Missing the 1 Percent

Solution
Traditional grocers need to better
establish an identity to recapture
losses to alternate channels.
By Kent Smith, VP for Global Business Development, Galleria Retail Technology
Solutions
Retail Insights
Missing the 1 Percent Solution

The Need
The fixture of American grocery – the traditional supermarket – reached its zenith in terms of
market share in the late 1980s, but since then a combination of pressures has resulted in its
market share slowly but steadily eroding at a rate of 1 percent or more per year.

The advent of warehouse clubs like Costco,

the widespread success of mass merchants
like Walmart, the growing credibility and
acceptance of discount stores like WinCo, and
specialty chains ranging from Whole Foods
Market to Northgate Gonzalez have all eaten
away at the traditional’s share. And now online
grocery shopping shows real signs of catching
on.

The nontraditional’s share of the market –

more than 20 percent in 2009, according to
a well-known industry trade publication –
amounts to well above $325 billion. According
to the Department of Agriculture’s Economic
Research Service, inflation-adjusted sales
growth for grocery stores was virtually flat
from 1999 to 2009.

That’s good for customers, but not so good for traditional grocers.

Why have the once “alternate channels” been so successful? There are many reasons, and for most,
conclusions have to begin with price: Walmart and WinCo, for example, routinely sell the same items as their
traditional counterparts at significantly lower everyday prices. A family that switches over can save $50 per
week – a staggering $2,500 per year.

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Missing the 1 Percent Solution

These “discounters” have steadily improved the shopping environment and breadth, so you don’t have to
compromise on selection and experience to save a bundle. Surely, economic conditions today provide extra
incentive to be thrifty.

It’s not just price, though: Specialty retailers are doing an increasingly adept job of delivering a quality
shopping experience. Chains like Northgate Gonzalez don’t segment “Hispanic foods” in an aisle; their entire
brands are built to embrace the culture from the ground up.

Whole Foods might just be the first cool place to grocery

shop, with its packaged medley of healthy and gourmet
foods wrapped in a stylish market setting. Retailers can
deliver a quality experience through a solid understanding of
who they are. Many traditional chains, bent on a prototype of
“everything everywhere,” inevitably create an average brand
that, in comparison, can seem bland, unfocused and costly.

The share battle hasn’t been without major casualties.

Perhaps the highest-profile struggle is represented by
Supervalu, which was broken up after several straight
quarters of comparative-store declines and quarterly losses.
The sale to Ceberus will hopefully give the stores a fresh
start. A focus on “sales and cash” could suggest sharpening
price and getting more productive with inventory, the
empowerment of divisions perhaps to become more agile
and market-centric.

Yet amid the turmoil, there have been high-profile success

stories. So what works?

Success is going to be about more than just being local, but

rather being effectively local

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Missing the 1 Percent Solution

No More “One Size Fits All’

Traditional grocers aren’t without their success stories. H-E-B thrives in San Antonio – it’s no coincidence it
covers the market with multiple formats, cluster strategies, a local focus and varying scales that allow the
grocer to operate just about anywhere. Publix thrives in Florida by keeping to scale through adept store-
locating practices and focusing on core customers. Safeway has been highly successful with its Lifestyle
stores fitted to the right markets, and by applying various localizing techniques.

The lessons: Be focused, be efficient. What does this mean for traditional grocers?

Invert the notion of prototypes.

Instead of celebrating absolute consistency across
stores, define success in terms of the differences in There may be lots of
each locality. obstacles in the way, but no
one ever promised retailing
The first step is to invert the notion of prototypes.
Instead of celebrating absolute consistency across in the most competitive
stores, define success in terms of the differences in sector was going to be easy.
each locality. This isn’t about redesigning everything,
but instead how you adapt the standard. And these
celebrated differences need to be based on facts.

It’s about analytics: an approach to formats and

clustering that incorporates consumer demand,
planning assortments that target local opportunities,
and wrapping these in floor plans and planograms
that are optimized for the store. Optimization is crucial
because it fundamentally recognizes the limits of space
and resource. Without optimization, you don’t factually
resolve the trade-offs, and you’re back to guesswork
and opinion-oriented adjustments, or, worse, you
build large stores and try to jam everything in them.
Meaning: You’re shooting arrows in the dark. You’re
often going to be wrong. You’ll lose.

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Missing the 1 Percent Solution

Next, with the organization shifted from a production-

centric “prototype” approach to a local, consumer-centric
one, you can begin to design programs that are both
more effective for consumers and more efficient for
operators. Simply clustering categories, so that there’s a
slight but important difference in the mix of assortment,
presentation, pricing, promotion, service, etc., will create
a program that both sells better and incorporates fewer
resources.

