January 9, 2013

Grocery Retailing: An Industry on the Cusp of Major Transitions

A recent study by Booz & Company indicates that four important trends will significantly reshape the grocery retailing industry in the near future.

A recent study centering on American grocery retailing and led by management consulting firm Booz & Company in collaboration with the Food Marketing Institute, uncovered notable findings on the retail industry at large.

The analysis – which aimed to gauge the current state of food retailing in the U.S. market – sheds light on upcoming trends expected to punctuate the highly competitive and dynamic retail landscape. The new data highlights four important forces set to reshape industry competition over the next several years: the permanent shift to value seeking among consumers; the rise of technology-enabled shopping; greater online encroachment; and format and merchandise innovation.

These findings are pertinent to Middle East retailers who must remain acutely aware of these forces. Indeed, a failure to respond effectively could result in share losses, declining profitability, and even extinction.


Value Seeking Behavior

According to the survey, 50 to 60 percent of shoppers today describe themselves as “value-seeking and always have been.” Understandably, the current recession has resulted in a marked increase in such behavior. In truth, the crisis caused about 20 to 30 percent more shoppers to adopt a value-seeking approach as they adjusted to straitened personal circumstances or simply followed a set of perceived “acceptable” frugal behaviors. This entailed reducing overall expenses by shopping around for the best grocery deals, clipping coupons, buying private-label products, cooking at home rather than eating out, consuming leftovers, and reducing their pantries to the items they consume regularly.

“Interestingly, a majority of these newly frugal shoppers report that they will not revert to their previous behaviors as the recession ends,” said Karl Nader, Principal with Booz & Company. “This much is clear: in the Middle East, price perception is becoming an important matter.”

As a result, retailers are:

  • Increasingly introducing Private Label and value lines to meet the needs of shoppers. The share of PL has also grown in recent years in line with retail consolidation in the Middle East.

  • Focusing their price competitiveness on high traffic categories (e.g. dairy, juice, detergents). This is critical for price perception and allows them to maintain margins on low visibility categories.

  • Carefully reviewing their operating expenses to manage costs and ensure growth.

Key Findings: This survey’s results are robust for two reasons. Firstly, the corresponding questions covered a wide array of grocery-related behaviors, and the responses were consistent. Secondly, for the first time in several years, unemployment rates in the U.S. are on the decline; this indicates that most respondents answered the questions based on actual experience, rather than relative to some far-off recovery.


Technology-Enabled Shopping

In this day and age, digital technology is increasingly prevalent in every aspect of consumers’ lifestyles, and grocery shopping is no exception. Many consumers employ technology as part of their grocery shopping experience. At its most basic level, this might involve using a home-based personal computer to search for deals and recipes on local grocery stores’ websites. More sophisticated shoppers might download and print coupons from the retailer’s or manufacturer’s website, while the more tech-savvy might load these coupons onto their frequent shopper card. The most technologically-advanced shoppers are accessing these tools on their smartphones. “Whilst technology-enabled shopping has yet to penetrate the Middle East grocery industry, retailers are increasingly introducing new technologies to manage their businesses,” said Nader. “This entails incorporating retail analytics capabilities to better understand shoppers’ behavior and preferences, as well as adapting their offerings accordingly.”


Online Encroachment

In recent years, a new form of online grocery shopping has quietly encroached on the traditional industry. In effect, in contrast to a full-assortment offering, today’s online grocery shoppers are much more likely to be shopping for specific categories or SKUs. In fact, a staggering 54 percent of consumers report shopping for at least some grocery categories using this emerging online channel.

And, experience with a variety of demographics suggests that this behavior is pervasive. In the long term, however, the outlook for online grocery shopping remains somewhat uncertain: low-value, low-margin, bulky goods will always entail shipping costs but as online retailers innovate in both their merchandise offerings and logistics, only a brave executive would dismiss online groceries as irrelevant.

Today, with broadband at home being almost ubiquitous and the online retailing industry continuously growing, the time may be right for a big and diverse expansion in online grocery formats. “Grocers in the Middle East have started developing their online channels with a focus on non-food,” added Nader. “The online platform is an extension of the grocers’ physical stores, allowing them to offer a wider range of products”.

These are typically higher margin and higher ticket items that require additional space inside the store. The development of the online grocery shopping scene varies significantly across the different GCC countries. The UAE in particular might be more ready than the KSA for this channel – given the advanced development of the nation’s retail landscape and its relevant demographics.


Format and Merchandise Innovation

Over the past five years, the U.S. grocery retail industry has added about 150 million square feet of overall capacity (selling space) – essentially none of which was added to traditional supermarket formats.

Perhaps more interesting is the substantial space added by smaller formats, particularly dollar and hard discount stores; such businesses have added thousands of outlets over this five-year period. The third format, the small fresh food market, is well developed in only a few geographical areas; it is also more challenging as the operational complexity drives up costs, and it seems likely that success and profitability require significant retooling of the operating model.

This also applies to the Middle East. “Grocers are considering compact forms of hypermarkets to penetrate more condensed areas, as well as smaller convenience formats to cater to different on-the-go shopper needs, and discounter formats to satisfy value seeking shoppers,” explained Nader.

In all cases, these retailers are further strengthening their analytical capabilities to ensure optimal blueprints for each of these formats: the right product, in the right place, at the right price, at the right time and with the right cost.

Merchandising Innovation: In addition to new store formats, an explosion in merchandising innovation from both retailers and manufacturers is occurring. These innovations are designed to do two things: get more shoppers in the store and get them to spend more in a given banner. As a result, manufacturers and retailers are dramatically improving their go-to-market platform strategies. Moreover, new capabilities are being implemented as a way to enrich the shopping experience.


The Next Step for Retailers

These new forces will undoubtedly cause structural changes in the grocery retailing industry. From the shoppers’ perspective, the “recession-like” behavior has become engrained in their mindsets. At the same time, digital technologies will make “price shopping” ever easier and more convenient, and the Internet and other new formats will surely drain volume away from traditional channels.

Consequently, grocery retailers need to reassess their “way to play” – their overall strategic value proposition – on two dimensions. The first emphasizes the importance of building a strategic fit with the evolving market of consumers, while the second dimension reflects the key capabilities that the grocer will need to strengthen in order to deliver this value proposition. Distinctive capabilities might include a deep shopper understanding; digital and mobile marketing; multichannel retailing; and innovation.

Assessing a way to play is not necessarily straightforward, especially if there is instability in the market and/or disagreement among the senior team. It is solely by sharpening their focus on their strategic positioning and being clear on how they can compete that retailers can reduce costs and drive growth. More so, a focus on rewiring costs in merchandising, marketing, and supply chain is required to create the capital needed to invest in capabilities and grow the business.