redefining competitiveness - carolinas food industry

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Redefining Competitiveness Guidance, Strategies, Actions

Our Perspective on the Growing Challenges at Retail 2012

2 2

As the economy gradually recovers, shoppers remain wary—retailers must adapt to win in the ―new normal‖

Key Industry Questions

Has living through the recession changed the consumer mindset? How? Will change persist?

What is and will be the role of technology in changing the way shoppers shop?

How do retailers and manufacturers grow profitably? With ever increasing competition, food price inflation, new emerging

e-channels, weak product innovation, conservative consumers,?

3 3

1. Basic Retail Economics 2011/2012/2013

2. Four Mega-Trends that will be at the Center of Retailing in 2012/2013

3. Three Capabilities Needed to Win in 2012 and Beyond

Our dialogue today will focus on three strategic issues facing Retail

4 4





5 5

When exiting the 2011 US, market enthusiasm for growth was replaced with new and lasting economic realities

Realities of living with less

“Intensified uncertainty about the future”

Growing shopper bifurcation

“Creeping forward” economic /retailing environment

Technology enhanced path to purchase

6 6

Global retailing economy projected growth in 2012 is slow

Strong commodity prices result in growth a retail.

RETAIL: UP

Change in foreign investment policy coupled with inflation fighting.

RETAIL: CLOUDY IN THE SHORT TERM

Rebuilding economic production from the

earthquake.

RETAIL: FLAT TO SLIGHT DECLINE

Slowing consumer economy coupled with tightening fiscal

policies

RETAIL: UP

Continued growth of consumer credit coupled with

strong exports

RETAIL: UP

Continued retail contraction, higher taxes, and slowed spending

RETAIL: FLAT TO DECLINE

Slightly accelerating consumer economy balanced

with lack of governmental fiscal restraint.

RETAIL: LUKEWARM

7 7

The economy appears to be improving steadily though a substantial proportion of consumers remain unconvinced

March 2012 FMI Survey

N=1401

55

60

65

70

75

80

85

90

95

Q1/12 Q1/11 Q1/10 Q1/09 Q1/08 Q1/07 Q1/06 Q1/05

University of Michigan Index of Consumer Sentiment

(ICS) (1) Gross Domestic Product

$US Trillions, Chained 2005

14

13

12

2008 2011 2006 2010 2007 2009 2005

Recession 100%

58% Better

42% Worse

Recession

Sources: National Bureau of Economic Research (start and end dates for the recession, December 2007 and June 2009); University of Michigan/Thompson Reuters; Booz & Company Analysis

1) The University of Michigan Thompson Reuters Index of Consumer Sentiment Index is calculated monthly based on at least 500 telephone-survey responses to five questions. Full information is available at http://www.sca.isr.umich.edu/

2) Question: ―Do you think the economy is getting better or worse?‖

8 8

In 2012, average weekly household spend rose slightly— in real terms—a multi-year downward trend

Weekly Household Grocery Expenses (1)

$US

$93.30 $93.20 $97.80 $98.40 $99.90 $97.30

$104.90

2012

$ 88.06

2011

$ 85.60

2010

$ 88.15

2009

$ 87.27

2008

$ 92.29

2007

$ 91.64

2006

$

Food-inflation adjusted Weekly Spend (2006 Dollars) Nominal Weekly Spend (Dollars)

Note: (1) Survey question, presented in February or March of each year: Approximately how much do you spend each week on groceries for your family?

Sources: FMI U.S. Grocery Shopper Trends 2011, 20; USDA Consumer Price Index for Food at Home http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm; Booz & Company Analysis

http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm

http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm

9 9

Average weekly trips also rose while primary store share of wallet declined

Grocery Trips and Spend / Trip(1)

Average (Mean) Weekly

2.1 1.9 1.9 2.0 2.1

1.7

2.2

2012 2011 2010 2009 2008 2007 2006

2006 2007 2008 2009 2010 2011 2012

Spend $93.30 $93.20 $97.80 $98.40 $99.90 $97.30 $104.90

Spend/Trip $44.43 $49.05 $51.47 $49.20 $47.57 $57.24 $47.68

Notes: (1) Question: About how many visits do you make to a supermarket or grocery store in an average week? Please include going to the same store more than once, as well as going to different stores. Your best estimate is fine.

