Cool News - March, 03

The New Path to Supermarket Success

Several weeks ago, a Wall Street analyst predicted in USA Today that supermarkets' share of the U.S. grocery business would drop to 34 percent by 2010 from its current 53 percent -- with the bulk going to Wal-Mart Supercenters and Neighborhood Markets.

In a recent market basket study of 215 items in Texas, Albertson's prices were 43 percent higher than Wal-Mart's and Kroger's, 39 percent higher.

Can supermarkets survive in this environment by continuing to function the way they function?

Despite what supermarket executives think is daily hemorrhaging to value discount formats, the indications are that the invasion is still only in its incipient stages. Between now and 2010, Wal-Mart plans to fill in the spaces between its Supercenter locations with 3,000 Neighborhood Markets; Costco will buckshot the landscape with 60,000 square foot versions of its 8-10 percent margin Club stores and Dollar Stores will explode out of the Southeast and California to capture the affections of all of those citizens who like to buy plastic bunnies.

All of these formats operate with completely different business models than do supermarkets and all use both food and non-food CPG items as traffic draws. Because of their different business models, all can seriously underprice Supermarkets and still make more profit than supermarkets. Wal-Mart, for example, can deliver a 5.2 percent operating profit from a 22.2 percent gross margin. To deliver the same profit, Kroger has to get a 27.3 percent gross margin, Albertson's needs 29.3 percent while Safeway requires a whopping 31.1 percent.

Without question, today's cash-strapped consumer is vitally aware of these spreads. Based on the latest A.C. Nielsen Channel Blurring Study, between 1996 and 2002, American households defected in droves from supermarkets to other channels. The average number of shopping trips per household per year to supermarkets plunged from 95 in 1996 to 73 by the end of 2002 -- a loss of an astounding 2.3 billion trips per year!

During this same period, trip frequencies to Supercenters jumped from 13 to 21 per year while household penetration increased from 47 percent to 62 percent. Dollar stores literally doubled trip frequencies from 6 to 12 per year and penetration from 39 percent to 62 percent. Club stores enjoyed similar gains -- trip frequencies notched up from 8 to 10 per year and penetration from 49 percent to 52 percent.

The pattern that seems to be emerging is one of doing the "big shop" every other week at a Supercenter -- or every 5-6 weeks at a Club -- and filling-in on center-of-the-store items at supermarkets during the weekly perishables trip.

It's "Game Over" for the traditional supermarket business model as we know it. Specifically:

		Supermarkets can no longer compete on price-only basis with value discounters. The fact is (and we are sure that every Supermarket Executive reading this will be relieved at this news) Wal-Mart, Costco and Sam's etc. do get lower prices from manufacturers -- not because of their size or clout but because their business models and buying protocols are fundamentally different from those of supermarkets.
		Supermarkets can no longer rely on location proximity as one of their "indigenous" advantages. As detailed above, most of the 2.3 billion annual trips supermarkets lost between 1996 and 2002 are defections to value discount outlets which consumers had to get to by driving past supermarkets.
		As long as supermarkets continue to fixate on price as the solution to their problems, nothing meaningful in this industry is going to change. Despite the fact that there have been a zillion articles and speeches over the past decade on the need to connect with consumers and "brand the store," survey after survey continues to reveal that most consumers think all supermarkets are alike.
		Based on listening to quarterly conference calls between supermarket executives and Wall Street -- in which supermarket executives keep expounding on their latest efforts to reduce retails even further -- there is no indication that these folks are even close to "getting it" as far as the "consumer thing" is concerned. While supermarket executives have been focused on things like ECR, Category Management and squeezing more trade promotion monies from suppliers, the consumer has voted by simply walking away by the millions.

Are there supermarkets that have done well in this environment? You bet. To name a few -- HEB, Wegman's, Publix, Ukrop's, Trader Joe's, A.J.'s and Whole Foods.

What's the difference? These companies already know -- and have accepted -- that to attempt to compete solely on price with value discounters is a Kevorkian prescription. So rather than spend 24/7 fixated on a lost cause, these retailers have dimensionalized their focus by doing something that would be truly new and different for most U.S. supermarkets: they have engaged their consumers in ways that establish and nurture an emotional connection to their stores.

The value of doing this was recently quantified in a Gallup Study that tracked customer trip frequencies and expenditures in a leading supermarket chain:

		Customers who reported being less than "extremely satisfied" with the shopping experience visited the chain in question 4.3 times per month and spent an average of $166 during that month.
		Customers who reported being "extremely satisfied," but who did not have an strong emotional connection to the chain, actually visited the store less often and spent less -- 4.1 times per month and $144. In this case, extreme customer satisfaction represented no value added to the store.
		On the other hand, customers who were both "extremely satisfied" and "emotionally connected" to the store visited the store 5.4 times per month and spent an average of $210 that month..

The net of this is that those customers with strong emotional connections visited this grocery store chain 32 percent more often and spent 46 percent more money than those who were "extremely satisfied," but lacked an emotional bond.

Gallup's conclusion: "Without a strong emotional bond, satisfaction is a 'Trivial Pursuit.'"

We do not think for a moment that the path that large public supermarkets must take to engage their customers and create an emotional bond is either clear-cut or short-term. We do think, however, that creating an emotional bond is the answer. Given the present state of affairs, supermarkets must waste no time in taking the first step on that path.

Next month: The path and how to get there.