Breakthrough Insights

Transcription

BreakthroughInsights
“If You Don’t Know Where You’re Going …”
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Research Team
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Sara Al-Tukhaim
Frank Badillo
Jessica Campbell
Timothy Campbell
Apple Chen
Alida Destrempe
Fiona Feng
Karolina Fiedler
Ray Gaul
Bryan Gildenberg
Caroline Gormley
Doug Hermanson
Rema Iyer
Vivian Jiang
Simon Johnstone
Erin Kennedy
Laura Kennedy
Vadim Khetsuriani
Amy Koo
Jim Leonard
Michael Lieblich
Stephen Mader
Alexandra Mansfield
David Marcotte
Rachel McGuire
Leon Nicholas
Mike Paglia
Himanshu Pal
Tudor Popa
John Rand
Bryan Roberts
Nicole Santosuosso
Kate Senzamici
Robin Sherk
Mary Brett Whitfield
Han Yang
Oceanne Zhang
Anne Zybowski
© 2014 – Kantar Retail LLC. All Rights Reserved.
Disclaimer: The analyses and conclusions presented herein represent the opinions of Kantar Retail. The views expressed in this
publication do not necessarily reflect the views of the companies covered by this publication. This publication is not endorsed, or
otherwise supported, by the management of any of the companies covered herein.
Copyright Notice: No part of this publication may be reproduced in any form or by any means without the express written
permission of the copyright owner.
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In This Issue
Foreword........................................................................................................................... 4
Where and How? The Two Central Questions Guiding the
Future of Customer Management.................................................................................... 7
Changing Fortunes: Kantar Retail’s 2014 Predictions for the Retail Sector................ 15
Global Outlook Remains Split Among Markets Amid Russia Threats........................... 23
Shopping Behavior Changes Looming Larger than Spending Changes:
U.S. Macro Outlook......................................................................................................... 27
Using the Concept of “Economic Distress” in February ‘14 Planning........................... 31
Q4, FY 2013 Results: Amazon Delivers, Yet International Falls Short.......................... 35
Target’s Data Breach Fallout Undermines Strategy to Broaden Guest Base............... 41
First Takes: Safeway and Albertsons Merger................................................................ 47
Assessing the Club Trip: What Drives Member Purchasing?........................................ 51
Drug Shoppers’ Digital Behavior Varies By Retailer, Cohort......................................... 59
Supeco: Carrefour’s Newest Price Contender in Europe.............................................. 65
Lidl’s UK Checkout Realignment Is Part of a Bigger Brand Strategy............................ 73
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Foreword
“If You Don’t Know Where You’re Going …”
A Guide to the First Half of Breakthrough Insights 2014
“If you don’t know where you’re going, any road will take you there,” George
Harrison’s now famous paraphrase of the interchange between Alice and
the Cheshire Cat in Alice’s Adventures in Wonderland provides a marvelous
backdrop to both this edition of Kantar Retail’s Breakthrough Insights and the
planning environment in which many of us are formulating or finalizing our
2015 or 3/5-year strategic plans.
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Folks like me often hyperbolize how important this specific historic moment is,
or how the world has “never been changing more quickly.” As a former history
student, I find most of the time that’s untrue—the only constant in history is
every generation’s need to feel like it is the most important generation in the
history of history! That being said, there are important and fundamental shifts
taking place right now, and it alarms me how few companies seem to be preparing well for the actual challenges that will face them in the back half of the
2010s. Most of our clients seem to be gearing up to fight yesterday’s war with an
optimized (i.e., cost-reduced) army of talented people—too many of which are
aimed at the opportunities of yesterday, with a scant few facing the future.
This edition starts with an (admitted) oversimplification of these challenges
into two questions that frame up the other pieces: where are shoppers shopping, and how can they be reached? I tackle these two big questions in the
opening article—Where and How—and explore what their implications are to
suppliers looking to build customer-facing functions that can win from 20152020. The big ideas presented in the article—everywhere getting better, asset
productivity, the changing nature of analytics, and the more complex world
of reaching shoppers as a number of key marketing “lines” blur—are ones
we think will be the critical conversations forward-looking companies will be
having over the next five years.
From there, we move to the 2014 “predictions”
made by our U.S. research team. Covering
everything from events that have already come
true (the structural and not temporary nature
of Target’s challenges in Canada), to the somewhat fanciful (my slightly utopian prediction
that retailers in 2014 will get smart and opt
out of the promotional lunacy that the holiday
season has turned into), our team gives you a
good idea of not just what we think will happen,
but what we think the important topics to focus
on are in 2014.
The issue then dives into the 2014 economic environment—starting globally with two pieces: one
featuring Doug Hermanson’s macroeconomic overview highlighting the state
of play in a number of key global markets, the other being Ray Gaul and Simon
Johnstone’s piece on planning in periods of economic distress in Europe. With
China slowing, Brazil struggling, Russia in crisis, and India continuing to struggle to realize its economic potential, the 2015-2020 period may be described
as the “After-BRIC” era of international growth…and it is our anticipation that
suppliers will need to “get better everywhere.” A BRIC strategy was a wonderful
way of simplifying international expansion—just focus on a few things and it will
all be fine. One of the core themes of our customer planning discussions with
clients over the years has been the fragmentation of growth into unfamiliar places—that model will be echoed in global expansion as well. Companies will need
to get better at more (and more diverse) growth opportunities.
Frank Badillo’s article brings the focus back to the United States, leading the
way with a view on the relationship between economic reality and spending
behavior, and how the latter is probably more important than the former for
people trying to understand the 2014-2015 environment. The choices
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shoppers are making are changing the way retailers and suppliers need to
reach them—a nervous shopper who feels like they have many of the things
they need is becoming much more cautious about how they spend.
Cautious shoppers are a big part of the story for our pieces on Target and
Safeway. No retailer suffered a more tumultuous 2014 to date than Target. Amy
Koo’s piece on the intersection between Target’s data breach and its strategy
to reach a broader audience of shoppers highlights both Target’s short- and
long-term issues. Structural change in the U.S. marketplace was also pushed
forward in the supermarket industry, where John Rand’s perspective on what
the Cerberus acquisition of Safeway and its integration into its Albertson’s
business might mean for both suppliers and the future of the U.S. retail landscape more generally. My 2013 prediction was that 2013 would be the busiest
year for retail acquisitions in a generation, mostly predicated on the assumption that Safeway would be acquired. Sadly, that was just a few months off!
The catalyst for much of the U.S. marketplace change is rooted in two things:
the shopper behavior mentioned earlier and the disruptive nature of Amazon.
Two of our channel practice leads have put together detailed analysis of shopper trip behavior that will be critical for retailers trying to understand their
business and suppliers trying to help them. Sara Al-Tukhaim and Timothy
Campbell dive into trip drivers for the U.S. Warehouse Club industry, and how
they are both similar and distinctive among the three major operators, while
Jessica Campbell looks at the conundrum of age polarization for the U.S. Drug
channel through the drug channel shopper’s digital behavior. As both a health
care store for older Americans and a beauty destination for younger ones, the
drug channel faces the challenge of having to play a multitude of roles out of
the same store. This level of shopper segmentation and understanding will be
critical for every retail channel moving forward.
Amazon seems to have a new narrative attached to it every 90 days, so we
thought it was interesting to look back on Anne Zybowski and Nicole
Santosuosso’s review of its Q4 2013 performance. It’s always useful to under-
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stand that Jeff Bezos’ philosophy that “Every Day is Day 1” is actually a great
way to take a long-term view of your business. Amazon has absolutely no fear of
reinventing itself in many different ways quite quickly, and this dynamism will be
incredibly challenging to compete with for any brick-and-mortar operator.
In closing out the issue, the European economic environment provides a
great backdrop for two pieces on format innovation and transition in Europe.
Format innovation is covered in Tudor Popa’s take on Carrefour’s new Supeco
format—a piece rich with information about a retailer reconfiguring hypermarket “space” to give it a different economic model, operating strategy, and
brand proposition; and how this reinvention makes that asset more productive.
Asset productivity will be the foundation of joint economic business planning
between retailers and suppliers from 2015-2020, and it will take real work for
both sides to come to the table in those conversations prepared to optimize.
Format transition affords a look at the balancing act between shopper proposition and economic return through a different lens—Lidl’s decision to stop
selling chocolate and candy at the register. Lidl’s decision to stop selling chocolate and candy at the register is akin to another blockbuster decision: CVS’s
decision to stop selling tobacco in the United States. We see retailers making
choices with real economic implications to position themselves very firmly as
advocates for consumer health care. The blurring of the line between retail
and health care environment is a critical one on the 2015-2020 horizon.
In summary, we dedicate this edition to the future facers discussed earlier,
with the hopes that the content within gives you the inspiration and ammunition you need to marshal your organizations to follow you! Have a terrific
summer (or winter for those of you south of the equator), and I look forward to
seeing you right before the winter holidays with our H2 2014 installment!
All the best.
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Where and How?
The Two Central Questions Guiding the
Future of Customer Management
By: Bryan Gildenberg
At Kantar Retail, we spend most of our energy
dedicated to studying the retail, shopper, and
macro environment around the world, and more
specifically, where that environment is going and
how it’s changing. In this article however, we
adjust our lens to focus on the future of major
FMCG manufacturers, and how these companies
will interact with their best customers
going forward.
Historically, looking at this would have involved
examining the capabilities of a sales team or how
different functions can be connected to that team
to bring a more cross-functional approach. These
things will be important, but there are also some
significant changes that will go beyond competencies and functions and may get to the heart of how
FMCG companies develop, innovate, market, and
sell their brands.
We will focus our conclusions on four critical
implication areas, loosely divided into two central
questions: Where and how will we access shoppers? The big “where?” involves reviewing capabilities by geography and go-to-market platforms;
the big “how?” involves analytics and insight, and
the change in and integration of consumer and
shopper marketing.
The first section of this article, “Everywhere
Gets Better,” addresses the first critical
issue of “where” to reach shoppers and is
about capability development. It highlights
the unique challenges posed by a world
where every market’s capabilities are
rapidly evolving.
The second section focuses on a theme we
somewhat jokingly call “Cover Your Assets,”
and examines the impact of asset productivity
on the types of economic solutions required
by retailers, and the need for suppliers to
have a much more holistic view of brand,
item, and category productivity.
From there, we tackle two critical issues
around “how” to reach shoppers. The first
is a look at what we call “The New 4Ps”
and the importance of prediction, precision,
personalization, and proof from an analytics
perspective.
Finally, we explore the idea of “There Is No
Line” and the impact on suppliers of the
historic divide between “Above the Line” and
“Below the Line” marketing being eroded
by the blurring of the divide between retail
outlets and media platforms.
The Big “Where?”
Capabilities by Geography—
“Everywhere Gets Better”
Though many of the critical drivers of retail change
are truly universal or global, there won’t be a global
retail landscape in 2020, and in many key countries
there may only be a vaguely national one. India,
China, and the United States are all projected to
have a stubborn mix of local, national, and virtual
players. The key, though, is that unlike any time in
history, virtually every market in which an FMCG
company competes will be going through significant
capability transformation.
From 1990-2010, large parts of the world remained
“stalled” (notably most of Africa, and parts of
the Middle East and Asia), and large postmodern
markets like France and Germany hit something
approaching competitive stasis. In the next 5-10
years, “emerging” markets will literally emerge,
with virtually every country in the world developing
consumption and spending behavior that needs to
be addressed and managed differently. Africa will
become a market as nuanced and differentiated as
Latin America, with its various countries requiring
vastly different skills.
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The rest of the world is being disrupted by the digitization and mobilization of purchase behavior—a
global “climate change” impacting every market in
the world far more evenly than other revolutionary
changes like television, the automobile, or other
technological innovations. But more importantly,
capabilities in many markets will evolve in patterns,
and great global companies will need to understand
the five stages of market evolution to be successful:
exploration, concentration, penetration, maturation,
and postmodern.
