4 Ways to Be a Customer-Obsessed Food Retailer
Author: Eric Karlson
Source: Progressive Grocer
The Great Recession impacted consumers’ tastes and preferences over the past 10 years. If a retailer isn't carefully monitoring the changing needs of customers, gaps can quickly emerge, which open the door to competitors.
The biggest driver of changes in consumer behavior is income, and for much of the post-WWII period, real incomes (adjusted for inflation) have been rising. The chart below illustrates these income changes over the past 40 years.
- In the 1980s and 1990s, growing incomes resulted in shoppers wanting higher-quality items. Many retailers positioned themselves upmarket, focusing on more fresh products. This was a great time for many traditional retailers that grew rapidly during this time.
- In the 2000s, real incomes flattened, but many consumers supplemented their incomes by consuming the equity in their homes, resulting in no significant change in consumer behavior. According to the Center for Economic Policy Research, mortgage equity withdrawals resulted in $200 billion to $300 billion in additional expenditures. During this time, Walmart Supercenters, Costco, Trader Joe’s and the dollar stores continued to expand their store base.
- Then the derivatives and credit default swaps hit the fan in 2008. GDP bottomed out that same year, at a whopping -8.4%. According to Pew Research, half of the households in the United States experienced work-related hardships, and the popping of the bubble reduced household wealth by an average of 20%. The National Bureau of Economic Research (NBER) noted that consumers saved by taking advantage of coupons, sales, private brands, larger pack sizes, making more trips and shopping more at discount stores.
- The economy and real incomes rebounded in 2014, and have recently surpassed pre-recession levels.
- The changes in real income also had a direct impact on grocery gross margins. The chart below shows grocery gross margins before and after the recessions. Prior to the recession, margins rose as shoppers demanded higher-quality items. Margins leveled out in the 2000s and began falling post-recession. Pre-recession shoppers sought out quality, but in the post-recession period, shoppers transitioned to price and value.
We can clearly see there was a significant shift in pre- and post-recession consumer behavior, but what happened to gross margins when incomes rebounded? Did they return to pre-recession trends? Real incomes have significantly rebounded and now exceed pre-recession levels, but gross margins have only marginally improved, which suggests these consumer changes could be long-lasting.
Private brands and retailer growth by retailer type can also shed some light on the return to pre-recession behaviors. If shoppers were returning to pre-recession behaviors, we would expect private-brand dollar share to fall back to pre-recession levels. The opposite is occurring, and private-brand penetration continues to grow even as incomes have risen.
We know that real incomes began to aggressively rebound in 2014. So what types of retailers have been winning the past five years? If we were returning to pre-recession trends, quality and premium items should be growing relatively fast. Based on the 2019 Dunnhumby Retailer Preference Index (RPI), that's not the case. Price-focused retailers in the bottom right quadrant of the chart below have strong price perceptions and weaker quality perceptions. On average, they're growing twice as fast as the premium banners in the upper left-hand quadrant over the past five years.
Finally, Bank of America asserted that the past 10 years have been the “Discount Store Decade.” Its research found that lower-income spending is growing faster than the higher-income groups, and this spending is focused on discount products and retailers. Bank of America concluded the report by saying that there's no sign of a slowdown in low-income consumer spending.
Based on the significant changes that resulted from one of the biggest economic events over the past 100 years, many retailers aren't moving “at the speed of consumers” in making significant adjustments to their value proposition, or are moving in the wrong direction.
TOP-PERFORMING RETAILERS UNDERSTAND WHAT DRIVES CONSUMERS’ PREFERENCES
After the Great Recession fundamentally changed the customer and retailer relationship, in 2018, Dunnhumby developed a model and a corresponding Retailer Preference Index (RPI) to gain some understanding of what drives consumer choice. With survey data from more than 7,000 U.S. households, the index looks at about 60 of the largest U.S. grocery retailers and associates their emotional connection with consumers and financial performance with how they score on various preference drivers.
These drivers include customer perceptions regarding price, assortment, store experience, convenience, speed, discounts/rewards and operations. Associating the preference drivers with financial performance allows us to understand which preference drivers have the biggest impact on performance, both financial and emotional. Also, after ranking each retailer, we profiled the four quartiles to understand how those retailers at the top were different from those at the bottom.
Our first-quartile retailers, seen in the table below, had more targeted value propositions and consistently performed better financially and emotionally. The top quartile grew 11 times faster than the bottom quartile, four times faster than the third quartile and two times faster than the second quartile. Unlike the other three quartiles, the top-quartile retailers had larger swings in their preference pillar scores because they were making trade-offs to deliver in those areas that were most valued by their shoppers, while ignoring other areas that weren't. That doesn't necessarily mean that they're more customer-focused, but their strong performance does suggest that they're meeting the most important needs of their customers better than other retailers are.
Trader Joe’s is a good example of this. The company has been ranked No. 1 the past two years and is likely the most profitable grocery retailer in the United States. It wins because it focuses on price and quality, even at the expense of many “shiny objects” and consumer “trends” — convenient locations, winning big baskets, ready-to-eat items and digital.
- Its locations are generally in older, second-tier strip malls that are near educated, middle-income neighborhoods with a high propensity of foodies. These locations are often less convenient and have less traffic, but also have lower rents.
- It also chooses to offer a fraction of the SKUs in smaller, less expensive stores stocked almost exclusively with private-brand items. All of these choices drive profit, build value perceptions and aim to win the “first shop” rather than the “full shop.”
- Knowing that ready-to-eat is expensive and hard to deliver profitably, it focuses on frozen, easy-to-prepare items. Frozen is much easier to transport than fresh and has a longer shelf life.
- Finally, Trader Joe’s ended its New York ecommerce pilot about six months ago because it said that it couldn't deliver groceries without increasing costs and prices for consumers, which, from our perspective, would weaken its value core. It's too early to tell if that was the right decision, but based on our model, we would say that it probably made the right decision.
In contrast, the bottom-quartile retailers struggled with focus. They were often near average across the less important preference pillars — discounts/rewards, speed, operations — but then scored poorly on the most important ones — price and quality. In addition, many had relatively strong promotion scores but poor overall price scores, which suggests that promotion was the only lever they were comfortable pulling, and as a result, it had probably been pulled too much.
We also hypothesize that promotion is the only lever that they're comfortable pulling, because they don't deeply understand their customers. Moreover, many of these poorly performing retailers are using their limited resources and investing them in ecommerce or repositioning themselves as more upmarket. In both instances, this will only exacerbate their problems.
So there's evidence that the top-quartile retailers meet the needs of shoppers better than those in the bottom quartile. We can’t definitively say that they're more customer-focused, but their business choices suggest that they understand their customers’ needs better than others.