(2) Questions: Of these visits, how many are to [your primary store]? Of the [amount] you spend in an average week for groceries, how much is spent at [your primary store]?

Sources: Booz & Company Analysis

10 10

Average weekly trips also rose while primary store share of wallet declined

2.1 1.9 1.9 2.0 2.1

1.7

2.2

1.7 1.4 1.5 1.5 1.4 1.3 1.4

2012 2011 2010 2009 2008 2007 2006

Trips to Primary Store Total Trips

Primary Store Trips and Spend(2)

Average (Mean) Trips and Spend Weekly

2006 2007 2008 2009 2010 2011 2012

Primary Store Spend $72.21 $70.70 $75.80 $75.40 $75.28 $74.70 $72.86

Primary Store Share 77% 76% 78% 77% 75% 77% 69%

Notes: (1) Question: About how many visits do you make to a supermarket or grocery store in an average week? Please include going to the same store more than once, as well as going to different stores. Your best estimate is fine.

(2) Questions: Of these visits, how many are to [your primary store]? Of the [amount] you spend in an average week for groceries, how much is spent at [your primary store]?


11 11

Club, dollar, and drug stores gained trips at the expense of larger-assortment supermarkets and supercenters

2011 2012

Shopped for groceries in the last 30 days (1)

% of Shoppers, N = 1401

(1) Question: Please indicate the stores where you've purchased grocery type items in the past 30 days. Please select all that apply (from list of store formats, not individual stores, provided).

(2) Question: When you need grocery-type items, how often do you shop at the following…?

Source: Booz & Company Analysis

87%

59%

27%

19%

18%

15%

2%

2%

1%

1%

71%

39%

32%

17%

3%

15%

17%

17%

8%

13%

Natural/Organic Store

Drug Store

Dollar Store

Ethnic Foods Store

Supermarket

Supercenter

Warehouse Club

Convenience Store

Discount

Limited Assortment

12 12

“Great sales, lots of BOGOS, great customer service, well stocked, friendly employees, immaculate”

“ATM available”

“Close to home”

“Good choice of fruits and vegetables. Good assortment and the items are fresh.”

“Used to it. Average price is pretty good”

“The price is on par with other stores in the area and the quality is arguably better. Their butcher department also refuses to carry cloned meat and filler ground beef!”

“They have everything I need”

62%

60%

45%

44%

43%

37%

34%

29%

29%

27%

27%

24%

24%

23%

Best everyday price

Great quality products

Best Promotions

Organic, natural foods

Always in stock

Easy In / Out

Widest Assortment

Assortment beyond Grocery

Customer service

Habit

Clean, maintained

Private brands

Community Role

Convenience

The 5 Most Important Reasons Shoppers go to a Specific Store Mean/Top 2 Box N=2050

Convenience and price are the primary drivers of store choice

Sources: Grocery Retail Survey, Booz & Company Analysis

13 13

Consumers compare prices across the categories they buy most

50% Chicken

Fresh vegetables

Fresh fruits

Eggs

32%

55%

58%

41%

32%

Lunch Meat

Cheese

Pork

60%

37%

Milk

Seafood

Beef

Non-Milk Dairy

55%

44%

43%

Coffee/Tea

Juice and Water

Soda

Beer/Wine

41%

39%

36%

23%

Frozen Foods

Frozen prepared foods

42%

30%

Cereal

Canned foods

Dry Grocery

Salty Snacks

Condiments/Sauces

Sweet Snacks

Spices & herbs

Baking

Candy and Gum

43%

32%

29%

27%

24%

23%

21%

20%

12%

Categories Where Price Comparison Is Frequently Done N=1654, Top 2 Box

3%

34%

Baby wash/lotion/wipes

Cigarettes and Tobacco

41%

Cosmetics 20%

40%

Vitamin/health supplements 24%

33%

Kitchenware

Electronic Parts

Office/school supplies

27%

23%

20%

12%

Diapers

Baby food

7%

6%

23% Pet food/litter

Laundry Products

Paper Goods

Cleaning Products

Personal Care

10%

Medicine

Beverages/Alcohol

Frozen

Meat/Seafood/Eggs

Dairy

Fresh produce

Shelf-stable foods

Baby

Other

Household

Personal

Sources: Grocery Retail Survey, Booz & Company Analysis

14 14

The following categories are where you must be price competitive in order to keep shoppers