Exploration
This is the stage where organized retail is still
orienting itself to the needs of the market. Today,
non-Bangalore India, Pakistan, and most of Africa fall into this description; parts of India will be
beyond this by 2020, as may some major cities in
Africa, like Nairobi.
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Though historically, exploratory retail has been
brick-and-mortar in nature, we anticipate that it
will have a much more mobile/digital component to
it by 2020. It is not hard to imagine a mobile-based
retailer being a top 5 or 10 retailer in Nigeria, Bangladesh, or Uganda (all markets have much higher
mobile penetration than any other attribute of a
“modern” lifestyle) (Figure 1).
Concentration
This is the stage where emerging players scale
and compete with each other viciously for share of
relatively high-disposable-income shoppers (usually
in similar trading areas). By 2020, this will include
parts of India, non-coastal China, and tier-2 and
tier-3 Russian cities in all likelihood; today, most of
China is in this phase (Figure 2).
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Penetration
This stage involves the evolution of formats to
access non-core populations: remote, niched, and
densely urban. This transition is brutal for retailers,
in that they need to learn a whole new host of skills
to maintain a variety of footprints in a variety of
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geographies. Channel strategy moves from a “nice
to have” to a “must have.” Today, Brazil is entering
this stage, as is Russia; Turkey is currently in the
midst of it; and Mexico is almost through it. By 2020,
most of the Middle East/North Africa will be in this
phase of development (Figure 3).
Figure 1: EXPLORATION Stage
Key skills for suppliers
Key skills for the sales “general manager”
Understanding shopper need states and the basics of organized large-scale logistics
Navigating uncertainty,
route-to-market mapping,
Aggressively upgrading, analyzing, and perfecting traditional trade “trading partners” (i.e., ensuring
and organizational and
trading agreements are modern and performance-based and help best-in-class partners evolve their
skill development
capabilities to drive more effective and efficient distribution)
Understanding the role that modern retail plays in the wholesale/distribution channel
Source: Kantar Retail analysis
Figure 2: CONCENTRATION Stage
Exploring promotional
insights, visual
merchandising, and
reducing operational
errors
Identifying the beginnings of channel differentiation, intense pressure for promotional spend, and the
beginning of margin erosion, as organized trade tends to be more margin dilutive
Optimizing traditional trade and building deep partnerships with winning partners is key
Understanding the enabling infrastructure well enough to assess how quickly “non-store retail” can
grow in this environment—in some formats, this will be able to scale quite quickly (i.e., China)
Key trade-off to manage: short-term volume versus long-term pricing/equity issues based on
retail pricing
Figure 3: PENETRATION Stage
Space optimization, modern margin
management, category and planogram
management/development, and continuous
supply chain improvement
are critical
Own brands start competing for shelf space; category talent is essential to get
teams to successfully fight this
Joint business planning turns into something
beyond filling out forms your boss told you to
fill out, to developing regional marketing/
targeting/clustering and building a supply
chain that can handle multiple channels
By 2020, digital/mobile commerce will be considered a way to reach outlying
areas (possibly through retailers or possibly leveraging existing traditional trade
infrastructure to do it yourself)
Shopper insights become critical as real distinction emerges between how
shoppers shop different outlets/channels
Key trade-off to manage: balancing modern trade growth with traditional trade
opportunities/optimization to maintain country profitability
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Maturation
This stage involves the rationalization of existing
square meters of space into more disciplined
operations. The United States has just left this
phase, while Poland and Mexico are just
entering it (Figure 4).
Postmodern
This is the stage at which competition becomes
concentrated and aggressive between massive
retailers that are too big to be defeated but too
small to conquer each other, and includes format
reinvention, relentless demand optimization, and
margin maximization (through smart merchandising, negotiation, and own-brand development).
There is an intense focus on in-store merchandising and experience (and this will eventually mean
online experience as well) (Figure 5).
Go-to-Market Platforms—
“Cover Your Assets”
Irrespective of geography, one of the core themes
that comes out across all market types is the
need to work with your best customers on more
holistic economic solutions. Historically, this has
involved moving from simply trying to grow topline
sales to driving both sales and profit growth. Going
forward, the critical go-to-market issue with major
retail outlets will involve questions about profitable asset productivity: how do shelves, stores,
and distribution centers (DCs)/networks generate
optimal cash flow?
Productive Shelves—The Physical
The degree of variation required in the shelf set
and planogram for most retailers in most geographies will increase markedly as they seek to
capitalize on better information and harder-toaccess growth pockets. This triggers a need for
four core capabilities:
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Figure 4: MATURATION Stage
Identifying logistics efficiencies at scale and joint business
plan optimization/deepening
Customer segmentation and picking winners are critical
Acknowledging that space productivity becomes more cashflow and less margin centric—the real understanding of how
inventory flows impact results not just buying more to get a
better deal
Supply chain understanding (internal and external)
needs to be first rate
Key trade-off to manage: investing in winners that may not be as
profitable in the short term and who may challenge your model but
who will drive long-term growth in the marketplace
Understanding integrated omnichannel category
management, which requires robust channel differentiation
strategies, including multifunctional team management
and balancing conflicting objectives between your
own team members
Learning how to work sustainable living into the retailer’s
efficiency story
Figure 5: POSTMODERN Stage
Loyalty card optimization: high-level clustering
and segment analytics
Knowing that at this point, you’re running massive businesses the
size of countries or continents
Evaluating retailers as media platforms and brand building
experiences
Team development and succession management, customer-level
differentiation and uniqueness
Deep shopper missions/cluster understanding
Managing the portfolio of brands in the context of retailers whose
lack of support for a brand can severely damage it
High-level category analytics skills
Holistic management of the total demand chain
Managing the total demand chain to minimize price instability Understanding how to use retail trade as a tool to develop
sustainable living platforms without sacrificing the
short term
Key trade-off to manage: the needs of the short-term business
versus the infrastructure to win in the long term
To easily visualize, render, and test shelf set
varieties quickly.
A shopper-centered view of SKU-level
performance. It is critical to understand
what happens as assortment changes (what
assortment analytic tools are ideally designed
for), as well as to have a view on why they
are changing (fueled by best-in-class shopper
research) combined with what can shape
not just assortment fine-tuning, but
assortment strategy.
The best predictive analytics you can find on
how shelf productivity changes as changes
are made in assortment. As these business
problems get more challenging, “good
enough” may not be good enough, so to speak,
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on the analytic front. Too high a percentage of
total opportunity is going to come from these
types of small decisions; they will need to be
made with increasing levels of precision.
Holistic math. Shelf productivity needs to
be assessed at a sales, margin, turns, and
holding power/in-stock level. The questions
of optimal private label assortment and
variety will only be answered effectively by
looking at the total economic implications of
these decisions.
Productive “Shelves”—The Virtual
Sales leaders will increasingly be responsible for
parsing what gets sold online versus in-store: How
will that decision be made? What are the success
criteria for it? What are the tools required to make
that decision possible?
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The Simple. The selling argument for nonblockbuster SKUs will need to be increasingly
rooted in economics rather than abstract
concepts like “category framer” or “premium”
or “clever marketing.” That story will need to
answer one very simple question: Why does
this product need to be on the shelf?
The Complex. Increasingly, your customers
will be looking for a perspective on multichannel assortment architecture (the
strategy behind the economics outlined in
the penetration phase), asking themselves:
Why should certain items be in-store
versus online? How should promotions be
architected across channels?
The Strategic. A critical issue raised by
this shelf dynamic relates to the types of
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innovation that can comfortably be brought to
market. Because most major CPG companies
dedicate significant resources to incremental
line-extension innovation, the scenario
mapped out in the previous bullet raises one
fairly obvious question: Where are these line
extensions going to be sold? If the economic
story behind them isn’t breakthrough or
compelling, they will almost certainly be
distributed through a multi-channel retailer’s
web properties not their shelf properties.
At the very least, it requires a new mindset
for item development and marketing for
these types of items if they are not going
to be sold in-store. In all likelihood, what
this will require is a radical rethink of the
innovation investments and efforts made by
CPG companies, which in turn has significant
implications for strategy, capital allocation,
and even team development. If there are
no line extensions left to be made, what’s a
29-year-old assistant brand manager going
to do for a living?
Productive Stores—The Relationships
For years, the notion that certain suppliers will
need better understanding of the relationship
between departments in in-store positioning—in
terms of adjacencies, layouts, and fixtures—has
been discussed but never really brought to life
except in a few specific instances. Multi-category
suppliers are going to increasingly benefit from
understanding total store traffic patterns and
category layouts.
Productive Supply Networks
Who will build the logistics model that can get
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product from DC, to store, to locker, to pickup
point, to people’s homes? And, what happens when
everyone wants something different?
Making Your DCs More Productive. Most
companies will be fulfilling single-item
orders further up their value chain than they
do today. Whether for their own eCommerce
customers, for small business/reseller
customers, or for major multi-channel
customers, this capability will need to be
folded into broader distribution capability.
Making Your Trucking Network More
Productive. Outside of home delivery, much
of the growth in the retail ecosystem between
now and 2020 will come from stores that are
much smaller than your distribution network
is used to fulfilling. That will, in all likelihood,
require smaller trucks and different delivery
patterns to make that work more effectively.
Making the Customer’s Safety Stock More
Productive. As Amazon.com continues to try
to manage a business with the bare minimum
of safety stock inventory (often to deleterious
effect on its sales), other retailers will be
pressured to get better at this (in many
ways similar to the pressure Walmart put
on less efficient retail under 25 years ago).
Replenishment forecasting and modeling
will need quantum leap improvements (in
particular with better predictive data for
simple things like weather and more complex
issues like changing consumer trends) in
order to keep the primarily brick-and-mortar
multi-channel retailers’ inventory competitive
with the best pure-play online operators.
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The Big “How?”
The Future of Analytics—“The New 4Ps”
The future of customer management is rooted
in analytic power. Much of that work will be the
transfer of leading global practices to the appropriate markets/stages that require them (e.g., a
market like China leaving the concentration stage
and moving to the penetration stage will benefit
from the category management skills honed in
markets beyond this stage).
At the same time, the world of analytics will
change as well, requiring new capabilities across
the board (while this article doesn’t break down
those analytic changes in detail, Kantar Retail will
continue to develop a robust perspective on that
for clients). To start this dialogue though, framing
the four key business questions we think
will require transformational analytics to
answer is essential.
Precision—Where Should I Target?
Increasingly, the answer to this question will
require much more sophisticated analytics to
understand, as conventional data sets (i.e., loyalty
and customer relationship management (CRM))
are crossed with the more widely available world of
data (an individual’s “digital/social/mobile” footprint) to create targeting that will require increasing precision. According to numerous sources,
when Barack Obama ran for U.S. President in 2008
and 2012, he was able to send out over 10,000
different “targeted” communications based on
micro-clusters of voters. The future of shopper
marketing (and marketing, period) probably relies
on the ability to do more campaigns that look
more like that and fewer that are about one simple
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message. The relationship between a powerful
over-arching brand narrative with micro-targeted
resonant messages aimed at precise need states
will require creative and analytic types to work
together in transformationally different ways than
they have before.
Personalization—Who Are They?
A related but separate question to precision is the
idea of personalization. Increasingly, shoppers are
going to want not only targeted messages, but they
will also want the “old 4Ps” served up in their own
personal way.
Product. More and more, products that can
be customized will be: flavors, variants,
colors…anything that isn’t core to the
formulation. Manufacturing plants will need
to accommodate this by thinking through the
“personalization chain.” Processes will need
to be built that can accommodate this
cost effectively.
Placement. Virtual shopping will increase
delivery to a personalized location: home,
work, locker, car park, etc. A supply chain that
can meet this need will be essential.
Promotion & Price. Possibly the greatest
test to conventional marketing analytics
and frameworks will be driven by the notion
of personalized pricing. Personalized
promotions based on transactional history
are not the future—it is CVS’s stated
strategy today. Safeway’s “just 4 U” pricing
platform explores the line between that and
personalized pricing in the United States.
