Shaping the Future of Retail
As the world changes, so does retail.
Advances in mobile technology and the Internet are providing consumers with more information about products and pricing, more buying options and more control over grocery shopping than ever. At the same time, an increasingly diverse population and other demographic shifts are spurring a need for retailers to provide wider varieties of merchandise and rethink store formats.
Looking ahead, experts expect these trends to continue, with technology taking on greater importance, often driving purchase decisions based on price. In turn, private label products will likely remain a staple in households that have come to find their value proposition appealing, while the growing Hispanic population and the changing characteristics of the "typical" American family encourage food manufacturers and retailers to make room for new product entrants that cater to the demographic trends. In the following pages, Retail Leader provides an in-depth look at these and other trends expected to shape the future of retail.
THE DEMOGRAPHIC TAPESTRY
By 2025, the U.S. Census Bureau estimates the Hispanic population will grow 41 percent and the Asian population 37 percent, while 19 percent of the overall population will be 65 and older compared with 13 percent today. Household diversity, including alternative lifestyles, living alone and single parenthood, are expected to continue to influence the culture.
Tracking these changes is easy. Understanding how they influence shopper behavior is more difficult. "When we look at the market, we always start with demography," says Neil Stern, partner at retail consultants McMillanDoolittle. "Demographic changes lead to behavior changes. Then, we look at what's happening in the environment that can accelerate changes."
Family Dynamics: One of the most dramatic shifts involves family structure. In 1960, 52 percent of households were made up of married couples with children, according to the U.S. Census Bureau. Today, 32 percent fit this definition. Household size has gone from an average of 3.65 people in 1960 to 2.58 today, with 28 percent of homes inhabited by one person, up from 14 percent in 1960 and 8 percent in 1940. More homes contain same-sex couples or single parents than in previous decades.
Within nuclear families, both partners may work, and Dad may shop more than Mom. Yet few food retailers or suppliers recognize this. "Forty-seven percent of men are primary shoppers," says Shelley Balanko, senior vice president of business development at The Hartman Group in Evergreen, Colo. While other research pegs the percentage of primary male shoppers at about 30 percent, few disagree that their numbers are growing. "Men shop differently. They have more of a 'search and retrieve' mentality. They don't pre-plan, so it's hard to get their attention. But most [food retail] companies don't go after men," Balanko says.
Urban Life: According to the U.S. Census Bureau, the nation's urban population increased 12.1 percent between 2000 to 2010, outpacing the country's overall growth of 9.7 percent. This is partly due to the residential development of former industrial areas and also is indicative of Americans' desire to reside closer to work.
"There's a high degree of urbanization, with millennials in particular living downtown," says Jim Brown, director of North American marketing at A.T. Kearney. "They may not have cars and need small, more local formats."
This has drawn big box retailers to cities. Due to space constraints and efficiencies, many have developed special retail formats and smaller package sizes. Target has opened CityTarget concepts in Chicago, San Francisco and Seattle, providing fresh food, apparel and general merchandise. Walmart is testing its Express format, which offers about 15,000 SKUs, in urban and rural areas.
 | 50% of retailer respondents cite customer service as the single most effective strategy in today's economic climate. SOURCE: Retail Leader 2013 Trends Survey |
OMNICHANNEL: STILL A LONG WAY TO GO
Another option for consumers without a car is e-commerce. Today, just $5.8 billion – or about 2 percent to 3 percent–of total food and beverage sales are conducted online, according to the U.S. Department of Commerce. That compares with $56.8 billion in online electronics sales and $54.2 billion in online apparel sales.
| 62.2% of retailer respondents identify convenience stores as the channel from which they perceive the most competition. SOURCE: Retail Leader 2013 Trends Survey |
But most experts agree so-called omnichannel will play a larger role in the future, as consumers demand the convenience of shopping in ways that fit their lifestyle. "Retailers should be wherever and whenever consumers interact," says Renato Scaff, managing director at Accenture in Atlanta. "With omnichannel, everybody is in the early stages of experimentation. But over the next five years, retail will change more than it has in 50. And consumers will tell us what they like and don't."