Fresh Fruits Fresh Vegetables Milk Chicken Beef

Laundry Products Coffee/Tea Milk Non-Dairy Cheese Paper Products

15 15

As we ―modeled the future‖ through the current economic lens, spending stagnation is projected through mid-2013

Time Period: 4 Years of Back Data, Forecast – Next 19 Months

Source: IRI Economic Shopping Behavior Longitudinal Database™, IRI Consumer Network™; Total US

Total US: Total Store – Average Monthly Spend per Buyer Actual Data: January 2007 to November 2011; Forecast: December 2011 to May 2013

$240.0

$245.0

$250.0

$255.0

$260.0

$265.0

$270.0

$275.0

$280.0

$285.0

$290.0

$295.0

Dollars per Buyer

Forecast2008 2009 2010 YTD 2011 2007

Dec 07 – June 09 The Great Recession

Path to Recession

July 09 – June 11 Road to Stability

Transit ion in Shopper Behaviors July 11 – May 13

New Shopping Norms

16 16

The consumer-led economy remains in a recession

Slight positive momentum – very weak and questionable recovery

Lack of confidence in governmental spending controls continues to shroud ongoing shopper behaviors and rituals

Shopper traffic, spend, and trip levels have stayed relatively flat

Approaching deal saturation

Mobile technologies are redefining [r]etail

Innovation (product, merchandising platforms, dialogue driven marketing, and format) are becoming strategic differentiators

The first 200 days of 2012

17 17

2012 Election drives not major new economic initiatives for growth –Bush era tax cuts get repealed – if so – expect recession

–Unemployment and Underemployment remain above 16%

The US Government does not get spending under control and becomes the ―new Greece‖ in ten years –$20B budget deficit projected by 2020

Enter a deflationary period

Shopper spend levels continue flat through 2020 at the least

The consumer increasingly exhibits ―pause before purchase‖

Economic scenarios – Worst Case

18 18

The new election brings an increase in taxes coupled with some governmental spending controls –Retain some portion of the Bush tax cuts

–Massive Governmental budgets cuts across the board

–Significant new taxes (personal and corporate)

Retail suffers as shoppers mostly to only purchase ―needs versus wants‖ –The “daily pressures of austerity” reigns

–Recovery follows consumer confidence growth especially in home buying

–Competition is at all time high -- “intensified”

Economic scenarios – Most likely case

19 19





20 20

Four mega-trends are reshaping the retail industry for the foreseeable future

Continuing Trends

2012 Retail Key Mega-Trends

Format Innovation

Online Encroachment

Value Seeking

Technology- Enhanced Shopping

Emerging digital shopping behaviors which enable ever more consumers to access the best deals available in their local market

2

Continued innovation in physical store formats –particularly smaller stores – meeting distinct consumer needs

4

The recession caused a likely permanent shift

towards “value seeking” behaviors

1

Growth in online retailing within

grocery – but driven primarily by

“peripheral” categories not the core

3

Plus 2 key continuing trends: ● Private brand share is stable

at a new, higher level ● Ongoing concern for health,

wellness and sustainability

5

21 21

The recession caused a sharp increase in ―value seeking‖ behavior – some of which will likely persist

+17%

"New Normal"

78%

Will revert to

pre-

recessionary

behavior

11%

Changed

behavior

during the

recession

28%

Always

exhibited

behavior

61%

I seek discounts often % of All Shoppers

+14%

"New

Normal"

78%

Will revert to

pre-

recessionary

behavior

13%

Changed

behavior

during the

recession

27%

Always

exhibited

behavior

64%

+13%

"New

Normal"