Over time, transactional data will be fused
with data from other sources (e.g., media
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consumption, demographics, and online
behavior) to build pricing tolerances that
are both individualized and contextualized.
In all likelihood, shelf price for an item will
look more like the “sticker price” for a car
in the United States, a rough frame of value
rather than a specific economic data point.
When that point is reached, the calculation of
elasticities and equities will need to get more
“scenario-based” and curved, rather than
formulaic and linear.
Prediction—What Does the Future Hold?
As promotion and price become more scenario
based, all of our analytics change both their lens
and their base. The lens has to become more
forward-looking, and the base needs to reflect
some of the inherent uncertainty rooted in a
more scenario-based future. One of the defining
retailers of 2015-2025 will be Amazon.com, and
its approach to pricing is fundamentally different
from any retailer that has driven the market before
it. Put simply, Amazon.com views price as an
outcome as much as a strategy, and that outcome
is determined by a variety of factors. Reducing
variability in this outcome is part of the go-to-market work we will discuss in the last section of this
article, as a “leaky” distribution chain can cause
ripples in the C2C marketplace that can shake
business planning at your largest customers.
Prediction has always (to some degree) been the
point of analytics, though much of the research
and insight done have always inherently had a
backward-facing view. Winning companies in the
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future will work hard to get this forward-leaning
bias built into their insights, and this will require
reconfiguring three sets of critical enablers:
Skills/Tools. This is interesting because not
only will your analytic teams be increasingly
thrust into arenas where procedures,
techniques, and successes are less well
defined (which means your analytic hires
will need to look different than they do
today: perhaps a 50/50 split between people
with conventional and less classic CPG
backgrounds for a start), but also your
machines will need to work differently. Large
data collection, neural network processing,
and massive computational power could all
be critical differentiators.
Processes. If success is modeled best as
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scenarios, this almost certainly means our
decision processes need to be less linear,
and more recursive and adaptable. Large
commercial enterprises don’t like to rethink
decisions but leaders of these companies
will become increasingly comfortable with
a management style that’s less about “we
agreed to the plan, now let’s just relentlessly
execute” and more about recursive learning
and adaptation along the way.
Measures. If the future is scenario based,
in all likelihood we’ll be evaluating larger
buckets of activity and work to determine
success and reward. To paraphrase John
Wanamaker, “I know 25% of my initiatives
won’t work—I just don’t know which 25%
that will be.” This means that initiatives that
don’t achieve projections are not necessarily
failures and that teams and leaders will
probably find that a perfect success record
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probably is not compatible with achieving your
targets. The world is too complicated to grow
faster than the market without failure.
Proof—How Much Do I Make If This Works?
The fourth critical area of analytic competency is to
some degree the mirror image of the third: I need
my recommendations to be more forward-looking but at the same time, my backward-looking
views need to get more holistic in order to properly determine causation and evaluate success.
ROI analysis on all marketing initiatives becomes
increasingly complex the more touchpoints we
have with the consumer/shopper. In general, there
are three themes to ROI analysis that appear to be
most significant:
Campaign, Not Event Based. Measuring
the impact of discrete events in many cases
even today can drive curious behavior. For
instance, many companies that have strict
ROI measures on trade promotion wind up
over-relying on price discounting versus
other forms of promotion, because there’s
generally little you can do that has more
direct and immediate impact than a price
reduction. Evaluating campaign ROI involves
three core attributes:
-- A sense going in of what you’re trying
to accomplish;
-- Planned, rather than reactive, techniques;
and
-- Patience.
Understanding the Difference between
Correlation and Causation. As available
data in the short term outstrips the ability to
rationally process, it is critical to remember
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the appropriate use of correlation and causal
analysis. Sometimes correlation is fine: if we
do two things together, they work better than
either independently, for instance. We can
sign up for that and be happy. The challenge
arises when you start reconfiguring strategy
based on an assumed cause. Generally
speaking, correlation (i.e., “what happened”)
analysis is very good for figuring out what
to do, but to understand “why” something
happened, we generally need to dig deeper for
root causes.
Breaking Down Classic Divides Like “Above
the Line” and “Below the Line.” Following
shopper influence wherever it happens
(even if it crosses organizational silos)
will be essential.
The Blending of Shopper Marketing,
Consumer Marketing, Digital Marketing,
and Corporate Responsibility—“There
Is No Line”
The notion of “Above the Line” and “Below the
Line” marketing is as old as modern marketing
itself. It has served as a useful distinction between
work that was thought to be “equity accretive”
versus “trade oriented,” provided a legal architecture for the relationship between major suppliers
and customers, and been the root of countless
thousands of arguments between departments
about who gets to pay for what. But as the “Proof”
ROI concept becomes more ingrained and as we
begin to understand that these “lines” serve as
poor guides for how consumers and shoppers
relate to brands and making purchases, there are
real business reasons for removing this divide. At
the same time, the emergence of Amazon.com
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as both a massive retailer and highly successful
media platform presents a practical challenge—if
your largest customer is also a media entity, they
can (without too much difficulty) understand a
supplier’s total spending relationship with them.
Today, top-to-top meetings with Amazon.com for
suppliers where Amazon.com matters look very
different than they have in the past, and this has
enormous implications for suppliers, agencies,
media buyers, and their competitive retail set.
“Blurred Line #1”: The Boundary between
Shopper and Digital Marketing
As more and more shopping is done via mobile
phone (both in-store and online), and as more web
access is truly mobile (Google estimates that most
of the 3 billion people between now and 2020 that
become Internet connected will adopt mobile as
their primary means of accessing the web), what is
the point of having digital marketing removed from
shopper marketing? If the world is a “perpetual
purchase occasion,” how does that change the
way we think about the connection between attitudinal marketing and behavioral marketing?
Can brand building, brand development, and
marketing to shoppers be relevant in isolation
from one another?
Next Generation Marketing to Shoppers
If the world is a permanent purchase occasion, then
there is a need to intertwine “call-to-action”behavior
almost everywhere. For example, disrupting routine
replenishment purchases to get “new” into automatically filled baskets, or tying loyalty data, mobile
communication, and in-store presence to create new
points of interruption for retailers in a world without
natural stopping points (i.e., checkouts).
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“Blurred Line #2”: The Deconstruction
of “Channel”
While this is a term that applies to both media
platforms and selling platforms today, the fact
that they are the same word won’t be coincidental. Either by organic growth (Amazon.com),
partnership (Google), or acquisition (Walmart),
in all likelihood, your largest retailers will also
be among your largest media platforms as well.
Some possible scenarios:
Could Walmart buy Yahoo?
Would Target ever buy a TV network?
Will Walmart and Facebook become more and
more integrated?
Is Alibaba’s investment in shopping malls an
experiment or the start of a trend?
Next Generation Marketing Planning
Balancing the reward of gross rating pointequivalent impressions with the reward of retail
benefit (i.e., merchandising at a moment of truth
in the context of margin relief in categories that
are extremely price competitive) will be critical.
Tomorrow’s sales GMs will be responsible (in the
absence of a planning agency’s support) for essentially building a field media plan for your brands.
We expect there to be an enormous amount of
energy in the following areas:
Continuing to perfect the quest to tie
together media consumption and purchase
behavior for better media targeting
An understanding of the equity building
power of marketing through customers
A combination of retailer and supplier assets
aimed at high quality customer relationship
management (CRM)
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“Blurred Line #3”: The End of Corporate
Social Responsibility as a “Luxury” and
“Brand Transparency”
As more shoppers begin to leverage the transparency a digital world provides, they will have unique
insights into where products come from and what
companies stand for.
Next Generation of CSR. Sales leaders will
need to manage the “Triple Net” bottom line:
reducing costs and waste while enhancing
consumer satisfaction. The need to bring
marketers and operators together to form a
coherent team pulling in the same direction,
in many cases, will be rooted in customerfacing behavior.
Brand Transparency. Increasingly,
consumers will want to see inside the brand’s
personality and feel like they know brands
better. How can retail be an effective platform
to facilitate that?
The Deconstruction of Money. As in most of
the “next billion” markets, it seems likely that
banking will skip a generation and go mobile.
How does totally digital payment change the
way retail works? How does this change the
way we advertise and promote if someone’s
wallet is also his or her TV?
Next Generation Budgeting/
Shopping List Management
As retailers inevitably move into financial services/
payment provision more and more, does this change
their operational economics, and if so, how? The winners
in the marketplace will be the ones who can understand and move nimbly from shopper influence, to item
selection, to replenishment, to purchase as seamlessly
as possible. Is it possible that the dominant retailer of
the 21st century in emerging markets could be Google?
A wireless carrier? Visa? Of course it’s possible.
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Changing Fortunes
Kantar Retail’s 2014 Predictions for the Retail Sector
By: Kantar Retail Analysts
Now that 2013 has come to a close, we wipe the
slate clean and look to begin anew in the coming
year. In 2014, retailers will look to change their
fortunes after producing mostly underwhelming
growth during the past year. These goals should
get some help from slow but steady traction in
the economic recovery. As in recent years, the
government will continue to play a prominent role
in shaping shoppers’ spending plans.
The net effect will be spotty growth early in 2014
that will give way to stronger demand among both
Have and Have-Not households. Along the way,
growth will be affected by:
•Food stamp cuts. Cuts to the SNAP food stamp
program that went into effect November 1, 2013
will curb consumables spending by as much
as USD5 billion and grocery-related category
growth by as much as 0.5 percentage points.
•Health care expansion. The health care
expansion that begins on January 1, 2014 is
projected to add as much as USD15 billion in
prescription drug spending—among other effects
that now may lag given the troubled rollout. Both
the food stamp cuts and health care expansion
are likely to heighten competition among
consumables retailers—especially Walmart,
dollar stores, and supermarkets—as they work
to preserve and gain share among the lowerincome shoppers affected by these changes.
•Fed tapering. When and how quickly the Fed
decides to taper its bond-buying program will
be a key economic hurdle in 2014. Homegoods
categories and channels will be most affected.
Their growth will moderate but be sustained
along with the housing recovery.
•Fiscal uncertainty. Government budget battles
will also cast a cloud of uncertainty during
periods of 2014—with the next fiscal standoff
likely in mid-January.
In the end, growth should be fostered in 2014,
especially in the back half of the year, by a
continued downward trend in unemployment. This
will help Have-Not households absorb cuts to food
stamps or shift some of them out of the program
altogether. Low inflation in food and fuel in the first
half of the year should also help these households
keep most of their spending plans, even with
less government support. Stronger income
growth and sustained, albeit slower, wealth gains
will additionally expand the budgets of Have
households that tend to drive more incremental
demand, especially for discretionary categories.
With these factors in mind, Kantar Retail has
peered into its crystal ball to identify key trends
and developments that will impact the U.S. retail
sector in the coming year and beyond.
Transformers
As we did last year, we have bucketed our ideas
into three categories: Transformers, Shapers, and
Reflectors. Transformers represent developments
that will fundamentally transform the structure
of the retail industry, affecting how retailers and
suppliers operate today and well into the future.
The intention of these predictions is not to be
precisely right, but to give the reader “stretch” for a
three- to five-year scenario planning exercise. Even
if the likelihood of the following events occurring
is less than 50%, they are significant enough that
there should be thinking in place around what it
means if they take place.
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“The Only Way to Win Is Not to Play”:
Retailers Learn about Black Friday from
War Games
Some of you might remember the iconic movie War
Games, where a computer that controls America’s
nuclear arsenal talks itself out of precipitating
global nuclear annihilation by playing itself to a tie
in an almost infinite number of tic-tac-toe games.
The closing line of that movie (referenced above)
feels like a line many retailer boardrooms will be
hearing when they pull together their Black
Friday 2014 plans.
Kantar Retail’s prediction for 2014’s retail
environment is a marked decline (for the first time
in living memory) of promotional and marketing
intensity focused on Black Friday and the
beginning of its march toward irrelevance. There
are a few simple reasons for this:
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•The name Black Friday came about because it
was the day retailers theoretically went “into
the black” (i.e., turned a profit for the year).
