Under Attack

October 11, 2017

Frozen & Refrigerated Buyer | October 11, 2017 – For decades, the supermarket industry has plodded along at rather a leisurely pace. Sure, there have been watershed moments: store brands, bar codes, supercenters and (gasp!) self-checkout. But it took years for those changes to occur, giving retailers plenty of time to adapt. Today, something big is happening every month — or week. Heck, a single 24-hour stretch in mid-June brought not one but two profoundly impactful events: the opening of the first Lidl stores in America and Amazon’s announcement that it would buy Whole Foods.

Given the breakneck pace of change in the supermarket business today, the state of the industry can only be described as chaotic. But as much as retailers feel the pressure to respond quickly, now is not the time to act hastily. “My best piece of advice is not to panic when these new influencers arrive on the scene,” says Bill Bishop, chief architect at Barrington, Ill.-based Brick Meets Click. “Retailers really need to be thoughtful about their response.” So just because everyone else is slashing prices to compete with the new Lidl that opened up down the street doesn’t mean that’s the right approach for you.

“Retailers need to stop being so reactive,” agrees Bob Shaw, president of Charlotte, N.C.- based Concentric Marketing. “Their focus should be less on what another retailer is doing and more on what they can be doing. The chains that will thrive in the future are the ones that are thinking about the future, not reacting to the present or living in the past.

E-COMMERCE CHANGES THE GAME

What kinds of changes should retailers prepare for in 2018? Industry observers say they should expect a bigger percentage of their sales to go online. “Amazon’s acquisition of Whole Foods was a wake-up call for the industry,” says Jon Hauptman, senior director of Willard Bishop, Long Grove, Ill. “Supermarkets realize that an e-commerce offering is table stakes, and click-and-collect is only a stop-gap solution for many retailers.” Not only will chains need to rethink store-level picking, which is cumbersome, labor-intensive and disruptive, they need to figure out how to efficiently deliver temperature-sensitive refrigerated and frozen products and somehow still make money.

A handful of chains are already hard at work on the problem. For example, Walmart just announced it will begin testing direct-to-refrigerator, in-home grocery delivery in households equipped with August smart locks. However, pricing has yet to be determined, highlighting the difficulty associated with turning a profit on grocery delivery, especially frozen and refrigerated items.

One sure-fire way to boost cost-effectiveness is to increase the average size of online orders, says Bishop. “We’ve observed that supermarket orders are bigger than a lot of other online grocery orders but still not as big as they should be,” he reports. “An obvious opportunity that hasn’t been stressed enough is setting certain dollar thresholds at which fees are waived: ‘free delivery with $100+ order’ or something like that.” He also suggests retailers do more to promote online shopping availability in-store. “Make sure cashiers are familiar with the service and can talk to customers about the benefits — and use signage to communicate details about it.” Yes, says Bishop, ideally, you want shoppers in your store. But if they’re going to be buying groceries online anyhow, make sure it’s from you.

Retailers should also take a close look at exactly what shoppers are buying online from competitors for at-home delivery. In many cases, of course, it’s fresh meal kits. “Brick-and-mortar supermarkets — where 98.5% of the food business is done — have an opportunity to respond by offering their own Blue Apron-type products. And they can offer fresher, more customized options in-store versus delivery, options that also include frozen and refrigerated items,” says Don Stuart, managing partner at Wilton, Conn.-based Cadent Consulting. Kroger and Whole Foods have already rolled out meal kits, though Amazon’s recent announcement that it will enter the meal kit delivery business as well may spur even more retailers to develop in-store solutions.

A DIFFERENT WAY OF FOCUSING

Another approach is to focus on what consumers are not buying online and “lean in to categories that aren’t eroding as quickly,” says Shaw. For now at least, he continues, online purchases tend to revolve around general merchandise, HBC and highly consumable center store items like, say, energy bars, not perishables. “So grocers may look to frozen and refrigerated products as opportunities to become more relevant.” One way to do that is to emphasize the importance of the shopping experience — the ability to handpick your own fresh meats, seek out the advice of an in-store dietician or sample a new cheese at the deli before buying, he says.

Interestingly, the rise of e-commerce also impacts how consumers shop brick-and-mortar stores. “One of the most significant indirect effects of online shopping on the frozen and refrigerated business is that it’s forcing faster adoption of digital marketing. Manufacturers can and, in fact, must tell consumers a lot more about their products: their characteristics, their benefits, the stories behind them,” says Bishop. Whether or not suppliers believe sharing it actually drives sales, shoppers used to having all kinds of facts and figures literally at their fingertips want that information. The good news is that manufacturers of frozen items in particular finally have an opportunity to communicate “the many underappreciated advantages” of their products, which could help increase sales, says Bishop. Consumers are hungry for information, he adds, so it’s up to manufacturers to provide it to retailers to disseminate through ads, in-store signage, websites, digital communications, etc.

