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To market, to market: the changing face of grocery retailing
To Market, to Market: the Changing Face of Grocery Retailing Heart Tat Keh and Seong Y. Park
Introduction More is happening in retailing than is happening in manufacturing or in finance. It is retailing distribution which in the next few years is going to be the area of the greatest innovations and greatest changes?
The above quote by Peter Drucker reflects the many changes that have taken place, and continue to take place, in retailing in general. However, it is particularly relevant to grocery retailing, which is economically, culturally and politically central in many countries. The grocery channel plays a vital role in conveying food and other household items to the population at large. There are several salient characteristics which, taken together, make the industry an interesting study: 2 • It is an intensely competitive, low-margin, highvolume industry. • Much of the product is perishable, and the markets are local. In this sense, the workers and consumers have more power relative to those in other industries. • It is highly visible and has been the subject of several attempts by the state to regulate operations. For example, the industry was one of the last to be released from the wage and price controls of the early 1970s in the U.S. The grocery industry, with U.S. supermarket sales in 1995 totaling $312 billion, is a significant part of the economy. Table 1 shows the sales for the 10 largest chains in the U.S. Over the past few decades, grocery retailing has evolved from being a simple mom-and-pop type of ~
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operation to one which is dominated by chains utilizing advanced technology and surviving on a low margin-high volume strategy. The changes in grocery retailing can be represented by Figure 1. It is clear that the force driving the revolution is changing consumer characteristics. In order to be more responsive to consumer demands, the industry has been transformed in three major ways: (1) the implementation of technological innovations, with an emphasis on efficient consumer response (ECR); (2) the introduction of new products and/or services; and (3) organizational Long Range Planning, Vol. 30, No. 6, pp. 836 to 846, 1997 © 1997 Published by Elsevier Science Ltd. All rights reserved Printed in Great Britain
Changing Consumer Characteristics Revenue (USD millions) Chain Kroger Safeway American Stores Albertson's Winn-Dixie A&P Publix Ahold USA Food Lion Ralphs
1995
1994
1993
23 938 16397 13302 12 585 11 788 10101 9400 8336 8211 5500
22 959 15627 12959 11 895 11 082 10332 7500 7420 7933 2725
22 384 15214 13235 11 284 10832 10384 7000 6619 7610 2800
D.P. Schulz, The nation's biggest retail companies, Stores 78 (July), $18 (1996).
restructuring as well as mergers and acquisitions. These transformations have tremendous implications for the marketing mix, productivity and manufacturer-retailer relationships.
The most important force driving the changes in grocery retailing is consumer demand. It is worthwhile to spend some time analyzing the changes that have taken place in the American household. As shown in Table 2, since 1970 families have become smaller; more are led by one parent, and more have mothers who work outside the home. From 1970 to 1995, the number of married couples with children under 18 shrank from 40% of all households to 25%. Divorce rates have increased, and the number of single-person households climbed from 17% of all households to 25%. In addition, while the number of marriedcouple households rose just 3% from 1990 to 1995, to 53.9 million, the number of single-parent families headed by w o m e n rose 12%, to 12.2 million. :~ Studies by the Census Bureau also found evidence of the effects of shrinking paychecks, from the 1970s, when one check supported a family, to today, when two checks are needed to maintain a similar standard of living. These changes have a significant impact on retailing. According to Eisenhart 4 'the same baby
Long Range Planning Vol. 30
December 1997
Percentage of households in each category
Family households Married couples with children Married couples without children Other families with children Other families without children Nonfamily households People living alone Other nonfamily households
1970
1980
1990
1995
40.3 30.3 5.0 5.6
30.9 29.9 7.5 5.4
26.3 29.8 8.3 6.5
25.5 28.9 9.1 6.5
17.1
22.7 3.6
24.6 4.6
25.0
1.7
5.0
P.T. Kilborn, Shifts in families reach a plateau, study says, New York Times November 27, A8 (1996).
boomers who rose up in revolution against the "material world" in the 1960s have rechanneled their energy into a consumer society extraordinaire, demanding products and services that meet diverse and specific needs and that match lifestyles now grown powerful with an enormous aggregate earning and spending capacity.' These changes in the constitution of the average American household affect its needs and demands for grocery items. Speed and convenience are increasingly important attributes in food preparation, which may account for the rise in microwave ovens in households. For fresh produce, the most important produce characteristics are: (1) freshness or ripeness; (2) taste or flavor; (3) appearance or condition; and (4) nutritional value. 5 Growing literacy rates imply that consumers are reading the product labels more carefully. Food safety is an important issue. Over the years there have been numerous examples where contaminated food products caused serious ailments and even deaths among consumers. A recent example was the detection of E. coli in Odwalla's apple juice in the states of Washington and California, where the bacteria caused serious sickness among children who consumed the product.
Technological Innovations It has been noted that application of technology has become essential in ensuring that each firm remains in touch with the market and competitive against its rivals. Technology plays crucial roles throughout the entire grocery channel; from helping manufacturers produce and distribute their goods efficiently to enabling the grocery store to create competitive advantage and serve customers more effectively. As a substantial portion of grocery items is perishable (e.g., vegetables, fruits, meats, and dairy products), it is imperative for products to flow from suppliers to retail stores in a timely, efficient and productive To Market, to Market: the Changing Face of Grocery Retailing
manner. From a survey of supermarkets in five European countries, it has been found that the most consistently given reason for the implementation of technology was to improve management control and operational information. These findings are summarized in Table 3. Table 4 presents the major technological innovations in the grocery industry since the 1970s, as well as other potentially important technologies. Some of these technologies (e.g. scanners, database management) are well known, whereas others are yet to prove their worth (e.g. virtual reality, personal shopping assistant). As consumers become increasingly busy with their lives, they have little time to do their grocery shopping. A solution to this problem is Peapod, an online food buying service, currently available in Chicago, San Francisco and Boston. Peapod has arrangements with local supermarkets who update the prices of over 18 000 items in a database daily. Consumers can scroll through the online catalogs and even compare prices. They fill out an order of selected grocery items and specify the delivery time for the following day. Peapod forwards the orders to the closest participating supermarket. The orders are filled by Peapod staffand checked out at special counters. They are then picked up and delivered by another set of Peapod employees. For this service, consumers pay a $29.95 startup fee, a $4.95 monthly service fee, plus $6.95 and 5% of their grocery total per order. 6 A broader technological innovation in the grocery industry to serve consumers better is Efficient Consumer Response (ECR), a concept introduced in 1993. 7 ECR encompasses multiple technological and managerial innovations which aim to transform retailers, distributors and manufacturers into more efficient and interlinked organizations. It involves collaboration between consumer goods manufacturers and retailers to enhance merchandising effectiveness, inventory and material flow efficiency,
Country Belgium UK
Defensive Aggressive response to Reduce Improve belief in innovation staff or other customer innovation by others costs service * *
Improve management Improve control over management work, Desire for Desire for control over finance, improved improved theft or loose materials operational strategic working scheduling information information
*
* *
*
FRG
*
Italy Sweden
*
*
*
*
*
* * *
*
*
*
*
* *
*
J. Child and R. Loveridge, Information Technology in European Services: Towards a Microelectronic Future, Basil Blackwell, Oxford, 197 (1990).