55%

Will revert to

pre-

recessionary

behavior

19%

Changed

behavior

during the

recession

32%

Always

exhibited

behavior

42%

I am comfortable buying store (private) brands

% of All Shoppers

I accept living with less % of All Shoppers


22 22

This translates into a shift towards austerity for millions of households

70

13 89

"New Normal" Will revert to

pre-

recessionary

behavior

Changed

behavior

during the

recession

32

Always

exhibited

behavior

+19M

I seek discounts often Millions of US Households


“89 million out of 115 million

households are now value seekers”

23 23


73

15 89

"New

Normal"

31

Will revert to

pre-

recessionary

behavior

Always

exhibited

behavior

Changed

behavior

during the

recession

+16

I am comfortable buying store (private) brands

Millions of US Households



households are confortable buying

private brands”

24 24


48

22

63

+15M

"New

Normal"

Will revert to

pre-

recessionary

behavior

Changed

behavior

during the

recession

37

Always

exhibited

behavior

I accept living with less Millions of US Households



households accept living with less”


households are confortable buying

private brands”

25 25

And shoppers clearly articulated their definition of value

“Quality received per

dollar spent”

Value

26 26

At the same time, digital technologies are changing the way consumers shop for groceries

Shopper Technology Use (% of shoppers)

(1)


Online Coupons:

31% use

online coupons Mobile: 31% use mobile

technology while grocery

shopping

Check Prices: 23% check prices

at multiple stores online before

going shopping

25% use technology

at least two ways

9% use technology

all three ways

Overall, 52% use technology in their grocery

shopping

6%

6% 4%

12%

4%

11%

9%

(1) % Shoppers using technology for 25% of shopping trips or more.

27 27

Shoppers use technology most often to obtain lower prices, as well as to research products and make lists

7%

Check nutritional

information

7%

Scan shelf labels

5%

Locate products

Check prices

8%

Research products

9%

Track spend

9%

Check for coupons

9%

Check recipes

13%

Track shopping

list

16%

Make shopping

list on mobile device

16%

Research products pre-trip

20%

Check prices pre-trip

23%

Get coupons pre-trip

32%

Read product reviews pre-trip

19%

Pre-Trip In-Store

Value Discovery and Other Activities % of Shoppers who use technology for more than 25% of Shopping Trips

32% of shoppers use online coupons more than 25% of the time

8% of shoppers compare prices in store on over 25% of their trips

Value Discovery Activities Other Activities


28 28

As in other sectors, technology makes value seeking in grocery easier—so value seeking behavior is likely to increase

For several years, digital

technology has allowed for

instant price comparison in

the travel industry

As technology improves grocery shoppers will eventually have the same complete price

transparency across different online and offline retailers

Southern Savers (southernsavers.com) already identifies the lowest prices for key

items across multiple stores

5998 coupons available this week

29 29

Fresh Foods, Produce

Dry Groceries, Beverage

Pet Care

Home Essentials

Health Care

Personal, Beauty Care

Clothing, Footwear

Electronics, Books, or Music

More than half of consumers purchase grocery categories online at least occasionally – mostly in specific, non-core categories

Never

46% At Least

Occasionally

54%

Online Purchase of Grocery Categories

4%

9%

12%

12%

29%

29%

77%

85%

Occasionally Regularly Almost Always

Percent of Shoppers who Make Purchases Online by Category

(N=1402)

No

n-G

roc

ery

G

roc

ery

– N

on

-Co

re

Gro

ce

ry –

Co

re


30 30

Very few consumers shop their full assortment online—but category-specific online shopping is at least as big a threat

61%

% of Shoppers

100 35 60 55

40%

0

% o

f S

pe

nd

4% 0%

5%

24%

11%

30

95

10

20

40

50

60

70

30 50 15 25 10 20 40 45 5

0

Estimated Percent of Grocery Dollars Spent Online Among Online Grocery Shoppers

Category Specific Full Assortment

Estimated


54% shop online a little bit, for a few

items (0.4% of total

demand)

Less than 2% of consumers shop

online a lot (0.4% of total

demand)

31 31

New small format stores – particularly Dollar and Hard Discount stores – are expanding rapidly