TECHNOLOGY ALLOWS PERSONALIZED PRICING

While e-commerce is, of course, the most important technology impacting the grocery industry, it’s by no means the only one. “The biggest opportunities outside traditional POS and e-commerce are almost all data oriented, including better use of business intelligence, increased leverage of promotional planning and demand forecasting to drive product-by-product pricing decisions,” says vp and practice lead Scott Langdoc of Boston-based Boston Retail Partners. “The more automation and analytics that can be applied to assessing past performance and projecting future demand, the better a retailer can ‘dial in’ the proper blend of projected margin and volume,” he explains. But the technology that appears to hold the most promise is using transactional/loyalty card data to create more personalized pricing to drive specific behaviors. “Retailers that continue to use loyalty programs with simple two-tier pricing can’t win against competitors, including Amazon, that have this kind of analytic DNA in their blood,” he remarks.

Outside of data analysis, Bishop thinks self-checkout using mobile phones to scan products as you shop (and bag) is very potent from a consumer point of view. His household actually shopped at a store that was testing the technology and found it a tremendous benefit. “When they shut the system down due to unacceptable shrink, it had a very negative impact on our attitude toward the store,” he adds. “We actually took some of our business elsewhere.”
Another potential use of technology is at the back end where blockchain or distributed ledgers can source and track every single ingredient in every single product in store, says Stuart. “It’s got tremendous implications for sourcing, quality and recalls,” he explains.

DISCOUNTERS BOOST FROZEN’S PROFILE

Although it gets the most attention, e-commerce isn’t the only threat — or even the biggest threat — to traditional supermarkets in the coming year. Depending on who you ask, that honor could go to hard discounters. “It’s easier to convince consumers to switch stores or add another store to their routine than it is to get them to shift a large percentage of their grocery purchases online,” explains Bishop. “So at least in the near term, I see hard discounters as a bigger disruptor.” Two more reasons to fear hard discounters: 1. their prices are significantly lower than even Amazon’s, and 2. Aldi and Lidl are intensely competitive with each other, suggesting the bar will only get higher.
The two chains generally do a pretty good job with frozen foods, which may bode well for the department in other channels as well. Part of it is just good merchandising. Gravity-fed racks fed from the rear showcase the assortment well, and because the department is often situated along an outside wall, not down an aisle few consumers enter, it’s more visible. Secondary display bunkers are reserved for promotional and in-and-out items. Between the two, “shoppers can’t help but see what’s new,” says Bishop, who thinks frozen probably represents a bigger portion of the basket at discounters than at traditional supermarkets.

Hard discounters have also upped the ante on product innovation, particularly in the frozen department, says Hauptman. “They’ve created a competitive advantage not only with low prices but by offering unique, value-added products not available elsewhere.” Adds Shaw, “They’ve proven that interesting and inexpensive are not contradictory.”

The net effect could be positive for the industry if frozen food’s success in the discount channel spurs innovation in other channels as well, says Bishop. Of course, there are those low prices to contend with.

Although many expected Amazon to start a price war after lowering retails on a wide range of items at Whole Foods as much as 43% — on Day 1 — Bishop says hard discounters are the ones putting the most price pressure on traditional supermarkets. In fact, Aldi and Lidl have already forced price cuts and tests at Kroger, Walmart and others. But that’s not the only way to respond to a hard discounter in the neighborhood.

“Traditional supermarkets may choose to focus on a few bellwether items that they need to be competitive on — milk, eggs, etc.,” says Stuart. “But they won’t win on pure price. Th ey need to win on their service model, their broader assortments, their national brands, etc.” Sharp prices on key value items is really just the cost of doing business in a competitive environment. But beyond that, retailers should proceed with caution.

“Our business isn’t particularly inventive,” says Shaw. “And the rote answer to attract or keep customers is to reduce price and quality, maybe throw in a few BOGOs. But my best tip for surviving a price war is to resist throwing all money into price-trade spend and focus on building loyalty with top 20% of customers instead.” He also suggests spending more time launching the right new items versus simply plugging holes because there won’t be room for products that don’t pull their weight.

To that end, says Bishop, retailers may need to shift focus from profit margin to item profitability, shedding less profitable products and lowering prices on those that remain. “I really think that day is coming,” he says. And the frozen department will probably be looked at first because of its relatively high occupancy costs. So expect tighter assortments in 2018.

Another high-value weapon in a price war is a robust private label program, including a strong entry level assortment that provides an opening price point option in many categories. “It’s a great defense against nontraditional, low-price competitors and helps retailers that offer unique options stand out from the crowd,” says Hauptman.

PREMIUM PL DRAWS ATTENTION

At the other end of the spectrum, Langdoc says premium private label is a particular interest. “Changes in buying behaviors and advertising influence give grocers further opportunities to better position their own brand product offerings, especially when they emphasize quality and taste along with value.” He adds that nearinstant customer feedback via social media is helping retailers make rapid adjustments to both individual products and whole categories. “Being more agile than competitors or national brands gives grocers the ability to optimize product offerings to a broader customer base.”