1970s Technological innovations
1980s
1990s
2000s
Product handling*
Scanner systems
Expert systems
Virtual reality
Information processing
Bar codes
Consumer scanning
Shopper ID
Product display
Electronic cash register
Data warehousing
Personal shopping assistant
Housekeeping
Database management
Continuous replenishment
Supply chain reinvention
Climate control
Electronic data interchange
Computer-assisted ordering Category management Direct store delivery Cross-docking
Decision transformation
Electronic shelf labels *Although some of these technologies were technically available earlier, they have been placed here by order of mass implementation. H.T. Keh, Technological innovations in the grocery industry: retrospect and prospect, forthcoming.
and the channel's administrative efficiency. It includes the following activities within an organization: (1) integrated electronic data interchange (EDI); (2) continuous replenishment; (3) computerassisted ordering; (4) direct store delivery; and (5) category management. We will examine each of these activities in turn. The concept of Electronic Data Interchange (EDI) is ~:entral to ECR. It first came into prominence in the 1980s. There are two types of information transfer used with EDI. One is the terminal-to-computer link, found mainly in intraorganizational networks and in the early stages of interorganizational networks. The other is the more sophisticated computer-to-computer link which requires the integration of two or more independent systems. The grocery industry has been found to use the most advanced EDI system, the !Jniform Communication Standard, which contains
both message and communication standards and is being implemented throughout the industry by manufacturers, brokers and distributors." The implementation of an EDI reflects a significant commitment to the relationship between channel members. It not only reduces transaction costs between them, but also provides better services for the final consumers. Continuous replenishment (CRP) alone is estimated to have the potential to account for 38% of total industry ECR savings. 9 It works in the following way: the manufacturer supplies the retailer with products based directly on warehouse shipment and inventory data rather than wait for the retailer's purchase orders. The manufacturer then determines the order quantity needed, assembles the delivery, and informs the retailer electronically of the impending shipment. Two manufacturers, Procter & Gamble and Campbell Soup, are supplying as m u c h as 30 to 40% of their Long Range Planning Vol. 30
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volume via CRP. CRP is able to increase in-stock performance, lower inventory and provide better asset utilization. An important task within CRP is item-by-item forecasting, which can be mathematically extrapolated from historical sales data. This is possible with com-
puter-assisted ordering (CAO). The use of CAO can reduce the amount of time a salesperson spends in the store taking orders, enabling those stores to be replenished just in time with the right product using information from the sales register. Directly related to CRP is the concept of direct store
Supplier Production lines
Supplier Distribution centers
Wholesaler Distribution centers Retailer Distribution centers
Retailer Stores
Consumer Right product, right place, right time, right price
To Market, to Market: the Changing Face of Grocery Retailing
delivery (DSD). Figure 2 shows the various channels through which a manufacturer can supply its retailer. Traditionally, industry executives have relied on distribution system B. Channel A is popular with huge retailers such as Wal-Mart which are able to purchase it1 large quantities from major manufacturers such as Procter & Gamble. The relatively low number of stores (vis-fi-vis grocery stores) can be supplied efficiently from Wal-Mart's own distribution centers. However, most retailers do not operate on the same scale as WalMart. DSD (channel C) is particularly appropriate for: (1) branded products where freshness is critical (e.g. dairy products and breads); (2) branded products with large movement volumes (e.g. soda and beer); and (3) products that require extensive in-store inventory management (e.g. greeting cards and panty hose). 1° Distributors and suppliers in the grocery industry often claim category management as the most important issue facing the industry. A 'category' is a distinct, manageable group of products/services that consumers perceive to be interrelated and/or substitutable in meeting a consumer need, while 'category management' is a distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value. ~1 It shifts decision-making from a tactical to a strategic approach. Category management is expected to increase revenue, gross profit and inventory savings. If implemented correctly, ECR is expected to save the grocery industry approximately $30 billion annually. 12 More broadly, retailers are expected to benefit from increased sales per store, higher productivity of selling space and less back room area. Manufacturers will benefit via lower manufacturing and distribution costs and more effective use of promotional funds, as well as from knowing where the product is in the pipeline at any given time. However, ECR is costly to implement. The start-up costs are high, and the returns are not immediate. In a h~w-margin industry, where supermarket net profits aw~rage 0.49% of sales, not every grocery chain is r~lshing to implement the system.
N e w Products and Services A business organization often defines itself by the products and services it offers the market. In order to sustain a competitive advantage, the development of n e w products and services is crucial. Within the grocery industry, we can delineate three trends: (1) the introduction of n e w products; (2) the implementation of n e w in-store services; and (3) the enhancement of private labels. According to Bob Tanojev, senior partner in Ernst & Young's Global Consumer Products Consulting Group: 13
Today, both manufacturers and distributors are stepping up their investment in new products. The manufacturers are investing billions of dollars in research and development programs designed to create new generations of innovative products that will meet consumer needs in the 21st century. These investments represent big gambles in science, technology, lifestyle forecasting and product commercialization.... in the world where ECR is fully operational, the premium will be on getting hold of products that are truly 'new.' In grocery retailing, n e w products are sometimes considered to be the savior of the industry. A new product can take on multiple meanings and forms. The degree of innovation can range from clever repackaging (without any detectable change to the product itself) through incremental improvements to true breakthroughs. In Table 5, we show h o w new products can be categorized in the grocery industry. It should be noted, however, that a high proportion of new products do not succeed in the marketplace and are eventually pulled out. In addition to new products, grocery retailers have also introduced n e w services in their stores. The most prominent of these is the establishment of foodservice departments in grocery stores. A n e w report by McKinsey & Co? 4 notes that 'while traditional grocery could increase $11 billion over the next 10 years, a greater opportunity could be provided from prepared foods. Easily another $19 billion in growth is possible from further expansion of the prepared food deli offering.' There has been a dramatic increase in the number of grocery chains offering food services. For example, Sunset Foods in Northbrook, Illinois has a food service department staffed by 15 people who wait on customers and 20 employees who prepare food. Customers can either purchase prepared food off the shelf or place a special order that will be prepared on the spot by a chef while the customer continues to shop. Several other food stores have also moved into catering, a concept traditionally associated with restaurants. Often the food is made to order and customized to fit individual customers' needs. In the face of relentless competition, grocery chains are also diversifying into other services. In addition to services such as film processing, video rental and lottery sales, some are even venturing into financial services. For example, J. Sainsbury, Britain's second largest supermarket chain, claims to have enrolled 100 000 customers for its new bank within the first two months of its operation. The bank is a joint venture with the Bank of Scotland, with deposits reaching £100 million ($163 million), and attracting 10000 new customers a week. Private labels play an important role in grocery retailing. In terms of growth, private labels continue to outgrow manufacturer (also known as national) brands. Table 6 shows a comparison of national versus private brands. In 1996, private labels grew by 5.6% while national brands experienced much lower growth. The importance of private labels goes b e y o n d Long Range Planning Vol. 30
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New product classification
Description
Classically Innovative Products
Equity Transfer Products
Seasonal Products
Line Extensions or Flankers and Blockers
Regional Products
New Packaging
Clone Products
Products which appear to the consumer and to two or more segments of the value chain as bringing true innovation to a category, or products which by their nature create new categories. Products which may or may not represent significant innovation. The 'newness' in these cases is based on the assignment of an established name or franchise to a product or the extension of an equity name. Products whose consumer-use occasions dictate a radically compressed 'lifecycle' or 'sell cycle.' Seasonal products fall into three distinct groupings: products introduced for a specific date or event; products which reappear every year during the particular season; and products which enjoy a majority of their sales at certain periods but have a presence on the shelf throughout the year. Products which represent new flavors, forms and/or sizes of existing products. These products are generally introduced to either revitalize existing brand franchises or increase a manufacturer's presence on a shelf, thereby limiting shelf space to competitors. Products whose newness is primarily defined by geographic distribution. Regional products may be well-established in one warehouse of a multi-warehouse distributor, but function as a new item when they migrate to other warehouses within that distributor's system. Packaging in and of itself does not make a product new, but a packaging difference can constitute a new product if it represents a new consumer-use occasion or an application of new packaging technology that somehow delivers a tangible consumer benefit. Products which extend a category solely by imitating existing items within that category without delivering any clear new value proposition to the consumer.