US Store Count Expansion from 2005-2011

Source: Nielsen US Retail Trends, March 2, 2012; Booz & Company Analysis

38,513

31,590

18,579

4,578 2,462

1,067 1,964

38,526

32,924

22,782

4,334 3,645 1,231

2,410

Hard discount stores Aldi, and Save-A-Lot are growing rapidly

Family Dollar and Dollar General

alone have added over 3,000 stores

since 2005

Supercenters Mass Merch Supermarkets $2MM+

Dollar Stores Drug Convenience Hard Discount

Warehouse Clubs

2005 2011

148,126

140,655

+5%

0%

+4%

+23%

-5% +48%

+15% +23%

32 32

About a third of consumers visits smaller formats—mostly for quick trips

70%

3%

27%

Percent of Shoppers Who Shop at Small Format Stores

Based on Trips in a 60 Day Period (N = 1401)

Do Not Shop at a

Small Format Store

Primary Store

is Small Format Shop at a Small Format

Store, but Not Primarily

Distribution of Small Format Trips by Trip Type

Only 1 in 10 shoppers of small format stores selected one as their primary store.

Less than 25% of

trips to small format

stores besides

Hard Discounters

are for “stock ups”

Note: Shoppers included in pie chart analysis are all survey respondents who reported shopping at any one of five small-format banners –including supermarkets and dollar stores but excluding convenience and drug stores—in the past 60 days.

Stock Up

Fill In

Quick Food

Quick Non-Food

Special Purpose

Dollar Stores

12%

18%

14%

42%

15%

Small Format Fresh

& Prepared Foods

Markets

24%

25%

29%

13%

10%

Hard Discounters

35%

30%

25%

5% 5%


33 33

Small stores compete with very different value propositions

Why Shoppers Go to Small Format Stores Instead of More Traditional Stores (% of shoppers who shop at a particular store and rated category as an important reason why)

30%

82%

Higher value store brands

39%

Lower prices 60%

48%

25%

9% There is a better

selection of pre-packaged

meals

15%

5%

Fresh Food

37%

26%

20%

Dollar Stores Small Format Fresh

& Prepared Foods Markets Hard Discounters

43%

Faster Checkout

34%

32%

26%

30%

32%

Simple store

navigation

Price/Value Assortment Convenience


34 34

The Cabela Multi-Channel retailing strategy fully integrates and continues to deliver a seamless experience

Retail Stores

Specialized Product

Departments

Specialized Service

Departments

Catalog

Shopping Resources

Customer Service

Membership Groups

Information and

Social Interaction

1 1

3

3

4

4 5

7

6

5

7

6

8

8

2

2

7 7

3

34

Creating coherence across all channels

35 35

Beyond understanding small format innovation, retailers are exploring multiple merchandising/market innovation initiatives

Bringing together multiple categories to deliver value (Spring Cleaning, Healthier Eating, Beauty Regimens)

Transforming Categories into Departments

Linking items that represent a shopper needs state (Cough and cold, Well Baby, Backyard Barbeque)

Simplifying merchandise offering (Assortments, Signage, Effective New Item Management)

Rethinking and redesigning aisles (Pet food to Holistic Pet Care, Thirst Center)

Evolving Strategic Capabilities Implemented Tactical Examples

Designing Total Merchandise Solutions

Creating Affinity Displays

Rethinking assortments and shelves

36 36

It is clear that retailers are using multiple techniques to change the in-store experience at an increasingly rapid pace

Implementing some level of “affinity based/driven” merchandising programs 68%

Integrating “private brands” in key merchandising platform solutions 56%

Rethinking a more efficient and effective approach/process to execute better in-store 51%

Challenging the merchandising organization to simplify the shopping experience

46%

Redesigning assortments to better meet shopper needs, usage states, and occasions

42%

37 37

Private label sales rose sharply in 2008 – apparently driven by falling consumer confidence – and have stabilized at a new high

Source: Nielsen, University of Michigan/Thompson Reuters Consumer Sentiment Index: 9/2011 Table 1. The Index of Consumer Sentiment, http://www.sca.isr.umich.edu

