Angeles; the second on July 14, in Lake Oswego, Oregon; and the third this fall in Bellevue, Wash.
365 by Whole Foods Market is just one example of the transformative changes CPG retailers are making to successfully compete in today's quickly changing, ever-more-challenging food and beverage marketplace.
FACTORS FUELING CHANGE
Just why are retailers making such monumental moves to restructure their businesses? The reasons are many, industry experts say.
"Most are driven by the fact that they are not achieving growth as planned, and they are looking for new avenues of growth," says Bill Bishop, chief architect at Brick Meets Click, a consulting company that focuses on growth opportunities at the intersection of brick-and-mortar and online grocery retailing.
According to James Lamberti, chief marketing officer at Quri, a company that enables CPG manufacturers to monitor merchandising of their products, three things are causing retailers to seek those new avenues of growth.
The first is the trend toward organic products.
Whole Foods, for example, once owned the organic category, Lamberti notes. "Now, organic has become mostly mainstream, and Whole Foods leaders are trying to figure out their positions," Lamberti says. "You have interesting players like Sprouts and The Fresh Market—smaller-format stores are now competing in that space. That is one thing that is driving change."
Keith Daniels, a partner at Carl Marks Advisors who has more than 20 years of experience as a restructuring advisor, agrees with that assessment.
"Whole Foods had saturated the higher-end market, so they're going to the lower end to try to compete more directly with stores like Walmart, Kroger and Supervalu to capture more organic [product] sales," Daniels says.
Consumers' migration from center-store to perimeter departments is the second.
"The push from 50 to 80 years of center-store staples to perimeter variety and specialty products is another thing having a big impact on a lot of players who are operationally challenged," Lamberti says. "Huge grocers like Safeway and Kroger are caught in the middle...it is becoming more challenging to try to figure out an identity."
"What is happening in food and grocery is that consumers are moving away from what we used to be able to sell them to what they want to buy—and that is unnerving."
Bishop echoes that notion: "What is happening in food and grocery is that consumers are moving away from what we used to be able to sell them to what they want to buy—and that is unnerving."
Lunch sandwiches are one example.
"Five to seven years ago, all sandwiches looked pretty much the same as they did in c-stores—they were inexpensive and factory-made," Bishop says. "Today, [places like] Fred Meyer have $5 sandwiches that are co-branded with a meat supplier and are beautifully presented. There has been an evolution from basic sandwiches to restaurant-quality sandwiches. Consumers are looking for that kind of higher quality, custom-made product…but how many stores are organized to do that? It is a big migration to make."
The third factor impacting CPG retailing today, Lamberti says, is millennials' shift away from loyalty to specific brands.
"These are all things that are driving new strategies and formats," Lamberti says.
According to Bishop, CPG retailers must consider two issues before embarking on the restructuring route that will determine the kind of business they ultimately will become.
"Are they organized in a way that can accommodate growth? And do they realistically have the capability to grow?" Bishop says.
"The first step—if they're introspective—is to take a hard look at their strengths as well as where they are falling short," Bishop continues. "That allows them to narrow the spectrum of where to look to change. Unfortunately, the tendency is to look in all directions to grow, when their direction should be narrowed from 360 degrees to maybe a 45-degree angle."
A company's history also can pose problems, Bishop notes.
"There can be tension between a company's legacy and the future," Bishop explains. "It might be a legacy they really believe in. Target is about cheap chic, for example, or maybe carrying out a customers' groceries is part of a company's customer service legacy. But what if those are not the right answers anymore?"
As important as internal factors like unrealized growth and company culture are, external forces are even more important for retailers exploring restructuring to consider.
"The foundation is the changing consumer," Bishop stresses.
In addition to their increasing desire for fresh, high-quality, prepared food, today's consumers also have lofty expectations about the in-store experience retailers should offer.
"Technology has become table stakes," Bishop continues. "Everyone has an app that allows customers to order, so the consumer arrives [at the store] with requirements from their experiences with restaurants. Technology is disrupting the industry, and retailers are not prepared. The same is true for online grocery shopping—consumers are ahead of the game, and retailers are running to try and catch up."
Lamberti concurs: "Consumers are really demanding a retail experience. Companies like Publix, Wegmans and Draeger's Market have created that high-end department store feel. They have nailed the experience in-store."
And that means merchandising matters—perhaps more today than ever before.
Creating the more complex, higher-quality environment customers seek—focusing on fresh, prepared food and fresh produce, for example—can be challenging, Lamberti notes. "Those things require not only off-shelf but also on-shelf merchandising, often seasonally," he explains. "Stores have to be well-stocked at the right price point and uncluttered. There is a link between strategy and trends, and merchandising execution is harder than it has ever been to do well."
Leveraging the shoppers themselves is one way to tackle merchandising challenges, Lamberti says.
"The push from 50 to 80 years of center-store staples to perimeter variety and specialty products is another thing having a big impact on a lot of players who are operationally challenged."
"Many times merchandising is done by brokers, distributors, third parties. Quri makes it possible to routinely provide visibility to in-store merchandising conditions. When shoppers are in Jewel-Osco or Wegmans, for example, we can alert them to go see the beer aisle and tell us what they see. We then aggregate data, layer on insights, and provide that back to the retailer in almost real time. The retailers know which stores look great, which need help. It is performance-driven merchandising."
CARE BEFORE TRANSFORMATION
Change of some kind, of course, is always necessary in a retail environment. But retailers must take care before instituting truly transformative changes, experts stress.
"Change can be good, but radical change in a brand can be problematic," cautions consultant Steven Platt. Case in point: J.C. Penney's push to move away from sales and into an everyday low price format alienated the company's core customers, Platt notes.
That's why thoughtful planning before any restructuring is so important, Bishop says.
"Start the process before you have a problem—that way, there is no panic, no pressure," Bishop says. "The industry is changing so fast that you have to be monitoring changes regularly and examining what they mean to you."
That monitoring should reveal where vulnerabilities in relation to your customers exist, and where your customers want to go that they're not able to go. "Step in so you will be the answer," Bishop advises.
"My advice would be to ensure that any major changes be firmly grounded in a clear understanding of consumer needs, and a sober assessment of competitive dynamics and internal competencies," echoes Dustin Longstreth, senior vice president and strategy group director at CBX, a New York City-based full-service branding firm. "This will focus resources towards the areas where you truly have a right to win."
Being specific about how a restructuring initiative will help you will do better is a second important step, Bishop says: "You have to nail a clear strategy before you start doing things, or you will end up redoing them."
"Whole Foods had saturated the higher-end market, so they're going to the lower end to try to compete more directly with stores like Walmart, Kroger and Supervalu to capture more organic [product] sales."
Finally, accepting the sometimes hard reality that investing in new assets while divesting of old ones has to be part of any restructuring plan.
"Get rid of assets that don't have profitability," Bishop says. "For example, you might want to keep a marginally performing, 35,000-sq.-ft. store. But given the distraction [it causes], and the challenge of allocating scarce resources, you might have to get rid of it. Part of the restructuring process is letting go."
Daniels sums up the steps retailers who are exploring restructuring should take even more simply:
"Understand how consumers are shifting; embrace technology; and focus on taking the cost out of the business," he says. "Price and service are big issues, and will continue to be."