Example Frito-Lay's Baked Lays. Oscar Mayer Lunchables. Nabisco's Snackwell's.
Ivory dishwasher liquid.
Seasonal greeting cards. Canned pumpkins (Halloween and Thanksgiving).
Variations of Kellogg's Cornflakes (e.g. Regular, Honeycrunch, Cocoa frosted).
Ken Davis products (barbecue sauces) in midwest USA.
Repackaging chocolates into heart-shaped boxes for Valentine's Day.
Of Ragu's 27 flavors of pasta sauces, some are hardly distinguishable from others.
Adapted from R. Mathews, New products: lifeblood or tired blood?, Progressive Grocer75 (8), 28 (1996).
Top 10 manufacturers Top 25 manufacturers All other manufacturers Private label Generics Total food stores
Share of 1996 food dollar sales (%)
1996 vs. 1995 (% change in dollars)
32.9 49.2 35.5 15.2 0.1 100.0
1.7 1.4 2.1 5.6 (7.5) 2.2
The growth gap, Progressive Grocer75(11), A19 (1996).
To Market, to Market: the Changing Face of Grocery Retailing
profitability. It gives the retailer extra bargaining leverage with national brand manufacturers. Retailers with private labels also gain incremental manufacturing margins. For example, Safeway, a major U.S. grocery chain, supplies Select (its house brand) products to Vons, Stop & Shop and Bruno's, three other major supermarket chains. It has been found that private labels perform better in large categories with high margins. 15 They also do better when competing against fewer national manufacturers who spend less on national advertising. Research shows that consumers do not buy private labels simply because they are cheaper. Consumers are interested in quality, and grocery retailers should
continue to purchase from manufacturers that have the highest quality products. Although the development of private label brands originated in the U.S., the trend has also caught on in Europe. In fact, British grocery stores such as Sainsbury and Tesco, with private label sales at 54% and 41% of their total revenues respectively, outperform their U.S. counterparts who average only 15% of sales from private labels. European success with private label has been attributed to two factors: (1) regulated television markets mean that the level ~f television advertising for national brands does not reach U.S. levels; and (2) national chains are dominant in most western European countries, resulting in higher retailer power vis-a-vis manufacturers. 16
Corporate Restructuring and Mergers and Acquisitions As a result of changes in consumer demand, the grocery industry is also forced to restructure itself to become more nimble and responsive. This restruct uring involves both ends of the distribution, and both manufacturers and retailers are affected. At the upstream level, manufacturers can no longer have routine price increases like they used to. Consumers resist higher prices, and, at the same time, retailers are charging more for shelf space for n e w products. The manufacturers are forced to restructure themselves through reorganization, cost cutting and downsizing. For example, Campbell Soup recently restructured itself to focus on global expansion by ~.liminating 650 employees in 1996 and cutting costs by buying from outside contractors. In late 1996, the H.[. Heinz Company announced that it w o u l d sell off inoney-losing operations in the U.S. and abroad as t~art of a plan to reduce debt. Ever since the Quaker Oats Company acquired Snapple in 1994, it has gone !hrough a series of work force reductions and reorganizations. Hopefully, its recent disposal of Snappte will snap it out of its doldrums. Overall, it is estimated
Company Ahold Aldi Carrefour Casino Delhaize Ito Yokado Marks & Spencer Tengelmann Yaohan
that 100 000 jobs have been lost in the food industry in the U.S. since mid-1995. U.S. manufacturers are not alone in their plight, as European manufacturers are also facing hard times. For example, Unilever, the British-Dutch consumer products giant, plans to sell off underperforming units, reorganize management and link executive salary to firm profitability. Their lean-and-mean focus is reminiscent of their U.S. counterparts. At the other end of the channel, grocery retailers have also restructured their operations. As more and more of these grocery chains have sought to merge with or acquire other chains, grocery retailing has become more concentrated, with fewer but bigger grocery chains. M&A activities take place domestically as well as internationally. In June 1995, Ralphs Grocery Company merged with Food 4 Less Supermarkets in a deal worth $1.5 billion. Following the merger, Ralphs operates about 280 supermarkets and 70 warehouse stores in southern California. Quality Food Centers, a regional chain based in Washington State, is seeking to become a larger national player. In November 1996, it agreed to acquire Hughes Family Markets, a 56-store chain based in southern California for $360 million. This will double QFC's size and push annual sales over $2 billion. On the international scene, the occurrence of M&A activities has been just as rapid. It has been estimated that as much as $1 of every $5 spent in U.S. food stores goes to retailers owned or controlled, at least in part, by foreign companies. 17 The presence of foreign firms in U.S. grocery retailing is growing. The Bureau of Economic Analysis notes that for 1994, sales of U.S. food retailing companies with at least a 10% foreign ownership was worth $57.4 billion. Table 7 lists several foreign companies with control of grocery operations in the U.S. Some Asian grocery powerhouses are also becoming increasingly international in their outlook. For instance, the Yaohan Group, which originally started out in Japan, has moved its headquarters twice, first to Hong Kong and then to Shanghai, China. It cur-
Country The Netherlands Germany France France Belgium Japan U.K. Germany Hong Kong
Stores/stake 906 stores: Stop & Shop, Edwards, Giant Food, Tops, Finast, Bi-Lo 400+ Aldi limited assortment stores; 27 Trader Joe's; 11% stake in Albertson's 11% stake in Price/Costco 53% of Smart & Final Control of Food Lion; share of Super Discount Markets (Cub stores) Southland (7-Eleven stores) 19 Kings supermarkets 54% stake in A&P Operates eight Yaohan supermarkets in the U.S.
S. Weinstein, Foreign affairs, Progressive Grocer75 (11), 26-32 (1996).
Long Range Planning Vo|. 30
December 1997
rently has over 400 stores in 13 countries, with annual revenue exceeding 500 billion yen. However, cutthroat competition has also taken its toll on Yaohan. Earlier this year, it announced that it would sell 16 of its outlets in Japan to Daiei Inc., the largest grocery chain in the country. This is part of Yaohan's plan to reorganize itself and boost its financial situation. The company also plans to increase its presence in China, where it currently has 33 supermarkets, one department store, a distribution center and 15 hamburger outlets through a joint venture. IGA, the nonprofit organization established in 1926 to help independent grocers, is continuing to expand overseas. Its 3600-store network includes more than 1200 retailers in 21 countries. In 1996 IGA opened five stores in Brazil and 25 in South Africa, which are new markets. It is also concurrently expanding the number of stores in China from 25 to 61, and will soon add 300 stores to the 240 it already works with in Australia. By 2000, IGA expects to open another 64 stores in China and to increase sales there from $9 million in 1995 to about $400 million. The 3-year plan also includes 100 new stores for Brazil and 200 for South Africa. 18 In Europe, the British chains are also busy expanding into other countries. In the U.S., Sainsbury has a half interest in Giant Food in addition to controlling Shaw's (which has 101 stores). Tesco, another British chain, has focused on expanding in Europe. Since 1993, it has purchased the Catteau chain in France, Global in Hungary, Savia in Poland and Kmart stores in the Czech Republic and Slovakia. Altogether, Tesco operates over 200 stores in Europe. Ahold, the Dutch giant, is also expanding rapidly. It has acquired several grocery chains in the U.S. and has also built new stores in Asia. Latin America has also seen some M&A activities. For example, recently the Exxel Group (which has investments including electric utilities, prepaid health plans and the Mastercard international licenses for Argentina and Uruguay) has agreed to purchase C o m p a ~ a Argentina de Supermercados, one the country's largest chains, for $440 million. Argentina de Supermercados, which owns the Norte chain of 25 grocery stores, will spend $350 million over 5 years on further expansion in Argentina, Brazil, Paraguay and Uruguay.