Although private label share has remained fairly steady since 1980, a new report from Cadent Consulting suggests a sea change is on the way, thanks to seven key drivers, including both Amazon/Whole Foods and hard discounters. The Amazon/Whole Foods combination alone could yield 2 incremental share points and hard discounters 1.5 share points over the next 10 years, reports Stuart. All told, store brand share is expected to jump a whopping 8.0 points to 25.7% by 2027, he says.

While hard discounters are driving many of the changes in food retailing today, “Don’t forget about club stores,” says Stuart. “Costco’s private label will put tremendous pressure on traditional grocery.” And it’s not afraid to flex its considerable muscle. In fact, the chain recently made news when it eliminated Kind bars from its assortment in favor of its own store brand because it didn’t think it was getting the best possible price. He also suggests traditional retailers keep a close eye on emerging channels like drugstores and dollar stores that continue to add frozen and refrigerated SKUs. “We expect more out of both of them in the year ahead,” says Stuart.

But according to Hauptman, foodservice providers could be a bigger threat “because they’re better able to tailor their offerings to the needs of time-pressed consumers looking for occasion based meal solutions, not just ingredients.”
And they’ve got technology that makes the task even easier. “The rapid advancement of mobile ordering and location/GPS intelligence is giving QSR and fast casual brands in particular more opportunities to capture customer demand that would typically be directed toward traditional grocery shopping,” says Langdoc. “If dinner is only a single click away and it’s ready at the exact time you arrive for pick up because you gave the restaurant permission to track your location via GPS, that will appeal to consumers — especially millennials — and is a real threat to grocers.” But supermarket chains can do it, too!

“Meal kits, prepared foods and grocerants should all grow within grocery,” confirms Shaw. “And frozen dinners need to continue to evolve toward something more competitive with other convenience choices in terms of quality.”
Stuart expects to see some bifurcation where highvalue, high-touch grocers go bigger into foodservice while those that want to compete more aggressively on price stick to low-cost groceries.

Although frozen department units fell 1.0% during the 52 weeks ended Aug. 13, dollar sales edged up 0.6% during the period, suggesting a shift to higher-priced, better-quality items. But during the most recent 12 weeks, both units (+0.1%) and dollars (+2.0%) were on the rise, marking the first unit growth in some time. Why has it taken so long? “I think the better-for-you trend is starting to hold — new items are popping up all the time at places like the Natural Foods Expo,” and it’s helping the category shed old stereotypes, says Shaw. “But perception always lags reality, so it may take a few years for consumers to catch on completely.” He adds that retailers that still treat “natural” as a separate category are missing the boat. “The shift [to mainstream] happened a decade ago.

Stuart believes the segment has also gotten a bit of a lift from its location on or near the perimeter in many stores. “The perimeter is where millennials shop and we expect to see 15 million more millennials in the U.S. over the next 10 years.”

Although millennials haven’t been big frozen food fans in the past, attitudes are changing as manufacturers roll out products more attractive to younger consumers. “Products successful with millennials seem to have three things in common: health, convenience and flavor,” reports Lisa St. Germain, senior manager of the category solutions team at Stamford, Conn.-based Daymon. “Finding frozen items that deliver on all three will not only bring millennials to the frozen aisle — they’ll snap a picture and send it to their friends.”

While products like frozen fruit and veggies score high on health and convenience, “Layering on attributes like organic, enhanced protein, superfoods and grains increases its chances of success,” she says. In addition, “Offerings that include bold, global and unique ingredients like ethnic sauces or exotic fruits continue to resonate with this group.” Millennials are also attracted to individual or single-serve packages and value-added items like riced vegetables and smoothie kits. But they also like to cook, so frozen spiralized vegetables and frozen meal kits may be of interest as well, says St. Germain.

Other frozen products gaining traction with millennials include high protein and plant-based ice cream, gourmet pizza with ethnic toppings and sauces, gluten-free products, veggie crust pizza, breakfast pizza, ethnic entrees and handheld sandwiches, street food of all kinds, breakfast bowls and handheld breakfast options, ethnic appetizers and snack-size desserts.

Millennials are also interested in social activism and environmental causes, so imperfect frozen fruit and vegetables may represent an opportunity.

“With the right marketing, positioning and storytelling around sourcing, frozen sales can certainly grow among millennials,” says Stuart.

Marketers face an easier time selling the dairy category— where non-dairy, plant-based options are actually registering some of the biggest gains. With millennials, “Freshness is the real selling point,” says Stuart, citing attributes like organic, grass-fed and hormone-free as important drivers as well.

Stuart believes overall marketing spend will remain steady, but he expects more spending through the consumer (traditional trade promotion, retailer-sponsored digital programs, shopper marketing, etc.). He adds that while the portion of the marketing budget devoted to digital has tripled over the past fi ve years, there has been some pushback around placement, integrity and effectiveness. “So accountability and return on investment will be the watchwords for 2018.”

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