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According to the Food Marketing Institute's report "Food Retailing 2013: Tomorrow's Trends Delivered Today," online grocery sales will exceed 10 percent by 2025. According to an April 2013 Accenture poll, 49 percent of shopper respondents say the best thing retailers can do to improve service is to better integrate channels, and 89 percent would like retailers to let them shop in the most convenient way.
"The idea of omnichannel–or channel agnostic–will be the Holy Grail of the industry for the next 10, 15 years," says Sajal Kohli, director of retail practice at McKinsey & Co. "But online food retailing is behind other categories. There are issues with supply chains and perishability. But, talk about growth is not just talk, with online food sales growing five times faster than offline."
Beyond home delivery efficiency issues, the biggest supply chain challenge involves fully integrating physical and digital channels so they rely on one common set of inventory to minimize costs and out of stocks. For food retailers that sell across channels–or plan to–this can be challenging. Still, 43.8 percent of food retailers say supply chain integration holds the most opportunity for retailers using technology solutions, according to Retail Leader's 2013 Trends Survey.
In food, lead times are short since retailers do not order months in advance, turns are high and fresh food is not warehoused for long. Plus, retailers do not always use the same supplier for one product. All of this creates frustration for shoppers, who know, or care, little about distribution, but simply want to find the products they desire on store shelves.
"Different channels developed as 'silos' and may have different distribution," says Lori Mitchell-Keller, senior vice president and head of SAP's global retailing business. "Customers don't see it this way. They just want those new towels from Pottery Barn. Retailers are now figuring out how customers view this. But it's harder with food."
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A PRIVATE BATTLE
Private label's share of total CPG spending was 14.4 percent in 2012 compared with 14 percent in 2010 and 17.6 percent in recessionary year 2009, according to a November 2012 IRI report entitled, "Is the Private Label Surge Ebbing?" Private label's unit share fell to 17.1 percent in 2012 from 17.4 percent in 2010 and 22.8 percent in 2009. According to the Private Label Manufacturers' Association, private brand sales in food, drug and mass retail totaled $108 billion in 2012.
 | 61.7% of retailer respondents see their shoppers as more value conscious in the past six months. SOURCE: Retail Leader 2013 Trends Survey |
Private label price increases are partly to blame for the decline in market share. Experts also point to increased competition from national brands that have been emphasizing new product development and a lack of private label promotions and merchandising support.
"Retailers should build brands that engage customers and make them choose [them] over someone else," says Christopher Durham, president of My Private Brand.
In both CPG and fresh food categories, private brands should fill an unmet consumer need and help retailers stand out, says Susan Viamari, editor of IRI's "Times and Trends." Some of the more successful store brands include fresh items packaged for on-the-go consumption, natural and organic foods, premium foods and offerings that target specific consumer groups.
Whole Foods Market has had success with its private-label brand of four-compartment snack packs filled with items like grapes, cheese and crackers, points out Janet Oak, senior director of strategy and insights at Daymon Worldwide, a retail branding company based in Stamford, Conn.
Walgreens' Delish brand of premade sandwiches, salads and other foods offer consumers an alternative to fast food in downtown areas. Kroger's Simple Truth brand, Safeway's Open Nature and Aldi's Simply Nature are answering the health and wellness niche with proprietary lines of natural and organic foods.
Some banners themselves have become brands, including Wegmans and Trader Joe's. "Their private brands embody the store," Oak says. "They understand it's about being innovative and knowing customers. Trader Joe's customer is overeducated and underpaid–that's how they define them. Products, which can't be found elsewhere, are tailored to their likes."
In some instances, private brands' pricing is on par with or higher than that of comparable national brands. This is true of the shelf stable snacks under Walgreens' Delish label. This "premium" tier of private label, she adds, has been slowly growing.
Private brands can suffer from a lack of marketing and merchandising support. IRI found this was the case with 59 percent of private label CPG products in 2011. Support is essential for private brands not driven by price alone, Oak says. They also need enticing packaging and marketing that's backed by consumer insights and CPG specialists. "You need to invest if the brand is going to grow. But not many retailers are in this phase."