Strategic Implications Given that grocery retailing is being dramatically transformed, what are the implications for managers? How will these changes affect what they do? More specifically, how will they affect the marketing mix in terms of the four P's (product, promotion, price and place)? In addition, how will this affect retailing To Market, to Market: the Changing Face of Grocery Retailing
productivity? Will the relationships between the supplier and retailer become better? It is clear that consumer demand has forced the manufacturers to offer a wider product assortment. Thus we are witnessing more competition for shelf space among the manufacturers. For example, within the past 5 years, the four major cereals producers in the U.S. have created new varieties to capture greater market share. Some of the new brands have managed to gain market acceptance while others have not done as well, although some long-time favorites such as Kellogg's Corn Flakes still continue to prosper. The significant growth in private labels has come at the expense of national brands. Consequently, national manufacturers who engage in a mixed branding strategy (producing their own as well as private brands) may experience growth in overall sales but also some product cannibalization among their own product lines. Price is a particularly important issue in grocery retailing. In an industry which is notorious for its low margins, m a n y producers and retailers are collaborating to ensure that the final price paid by consumers remains competitive. Efficient customer response (ECR) is especially useful in this regard. The dichotomy of national and private brands is also reflected in the price differences. Price considerations also affect the amount of promotion and advertising expended by manufacturers. In recent years, several large national brand manufacturers, including Procter & Gamble, have been cutting down on their promotion expenses. Among other things, they are re-thinking the concept of providing coupons to consumers, a costly endeavor which produces a low redemption rate nationally. The final 'P' (place) is also changing the face of grocery retailing. As the industry becomes increasingly competitive, margins are being driven very low. A profitable operation relies on high volume. This has sounded the death knell of many small players, particularly mom-and-pop operations. However, it has also spelled opportunities for niche marketers. An off-shoot of changing consumer characteristics is the growth in natural food stores. In the U.S., since 1990 the natural foods category has grown by 22% annually. Americans have become more discerning in their food consumption patterns, thus feeding the growth in natural food stores. Managerial surveys in the trade journals often indicate only the level of satisfaction with new technologies and their impact on profitability. Most managers are content with their performance so long as the stores remain in the black. We contend that profitability p e r s e is an insufficient measure of the health of the industry. At a time w h e n the cost of capital is increasing, labor costs are expanding and distribution expenses continue to grow, measures other than profitability should be used. It should be
emphasized that in a low margin/high volume industry, the focus should be on productivity, which in turn drives profitability. It has been found that total factor productivity in the food industry grows at a much slower rate than in manufacturing. 19 This is disturbing given that the industry as a whole has invested enormous amounts of resources (including new technologies) in addition to restructuring (downsizing) to become more productive. What has gone wrong? A prominent economist 2° notes that for the U.S. economy in general '['he surge of downsizing and other forms of cost cutting may have little or nothing to do with sustained e n h a n c e m e n t s in productivity. In fact, not one shred of theoretical or empirical evidence supports the interpretation of the recent wave of downsizing as a necessary step in a process of reviving productivity.
Whether this is true for grocery retailing we do not know. More empirical research needs to be conducted in this area for us to have a better understanding of this salient issue. The other major implication of the changes in grocery retailing has to do with supplier-retailer relationships. It has been noted that retailers are becoming more powerful versus their suppliers. 21 Given that this is true, what does it mean for suppliers and retailers? Will this trend continue? Wal-Mart is often cited as an example to back this claim. Since 1984, Wal-Mart's expenses have shrunk from 19.1% of sales to just above 15.8% in 1995. Its management realizes that cost savings come by forcing suppliers to replenish inventory only as it is depleted. 22 This, in turn, forces its suppliers to rethink their distribution strategies in order to cope with Wal-Mart's increasing market leverage. One of them, Coca-Cola, began to orchestrate the activities of its independent bottlers in the late 1980s. This ensures greater efficiency in the, distribution of Coke products to Wal-Mart stores. There is a clear need to improve supply chain management with a view towards improving manu-
facturer-retailer relationships. The role of the store should change from buying from suppliers to anticipating consumer demand. Retailers needs to work closely with their suppliers to develop products that fit the demand. The implementation of ECR is useful here. Both parties can no longer afford selfish costminimizing measures, rather the focus should be on channel-wide cost efficiencies. It has become axiomatic that in order to achieve industry success, both manufacturers and retailers have to develop longterm commitment and trust for their mutual benefits.
Conclusion It is obvious that grocery retailing today is no longer what it was ten years ago. The driving force behind most of the changes can be attributed to changing consumer characteristics. Consumers never stay the same. Food retailers should be continually scanning their environment to ensure that their operations anticipate these changes and stay ahead of their competition. Most of the changes can be broken down into three categories: (1) n e w technology; (2) introduction of new products and/or services; and (3) corporate restructuring and mergers and acquisitions. We have addressed these issues in some detail and looked at their implications on the marketing mix, productivity and supplier-retailer relationships. As we move into the next century, we foresee more dramatic changes on the horizon. Currently, the trend is towards globalization. Consumers the world over are becoming more homogeneous in their demands. This accounts for the global success of companies as diverse as McDonald's, Levi Strauss, Coca-Cola and Nike. As we mentioned previously, the number of grocery chains operating internationally, some due to mergers and acquisitions, is growing. How the grocery chains take advantage of these exciting changes is another interesting episode waiting to unfold in the revolution of grocery retailing.
References 1. P. F. Drucker. Retailing in a post-capitalist society. Stores 75 (8), RBR1-RBR4(1993). 2. J. P. Walsh. Supermarkets Transformed: Understanding Organizational and Technological Innovations. Rutgers University Press, New Brunswick, NJ (1993). 3. P.T. Kilborn, Shifts in families reach a plateau, study says, New York Times (November) 27, A8 (1996). 4 D. M. Eisenhart. Publishing in the Information Age. Quorum Books, Westport, CT (1994). 5 T. Zind. Fresh trends '90: a profile of fresh produce consumers. Focus 1989-90, 37-68 (1989). 6. S. Chandler, The grocery cart in your PC, Business Week, September, 11, 63-64 (1995). 7. Kurt Salmon Associates. Efficient Consumer Response: Enhancing Consumer Value in the Grocery Industry. Food Marketing Institute, Washington, DC (1993).
