Four forces shaping competition in grocery retailing

Executive summary

Grocery retailing is a dynamic and highly competitive industry, and it’s becoming more so. With the economy seemingly emerging from the downturn, industry leaders are looking for a heightened understanding of shoppers’ mind-sets. Indeed, grocery retailers will have to respond to four increasingly important trends that will reshape competition over the next several years: the permanent shift to value seeking among consumers; the rise of technology-enabled shopping; greater online encroachment; and format and merchandise innovation.

For grocery retailers to respond to these forces successfully, they need to rethink their strategies. This means assessing their overall strategic value proposition and the key capabilities system that will distinguish them from competitors. Those in the industry not willing to foster the right capabilities risk the loss of market share, declining profits, and perhaps even extinction.

Introduction

In early 2012, Strategy&, along with Food Marketing Institute, collaborated with leading data providers the Nielsen Company, SymphonyIRI Group, VideoMining, and Intelligent Clearing Network (ICN) to gauge the current state of food retailing in the U.S. market. This study included interviews with about a dozen grocery CEOs and senior executives (as well as Strategy& experts from around the world) and, most important, fielded custom consumer research to 2,000 grocery buyers across the country representative of the U.S. population base.

At one level the results were unsurprising. Grocery retailing is a dynamic and highly competitive industry requiring increasing merchandising and marketing expertise, heightened understanding of and attention to a new shopper mind-set, innovation in all dimensions of retailing and manufacturer collaboration, and a renewed focus on operating costs. However, the study also surfaced four increasingly important forces that will reshape grocery competition over the next several years. Retailers that respond to and exploit these forces will prosper and grow. Those that do not will risk share losses, declining profitability, and perhaps even extinction.

Those four forces will have significant impact as grocery retailers and manufacturers navigate the uncharted waters of Retailing 2012 and beyond.

What should grocery retailers do next?

These forces will cause structural change in the grocery retailing industry over the next several years. From the shoppers’ perspective, the recession or at least “recession-like” behavior will not end soon, if ever. Shoppers’ value-seeking behaviors have become ingrained. At the same time, digital technologies will make “price shopping” ever easier and more convenient, and the Internet and other new formats will drain volume away from traditional channels.

Grocery retailers need to reassess their “way to play” — their overall strategic value proposition — on two dimensions at once. First is the strategic fit with the evolving market of consumers. How does your retail chain deliver value to shoppers currently? How will it do so in the years ahead? What types of demand exist in the market today that are worth fulfilling?

The second dimension is the key capabilities that the grocer will need to bring to bear to deliver this value proposition. What are the most distinctive things that you do better than anyone else? How are these capabilities for a grocery retailer positioned better than any of their competitors so that the capabilities system they build is truly advantaged and differentiated versus their competition?

Distinctive capabilities might include the following:

1. Deep shopper understanding: Winning with the shoppers — understanding and reacting to their ongoing behaviors — is a potential differentiating capability for some retailers. This might require enhancing shopper loyalty programs and/or developing new capabilities around data analytics.
2. Digital and mobile marketing: Digital and mobile technology may play different roles at different retailers, depending on their chosen way to play. For example, a hi-lo retailer might leverage mobile technologies to deliver targeted manufacturer-funded deals. Alternatively, a premium player might provide recipe help and information about new or unfamiliar products. Either way, mobile technology can enhance the shopping experience for your target shoppers.
3. Multichannel retailing: The slow erosion of traditional grocery categories to online retailers will be a drag on comparable store performance for the foreseeable future. All retailers need to respond, whether by bolstering the in-store experience to defend their traditional business or by building a true multichannel capability themselves. A true multichannel retailing capability integrates in-store, online, and digital mobile offerings to meet shoppers’ differing needs, supported by the appropriate back-office systems and supply chain capabilities.
4. Innovation: Innovation in products and merchandising can be a route to success for some retailers. New private-label products (beyond national-brand clones) can differentiate the banner in shoppers’ minds and deliver distinctive value. In parallel, new merchandising platforms developed in collaboration with suppliers promise to increase shopper conversion at the shelf and drive basket size.

Assessing and choosing a way to play is not necessarily straightforward, especially if there is instability in the market and/or disagreement among the senior team. Indeed, it is possible that some of the established ways to play in grocery retail (e.g., EDLP, hi-lo, premium organic, high experience, customer intimate, etc.) will become obsolete. For instance, what does it mean to be a hi-lo retailer if 90 percent or more of your shoppers are seeking deals?

With a chosen way to play and a laser-like focus on the capabilities required to win with that way to play, retailers can then turn their attention to costs. By sharpening their focus on their strategic positioning and being clear about how they compete, we believe, retailers can not only reduce costs but drive stronger growth. By removing unwanted and unnecessary costs, retailers can simultaneously become more effective and more efficient. A focus on rewiring costs in merchandising, marketing, and supply chain is required to create the dollars needed to invest in capabilities and grow the business.