This meaning has become completely lost with
retailers seeking to outdo each other with lunatic
opening hours and deals.
•Overwhelming the stores with traffic completely
defeats the purpose of a loss-leader promotion.
It not only encourages cherry picking, but also
it’s like opening a store where all you sell is
cherries and being disappointed you didn’t
sell grapes.
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•There is simply no quantitative evidence that
suggests that a successful Black Friday builds
momentum into the holiday shopping season.
This year, most retailers reported alarmingly low
store traffic in the weeks between Thanksgiving
and the week before Christmas, irrespective of
their Black Friday intensity.
•Wall Street is placing way too much emphasis
on terrible anecdotal snapshots from Black
Friday. Our suggestion for CFOs: manage this
narrative by stressing the degree to which you
are selectively participating in it.
•The trick with the holiday season (in what by
all accounts will be a blockbuster season for
Amazon) is asking yourself: How do I create a
solution that captures what the Amazon shopper
is doing in holiday shopping? Rest assured, what
the Amazon shopper is not doing is standing
outside in line for hours waiting to turn on their
mobile phone to shop.
Primarily brick-and-mortar multi-channel
(PBAMM) retailers have for the last five years been
engaged in the process of watching automobiles
populate America’s roadways and trying to make
a bigger, faster, meaner horse. Walmart seemed
happy with what it accomplished during Black
Friday, but this kind of overwhelming force lends
itself better to their operating model more than
anyone else’s. “We said Black Friday is the Super
Bowl of retail, we ran a play that only Walmart
could deliver and our customers loved it,” reported
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Bill Simon on November 29, 2013. The trick with
the Super Bowl is, if you weren’t a great team
all season, you aren’t playing in it. No amount of
promoting can get you there if you didn’t have the
325 days or so that precede Black Friday right
from a value-proposition perspective.
So, what do we expect instead of Black Friday?
•Unique products. Placing more emphasis on
items that can only be bought in one outlet.
•Using personalized understanding to help
shoppers create holiday shopping lists
throughout the year so that come holiday
time, more decisions are locked in. Pinterest
or other similar social media outlets seem
like a marvelous platform for this. In fact, a
preliminary report from IBM suggests that a
shopper referred to a retailer site by Pinterest
spent approximately USD100 on that visit (nearly
double what Facebook was able to generate,
though Facebook was apparently markedly better
at conversion).
•Using contextualized positioning to guide
shoppers into purchases that wouldn’t
occur to them in other environments.
Retailers that are curators of assortment or
that have brand footprints that extend beyond
their merchandise to a lifestyle seem ideally
positioned to lure shoppers out of item-centric
promotional discounting.
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•Understanding “self-gifting” better. It seems
reasonable to assume that if a shopper is buying
a big screen TV for Christmas, they’re not giving
it to their neighbor. We’d expect big-ticket-item
retailers to understand this purchase dynamic
better and begin to offer value platforms that
allow shoppers to treat themselves before the
holiday season and avoid the crowds.
•Mobile as the platform. Someone’s going to
find a way to geo-target shoppers standing
outside their competitor’s stores and offer them
USD20 to go home and buy something on their
website instead. Assertively promoting the
ability to access deals without lines, crowds,
endangerment, and insanity seems like a more
sensible proposition for any retailer who has a
more complex relationship with its shopper than
a lab rat has with a food pellet.
In short, we expect holiday shopping to change
similarly to how all shopping will change: it
will take place on the shopper’s terms, not the
retailers’. There is a small subset of shoppers that
enjoy leaving their families on Thanksgiving or
waking up at 3 AM to capitalize on great deals; we
just expect most retail CFOs to start encouraging
their merchants and marketers to find better,
smarter ways to reach the majority of shoppers
that really want to be sold to differently.
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The 2014 Buzzword Is “Embedding”
Gamification of Loyalty
This is not a prediction about anything specific,
but the management buzzword for 2014 and 2015
will be the concept of embedding the massive
changes currently happening in the marketplace
more foundationally into the behavior and strategy
of large enterprises. We expect the competitive
environment from 2015 to 2020 to be dominated
by companies that not only know things, but also
do things with what they know most consistently;
“embedding” is the simplest word that embraces
this concept. Should your company have a Director
of Embedding to help your teams take change and
make sure that change sustainably and effectively
impacts the way you work?
Combining existing loyalty card strategy that
provides personalized pricing, with the tactics of
gamification, will have profound impact on the
way we look at one-to-one engagement with our
most loyal shoppers. Gamification of loyalty is
the process of rewarding the shopper when they
have completed a set of objectives or tasks. In
a traditional loyalty program, those objectives
were often hidden from view; the shopper knew
they received a discount, but had no way to
monitor their progress toward the next promotion.
Gamification demands those requirements be
transparent and open, so shoppers can monitor
their progress toward completing those goals.
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There has been a handful of retailer-owned tests
of gamification over the last few years, such as
Meijer’s mPerks, where shoppers can unlock
rewards based on frequency of category purchase.
Shoppers can see how often they have purchased
a category and can see how many more times they
need to repurchase the category to receive the
next tier of promotion. In 2014, additional major
retailers will move from fringe experiments to
fully embedding gamification tactics into their
loyalty strategies.
begin to reduce inventory in stores dedicated
to big-ticket, space-hogging merchandise like
appliances, storage equipment, and power
equipment, leaving traffic drivers like hardware
and tools in place. Such moves will clear room
for display space where the retailers can inspire
shoppers with elaborate room displays and project
demonstrations. The retailers aren’t likely to turn
all of their stores to half-showroom, half-hardware
stores, but they will seize the opportunity to do so
in major markets and high-income areas.
The opportunities for suppliers are immense.
We will move to a world where suppliers can
fund “achievements” or “badges,” rather than
straight promotions. For a supplier with a large
cross-category portfolio in the health and beauty
category, this could manifest itself in sponsoring a
“spa day” achievement that rewards the shopper
with a discount across a basket of products—the
next evolution of solution bundling.
Home Depot has already acknowledged the
benefits of holding inventory for online sales by
expanding its appliance selection in just 240 stores
so far, and by testing out a more showroomlike experience in its “Superstore” prototype in
Vauxhall, NJ. Meanwhile, Lowe’s and its suppliers
have found great success from its New Innovations
endcaps, which are interactive and engaging
displays featuring the best and brightest of
manufacturers’ new inventions. Shoppers will be
able to test out everything from faucet fixtures to
washing machines and home décor.
Shapers
These ideas represent developments that will
shape how the retail industry operates. They
are predictions we would be surprised, but not
shocked, if they did not come to fruition and are
significant enough that they should be pillars of
your planning process.
Home Improvement Retailers Embrace
the Showroom
In 2014, Home Depot and Lowe’s will embrace
their stores’ value as showrooms and will
The retailers will also begin investing in longerterm deeper training of their associates to
fully capitalize on their competitive advantage
over online retail: in-store advice and how-to
instruction. Look for the retailers to seize new
technologies such as augmented reality—a
technology Home Depot already features in its
mobile app—to help shoppers envision their own
dream homes, kitchens, bathrooms, and more.
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Walmart Leapfrogs Loyalty Cards, Predicts
Shoppers Needs
With a full rollout of Scan & Go—Walmart’s mobile
self-checkout app—anticipated in 2014, the
retailer will supersede the analytic and targeted
marketing capabilities of traditional and mobilebased loyalty programs. Allowing insight into
shoppers’ trip planning, Scan & Go lets users
enter lists and select digital coupons. Once instore, the app may track what products shoppers
select, switch, and research, as well as their route
through the store. Afterward, the app can follow
when, where, how often, and how much each user
shopped. Undoubtedly, the retailer will have this
data at scale: if only 1% of its shoppers use this
tool, it will amount to recording roughly 1.4 million
trips a week.
As Walmart amasses this unprecedented
understanding of store shoppers’ purchase
behaviors, Kantar Retail anticipates that its
individual targeted capabilities will leapfrog brickand-mortar retailers. In 2014, Walmart will predict
list needs based on past purchase frequencies
and suggest Rollback items based on shopping
tendencies. Real-time geo-targeting will allow
Walmart to appeal to shoppers mid-trip, offering
suggestions based on similar users and coupons
based on their current basket. This individually
targeted marketing will bring sophisticated
tracking and targeting techniques commonly found
on websites to the physical store, raising the bar
for competitors and challenging suppliers to hone
their techniques to the customer.
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Target Canada Will Scale Back
Key battleground areas to watch:
By the end of 2014, Target Canada will still be
struggling to win over Canadians who remain
skeptical of Target’s “Expect More. Pay Less”
appeal. While in-stock inventory challenges will
be improved for Target stores, trip frequency will
still struggle. As a result, Target will roll back its
touted 2017 goal of USD6 billion million in Canada
to just under USD4 million.
•The Charlotte market area. As Publix invades,
Harris Teeter combines with Kroger, and Walmart
continues aggressive price marketing, it may not
be a good year for Food Lion.
Urban/CityTarget 2.0 Arrives
Building on its strong private brand portfolio as
well as earlier private brand over-facing tests,
Target will pilot a smaller limited-assortment box
(~40K sq. ft.) in urban neighborhoods that carries
private brand food, non-edible grocery, HBA, and
a selection of apparel merchandise, including C9
by Champion. Key vendor partners will provide a
small rotating selection of merchandise to create
a treasure hunt experience. A pharmacy and store
pickup area, for online orders, will also encourage
regular traffic into the box.
Grocers Will Grow and Gain
Market Share
Kroger, Whole Foods, Publix, Meijer, HEB—a
whole pantheon of good retailers, large and
small, with strong brands and a clear definition of
their value to the shopper—will continue to grow
and gain incremental share. Combined with the
expansion of Walmart’s Neighborhood Market,
less prepared and less well-defined supermarket
retailers will struggle. As a result, the wave of
swaps, sell-offs, mergers, acquisitions, and
divestitures we saw in 2013 will continue.
•The Dallas/Fort Worth market area. As WinCo
arrives, HEB moves closer to the core market
area, and established large players stay strong,
Safeway will continue to struggle.
•The Chicago market area. This market will be
the rugby scrum of grocery retailing for 2014 as
Dominick’s is dismantled, Mariano’s continues to
penetrate, and Jewel continues trying to regain
momentum. Someone is likely to make a big
move here.
Reflectors
Reflectors are predictions that are reasonably
conservative—in many cases, they are extrapolations of changes taking place today. We chose
them because we feel they are reflective of broader
trends that are useful to account for as you build
your 2014 and 2015 plans.
Dollar Stores Will Become Health
and Wellness Destinations for
Price-Sensitive Shoppers
As low-income shoppers are forced to buy health
insurance under the Affordable Care Act, they
will also be compelled to actively manage their
everyday health in order to avoid costly trips to
the doctor’s office and medical bills. Doing so
will require greater reliance on over-the-counter
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items to manage chronic health conditions. Dollar
stores that can remain competitively priced while
effectively communicating that it’s less expensive
to be healthy will quickly establish a leadership
position in these categories and create significant
pressure on competitors.
Clubs Reach an Inflection Point
As the club shopper base continues to age out
of the box, clubs will have no choice but to shift
focus to the next generation of members, Gen
Y. The need to retain the largest represented
cohort of their member base (Boomers) while
attracting a sustainable, longer-term base
of Gen Yers, however, creates a fundamental
conflict in the message and mix. This will result
in greater demand from Costco, Sam’s Club, and
BJ’s Wholesale for the use of prospective and
current member insights to drive meaningful
differentiation and growth moving forward.
Expect a much greater emphasis on analysis
and a corresponding demand for support.
Meanwhile, the threat of Amazon will
disproportionately impact club shopping.