Marketing support doesn't have to be costly, says Viamari. It can involve placing the private brand next to the national one, or creating signage and circulars. "Private label is consistently under-merchandised," she adds. "Retailers have considerations in terms of keeping national brands happy." Often, national brands take priority.
TECHNOLOGY: RIDING THE NEXT WAVE
For the savvy food retailers of the future, finding new ways to use smartphones, harness predictive analytics and incorporate other technologies to improve shopping efficiency and experience will be one of their biggest competitive advantages.
Still, adoption of these tools is slow to take hold in the grocery sector. According to Retail Leader's 2013 Trends survey, just 36.8 percent of food retailers have formal digital strategies around digital marketing and promotions, supply chain integration and mobile commerce and e-commerce. About 23 percent offer a consumer app, while 10.5 percent plan to do so in the next six months.
But experts expect that adoption rate to accelerate in the future. "Retailers are faster adopters of technology than they are adopters of innovation," says Bill Bishop, chairman of Brick Meets Click in Barrington, Ill. "Look how long they struggled with scanner-driven replenishment. When it became easy and effective, they realized the potential."
Retailers are keenly aware of how much consumers rely on technology, particularly smartphones, to make decisions. According to Google's April 2013 report "Mobile In-Store Research," 82 percent of shoppers use phones to browse for product information while in stores. Ninety percent use their devices for pre-shopping activities, particularly to learn store locations and hours, do price comparisons and find promotions. After appliances (97 percent), grocery is the most popular category researched (89 percent) via mobile devices.
Today, text messaging and social media are retailers' most common ways of using mobile, primarily to inform consumers of personalized deals and other information. Bishop describes most of these strategies as "first generation."
One talked-about personalization strategy allows the retailer to send shoppers promotions based on what department, or aisle, they are currently shopping. "People are trying to figure out what the killer app is in grocery, the real compelling value proposition," says Nick Hodson, vice president at Booz & Co. in San Francisco.
As mobile technology becomes more sophisticated, consumers–and subsequently retailers–are expected to use it more broadly. According to the FMI report, smartphones will be 10 times more powerful by 2017 as new features are added, including 3D and other types of screens, Near Field Communication (NFC) automatic payment interfaces, location services and biometrics. By 2016, experts say the number of apps is expected to climb to 94 million from an estimated 50 million today.
Retailers and suppliers already are experimenting with NFC technology, which is more dynamic than QR codes. Late last year, Safeway and Kraft conducted a comparison involving recipes and other information in San Francisco, reported NFC World in October 2012. NFC engagement was 12 times higher than that of QR codes.
Checkout lines have long been the bane of busy shoppers, but that also is changing. Stop & Shop is experimenting with a mobile strategy that allows consumers to scan groceries as they put them in their carts, says Hodson. At checkout, the order is already tallied and the shopper simply pays and shows his receipt on the way out. Walmart's iPhone app, Scan & Go, allows shoppers in select stores to scan items as they shop and pay with a credit card swipe.
DEFINING LOYALTY
The market has become inundated with loyalty programs since the 1990s, yet experts say many retailers have been unable to fully capitalize on them.
An exception is Safeway's Just for U program, which includes personalized offers based on POS data, Hodson says. "But most retailers are not customizing to the level they should," he adds. "At first, they learned that 20 percent of customers represented 80 percent of sales. Then, they realized it's more complicated and came up with gold, silver and bronze customers. It's a little clunky, but they're getting close to being personalized."
 | 75.3% of retailer respondents see the most opportunity for technology adoption in the area of digital marketing and promotions. SOURCE: Retail Leader 2013 Trends Survey |
Albertsons has taken the opposite approach. Rejecting the strategy of different prices to different customers, the banner has eliminated its loyalty program, explains Dan Raftery, president of Raftery Resource Network in Antioch, Ill. "Special prices are the biggest reason for a frequency program," he says. "But you [can] offend people."