Long Range Planning Vol. 30
December 1997
8. L.W. Stern and P.J. Kaufmann. Electronic data interchange in selected consumer goods industries: an interorganizational perspective. In Robert D. Buzzell (ed), Marketing in an Electronic Age, pp. 52-73, Harvard Business School Press, Boston (1985). 9. G. Robins, Sailing into ECR's uncharted waters, Stores, October, 76, 43-44 (1994). 10. T. H. Clark and D. C. Croson. H. E. Butt Grocery Company: a leader in ECR implementation. Case 9-195-125, Harvard Business School (1994). 11. The gospel according to ECR. Progressive Grocer74 (8), 26-31 (1995). 12. Kurt Salmon, op. cit. 13. R. Mathews, New products: lifeblood or tired blood?, Progressive Grocer76, (8), 24-28 (1996). 14. McKinsey & Co. Foodservice 2005: Satisfying America's Changing Appetite. International Foodservice Distributors Association, Washington, DC (1996). 15. S. J. Hoch and S. Banerji, When do private labels succeed?, Sloan Management Review 34, (4), 57-67 (1993). 16. J. A. Quelch and D. Harding, Brands versus private labels: fighting to win, Harvard Business Review74, (1), 99-109 (1996). 17. S. Weinstein. Foreign affairs. Progressive Grocer76 (11), 26-32 (1996). See also J. R. Ross. Ahold steps up drive for east coast markets. Stores 78 July, 58, 62, 64 (1996). 18. S. M. Reese, IGA expands in tough overseas grocery markets, Stores, 78, 26-27 (1996). 19. B.T. Ratchford and J. R. Brown, A study of productivity changes in food retailing, Marketing Science 4, (Fall), 292-311 (1985). 20. S. S. Roach, The hollow ring of productivity revival, Harvard Business Review74, (6), 8189 (1996). 21. N. Kumar, The power of trust in manufacturer-retailer relationships, Harvard Business Review74, (6), 92-106 (1996). See also P. R. Messinger and C. Narasimhan. Has power shifted in the grocery channel? Marketing Science 14 (2), 189-223 (1995). 22. M. Kuntz, L. Bongiorno, K. Naughton and S. Forest, Reinventing the store, Business Week (November) 27, 84-96 (1995).
To Market, to Market: The Changing Face of Grocery Retailing
Introduction More is happening in retailing than is happening in manufacturing or in finance. It is retailing distribution which in the next few years is going to be the area of the greatest innovations and greatest changes?
The above quote by Peter Drucker reflects the many changes that have taken place, and continue to take place, in retailing in general. However, it is particularly relevant to grocery retailing, which is economically, culturally and politically central in many countries. The grocery channel plays a vital role in conveying food and other household items to the population at large. There are several salient characteristics which, taken together, make the industry an interesting study: 2 • It is an intensely competitive, low-margin, highvolume industry. • Much of the product is perishable, and the markets are local. In this sense, the workers and consumers have more power relative to those in other industries. • It is highly visible and has been the subject of several attempts by the state to regulate operations. For example, the industry was one of the last to be released from the wage and price controls of the early 1970s in the U.S. The grocery industry, with U.S. supermarket sales in 1995 totaling $312 billion, is a significant part of the economy. Table 1 shows the sales for the 10 largest chains in the U.S. Over the past few decades, grocery retailing has evolved from being a simple mom-and-pop type of ~
Pergamon PII: S0024-6301(97)00069-1
operation to one which is dominated by chains utilizing advanced technology and surviving on a low margin-high volume strategy. The changes in grocery retailing can be represented by Figure 1. It is clear that the force driving the revolution is changing consumer characteristics. In order to be more responsive to consumer demands, the industry has been transformed in three major ways: (1) the implementation of technological innovations, with an emphasis on efficient consumer response (ECR); (2) the introduction of new products and/or services; and (3) organizational Long Range Planning, Vol. 30, No. 6, pp. 836 to 846, 1997 © 1997 Published by Elsevier Science Ltd. All rights reserved Printed in Great Britain
Changing Consumer Characteristics Revenue (USD millions) Chain Kroger Safeway American Stores Albertson's Winn-Dixie A&P Publix Ahold USA Food Lion Ralphs
1995
1994
1993
23 938 16397 13302 12 585 11 788 10101 9400 8336 8211 5500
22 959 15627 12959 11 895 11 082 10332 7500 7420 7933 2725
22 384 15214 13235 11 284 10832 10384 7000 6619 7610 2800
D.P. Schulz, The nation's biggest retail companies, Stores 78 (July), $18 (1996).
restructuring as well as mergers and acquisitions. These transformations have tremendous implications for the marketing mix, productivity and manufacturer-retailer relationships.
The most important force driving the changes in grocery retailing is consumer demand. It is worthwhile to spend some time analyzing the changes that have taken place in the American household. As shown in Table 2, since 1970 families have become smaller; more are led by one parent, and more have mothers who work outside the home. From 1970 to 1995, the number of married couples with children under 18 shrank from 40% of all households to 25%. Divorce rates have increased, and the number of single-person households climbed from 17% of all households to 25%. In addition, while the number of marriedcouple households rose just 3% from 1990 to 1995, to 53.9 million, the number of single-parent families headed by w o m e n rose 12%, to 12.2 million. :~ Studies by the Census Bureau also found evidence of the effects of shrinking paychecks, from the 1970s, when one check supported a family, to today, when two checks are needed to maintain a similar standard of living. These changes have a significant impact on retailing. According to Eisenhart 4 'the same baby
Long Range Planning Vol. 30
December 1997
Percentage of households in each category
Family households Married couples with children Married couples without children Other families with children Other families without children Nonfamily households People living alone Other nonfamily households
1970
1980
1990
1995
40.3 30.3 5.0 5.6
30.9 29.9 7.5 5.4
26.3 29.8 8.3 6.5
25.5 28.9 9.1 6.5
17.1
22.7 3.6
24.6 4.6
25.0
1.7
5.0
P.T. Kilborn, Shifts in families reach a plateau, study says, New York Times November 27, A8 (1996).
boomers who rose up in revolution against the "material world" in the 1960s have rechanneled their energy into a consumer society extraordinaire, demanding products and services that meet diverse and specific needs and that match lifestyles now grown powerful with an enormous aggregate earning and spending capacity.' These changes in the constitution of the average American household affect its needs and demands for grocery items. Speed and convenience are increasingly important attributes in food preparation, which may account for the rise in microwave ovens in households. For fresh produce, the most important produce characteristics are: (1) freshness or ripeness; (2) taste or flavor; (3) appearance or condition; and (4) nutritional value. 5 Growing literacy rates imply that consumers are reading the product labels more carefully. Food safety is an important issue. Over the years there have been numerous examples where contaminated food products caused serious ailments and even deaths among consumers. A recent example was the detection of E. coli in Odwalla's apple juice in the states of Washington and California, where the bacteria caused serious sickness among children who consumed the product.
Technological Innovations It has been noted that application of technology has become essential in ensuring that each firm remains in touch with the market and competitive against its rivals. Technology plays crucial roles throughout the entire grocery channel; from helping manufacturers produce and distribute their goods efficiently to enabling the grocery store to create competitive advantage and serve customers more effectively. As a substantial portion of grocery items is perishable (e.g., vegetables, fruits, meats, and dairy products), it is imperative for products to flow from suppliers to retail stores in a timely, efficient and productive To Market, to Market: the Changing Face of Grocery Retailing
manner. From a survey of supermarkets in five European countries, it has been found that the most consistently given reason for the implementation of technology was to improve management control and operational information. These findings are summarized in Table 3. Table 4 presents the major technological innovations in the grocery industry since the 1970s, as well as other potentially important technologies. Some of these technologies (e.g. scanners, database management) are well known, whereas others are yet to prove their worth (e.g. virtual reality, personal shopping assistant). As consumers become increasingly busy with their lives, they have little time to do their grocery shopping. A solution to this problem is Peapod, an online food buying service, currently available in Chicago, San Francisco and Boston. Peapod has arrangements with local supermarkets who update the prices of over 18 000 items in a database daily. Consumers can scroll through the online catalogs and even compare prices. They fill out an order of selected grocery items and specify the delivery time for the following day. Peapod forwards the orders to the closest participating supermarket. The orders are filled by Peapod staffand checked out at special counters. They are then picked up and delivered by another set of Peapod employees. For this service, consumers pay a $29.95 startup fee, a $4.95 monthly service fee, plus $6.95 and 5% of their grocery total per order. 6 A broader technological innovation in the grocery industry to serve consumers better is Efficient Consumer Response (ECR), a concept introduced in 1993. 7 ECR encompasses multiple technological and managerial innovations which aim to transform retailers, distributors and manufacturers into more efficient and interlinked organizations. It involves collaboration between consumer goods manufacturers and retailers to enhance merchandising effectiveness, inventory and material flow efficiency,
Country Belgium UK
Defensive Aggressive response to Reduce Improve belief in innovation staff or other customer innovation by others costs service * *
Improve management Improve control over management work, Desire for Desire for control over finance, improved improved theft or loose materials operational strategic working scheduling information information
*
* *
*
FRG
*
Italy Sweden
*
*
*
*
*
* * *
*
*
*
*
* *
*
J. Child and R. Loveridge, Information Technology in European Services: Towards a Microelectronic Future, Basil Blackwell, Oxford, 197 (1990).