Club members continue to skew higher in
cross-shopping Amazon and participating in
memberships like Prime, Mom, and Subscribe
& Save than typical U.S. shoppers. Because
traditional club products (e.g., those with stock-up,
bulk, shelf-stable traits) are more aligned to online
purchasing, expect that the clubs will attribute
more importance to offers and experiences that
Amazon (and online retailers in general) can’t
currently contend with. This will drive the need for
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a more curated, omni-channel assortment than
ever, as well as more exclusive, new, and local
items to reflect greater member relevance and
unique value. While this challenge is not new, the
potential for rapid growth in overlap between their
online and in-club offers and services could be a
game changer.
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In this context, the expansion of services will also
be key to elevating the club value proposition.
Areas like health care, health and wellness,
technology, travel, small business support, and
financial management are ripe for greater club
involvement given the nature of their evolving
member bases. Members, especially Gen Y who
are more inclined to take these efforts into their
own hands, will appreciate the convenience and
value of these types of online and in-person
services. As the clubs elevate the role of services
in their overall value proposition, opportunities will
emerge for suppliers across categories to better
fit with the broader solutions the clubs offer,
particularly those targeting specific generation
cohorts and life stages like club moms, college
students, and those members seeking more
transparent and practical health and
wellness solutions.
Further, with a model that continues to prove
successful amid growing competition in the
United States, expect that the clubs (namely
Costco and Sam’s Club) will seek to capitalize
on a more global brand. Costco has already set
several wheels in motion that will pave the way for
expansion into continental Europe in early 2014, as
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well as the potential introduction of dot-com
in markets where it currently doesn’t operate a
transactional site. Costco’s ramp up in Mexico
will also require a response from Sam’s Club,
which will need to more thoughtfully defend what
has largely been its market of markets. This
will place more pressure than ever on suppliers
to get their global logistics in order, to ensure
greater connectivity between their more marketspecific club constituents, and to better leverage
the crossover between imported and exported
products to appeal to the clubs’ treasure
hunt environment.
Drug Retailers Focus on Communicating
Value to Stay Competitive
In 2014, expect CVS, Walgreens, and Rite Aid to
emphasize value through loyalty and services. As
millions of shoppers enter the health care system,
drug channel retailers will need to accurately
communicate value to the newly insured Have Nots
or risk losing them to another channel. All three
players will focus on this in a few different ways.
•By offering rewards to compete at a basket
level instead of individual item level. Rewards,
promotions, and coupons all help lower the total
basket, improve price perception, and make
comparing prices more difficult.
•Through personalization. Creating a more
unique experience and tailoring promotions
or assortment will build a relationship with
shoppers and encourage them to return.
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•By adding value beyond price. Drug retailers’
overall health care expertise will give them
an opportunity to create value through health
services, education, and one-on-one guidance.
On a retailer level, CVS will continue honing its
personalization efforts and incorporating health
conditions and education across the total store.
Walgreens will focus on educating shoppers on
how to optimize Balance Rewards and honing
its rewards and promotions. Rite Aid will use
wellness+ to target specific groups, such as
moms and senior shoppers.
Ethnic Foods Expand into New Categories
When someone says “ethnic foods,” the most
common reaction is to think of Hispanic marketing
opportunities. But the extraordinary wave of new
immigration that has reached the United States in
the last 20 years also includes large numbers of
people from Asia, Eastern European, and Africa;
literally, people from almost everywhere.
Food and product trends are always a surprise to
mainstream companies unless they make large
efforts to look beyond the obvious. Not long ago,
few knew what edamame was, breakfast burritos
were a local oddity, and no one had any idea what a
success story Greek yogurt was about to become.
In 2014, an item or cuisine that seems exotic
or niche today will “suddenly” gain traction.
Like a small band working in small venues that
“suddenly” becomes an overnight success, that
item or cuisine is out there right now. Winning
suppliers find these things. Winning retailers find
these things. Have you been looking?
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For Grocers: Eat Well, Be Well, Act Well
With large, well-publicized efforts to remove trans
fats from American product lines and 14 million
people entering the health care system, there is
increased awareness of healthy eating; however,
shoppers will need guidance, and supermarkets
are well positioned to step into this gap to leverage
health and wellness across the entire store. Some
directions supermarkets can capitalize on include
the following:
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merchandising and assortment changes will
be made to meet specific dietary needs. Expect
better signage and more integrated wellnessoriented marketing as well.
•Act Well. Helping shoppers stay fit through
programs that tie food in with fitness.
Retailers will either engage in partnerships
or launch contest/marketing programs tied
specifically to fitness.
•Eat Well. Offering guidance and expertise to help
shoppers make healthy food purchases. Shelftag messages, in-store staff, cooking seminars
and demos, etc., will be increasingly utilized,
and some retailers will begin to proactively
discontinue product lines or items, or demand
changes to formulations to meet new standards.
•Be Well. Managing shoppers’ dietary or
health needs by acting as a wellness resource
and/or provider. Pharmacy services will be
leveraged more and become more accessible.
Clinic investments will accelerate, and more
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Global Outlook Remains Split Among
Markets Amid Russia Threats
F
By: Doug Hermanson
As the Russia-Ukraine conflict creates new
disruptions and China struggles to restimulate
growth, the global outlook for retailers and suppliers increasingly requires approaches to minimize
the impact of weaker demand growth in emerging markets and capitalize on improved demand
growth in developed markets that is expected to
persist despite the new disruptions.
The outlook for developing markets has a greater
potential for deteriorating in the coming months
due to price pressures and market disruptions,
including the Russia-Ukraine conflict. Putting a
cap on price pressures will be essential for Mexico,
Brazil, India, and Russia. Most policies to do this
likely will produce slower or relatively moderate
economic growth in the short term. China is trying
to stave off such an outcome as its efforts to rein
in consumer and property prices takes its toll on
economic growth. Russia’s incursion into Ukraine
will have a negative effect that will vary by country
as sanctions or the prospect of sanctions scares
off business investment at home and abroad.
Be on guard against implications from the
exception from most other developed markets, as
higher tax rates depress retail sales growth in the
coming months.
Russia-Ukraine conflict. A quick resolution to
this conflict is unlikely. Broad-based sanctions
that move the conflict toward resolution will be
difficult to achieve due to the varying economic
ties to Russia, especially among European
Union members. As a result, the implications
by country will be varied and likely to unfold
over a span of months. One possibility is that
Russia’s oil and gas markets will be vulnerable
These are among the factors affecting the
macroeconomic conditions across countries as
summarized in Figure 1.
In broad terms, here’s what this outlook means for
its varying impact across the retail landscape:
Figure 1: Selected Indicators by Key Markets
Key Markets
By measures of:
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Developed Emerging
Markets
Markets
Euro
Zone
Japan
United
States
Overall Consumer/Retail Spending
Market Disruptions#
Consumer Confidence
Employment/Income#
Business/Residential Investment
Prices
Policy: Fiscal, Monetary, Exchange Rate
Europe should continue to show uneven signs
of recovery that persist despite threats from the
Russia-Ukraine conflict. The United States is likely
to produce respectable growth this year as government-related uncertainty that plagued growth
last year mostly subsides. This boosts the outlook
for Canada, which will need exports of goods and
services to the United States to offset moderation
in housing and other sectors. Japan will be the
? = POSITIVE
? = MIXED
? = NEGATIVE
GDP, Investment and Consumer Spending are quarterly through second quarter of 2013; Remaining indicators are
monthly through June, July, or August 2013.
# Market disruptions are typically events that are temporary in nature and cannot be controlled by households,
firms, or government; Employment/Income metrics may be based on a different mix of indicators by country as well
as Kantar Retail analysis; Policy factors focus on the expected impact on retail sales of government policies related
to government spending, money supply and interest rates, and their related/expected effect on the exchange rate of
the domestic currency.
Source: Government sources, Kantar Retail analysis
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to disruptions that push fuel prices higher or
make them more volatile in certain countries,
if not globally.
In most Western European markets,
sanctions could have an effect on certain
retailers and manufacturers. Exports of
luxury goods and automobiles from Germany,
France, and Italy to Russia are at risk. The
United Kingdom could feel effects from
a pullback in residential investment and
tourist spending from wealthy Russians
living in London. The direct effect on most
consumables categories and European
retailers is not likely to be severe, but in the
long term they are threatened indirectly by
any pullback in business confidence and
investment that puts pressure on job gains.
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Plan cautiously for sustained, albeit uneven,
growth in European markets. Despite the
threat from Russia-related disruptions, the
negative effects should not be enough to
overcome positive momentum most evident in
countries such as the United Kingdom, Spain,
and, to a lesser extent, Italy. At the same
time, expect the gap between Have and Have
Nots across European countries to persist
and widen. In France, the outlook depends
on whether government spending cuts
deepen or stay the course, which has led to
steeper-than-desired deficits. A shift toward
less government spending would put more
pressure on Have Nots.
As the uneven European recovery continues,
Have households will be the first to increase
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spending plans as they benefit from a bounce
back in investments. Have households in the
United Kingdom are receiving an additional
lift from surging home values pushed up
by additional government support for home
buying enacted in the past year. Additionally,
job growth in this segment has likely been
more resilient during the downturn,
providing more immediate spending power
as consumer confidence returns. Have Nots
are likely to remain more cautious with their
spending plans, perhaps for several years.
Jobs and savings that have been severely
depressed by the prolonged downturn will
likely take years to recover. Suppliers and
retailers will need to differentiate products
and marketing efforts to address the twotrack course of the Haves and Have Nots.
Products and retailers that are unable
to appeal to one or both of these distinct
segments may fail to benefit from the initial
recovery in most European markets or the
potentially increased value focus in others,
such as France.
Prepare for persisting uncertainty in
emerging markets that should give way to
stronger growth in the long term. Russia
itself and other emerging markets should be
most negatively affected by the disruptions
caused by the Ukraine crisis as investors
flee to U.S. dollar or euro-based assets and
investments. In addition, the short-term
growth outlook of emerging markets will
continue to be hurt by the steps the Federal
Reserve is taking to unwind its huge cash
injection into the U.S. economy—and into the
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global economy indirectly—over the past five
years. The Fed’s “tapering” has led to a selloff
in many emerging market currencies.
The weaker currencies are fanning
inflation in India, Brazil, Russia, Mexico,
and emerging markets generally by raising
prices of imported goods. The currency and
price impact also dampens demand from
consumers and slows economic growth.
Brazil also faces a toll on demand from
increased sales taxes on beverages at least
until the end of 2014, which is among the
negative factors that will likely offset any
potential stimulus from the upcoming
World Cup.
Inflation pressures combined with bulging
government debt in India and Brazil has
limited the ability of these countries to
respond by lowering interest rates or
sharply increasing federal spending to boost
economic growth. China largely has been an
exception to these exchange rate effects due
to its tight control of money flows in and out
of the country. The currency effects likely will
require raising interest rates in the case of
Russia and Mexico and keeping rates at high
levels in Brazil and India. This should lead
to subsiding inflation and a strengthening
currency in the long term that attracts
investors and again makes these markets
key growth engines for retailers and suppliers
(attracted to relatively younger populations
and emerging middle-class populations in
most of these markets). In the short term,
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though, these policies will keep growth
moderate or may even dampen
growth further.
Curb expectations of a short-term rebound
in China’s growth. China’s road to rebalancing
its economy is becoming bumpier. Factory
growth has slowed and perhaps retracted
in recent months. Consumer confidence is
flagging, which is an ominous sign for nearterm retail sales growth. The government
has already responded in recent weeks by
announcing government-funded investment
projects and letting interest rates move
lower. This likely ensures that retail sales
growth in the short term will continue to
outpace most major markets, but pale
in comparison to the sky-high growth of
recent years. Take note, though, that the
government policy risks a hard fall down
the road. Increased government stimulus
may cause inflation to flare and easier credit
conditions may encourage more speculative
investment in housing. The government will
be hard pressed to stimulate the economy
just enough, but not too much.
