Archive for August 27, 2012

Finding Common Ground….that isn’t at the bottom of a pit

U.S. Supermarkets generate nearly $700 billion in sales and over 22 billion transactions per year.  With so much money and many shoppers in play, it should be no surprise about that the industry has traditional been a magnet for huge investments from the consumer package goods (CPG) community.  But there has always been something missing from brand and retailer interactions.  It is often very difficult to get into this topic very deeply without writing an entire book.  Incidentally,  Glen Terbeek did just that back in 1999 with a book entitled the “Agentry Agenda”.

The book described the “friction” created by brands and retailers in the grocery channel pipeline and the inefficiencies this friction fostered. Diverting, slotting allowances, misuse of trade funds and dozens of other trade practices designed to solve short term financial needs, have cluttered this ecosystem at the detriment of the consumer.  Years ahead of his time, Mr. Terbeek understood that with new digital devices and systems, eventually consumers were going to seize the reins of this inefficient process and find other ways to acquire grocery products if bricks and mortar retailers and their brand partners don’t start playing “nice”.

So let’s define the current environment, which I believe is the antithesis of  “nice”.  Having toiled on the retail side of this business for several decades, I can safely say that the retail version of not-so-nice involves a variety of practices couched in receiving as much brand money and content from brand partners without providing the brands much in return.  Further, retailers can be very short-sighted and tactical when it comes to their interactions with brands and almost always believe that their brands have more money to give them than they receive.

Retailers have implicitly admitted that making money by selling to shoppers is getting more difficult by the day.  Consequently they are looking to the brands for increasing support and funds to become more profitable buyers, not better sellers!

Playing not-so-nice for the brand community is exemplified as their short-term priority of driving cases sales of the product even if the retailer or consumer demand of the product does not warrant the product in the system.  This practice leads to ah hoc promotions which continue to “push” products into the system as opposed to being “pulled” by consumer demand.   This mentality also leads to diverting and other short-term trade practices that distort and clutter the pipeline.

For the sake of brevity, I have somewhat over-simplified the process and have intentionally indicted the entire food industry for inefficient practices.  My apologies to all retailer and brands that have broken out of this paradigm of short-sighted, self-serving objectives.  For sure, some have taken a longer view and are making headway towards actually creating synergies from their combined efforts.  For those that are moving forward, they are likely trading data, working together to layer their collective promotional efforts, and are being upfront with one another every step of the way, understanding the needs of the other out of the partnership and working in earnest to achieve those goals.

Finally and the point of all of this, if brands and retailers do not evolve to become better “agents” of the consumer, lurking around the corner, are new players positioning themselves to assume command. This proverbial paradigm shift will not be easy.  Mr. Terbeek sent out the first warning flare thirteen years ago with his book.  Little has changed since.  Together, brand and retailer incumbents have dug a pretty deep pit from which to climb out of.    Systems, intelligence and the models now are in place to begin to create synergistic partnerships.  Let’s hope brands and retailers can soon find new common ground……. somewhere other than in the bottom of the pit.












Understanding “Extended Contribution”

Anyone who believes that successful retailers are driven purely by the numbers are either studying for their CPA, new to retailing, or perhaps both.  Walmart, Kroger, Wegmans, Publix, HEB, and  other successful grocers were  all founded by visionary entrepreneurs who understood that providing a pleasurable shopping environment along with the right products at a reasonable price, with an added touch of special service was the perquisite for success.

The aforementioned group of retailers were certainly not oblivious the science of retailing.  They know very well the numbers and the processes that make for a profitability, but rather they understood that some elements of  retailing remain imperative even if they can not be directly attributable to significant sales and resulting profits.

Here are a few offerings and amenities that often are not profitable as individual entities;

  • In-Store Pharmacies
  • Nutritional Programs
  • Organic Products
  • Sushi Bars
  • Coffee Bars
  • Salad & Soup Bars
  • Home Delivery Service (and In-Store Pick-Up Service)
  • Home Meal Replacement Programs
  • Carry-out Service
  • Bulk Foods
  • Service Seafood

So why do we still find many of these offerings in very successful and profitable stores?   The quick answer is these services promote the image of the store and the all-important aspect of variety that many shoppers expect their traditional supermarket to offer.  Given financial analysis of these offerings, individually, it becomes a no-brainer for their elimination.  However, take away any one of the listed services and you will likely lose shoppers or shopping trips of your existing customers that transcends that individual offering.

The savvy, “artful” retailer understands this principle.  They have learned to discern the difference between the individual financial profile of each offering and its “extended contribution” to the business.  Measuring this contribution can be difficult.  If you are a retailer that uses surveys to gauge customer perspectives, you already have a tool in place to score these amenities and services to better understand their perceived important to your customer base.  If you happen to have customer data at the household level, you have an opportunity to profile users of these amenities and determine how these shoppers rank in terms of their importance to your business.

No matter how you determine the “softer” contribution of these often forgotten bits of the business, eliminating them purely on the direct financial contribution, can be disastrous, especially if they happen to be important to your image and to your most profitable and prolific shoppers!