1970s Technological innovations
1980s
1990s
2000s
Product handling*
Scanner systems
Expert systems
Virtual reality
Information processing
Bar codes
Consumer scanning
Shopper ID
Product display
Electronic cash register
Data warehousing
Personal shopping assistant
Housekeeping
Database management
Continuous replenishment
Supply chain reinvention
Climate control
Electronic data interchange
Computer-assisted ordering Category management Direct store delivery Cross-docking
Decision transformation
Electronic shelf labels *Although some of these technologies were technically available earlier, they have been placed here by order of mass implementation. H.T. Keh, Technological innovations in the grocery industry: retrospect and prospect, forthcoming.
and the channel's administrative efficiency. It includes the following activities within an organization: (1) integrated electronic data interchange (EDI); (2) continuous replenishment; (3) computerassisted ordering; (4) direct store delivery; and (5) category management. We will examine each of these activities in turn. The concept of Electronic Data Interchange (EDI) is ~:entral to ECR. It first came into prominence in the 1980s. There are two types of information transfer used with EDI. One is the terminal-to-computer link, found mainly in intraorganizational networks and in the early stages of interorganizational networks. The other is the more sophisticated computer-to-computer link which requires the integration of two or more independent systems. The grocery industry has been found to use the most advanced EDI system, the !Jniform Communication Standard, which contains
both message and communication standards and is being implemented throughout the industry by manufacturers, brokers and distributors." The implementation of an EDI reflects a significant commitment to the relationship between channel members. It not only reduces transaction costs between them, but also provides better services for the final consumers. Continuous replenishment (CRP) alone is estimated to have the potential to account for 38% of total industry ECR savings. 9 It works in the following way: the manufacturer supplies the retailer with products based directly on warehouse shipment and inventory data rather than wait for the retailer's purchase orders. The manufacturer then determines the order quantity needed, assembles the delivery, and informs the retailer electronically of the impending shipment. Two manufacturers, Procter & Gamble and Campbell Soup, are supplying as m u c h as 30 to 40% of their Long Range Planning Vol. 30
December 1997
volume via CRP. CRP is able to increase in-stock performance, lower inventory and provide better asset utilization. An important task within CRP is item-by-item forecasting, which can be mathematically extrapolated from historical sales data. This is possible with com-
puter-assisted ordering (CAO). The use of CAO can reduce the amount of time a salesperson spends in the store taking orders, enabling those stores to be replenished just in time with the right product using information from the sales register. Directly related to CRP is the concept of direct store
Supplier Production lines
Supplier Distribution centers
Wholesaler Distribution centers Retailer Distribution centers
Retailer Stores
Consumer Right product, right place, right time, right price
To Market, to Market: the Changing Face of Grocery Retailing
delivery (DSD). Figure 2 shows the various channels through which a manufacturer can supply its retailer. Traditionally, industry executives have relied on distribution system B. Channel A is popular with huge retailers such as Wal-Mart which are able to purchase it1 large quantities from major manufacturers such as Procter & Gamble. The relatively low number of stores (vis-fi-vis grocery stores) can be supplied efficiently from Wal-Mart's own distribution centers. However, most retailers do not operate on the same scale as WalMart. DSD (channel C) is particularly appropriate for: (1) branded products where freshness is critical (e.g. dairy products and breads); (2) branded products with large movement volumes (e.g. soda and beer); and (3) products that require extensive in-store inventory management (e.g. greeting cards and panty hose). 1° Distributors and suppliers in the grocery industry often claim category management as the most important issue facing the industry. A 'category' is a distinct, manageable group of products/services that consumers perceive to be interrelated and/or substitutable in meeting a consumer need, while 'category management' is a distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value. ~1 It shifts decision-making from a tactical to a strategic approach. Category management is expected to increase revenue, gross profit and inventory savings. If implemented correctly, ECR is expected to save the grocery industry approximately $30 billion annually. 12 More broadly, retailers are expected to benefit from increased sales per store, higher productivity of selling space and less back room area. Manufacturers will benefit via lower manufacturing and distribution costs and more effective use of promotional funds, as well as from knowing where the product is in the pipeline at any given time. However, ECR is costly to implement. The start-up costs are high, and the returns are not immediate. In a h~w-margin industry, where supermarket net profits aw~rage 0.49% of sales, not every grocery chain is r~lshing to implement the system.
N e w Products and Services A business organization often defines itself by the products and services it offers the market. In order to sustain a competitive advantage, the development of n e w products and services is crucial. Within the grocery industry, we can delineate three trends: (1) the introduction of n e w products; (2) the implementation of n e w in-store services; and (3) the enhancement of private labels. According to Bob Tanojev, senior partner in Ernst & Young's Global Consumer Products Consulting Group: 13
Today, both manufacturers and distributors are stepping up their investment in new products. The manufacturers are investing billions of dollars in research and development programs designed to create new generations of innovative products that will meet consumer needs in the 21st century. These investments represent big gambles in science, technology, lifestyle forecasting and product commercialization.... in the world where ECR is fully operational, the premium will be on getting hold of products that are truly 'new.' In grocery retailing, n e w products are sometimes considered to be the savior of the industry. A new product can take on multiple meanings and forms. The degree of innovation can range from clever repackaging (without any detectable change to the product itself) through incremental improvements to true breakthroughs. In Table 5, we show h o w new products can be categorized in the grocery industry. It should be noted, however, that a high proportion of new products do not succeed in the marketplace and are eventually pulled out. In addition to new products, grocery retailers have also introduced n e w services in their stores. The most prominent of these is the establishment of foodservice departments in grocery stores. A n e w report by McKinsey & Co? 4 notes that 'while traditional grocery could increase $11 billion over the next 10 years, a greater opportunity could be provided from prepared foods. Easily another $19 billion in growth is possible from further expansion of the prepared food deli offering.' There has been a dramatic increase in the number of grocery chains offering food services. For example, Sunset Foods in Northbrook, Illinois has a food service department staffed by 15 people who wait on customers and 20 employees who prepare food. Customers can either purchase prepared food off the shelf or place a special order that will be prepared on the spot by a chef while the customer continues to shop. Several other food stores have also moved into catering, a concept traditionally associated with restaurants. Often the food is made to order and customized to fit individual customers' needs. In the face of relentless competition, grocery chains are also diversifying into other services. In addition to services such as film processing, video rental and lottery sales, some are even venturing into financial services. For example, J. Sainsbury, Britain's second largest supermarket chain, claims to have enrolled 100 000 customers for its new bank within the first two months of its operation. The bank is a joint venture with the Bank of Scotland, with deposits reaching £100 million ($163 million), and attracting 10000 new customers a week. Private labels play an important role in grocery retailing. In terms of growth, private labels continue to outgrow manufacturer (also known as national) brands. Table 6 shows a comparison of national versus private brands. In 1996, private labels grew by 5.6% while national brands experienced much lower growth. The importance of private labels goes b e y o n d Long Range Planning Vol. 30
December 1997
New product classification
Description
Classically Innovative Products
Equity Transfer Products
Seasonal Products
Line Extensions or Flankers and Blockers
Regional Products
New Packaging
Clone Products
Products which appear to the consumer and to two or more segments of the value chain as bringing true innovation to a category, or products which by their nature create new categories. Products which may or may not represent significant innovation. The 'newness' in these cases is based on the assignment of an established name or franchise to a product or the extension of an equity name. Products whose consumer-use occasions dictate a radically compressed 'lifecycle' or 'sell cycle.' Seasonal products fall into three distinct groupings: products introduced for a specific date or event; products which reappear every year during the particular season; and products which enjoy a majority of their sales at certain periods but have a presence on the shelf throughout the year. Products which represent new flavors, forms and/or sizes of existing products. These products are generally introduced to either revitalize existing brand franchises or increase a manufacturer's presence on a shelf, thereby limiting shelf space to competitors. Products whose newness is primarily defined by geographic distribution. Regional products may be well-established in one warehouse of a multi-warehouse distributor, but function as a new item when they migrate to other warehouses within that distributor's system. Packaging in and of itself does not make a product new, but a packaging difference can constitute a new product if it represents a new consumer-use occasion or an application of new packaging technology that somehow delivers a tangible consumer benefit. Products which extend a category solely by imitating existing items within that category without delivering any clear new value proposition to the consumer.