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

55

60

65

70

75

80

85

90

95

Sto

re B

ran

d S

ales

as

a %

of

Gro

cery

Sal

es

Un

iver

sity

of

Mic

hig

an

Ind

ex o

f C

on

sum

er S

enti

men

t

2011-12 2010-12 2009-12 2008-12 2007-12 2006-12 2005-12

Private Brand Unit Sales Share and Consumer Confidence

Private Brand Share Consumer Sentiment

Recession

Consumer Confidence

Private Brand Share

http://www.sca.isr.umich.edu/

38 38

Shoppers appreciate store brands’ value and quality and see store brands’ place as less limited now than in the past

Percentage of Shoppers Who Agree (Disagree) (N=1401)


Store brands are a great value

I plan to keep buying even if my economic situation continues to improves

I’m willing to buy a store brand if the price is low and I can’t find a national brand on sale

Perceive Store Brands as

Good Value

Perceive Store Brands as

High Quality

Have an Expanded View

of Store Brands’ Place

Store brands are the same quality as national brands

I am willing to buy premium store brand products

Store brands are generally low quality

Store brands are for people who just want to save money

-43% 23%

-49% 21%

-64% 6%

-52% 21%

-58% 14%

-11% 59%

-16% 47%

-9% 68%

-9% 68%

-4% 70%

Total Disagreement Total Agreement

Kids won’t eat the store brand

I’ll buy store brands for every day but not for special

I only buy store brands for basic needs/staples

39 39

Retailers must respond to current market conditions

Value

Seeking

Respond to the consumer need

Protect remaining profit opportunities

Cut costs to grow stronger

“Jump in,” innovate, experiment

Develop coherent digital strategy

Do more than weekly advertisements online

Address pain points driving consumers online

Develop own non-food, non-perishable models online

Investigate full-assortment online models

Understand drivers of new-format success or failure

Innovate realistically (understand economics too)

Address consumers’ trip needs – what draws them to new formats? How traditional stores address these needs (e.g. merchandise platforms)?

What Should Grocers Do?

Technology- Enhanced Shopping

Online

Encroachment

Format & Merchandising

Innovation

40 40





41 41

From ―best practice‖ engagements there are three capabilities that will differentiate winners from losers

42 42

Market leaders are funding growth by refocusing investments toward customer facing functions

―Fit for Growth‖ Framework

Transform Cost Structure

Reorganize for Growth

Builds sustainable &

differentiated

capabilities for growth

Creates a Right to Win

Establishes a Fit for

Purpose Organizational

Operating Model

Release

Funds

Invest in

Higher

Value-Added

Priorities

Eliminates low

productivity investments

and operating costs to

free up cash for more

attractive investments

Enable & Sustain

Reductions

Building-Blocks of “Fit For Growth”

Retailer Shopper Centric

Strategy

Articulates how a retailer

creates differentiated

value for customers

Invest in Growth

43 43

Multi-Channel Retailing

―Best Practices‖

Success in multi-channel retailing requires seven core competencies across the entire organization

Fully Integrated

Supply chain Seamless

Shopping Experience

Consistent Product and

Service Offers

Seamless Assortment

Custom and Mobile

Optimized Website

Branded Mobile

Application

Integrated Customer Contact

Organization

44 44

Where to grow is equally important – initial focus centers on defining and delivering shopper advocacy

―Headroom for Growth‖

Framework

Marketing Store Operations

Develops a shopper

centric value equation

recognized by the

shopper

Creates a sustainable

value equation

Insures in-store activities

always support the

ongoing banner promise

Rewires all types anf

forms of shopper

communications

resulting in “aligned

relationships”

Critical elements for profitable growth

Retailers Shopping

Experience Strategy”

Articulates how the retailer

delivers a simplified and

meaningful shopping experience

Merchandising

45 45

―It is the best of times – it is the worst of times……………‖

Living with less and comfortable

“When will it end mentality”

Continued shopper bifurcation

“Creeping forward” economic /retailing environment

Technology Enhanced path to purchase

46 46

And if you want to contact me……………

[email protected]

mailto:[email protected]

redefining competitiveness - carolinas food industry

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