Sign of the Times: “New Lower Prices”

“New Lower Prices”…..”Prices Locked In Until Next Thursday”, “We’re Dropping Prices Everywhere”, “Consistently Low Prices”

Does all of this look and sound familiar.  You don’t have to shop very many stores before you see a new banner hanging over the aisle or a sign in the aisle, boasting about how suddenly, out of the blue, a retailer has found a magical way of lowering their prices. I maintain that so many traditional retailers are launching these new programs and promotions, that instead of invoking the excitement and trial intended, shoppers take a deep breath and keep moving down the aisle.

Too much of a good thing almost always dilutes the impact, and I think we are seeing just that.  The consumer isn’t buying much of this anymore (literally or figuratively).  All the banners and new signs that retailers spend millions on each year are wasted if the program that the signs communicate is not founded in a sold, sustainable, believable platform of reality.  Instead most traditional supermarket retailers cut prices only in desperation, a last dreaded resort.  Reactive price cuts almost always produce little or no sales bump, but do manage to negatively impact profit margins.

The culprits preventing successfully modifying a retailer’s pricing position are known to all of us, but primarily many retailers are just not designed to incur extended periods of lower margins rates.  After a few months of viewing graphs and charts with arrows going in the wrong direction, the order is given to begin to raise prices, lots of prices on other items in hopes of recovering lost profit. As a consequence, the retailer’s poor price position is worsened, not improved.

Modifying a retailer’s position on price is a task that goes well beyond hanging signs and shelf tags, it must start with rethinking the entire operation.  First the question should be asked.  “Is price really our problem”?  If you find you are perceptually 10-15% higher priced than the price leader in the market, the answer is likely, YES.  If not, perhaps other issues need priority attention before embarking on a new pricing program.  I recommend having a Price Monitor customer survey in place to track those important metrics.

The next question ought to be,  “Can we profitably operate on one or two percent lower gross margin”?  That’s right.  Real price cuts means selling for less, not moving the problem from one department or category to another and hope that the shopper doesn’t notice.  This means that EBITDA expectations should be adjusted down and for more than just a few months.  Price cuts should be viewed just as much as an investment as a remodeled store is.  They should be given time to payback.

Which leads to the final question, “What are the expected outcomes of the price cut investment”?  I recommend having clear objectives mapped out for both short and longer term.  Recovering lost market share, customer counts, increased basket size, improved dollars per square foot are all viable success metrics.

Changing long-standing customer perceptions takes time, financial investment, and consistency.  If there isn’t an appetite for all three, save the expense on all the signs, banners, and shelf tags…..they won’t matter.




The Most Important Retail Metric of All

In all my years in the retail industry, I never had the question posed to me, “What is the most important measurement for retailers to monitor”?  Despite no one every asking, it’s a fair question I think.  Given that most retailers appear to be driven by the metrics that interest the financial community,  the list of candidates likely starts with metrics like comparable store sales, revenue, and of course profit.

As important as all of these common metrics are, none really speak to the “potential” that a retailer has to improve on any given number.  To place performance in context, at least in my view, one needs to include spatial metrics that speak how efficient a retailer is producing profit with the allotment of retail selling space they have to work with.  Can you see where I’m headed here?

About twenty years ago, spatial measurements were emerging as space management tools such as Apollo and Spaceman came on the scene.  For the first time, supermarket retailers had the means to understand how the placement of products in the store and on the shelf impacted sales and profit.  As a result, epiphanies were common place as retailers began to adjust space allotments and placements to a variety of items and results could be projected.  I had the privilege of working with Dr. Brian Harris, the founder of Apollo Space Management as well as the ensuing scientific approach to category management back in the early 90’s.  One of the key learnings that emerged from his work then was that we could actually combined sales performance with space performance we then had a metric that could help us understand if our performance was being both profitable and efficient.

Enter GMROI.   GMROI, (Gross Margin Return on Inventory Invested), calculates profit generated by the dollars (measured in average inventory cost) on each item placed on the shelf.

GMROI=  Gross Margin/Average Inventory Costs

The formula is simple, but in order to calculate Average Inventory Costs, you need a space management tool that calculates days of supply, holding costs, etc that comprise Average Inventory Costs.

Armed with GMROI numbers retailers could make judgements category by category, item by item, store by store.  Below is a quick view report from the 1992 Marsh Super Study that uses GMROI as the defining index to measure category performance.  Any number over 1 denotes the category is returning positively over the investment, but beyond that, the metric provides a relative unit of measure to compare items and categories.



The above report depicts a variety of metrics related to spatial performance.  Anyone of them are of potential value to the retailer as a means to adjust and improve performance .  GMROI, which is depicted in the far right hand side column in the table above, begins to paint the picture that category managers can use to fine tune space allotment, sku rationalization, and other decisions.  But if the retailer is not privy to “advance” spatial metrics offered by space management tools, a simpler metric, Gross Margin/Retail Square Foot is still a very telling number, however, it is much more difficult to look at any level of meaningful granularity without the space management tools.

So, with the admission that we need a number of measurements to manage the business,  my vote for most important retail metric above all others is GMROI.  It provides the combination of profit that is earned by manageable business units with how smartly the unit being measure is positioned and allocated in the store.   GMROI averages can be the yardstick for departments, categories,and even items, allowing  comparisons and categorizations so that retailers can make adjustments in pricing, space allotment, stocking and handling practices, and even positioning within the layout of the store.  I know of some retailers with well-seasoned space management departments are using this metric successfully.  Others should try it!