Example Frito-Lay's Baked Lays. Oscar Mayer Lunchables. Nabisco's Snackwell's.
Ivory dishwasher liquid.
Seasonal greeting cards. Canned pumpkins (Halloween and Thanksgiving).
Variations of Kellogg's Cornflakes (e.g. Regular, Honeycrunch, Cocoa frosted).
Ken Davis products (barbecue sauces) in midwest USA.
Repackaging chocolates into heart-shaped boxes for Valentine's Day.
Of Ragu's 27 flavors of pasta sauces, some are hardly distinguishable from others.
Adapted from R. Mathews, New products: lifeblood or tired blood?, Progressive Grocer75 (8), 28 (1996).
Top 10 manufacturers Top 25 manufacturers All other manufacturers Private label Generics Total food stores
Share of 1996 food dollar sales (%)
1996 vs. 1995 (% change in dollars)
32.9 49.2 35.5 15.2 0.1 100.0
1.7 1.4 2.1 5.6 (7.5) 2.2
The growth gap, Progressive Grocer75(11), A19 (1996).
To Market, to Market: the Changing Face of Grocery Retailing
profitability. It gives the retailer extra bargaining leverage with national brand manufacturers. Retailers with private labels also gain incremental manufacturing margins. For example, Safeway, a major U.S. grocery chain, supplies Select (its house brand) products to Vons, Stop & Shop and Bruno's, three other major supermarket chains. It has been found that private labels perform better in large categories with high margins. 15 They also do better when competing against fewer national manufacturers who spend less on national advertising. Research shows that consumers do not buy private labels simply because they are cheaper. Consumers are interested in quality, and grocery retailers should
continue to purchase from manufacturers that have the highest quality products. Although the development of private label brands originated in the U.S., the trend has also caught on in Europe. In fact, British grocery stores such as Sainsbury and Tesco, with private label sales at 54% and 41% of their total revenues respectively, outperform their U.S. counterparts who average only 15% of sales from private labels. European success with private label has been attributed to two factors: (1) regulated television markets mean that the level ~f television advertising for national brands does not reach U.S. levels; and (2) national chains are dominant in most western European countries, resulting in higher retailer power vis-a-vis manufacturers. 16
Corporate Restructuring and Mergers and Acquisitions As a result of changes in consumer demand, the grocery industry is also forced to restructure itself to become more nimble and responsive. This restruct uring involves both ends of the distribution, and both manufacturers and retailers are affected. At the upstream level, manufacturers can no longer have routine price increases like they used to. Consumers resist higher prices, and, at the same time, retailers are charging more for shelf space for n e w products. The manufacturers are forced to restructure themselves through reorganization, cost cutting and downsizing. For example, Campbell Soup recently restructured itself to focus on global expansion by ~.liminating 650 employees in 1996 and cutting costs by buying from outside contractors. In late 1996, the H.[. Heinz Company announced that it w o u l d sell off inoney-losing operations in the U.S. and abroad as t~art of a plan to reduce debt. Ever since the Quaker Oats Company acquired Snapple in 1994, it has gone !hrough a series of work force reductions and reorganizations. Hopefully, its recent disposal of Snappte will snap it out of its doldrums. Overall, it is estimated
Company Ahold Aldi Carrefour Casino Delhaize Ito Yokado Marks & Spencer Tengelmann Yaohan
that 100 000 jobs have been lost in the food industry in the U.S. since mid-1995. U.S. manufacturers are not alone in their plight, as European manufacturers are also facing hard times. For example, Unilever, the British-Dutch consumer products giant, plans to sell off underperforming units, reorganize management and link executive salary to firm profitability. Their lean-and-mean focus is reminiscent of their U.S. counterparts. At the other end of the channel, grocery retailers have also restructured their operations. As more and more of these grocery chains have sought to merge with or acquire other chains, grocery retailing has become more concentrated, with fewer but bigger grocery chains. M&A activities take place domestically as well as internationally. In June 1995, Ralphs Grocery Company merged with Food 4 Less Supermarkets in a deal worth $1.5 billion. Following the merger, Ralphs operates about 280 supermarkets and 70 warehouse stores in southern California. Quality Food Centers, a regional chain based in Washington State, is seeking to become a larger national player. In November 1996, it agreed to acquire Hughes Family Markets, a 56-store chain based in southern California for $360 million. This will double QFC's size and push annual sales over $2 billion. On the international scene, the occurrence of M&A activities has been just as rapid. It has been estimated that as much as $1 of every $5 spent in U.S. food stores goes to retailers owned or controlled, at least in part, by foreign companies. 17 The presence of foreign firms in U.S. grocery retailing is growing. The Bureau of Economic Analysis notes that for 1994, sales of U.S. food retailing companies with at least a 10% foreign ownership was worth $57.4 billion. Table 7 lists several foreign companies with control of grocery operations in the U.S. Some Asian grocery powerhouses are also becoming increasingly international in their outlook. For instance, the Yaohan Group, which originally started out in Japan, has moved its headquarters twice, first to Hong Kong and then to Shanghai, China. It cur-
Country The Netherlands Germany France France Belgium Japan U.K. Germany Hong Kong
Stores/stake 906 stores: Stop & Shop, Edwards, Giant Food, Tops, Finast, Bi-Lo 400+ Aldi limited assortment stores; 27 Trader Joe's; 11% stake in Albertson's 11% stake in Price/Costco 53% of Smart & Final Control of Food Lion; share of Super Discount Markets (Cub stores) Southland (7-Eleven stores) 19 Kings supermarkets 54% stake in A&P Operates eight Yaohan supermarkets in the U.S.