Expect sustained U.S. growth to bolster
Mexico and Canada. Improved weather and
job gains in the United States will shift U.S.
retail spending into higher gear in the coming
months. This will contribute to a pickup
in U.S. demand for Mexican and Canadian
exports that should be enough to keep these
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economies growing despite disruptions that
threaten to derail growth. Canada’s housing
market seems to have made a soft landing,
but is still vulnerable if job growth slows
sharply. The situation for Mexico is more
pressing. Rising food inflation is among the
factors that have pushed Mexican consumer
confidence down to its lowest levels in several
years. If inflation pressures can be contained,
then consumer demand should recover due
to sustained U.S. demand for Mexican goods
that will bolster jobs and incomes.
Plan cautiously in Japan. Expect retail sales
growth to slow in the short term due to a
higher national sales tax that took effect
on April 1. This is part of a multi-pronged
approach to simultaneously rid Japan of
growth-killing deflation and keep in check
Japan’s ballooning government debt. In
the past year, the Bank of Japan has been
implementing a plan to double the money
supply by 2015 and dole out a USD107 billion
fiscal-stimulus package. The initial effects
were positive for retail sales growth last
year as consumer confidence picked up. But
the higher sales tax will have a measurable
impact in the coming months. While a
slowdown in retail sales growth is tolerable,
and likely expected, the biggest fear is a
prolonged pullback in demand that might
cause consumer prices to fall once again and
cause government revenues to sink. Thus, the
success of these government policies, and the
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prospects for retail and supplier investment
in Japan, may be most evident over the longer
term, rather than the coming months.
Expect exchange rate fluctuations to play an
increased role in the global price picture.
The weak-to-moderate demand outlook for
China and other emerging markets will keep
global commodity price pressures mostly
dormant. Still, the inflation outlook will
remain much weaker for developed markets
than emerging markets due to a swing in the
value of currencies. The euro area, the United
Kingdom, Canada, and the United States will
continue to see muted price pressures due
to the increased value of their currencies.
Deflation may be a risk in Spain and other
euro-zone countries, but this is unlikely to
be severe enough or persist long enough to
become a threat to the economic recovery.
Brazil, Mexico, India, and Russia will continue
to battle price pressures due to a falling
currency value. China’s shift toward more
economic stimulus and less appreciation
of the yuan may spark more inflation in the
coming months.
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Shopping Behavior Changes Looming Larger
Than Spending Changes: U.S. Macro Outlook
By: Frank Badillo
Shoppers’ reaction to early-year macro conditions
dominated by bad weather, higher heating costs,
SNAP cutbacks, and the health care reform rollout
looms large heading into the second quarter of
2014. That response will ultimately have the
greatest effect in terms of changing shopping
behavior—more so than any pullback in levels or
growth of spending.
A key reason why shopping is more important than
spending is because the spending toll from any
one of the early-year disruptions is small relative
to overall spending on goods and services. The toll
on overall spending growth is measured in tenths
of a percentage point and can be easily obscured (or
offset) by other conditions—macro and competitive.
The spending toll, however, is magnified or minimized for any given retailer or supplier depending
on how households respond to the disruptions via
their shopping behavior. Among other things, we
are seeing:
Discretionary goods and services most
at risk. The money-saving tactics shoppers
initially resort to tend to preserve food and
drug spending and instead limit spending
on discretionary goods and services. Eating
out less is among the first tactics employed,
which then benefits and minimizes the
negative impact on grocery spending. Beyond
reining in spending on services, apparel,
and homegoods are the retail channels most
negatively affected.
Coupons, private label, and value channels
gain favor. The pressures moving households
toward value-focused behavior also mean
an ongoing inclination to use coupons, buy
private label, and shop at value-focused
channels and retailers such as dollar stores
and Walmart—with Have-Not households
disproportionately leveraging these
approaches to shopping.
Consumable goods sheltered, favored.
While households shelter food spending from
the most severe money-saving tactics, that
spending has simultaneously received a boost
of late from the bad weather because it has
encouraged households to spend more in
anticipation of weather-related needs. This
has especially benefited supermarkets,
and other consumable goods channels to a
lesser extent.
Consumables retailers and brands
not immune. While the net spending effects
can be relatively straightforward at a macro
level, determining what the underlying shifts
in shopping behavior mean for any given
retailer or brand is much more difficult.
A strong position among the growing online
and small-box value retailers will help
minimize the potential negative impact on
consumable goods brands, but a timely
competitive response to changes in shopper
behavior also will help.
The macroeconomic conditions shaping this
outlook are summarized in Figure 1.
Figure 1: Summary Scorecard of Macro Conditions
March 2013*
United States
Overall
Impact
Indicators by group
Overall Consumer/Retail Indicators
Market Disruptions
Confidence & Spending Intentions
Employment, Income, Wealth & Credit
Business & Residential Investment
Prices
Exchange Rate, Monetary & Fiscal Policy
? = IMPROVING
? = MIXED
? = WORSENING
* The latest weekly scorecard is available in a news brief
posted on the Macroeconomic Insights webpage at: http://www.
kantarretailiq.com/Topic/NewsList.aspx?Topic=368280
Source: U.S. Department of Commerce, U.S. Department of Labor,
Conference Board, Federal Reserve Board, Kantar Retail analysis
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Here’s what this outlook means in broad terms of
its varying impact across the retail landscape:
Expect spending intentions to bounce back.
In retrospect, it may be no surprise that
spending intentions among both Have and
Have-Not households reached their last
high point in October amid the resolution of
the government shutdown. In the following
months, spending intentions slid—albeit
slightly, but especially more among Have
households—as concerns about the health
care rollout rose and harsh winter weather
rolled in. For Have-Not households, SNAP
cuts also factored in.
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These should prove to be temporary effects
that fade as time passes. And in fact, signs of
improvement in spending intentions occurred
in February, but entirely among Have Nots with
Have household spending intentions holding
steady. A continued pickup should be driven
by underlying macro conditions that otherwise
remain positive. Jobs, income, inflation,
interest rates, and the housing market should
all remain on a track that sustains economic
recovery. While job measures appear mixed,
most meaningful are jobless claims, which
as a leading indicator suggest that the jobs
recovery remains on track.
Expect the SNAP impact to remain
blurred, blunted. Our initial estimate was that
the expected $5 billion cut in benefits would
reduce the growth pace in the consumables
channels by as much as one-half of a
percentage point. This impact has so far
not been clearly evident in the sales growth
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for consumables channels as reported by
the government through January. These
results for consumables channels have held
steady in the aggregate and actually picked
up into January, partly as households spent
to prepare for bad weather—especially at
supermarkets. Retailers such as Walmart and
Family Dollar have reported weak results for
their latest quarter that may reflect a SNAP
impact, but that impact is difficult to separate
from competitive and price pressures
on growth.
Among the factors blurring and blunting
the SNAP impact are: (1) actual benefit cuts
that are slightly lower than expected; (2) the
response in shopping behavior that shifts
part of the impact of the cuts to non-food
spending; and, (3) enrollment counts that
have begun to edge lower. SNAP data just
now available for the first months of the
cuts (November) show that average monthly
benefits fell by about $8 per person and $17
per household, which is a few dollars below
expectations and translate into an annualized
cut of about $4.5 billion. Meanwhile,
ShopperScape® survey results from
January tell us that one in every five SNAP
recipients say they have not changed their
retail spending behavior because of reduced
SNAP benefits. And those that have changed
behavior employ a variety of shopping and
spending tactics to blunt the impact. The
leading tactics are: not buying as many
non-essential food items (43%); using more
coupons (36%); and cutting back on non-food
household essentials (33%).
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Expect a health care reform impact that
is varied by segment and modest
in the aggregate. The clear impact of health
care reform on household discretionary
spending will remain difficult for a while to
separate from other disruptions affecting
households, such as weather effects
and SNAP cutbacks. However, the early
signs from retail sales results and our
ShopperScape® survey are consistent with
our initial expectations that the impact will
be modest at an aggregate level while varied
among specific consumer groups.
Have households are more likely to be
anticipating spending more on health care
and premiums in 2014: 47% vs. 37% of HaveNot shoppers. This may explain why spending
intentions slipped as 2014 approached more
so for Have than Have-Not households. But
not all believe these higher health care costs
will cause them to change their spending and
shopping behavior. This effectively means
that about one-third or fewer of households
entered the year expecting to change their
spending and shopping behavior in response
to health care costs. The wildcard is that
nearly one-quarter of households were not
sure if they would be spending more on health
care. So the impact of health care reform
likely will evolve over time—especially after
the next signup deadline passes on March 31.
Expect price pressures to remain isolated
and modest overall—for now. Higher winter
heating costs represent the biggest threat
to households from rising price pressures,
which we expect will expand across more
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categories as the year progresses. At the
moment, however, the inflation threat
remains isolated and should not create a big
drag on spending across all households—
not with the key consumer price inflation
measures running at a tepid rate between
1.0% and 1.5% through January even with
higher heating costs.
The inflation threat is focused in the
Northeast states and among households
that use heating oil, which is where the
biggest price spike has been. The uptick in
natural gas prices has been less dramatic.
In either case, these fuel price pressures
have the greatest negative impact on
Have-Not households, who primarily hold
back on spending in discretionary categories
in response. Consumable goods categories
should be affected far less significantly.
Respond to the range of conditions by state
and local market. The early-year macro
conditions will either aggravate or be blunted
by the varied conditions across states and
cities. The prospects look best in states that
have previously lagged, but that are recently
showing a pickup in jobs growth: Arizona,
Arkansas, Delaware, Florida, Hawaii, Indiana,
Nevada, North Carolina, South Carolina,
Tennessee, and Wisconsin.
Be careful in markets that have led the jobs
recovery, but that have slowed more recently:
Alaska, Iowa, Montana, Nebraska, Virginia,
Washington D.C., and West Virginia.
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And within states, be aware of the metro
markets that are growing faster or slower
than the rest of the state. The big markets
outpacing their state include San Jose, CA;
Indianapolis, IN; Louisville, KY; Charlotte and
Raleigh, NC; Columbus, OH; Pittsburgh, PA;
Nashville, TN; Seattle, WA. The big markets
lagging their states include Riverside and
Sacramento, CA; Bergen-Hudson-Passaic, NJ;
Westchester, NY; Cincinnati and Cleveland, OH;
Nashville, TN; Milwaukee, WI; Richmond and
Virginia Beach-Norfolk, VA.
Look for next quarters to pick up
across channels. Kantar Retail’s channel
forecasts by quarter show how the firstquarter weather effects have weighed
most on the discretionary goods-focused
channels—i.e., apparel and homegoods
specialists as well as online retailers. While
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they are forecast to bounce back in the
following quarters, growth at consumablesfocused channels also is expected to step
higher as macroeconomic conditions beyond
weather improve. This includes drug stores
and supermarkets, as well as big and smallbox mass retailers.
Look for 2014 pickup in consumables
categories. Kantar Retail’s category
forecasts suggest that a modest in-store
pickup in sales growth in 2014 will be led by
consumables goods categories. Prescription
drugs will see the biggest pickup because
of the impact of the Affordable Care Act, but
food, health, and beauty care categories also
will see improvement from last year’s weak
growth pace. Growth will be driven first by
unit volume gains and then price gains as the
year progresses.
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Using the Concept of “Economic Distress” in
February ’14 Planning
By: Ray Gaul, Simon Johnstone
Economic distress—a situation where consumers,
firms, or governments have the sense that they
lack funds—is a defining theme in European retail
analysis in 2014. Kantar Retail looks at three
different, yet similar, forms of economic distress:
1. Income Distress. Income distress is the
easiest concept to measure and understand.
Income distress occurs when there is either
no new revenue flowing into accounts or when
the amount of income flowing in is growing
more slowly than desired/needed.
2. Expense Distress. Expense distress is more
complicated because it comes in two forms:
acute and chronic. Acute distress is an
emergency that requires financial spending,
like a car breaking down or damage from a
natural disaster. Chronic distress is when
expenses rise faster than income over a long
period, such as what happens with property
bubbles or energy costs.
3. Expectations Distress. Expectations distress
is the least tangible concept of the three
forms of distress. Expectations distress
occurs when there is an expectation that
something good will happen but then it does
not materialize. Expectations distress can
have long-term effects on consumer behavior
in that it has the most profound impact on the
psychological nature of those affected.