Designing assortments that are objective-driven and

space-aware will produce ranges that fit into spaces
efficiently, yet clearly target opportunity. Planograms
that adjust strategy for individual store demand may not
change every facing, but the facings that are adjusted add
up to reduced out-of-stocks and less excess inventory, not
to mention the potential to sell more. In other words, what
you formerly aimed to do at the regional or chain-wide
level, you need to do at the local level.
Retailers can deliver
Being effective is intrinsically efficient when you do it a quality experience
right – when you select the tools from the outset that are
through a solid
designed to localize and optimize. You get a more effective
assortment, efficient replenishment on shelf and less understanding of who
waste. In other words, you free up capital for investment they are
in price, service or strategic breadth.

The New Chic

Since the Great Recession started four years ago, the new reality is that U.S. consumers have become more
price-focused, or, as my CEO said recently, “Being price-conscious is more chic than it’s ever been.”

Surveys suggest that consumer frugality is here to stay. In 2010, the Strategic Resource Group predicted
that consumer spending could remain weak for four to eight years and lead to a “downturn generation” that
learns to scrimp and save permanently.

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Missing the 1 Percent Solution

Therefore, part of the localization theme has to include a renewed focus on efficiency to fund price cuts,
but with an intelligent approach. There are traditional metrics for things like labor as a percent of sales and
shrink, and organizations press to meet or beat these through a variety of methods. The hammer approach
involves what we’ve seen recently within the market: “right-sizing”’ store labor. But reducing labor without
changing operations only reduces standards.

However, empowering stores with greater efficiency will result in improved labor productivity. In-store
logistics and related inventory costs consume several percentage points of sales. Right-sizing capacity,
inventory investments and rethinking ordering and restocking schedules can reduce cost without reducing
standards. Simply put, fine-tune your system with the right ordering and space allocation so you achieve
a high rate of “back door to retail floor” product flow. This kind of practical solution is far cheaper and can
be implemented far more quickly than a wholesale supply chain re-engineering – and these latter efforts
often don’t improve store productivity, as they fail to address this crucial “last mile.” Getting capacities right
improves restocking and reduces excess inventory.

Now, the simple math: Inefficient restocking in-store

costs about 50 cents per product per week. That’s $26
per year, per store, per affected item. A recent Galleria
study found thousands of such cases likely driving
many millions of dollars in wasted labor per year –
not to mention out-of-stocks, damages, warehouse
space requirements and other examples of excess
inventory. Resolving these reduces costs and improves
the brand by delivering a better product assortment to
customers.

Other challenges exist. Online shopping continues to

grow at a much quicker pace than brick-and-mortar
stores, and while its share today is small, it won’t
remain that way. Also, restaurants are responding to
changing consumer preferences with menu choices
and takeout options. Anyone that sells food is a
competitor, and all should be watched.

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Missing the 1 Percent Solution

Success is going to be about more than just being local, but rather
being effectively local.
Success is going to be about more than just being local, but rather being effectively local – giving you the sales
and cost basis that allow for reinvestment into other aspects of brand that need attention: synchronizing
the store and online presence, building excitement back in stores, energizing associates, reaching out to
communities, and reinventing and renovating the store. All of these things are essential, but much more
difficult to afford when you aren’t maximizing sales with what you already have, when you’re wasting labor on
in-store inefficiencies, taking unnecessary markdowns and tying up capital in unproductive inventory.

The lesson: Be focused, be efficient

There may be lots of obstacles in the way, but no one ever promised retailing in the most competitive sector
was going to be easy. You could choose to carry on as you are today, but as Einstein famously said, “Insanity is
doing the same thing over and over and expecting a different result.”

About the Author

Kent Smith is VP for global business development at Galleria Retail Technology Solutions, a Chicago-based
provider of retail and category optimization solutions and services. Learn more at www.galleria-rts.com

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Missing the 1 Percent Solution

Founded in 1989 and operating from offices in Cheshire in the UK and

Chicago in the US, Galleria is the leading provider of retailer and vendor
category planning, automation, optimization solutions and consulting
services. With its comprehensive product suite, Galleria provides
customer focused solutions for clustering, automated assortment and
space optimization supported by detailed analytics and reporting tools
designed to meet the needs of retailers and CPG vendors. The solution
suite supports both bottom-up product level in addition to store,
department, zone and aisle optimization.

The net result is that Retailers and CPG vendors/manufacturers realize

significant benefits from adopting Galleria’s solutions and services.
Identifying target customer groups and presenting them with the best
possible assortment, in the right location and with accurate inventory
levels results in satisfied and loyal customers.

Galleria’s flexible approach means that solutions can be hosted by Galleria

and or operated as both work group and integrated solutions. In addition
to purchasing the solutions the consulting practice is on hand to either
augment current resources or work on specific projects as and when
required. Typical engagements involve the analysis and optimization
of store space, assortments and promotions based upon intelligent
forecasting and customer behavioral analysis.

Galleria currently works with many of the world’s leading retailers

including A&P, Coop Denmark, East of England Coop, Giant Eagle, Maxima,
M.Video, Morrisons, One Stop, Safeway, Tesco and Unilever. Galleria has a
number of strategic partnerships with: Nielsen, RGIS and ZBD and is also
an accredited Microsoft Certified Development Partner.

For more information about Galleria visit www.galleria-rts.com

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