S. Weinstein, Foreign affairs, Progressive Grocer75 (11), 26-32 (1996).
Long Range Planning Vo|. 30
December 1997
rently has over 400 stores in 13 countries, with annual revenue exceeding 500 billion yen. However, cutthroat competition has also taken its toll on Yaohan. Earlier this year, it announced that it would sell 16 of its outlets in Japan to Daiei Inc., the largest grocery chain in the country. This is part of Yaohan's plan to reorganize itself and boost its financial situation. The company also plans to increase its presence in China, where it currently has 33 supermarkets, one department store, a distribution center and 15 hamburger outlets through a joint venture. IGA, the nonprofit organization established in 1926 to help independent grocers, is continuing to expand overseas. Its 3600-store network includes more than 1200 retailers in 21 countries. In 1996 IGA opened five stores in Brazil and 25 in South Africa, which are new markets. It is also concurrently expanding the number of stores in China from 25 to 61, and will soon add 300 stores to the 240 it already works with in Australia. By 2000, IGA expects to open another 64 stores in China and to increase sales there from $9 million in 1995 to about $400 million. The 3-year plan also includes 100 new stores for Brazil and 200 for South Africa. 18 In Europe, the British chains are also busy expanding into other countries. In the U.S., Sainsbury has a half interest in Giant Food in addition to controlling Shaw's (which has 101 stores). Tesco, another British chain, has focused on expanding in Europe. Since 1993, it has purchased the Catteau chain in France, Global in Hungary, Savia in Poland and Kmart stores in the Czech Republic and Slovakia. Altogether, Tesco operates over 200 stores in Europe. Ahold, the Dutch giant, is also expanding rapidly. It has acquired several grocery chains in the U.S. and has also built new stores in Asia. Latin America has also seen some M&A activities. For example, recently the Exxel Group (which has investments including electric utilities, prepaid health plans and the Mastercard international licenses for Argentina and Uruguay) has agreed to purchase C o m p a ~ a Argentina de Supermercados, one the country's largest chains, for $440 million. Argentina de Supermercados, which owns the Norte chain of 25 grocery stores, will spend $350 million over 5 years on further expansion in Argentina, Brazil, Paraguay and Uruguay.
Strategic Implications Given that grocery retailing is being dramatically transformed, what are the implications for managers? How will these changes affect what they do? More specifically, how will they affect the marketing mix in terms of the four P's (product, promotion, price and place)? In addition, how will this affect retailing To Market, to Market: the Changing Face of Grocery Retailing
productivity? Will the relationships between the supplier and retailer become better? It is clear that consumer demand has forced the manufacturers to offer a wider product assortment. Thus we are witnessing more competition for shelf space among the manufacturers. For example, within the past 5 years, the four major cereals producers in the U.S. have created new varieties to capture greater market share. Some of the new brands have managed to gain market acceptance while others have not done as well, although some long-time favorites such as Kellogg's Corn Flakes still continue to prosper. The significant growth in private labels has come at the expense of national brands. Consequently, national manufacturers who engage in a mixed branding strategy (producing their own as well as private brands) may experience growth in overall sales but also some product cannibalization among their own product lines. Price is a particularly important issue in grocery retailing. In an industry which is notorious for its low margins, m a n y producers and retailers are collaborating to ensure that the final price paid by consumers remains competitive. Efficient customer response (ECR) is especially useful in this regard. The dichotomy of national and private brands is also reflected in the price differences. Price considerations also affect the amount of promotion and advertising expended by manufacturers. In recent years, several large national brand manufacturers, including Procter & Gamble, have been cutting down on their promotion expenses. Among other things, they are re-thinking the concept of providing coupons to consumers, a costly endeavor which produces a low redemption rate nationally. The final 'P' (place) is also changing the face of grocery retailing. As the industry becomes increasingly competitive, margins are being driven very low. A profitable operation relies on high volume. This has sounded the death knell of many small players, particularly mom-and-pop operations. However, it has also spelled opportunities for niche marketers. An off-shoot of changing consumer characteristics is the growth in natural food stores. In the U.S., since 1990 the natural foods category has grown by 22% annually. Americans have become more discerning in their food consumption patterns, thus feeding the growth in natural food stores. Managerial surveys in the trade journals often indicate only the level of satisfaction with new technologies and their impact on profitability. Most managers are content with their performance so long as the stores remain in the black. We contend that profitability p e r s e is an insufficient measure of the health of the industry. At a time w h e n the cost of capital is increasing, labor costs are expanding and distribution expenses continue to grow, measures other than profitability should be used. It should be
emphasized that in a low margin/high volume industry, the focus should be on productivity, which in turn drives profitability. It has been found that total factor productivity in the food industry grows at a much slower rate than in manufacturing. 19 This is disturbing given that the industry as a whole has invested enormous amounts of resources (including new technologies) in addition to restructuring (downsizing) to become more productive. What has gone wrong? A prominent economist 2° notes that for the U.S. economy in general '['he surge of downsizing and other forms of cost cutting may have little or nothing to do with sustained e n h a n c e m e n t s in productivity. In fact, not one shred of theoretical or empirical evidence supports the interpretation of the recent wave of downsizing as a necessary step in a process of reviving productivity.
Whether this is true for grocery retailing we do not know. More empirical research needs to be conducted in this area for us to have a better understanding of this salient issue. The other major implication of the changes in grocery retailing has to do with supplier-retailer relationships. It has been noted that retailers are becoming more powerful versus their suppliers. 21 Given that this is true, what does it mean for suppliers and retailers? Will this trend continue? Wal-Mart is often cited as an example to back this claim. Since 1984, Wal-Mart's expenses have shrunk from 19.1% of sales to just above 15.8% in 1995. Its management realizes that cost savings come by forcing suppliers to replenish inventory only as it is depleted. 22 This, in turn, forces its suppliers to rethink their distribution strategies in order to cope with Wal-Mart's increasing market leverage. One of them, Coca-Cola, began to orchestrate the activities of its independent bottlers in the late 1980s. This ensures greater efficiency in the, distribution of Coke products to Wal-Mart stores. There is a clear need to improve supply chain management with a view towards improving manu-
facturer-retailer relationships. The role of the store should change from buying from suppliers to anticipating consumer demand. Retailers needs to work closely with their suppliers to develop products that fit the demand. The implementation of ECR is useful here. Both parties can no longer afford selfish costminimizing measures, rather the focus should be on channel-wide cost efficiencies. It has become axiomatic that in order to achieve industry success, both manufacturers and retailers have to develop longterm commitment and trust for their mutual benefits.
Conclusion It is obvious that grocery retailing today is no longer what it was ten years ago. The driving force behind most of the changes can be attributed to changing consumer characteristics. Consumers never stay the same. Food retailers should be continually scanning their environment to ensure that their operations anticipate these changes and stay ahead of their competition. Most of the changes can be broken down into three categories: (1) n e w technology; (2) introduction of new products and/or services; and (3) corporate restructuring and mergers and acquisitions. We have addressed these issues in some detail and looked at their implications on the marketing mix, productivity and supplier-retailer relationships. As we move into the next century, we foresee more dramatic changes on the horizon. Currently, the trend is towards globalization. Consumers the world over are becoming more homogeneous in their demands. This accounts for the global success of companies as diverse as McDonald's, Levi Strauss, Coca-Cola and Nike. As we mentioned previously, the number of grocery chains operating internationally, some due to mergers and acquisitions, is growing. How the grocery chains take advantage of these exciting changes is another interesting episode waiting to unfold in the revolution of grocery retailing.
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To Market, to Market: The Changing Face of Grocery Retailing