Three European countries are expected dominate
the headlines:
Switzerland—voters have just rejected
“open” movement of people from the EU
Bosnia & Herzegovina—youth protests
across the country have raised the possibility
of a “Balkan Spring”
Scotland (UK)—politicians are debating
the pros/cons of a “yes vote” for Scottish
independence
We can then combine these three with the three
countries that previously dominated headlines:
Turkey—a political corruption scandal has
opened the doors to currency devaluation
and the potential for a return to civic protest
similar to the summer of 2013
Ukraine—a stalemate between the president
and reformers has created a political and
economic crisis
Russia—the Olympics has thrown Russia
into the spotlight at a time when the
economy is slowing and the ruble is
facing external pressure
Using the three concepts of economic distress
to help characterize these countries will illustrate ways you can plan more effectively for retail
success in 2014.
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Mapping Distress in 2014
The easiest way to map economic distress is by
taking a view of the past and combining it with a
view of the future. In this illustration, we will use
GDP and look at the last five years combined with
expectations for 2014. You can take the same
approach with your customers by taking your own
“sell in” data by key account (Figure 1).
Figure 1: GDP Data
Real GDP,
Euros bn.
2008
€ 2,698
€ 1,958
€ 190
€ 610
€ 642
€
20
United Kingdom
Russia
Ukraine
Turkey
Switzerland
Bosnia and Herzegovina
Using this data, 5-year performance compared to
1-year outlook, we can map the countries (Figure 2).
Using this mapping, we end up with four groups of
countries (Figure 3).
2013
€ 2,672
€ 2,065
€ 178
€ 732
€ 679
€
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Source: Kantar Retail research, analysis
Figure 2: GDP Forecast vs. 5-Year Performance
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2014 Real GDP Forecast (% vs. 2013)
4.5%
4.0%
Turkey
3.5%
United Kingdom
3.0%
Russia
2.5%
Switzerland
2.0%
Bosnia and
Herzegovina
1.5%
1.0%
Ukraine
0.5%
0.0%
90.0
95.0
100.0
105.0
110.0
115.0
Economic Growth vs. 2008
(Real GDP in EUR using Fx as of 31-12-2013)
Source: Kantar Retail research, analysis
120.0
125.0
GDP Annual
Growth %
Index
2013:2008
99.0
105.5
93.7
120.0
105.8
100.0
2014E
2.4%
2.3%
1.3%
3.8%
2.2%
2.0%
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What becomes interesting is when comparing two
countries in the same situation, such as Russia
and Switzerland. In the case of Russia, consumers are primarily concerned with “expectations
distress”—a situation where the future may not
deliver adequate results. In the case of Switzerland, consumers are primarily concerned with
“expense distress”—a situation where the cost
of living rises faster than desirable (due to open
immigration policies and a generous social
support system).
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Figure 3: Four Groups of Countries
Group
Country
1. Fast Growth Ahead, Rapid Expansion over past 5 years
Turkey
2. Fast Growth Ahead, Expanded Gradually over last 5 years
Russia, Switzerland
3. Fast growth ahead, mild contraction in past 5 years
United Kingdom (Scotland), Bosnia & Herzegovina
4. Weak growth ahead, contraction in past 5 years
Ukraine
Using this analysis helps to explain why Aldi UK
has grown 30% in the past 12 months. It focuses
on consumers feeling of expense distress in a
market where expense distress is the dominant
theme (Figure 4).
Figure 4: Aldi’s Focus on Expense Distress, New Cross London, UK
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Q4, FY 2013 Results
Amazon Delivers, Yet International Falls Short
By: Anne Zybowski, Nicole Santosuosso
Amazon ended 2013 with a strong holiday
season—yet one that fell short of growth expectations on the international side of the business.
For its fourth quarter ended December 31, 2013,
revenue grew 20% to USD25.6 billion, as Amazon
surpassed over 237 million worldwide active
customer accounts. Full-year 2013 net sales
increased 22% to USD74.5 billion, compared with
USD61.1 billion in 2012. As shoppers become
increasingly connected across devices, mobile
continues to be a tailwind for the business, removing purchase friction and providing easier access
for shoppers that is one-click, or tap, away.
Amazon’s home market results outpaced slower
growth in international markets. 2013 international net sales grew merely 14% to USD29.9 billion,
while North America sales grew significantly faster
at 28% growth to USD44.5 billion. Apart from
product sales, strong growth in “other” revenue
reinforces Amazon’s business model as more than
just a retailer. This revenue, which includes credit
cards, third-party sales, Amazon Web Services
(AWS), and Amazon Media Group, was a significant
contributor to overall growth and now represents
18% of sales (Figure 1).
Sales Highlights by Segment,
Fiscal Year 2013
North America Sales Highlights
North America net sales grew 28% in the 2013
fiscal year to USD44.5 billion. Growth was driven
by the electronics and general merchandise (EGM)
category, which grew 29% to USD29.9 billion. The
media category grew 18% to USD10.8 billion. While
both categories continue to grow at double-digit
rates, EGM continues to outpace and take a larger
part of overall sales with a 67% share of net sales,
steady from last year. Media decreased share of
net by sales by approximately 200 basis points
(bp) from 2012. The “other” category (sales from
non-retail activities such as AWS,
Figure 1: Amazon Q4, FY 2013 Segment and Consolidated Performance
Quarter Ending
12/31/2013
12/31/2012
Media
$3,513
$2,903
Electronics/GM
$10,648
*Other
$1,170
$15,331
Year Ending
% change
12/31/2013
12/31/2012
% change
21%
$10,809
$9,189
18%
$8,503
25%
$29,985
$23,273
29%
$769
52%
$3,723
$2,351
58%
$12,175
26%
$44,517
$34,813
28%
Net Sales (USD millions)
North America
Total Net Sales
International
Media
$3,714
$3,611
3%
$10,907
$10,753
1%
Electronics/GM
$6,478
$5,431
19%
$18,817
$15,355
23%
$64
$51
25%
$211
$172
23%
$10,256
$9,093
13%
$29,935
$26,280
14%
*Other
Total Net Sales
Consolidated
Media
$7,227
$6,514
11%
$21,716
$19,942
9%
Electronics/GM
$17,126
$13,934
23%
$48,802
$38,628
26%
*Other
Total Net Sales
$1,234
$820
50%
$3,934
$2,523
56%
$25,587
$21,268
20%
$74,452
$61,093
22%
$725
$608
19%
$1,886
$1,592
18%
$151
$70
116%
$107
$76
41%
$876
$678
29%
$1,993
$1,668
19%
Profitability (USD millions)
North America
Segment Operating Income
International
Consolidated
*Other includes sales from credit cards, third-party, Amazon Web Services (AWS), and Amazon Media Group.
Source: Company reports
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advertising services, and co-branded credit card
agreements) grew 58% to USD3.7 billion. Other
revenue represented 8% of total net sales, an
increase by approximately 100 bp from 2012.
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International Sales Highlights
International net sales for the fiscal year 2013
grew 14% to USD29.9 billion, or 19% growth
excluding foreign exchange impact. EGM sales
were up 23% to USD18.8 billion, while Media grew
only 1% to USD10.9 billion; excluding foreign
exchange impacts category growth was 27% and
7%, respectively. EGM represents a larger portion
of International segment sales as well, increasing approximately 500 bp since 2012. The “other”
category (sales from non-retail activities such as
advertising services, and co-branded credit card
agreements) grew 23% to USD211 million and
contributed less than 1% share of net sales, about
steady from 2012.
Sales: Product vs. Services
Keep in mind that Amazon is not just a retailer,
but also a technology company that provides many
other services including AWS and Amazon Media
Group. Net service sales grew 45% to USD13.5
billion and increased share of net sales by approximately 300 bp from 2012. Product sales grew
18% to USD60.9 billion. Amazon’s marketplace
continues to be a key driver of the overall business in terms of both assortment and profitability,
with more than 2 million worldwide active seller
accounts that represent 39% of paid units.
Financial Highlights: Profitability, Fiscal
Year 2013
Amazon’s overall profitability for 2013 was relatively neutral with reported net income of USD274
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million, but a significant reversal of its net loss
of USD39 million last year (Figure 2). Operating
profit has remained flat at 1% of sales margin, or
USD745 million. Consolidated segment operating
income (CSOI) grew 20% to USD1.99 billion.
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Fulfillment expenses grew 33.7% as Amazon
opened seven net new fulfillment centers,
expanding capacity across all markets to
support first- and third-party (FBA) volume.
Net shipping expenses (shipping revenue
less outbound shipping costs) grew 23% to
USD3.5 billion, in line with revenue growth
and as a percentage of sales remained flat at
4.7% of sales.
North America operating income grew 19%
year-over-year to USD1.9 billion, a 4.2%
margin on segment sales, which is a slight
decline from 4.6% in 2012.
Technology and content, followed by
International operating income grew 41%
year-over-year to USD107 million, a 0.4%
margin on segment sales, which is relatively
flat versus the prior year.
To support topline growth, operating expenses
jumped from 23.6% of sales to 26.2% of sales in
2013. Key drivers of these expenses:
marketing, were the other two areas where
expense growth outstripped sales growth at
44% and 30%, respectively. Technology and
content development continue to be a driver of
both Amazon’s retail business as well as AWS
growth in “other” revenue.
Figure 2: Amazon FY 2013 Financial Data as Percentage of Total Sales
FISCAL YEAR ENDING
(USD millions)
2013
% of Total
Sales
2012
% of Total
Sales
Change
change bps
Net Sales
74,452
61,093
22%
Cost of sales
54,181
45,971
18%
Gross Profit
20,271
27.2%
15,122
24.8%
34%
247
19,526
26.2%
14,446
23.6%
35%
258
Operating Expenses
Fulfillment
8,585
11.5%
6,419
10.5%
34%
102
Technology and Content
6,565
8.8%
4,564
7.5%
44%
135
Marketing
3,133
4.2%
2,408
3.9%
30%
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General and Administrative
1,129
1.5%
896
1.5%
26%
5
Other Operating Expenses
114
0.2%
159
0.3%
(28%)
(11)
Operating Profit
745
1.0%
676
1.1%
10%
(11)
Net Income (loss)
274
0.4%
(39)
-0.1%
(803%)
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Net Shipping Expenses
3,499
4.7%
2,855
4.7%
23%
3
Shipping revenue
3,137
4.2%
2,279
3.7%
38%
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Outbound shipping costs
6,636
8.9%
5,134
8.4%
29%
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Source: Company reports
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Examining the balance sheet, cash and
marketable securities grew USD1 billion yearover-year to USD12.45 billion, driven by a stronger
increase in cash from operating activities. Inventory grew 23% to USD7.41 billion and payable days
decreased to 74 from 76 in 2012. Inventory turns
were 8.9, down from 9.3 turns in 2012 as Amazon
expanded selection, improved in-stock levels, and
introduced new product categories.
Looking Forward
As a nearly USD75 billion retailer, Kantar Retail
expects topline growth rates to remain strong, but
continue to moderate as Amazon hits scale. We
forecast that Amazon will deliver a 16% CAGR over
the next five years in North America as sales grow
from over USD50 billion in 2014 to over 90 billion
by 2018; International’s CAGR is estimated to be
21% over the next five years to reach over USD75
billion by 2018.
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For 2014, Amazon predicts between 13% and 24%
growth in first quarter sales with relatively flat
operating income. 2014 guidance anticipates first
quarter CSOI to be between USD150 million and
USD550 million, compared with USD441 million in
the first quarter of 2013.
2014 initiatives will continue to extend Amazon’s
value proposition, while driving conversion into
new categories and services.
Digital: Digital services continue to be a
value-add for Prime members, as new
content continues to be added to the U.S.
Kindle Owners’ Lending Library and Prime
Instant Video service. Internationally, Amazon
has just launched Prime Instant Video in the
UK and Germany as it continues to leverage
the “value-add” enhancements associated
with its Prime model.
