Managing Director & Senior Partner
In market after market worldwide, an increasingly popular breed of retailers is proving an old credo wrong. Stores such as Aldi, Lidl, Trader Joe’s, and Mercadona, which offer more targeted assortments than traditional grocers do, are showing that shoppers don’t have to choose between value and quality.
Mainstream grocers need a fresh approach to serving customers and running their businesses—an approach that goes beyond tactical bottom-up moves at the store level. (See “Succeeding with a Store-Led Strategy,” BCG article, September 2014.) They have long positioned themselves as champions of assortment and value as well as beacons of quality. But they have been finding it increasingly difficult to settle on the right positioning (and to drive top- and bottom-line growth). That’s because the needs and behaviors of shoppers have been shifting—and because the targeted assortment stores have recognized and responded to those shifts more quickly, upsetting the economics of the grocery trade in the process. (See the exhibit, “Hard Numbers That Should Rattle Traditional Grocers.”)
These days, far fewer families shop for what they’ll need next month. Instead, they take shorter, more frequent shopping trips, increasingly to smaller stores nearby that are easier to get in to and out of than the larger-format supermarkets and hyper-markets that, in the 1980s and 1990s, held the high ground on price and selection. Online retail further undercuts the “one-stop shopping” advantage and is well-suited to today’s consumers.
The relative newcomers in the grocery industry—firmly established in Europe and rapidly making inroads in the US, Australia, and elsewhere—were quick to seize the opportunity. With their smaller footprints, superior value, and steady additions of fresh and appealing products, they have won over more and more mainstream shoppers—and they’re keeping them. Why shop elsewhere when you can get almost everything on your list for 20% less and navigate the store more quickly?
The targeted assortment retailers have not been standing still. They have been adding services such as in-store butchers and products such as cage-free eggs, champagne, and snow crab claws at surprisingly low prices—items that once were sold only by retailers catering to affluent shoppers. Interestingly, more than a few of those well-heeled customers now shop at the targeted assortment stores.
Traditional retailers were quick to slap “discounter” labels on the newcomers, dismissing their collective moves as a low-quality play. But the incumbents have finally seen how fundamental are the shifts in customer demand and how different are the underlying proposition, operating model, and economic model that characterize the targeted assortment retailers. As a result, the mainstream grocers have realized that many of their initial responses have actually widened the gap. Below are some of the moves they have made—with limited impact.
Adding Products. As their sales volumes have declined, many retailers have added range to try to stimulate sales and satisfy suppliers during negotiations. Variety appeals to shoppers, of course, but 176 types of salad dressing—an actual SKU count at a leading US supermarket chain—is probably excessive. Wide, undifferentiated ranges dilute sales per product line, make stores more cluttered and harder to navigate, and add costs throughout the value chain.
Many retailers have also launched “discount” private-label lines. Yes, this has given them a lower entry price point in the categories, but it has failed to match the quality-price balance of the targeted assortment grocers. Worse, the private-label push has diluted sales per SKU and has created price and quality inconsistencies in many categories between different private-label tiers.
Boosting Promotions. Many traditional retailers have increased promotions to spark short-term sales, compensate for lack of price competitiveness, and please suppliers during negotiations. These days, it’s not uncommon for retailers to have upward of 40% of their sales come from promotions. However, the added promo typically disrupts shoppers’ perceptions of price and undermines their trust in the retailer. And it often inflates the shelf price and piles on operating costs across the retailer’s value chain.
Cutting Labor. Many grocers are cutting team members’ hours to relieve pressure on the bottom line and free up funds to invest in price cuts. But the consequences are quick to appear, in the form of deteriorating service levels, and shoppers soon notice. Associates who are disengaged or too busy are poor ambassadors for a store’s brand; if they’re surly or rude, many customers will shop elsewhere.
While many factors shape grocery operations, short-term moves such as the ones we’ve described can be a “triple whammy”—a detriment to shoppers, suppliers, and retailers. More and more consumers see traditional retailers as expensive, complex, and unengaged. Suppliers experience declining volume, more complexity, and lack of scale per product line. And retailers see sales volumes sliding and operating costs heading in the wrong direction.
So, how should retail executives respond? Leading grocery retailers that have successfully reinvented their operating models emphasize the following actions:
There can be no doubt that shoppers’ buying habits and needs have changed substantially in the past decade. Name-brand loyalty is a thing of the past; the targeted assortment retailers have proved that point. It’s time for mainstream stores to grasp those changes, too, and respond appropriately, with long-term positioning in mind.