Amazon Fresh: Although still in its infancy,
Amazon Fresh has seen positive results in the
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LA and San Francisco Bay area. The company
is pleased with performance thus far, citing
“good adoption” and “good conversion from
the Prime trials” and will continue to invest in
this service, expanding to additional markets
in 2014. Continued emphasis will be placed on
fulfillment and same day delivery.
Prime: Amazon is considering increasing
the cost of Prime by USD20-40 in the
United States. The company notes dramatic
increase in membership and selection
(from 1 million eligible items at launch in
2005 to over 19 million today) combined
with increased shipping costs as the cause.
Annual membership has remained at USD79
since the program’s launch in 2005, while
significantly investing in value-add content
services. Specifically asked during the
Q&A with investors, Amazon stated that
investments in content and Prime Instant
Video are not the reason for considering
price increases.
Kantar Retail Point of View
While Amazon delivered a solid fourth quarter and fiscal year 2013, the
retailer’s growing pains as it has tripled its scale in the past four years—from
USD25 billion in 2009 to USD75 billion in 2013—are quite evident in its recent
results. To understand the true story requires digging deeper below the headlines fixated on “irrational share prices” and “slowing growth” to understand
the real transitions by segment.
Topline vs. Bottom Line Balancing Act
Topline. You’ve heard us say this many times over the past year, so we’ll keep
it brief as it bears repeating. As Amazon becomes a major scale player, its
growth rates each year will continue to decline—it’s basic math. Its growth
rates are just declining from the high 30s down to low 20s and into the high
teens. From a dollars-of-growth-added perspective, Amazon is not slowing at
all; in fact, over the next five years Amazon will add approximately USD9 billion
in sales per year in the United States alone, making it the #1 growth retailer
ahead of Walmart.
International Impact. The biggest pressure on Amazon’s profitability comes
from its International division, which is very much in growth mode. Growth in
2013 was a bit disappointing at “only 19%” (excluding foreign exchange (FX)
rates), driven by a slowdown in media to 7%, as internationally it is in the early
stages of the transition from physical to digital. EGM growth (excluding FX rates)
was a respectable 27%, albeit a decline from the 40% growth of prior year.
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Mixed into the international performance are a number of new market entries,
which require significant start up investments particularly in DC capacity. India
was an entirely new market in 2013, and Amazon expanded its category footprint in Canada, Italy, and Spain. The combination of infrastructure, capacity,
and media investments in these countries is critical to ramping up and scaling
the market to drive revenue over time. It is the International division’s profitability that has been the biggest drag on the company’s overall profits.
Bottom Line. Even back in Amazon’s U.S. home market, tension around
profitability continues to mount as it expands into “new categories” such as
consumables, which have negative item-level profitability. While Amazon
pushes to continue innovating the supply chain to improve overall profitability,
there certainly has been increased focus and pressure on suppliers to help
drive profitability—from contra-COGS to packaging innovation and SIOC to save
touches and cost through the system.
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million items today. The “all-you-can-ship” mentality among members has
been a strong contributor to Amazon’s overall growth by eliminating purchase
barriers as “Prime members are ordering more items across more categories
than ever before, on a per customer basis,” but has also impacted its outbound
shipping costs significantly.
Given this increase in membership and usage, Amazon announced intentions to potentially raise the annual fee by USD20-40. This type of change in
membership fees would clearly have implications on renewal rates, impacting
both the topline and bottom line.
Kantar Retail’s recent read on Amazon Prime from the December
ShopperScape® survey gives us unique insight into the prevalence of
Prime and impact on behavior (Figure 3).
Penetration: has nearly doubled in three years to 19% of all primary
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This profitability push is being felt beyond Amazon’s direct relationship
with suppliers. There has been little publicity around changes to fees for its
marketplace sellers that account for 39% of units that Amazon sells.
On February 4, merchants that use Amazon’s webstore-only platform
saw monthly fees increase from USD39.99 to USD79; some merchants
who also use Selling on Amazon and previously didn’t pay monthly fees
are now subject to the full monthly charge.
For participants in Fulfillment by Amazon (FBA), pick and pack, weight
handling, and monthly storage fees all increased effective February 18.
In addition, Amazon intends to introduce an apparel fee in May 2014.
Prime Changes Ahead?
While overall revenue tripled in the past four years, Amazon has attracted
more new customers—and deepened its overall spend with its loyal Prime
customers; meanwhile, the annual cost of Prime has remained flat at USD79
per year and eligible products has increased from 1 million in 2005 to over 19
household shoppers by December 2013. This means that one in five
primary household shoppers are members of Prime, with incidence
levels at one in four among Gen Y and Gen X shoppers.
Likelihood to renew: 61% of members said they were likely to renew with
another 30% that were unsure; renewal rates increased significantly
among those that engaged in content like Prime Instant video and
jumped to 82% among members of three or more years (Costco-like
renewal rates).
Amazon-1st mentality: 49% of Prime members tended to check Amazon
first before shopping anywhere else, with nearly one-third agreeing
that they were shopping retail stores less often, and buying a wider
assortment of categories and brands on Amazon. Nearly 1 in 10 shoppers
had stopped shopping some retail stores, reaffirming loyalty to Amazon.
These topline insights reveal the significant impact that Prime membership
has on overall shopping behavior, and reinforces that membership has its
benefits for shoppers and Amazon. If or when the price of membership
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increases, it will clearly have an impact on renewal rates and reset the
membership base. The key for Amazon will be finding the right threshold to
keep loyal at a lower cost to shipping expenses, while potentially accelerating
the loss of unprofitable members.
At Kantar Retail, we will be closely watching the evolution of Prime membership rates. What’s interesting is the specific comment Amazon made that
the decision to increase Prime membership fees was tied solely to increases
Figure 3: Penetration of Amazon Prime Membership among
All U.S. Primary Household Shoppers
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in shipping volume and costs, not due to significant investments in content
for the “value-add” components of Prime. Particularly when Amazon is now
finally bringing Instant Video to Europe in the UK and Germany, that coincides
with a price increase in both programs. Figure 4 shows the UK promotion that
prompts users to “lock in your membership at GBP49” (the current cost of
Amazon Prime in the UK) compared to a “regular price” of GBP79; the same
dynamic applied in Germany at EUR29 versus EUR49.
Figure 4: Amazon UK 2014 Prime Promotion
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Source: Company website
Source: Kantar Retail ShopperScape , December 2011-2013
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Target’s Data Breach Fallout Undermines
Strategy to Broaden Guest Base
By: Amy Koo, Rachel McGuire
% Change vs. Year Ago
Shopped Target/SuperTarget in Past 4 Weeks
60%
15%
5%
40%
0%
-5%
30%
-10%
20%
-15%
10%
-20%
-25%
Source: Kantar Retail ShopperScape®, January 2011–January 2014
Jan-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Jan-12
Jul-11
Oct-11
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Jan-10
Jul-09
Oct-09
Apr-09
Oct-08
Jan-09
Jul-08
Apr-08
Oct-07
Jan-08
Jul-07
0%
% Change vs. Year Ago
10%
50%
Apr-07
The overall trend in Target’s past four-week
shopper penetration has been on a slightly downward trajectory for the past several years, but
Target’s confirmation in mid-December of a major
breach of its guests’ payment information may
prove to be a critical moment in exacerbating
that decline. In the wake of that news, Target
failed to reach a December “bump” in penetration of the same magnitude as it has enjoyed in
The shift away from shopping at Target in January
varied among key segments of guests (Figure 2).
Target saw the biggest year-to-year dips in penetration among some of its most core guests—
Gen X, who are more likely than any other cohort
to shop Target—and its more peripheral guests—
lower-income guests, whose penetration at Target
declined by a full 30% from January 2013 to
January 2014. While these lower-income guests
tend to be outside of Target’s traditional core base,
the shift away from Target among lower-income
Figure 1: Past Four-Week Shopping Incidence at Target/SuperTarget
Jan-07
Target’s Shopper Penetration Plummets in
January, Exacerbating an Existing Decline
latest drop fits into a larger pattern of consistent
declines over the last couple of years.
recent years, indicating that shoppers pulled
away from Target in the vastly important shopping
days between the data breach and Christmas.
As of mid-February, the Target breach has still
not completely fallen out of the news cycle, and
Target’s shopper penetration in January 2014 is
reflective of the extent to which the issue continues to plague the retailer: 33% of U.S. households
reported shopping at Target or SuperTarget during
January 2014, the lowest penetration number for
Target in the past three years, and a 22% decrease
in penetration versus January 2013 (Figure 1).
While guests’ reactions to the incident appear to
have contributed to January’s sharp decline, the
% Shopped Target/SuperTarget
in Past 4 Weeks
Target’s large payment card and guest database
breach dramatically affected the retailer’s fourth
quarter comparable store sales (comps), which
declined 2.5%, despite what was originally a
“strong start to the holiday season,” according to
the retailer’s December 18th press release.
After learning of the breach, Target leadership
immediately pivoted its strategy to manage the
fallout by locking down its data infrastructure and
working to regain the trust of its guests. While
Target was not the only retailer hit by a recent
data breach, its incident was the second-largest
retailer breach in history, seldom leaving the news
for weeks and keeping the issue top of mind for
shoppers. Kantar Retail examines the effect of the
data breach on guests’ attitudes and behaviors
in the weeks following the disclosure, and offers
implications for suppliers helping Target navigate
the tricky after-effects, as well as retailers looking
to their own data management.
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shoppers hints that the retailer’s “Pay Less”
appeals have not made great strides in
engendering a sense of loyalty among these
shoppers. On a positive note for Target, Gen Y
guests have shown greater willingness to stick
with Target during this challenging stretch,
indicating a stronger sense of loyalty among the
youngest guests.
Best Guests Are Still Carefully Visiting,
But Less-Engaged Guests More Likely to
Leave Target
News of the data breach was widely disseminated
through both media and Target’s own communication channels, and as of the third week of January
2014, 92% of all shoppers and 97% of Target’s
monthly guests were aware
of the breach.
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Although nearly all shoppers were aware of the
breach, the behavioral reaction since that time
has been somewhat different among the average
shopper versus Target’s core monthly guests,
and highlights Target’s continued vulnerability
among shoppers outside its core shopper base
(Figure 3). Across all shoppers who are aware of
the data breach, 10% indicated that they would
likely shop Target less in the future and 5% stated
that they are removing Target from their store
consideration set entirely. Discounts were insufficient in luring them back to the store, as only 3%
shopped at Target the weekend following news
of the breach, even with a hefty 10% discount off
their entire purchase (Figure 4). In contrast to all
shoppers, monthly guests showed a significantly
higher willingness to stick with Target, despite
encountering more inconveniences in managing
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Figure 2: Percent Shopped Target/SuperTarget During Past Four Weeks, by Key Segment
Jan-13
53%
51%
38%
33%
38%
35%
28%
Index:
Jan'14 vs.
Jan'13
46%
44%
44%
43%
43%
57%
56%
Jan-14
25%
27%
21%
All Shoppers
Gen Y
Gen X
Boomers
Seniors
78
85
72
76
84
19%
HH Income HH Income HH Income
<$35k
$35k-$84.9k
$85k+
70
79
Moms
78
80
Read as: the percentage of Gen Y shoppers who shopped at Target/SuperTarget in January 2014 (43%) was 15% less (100-85)
than the percentage of Gen Y shoppers who shopped at Target/SuperTarget in January 2013 (51%).
Source: Kantar Retail ShopperScape®, January 2013 and January 2014
Figure 3: How Shoppers Have Been Affected by Target Data Breach
(among all shoppers aware of data breach)
All Shoppers
Monthly Target/SuperTarget Shoppers
Have monitored my credit/debit
account more closely
26%
More likely to pay with cash going forward
forward wherever I shop
Less likely to shop Target going forward
10%
4%
9%
13%
Still shop at Target, but only pay with cash
Have stopped shopping at Target
5%
2%
Had to change my debit card PIN number
5%
Shopped at Target to get the extra discounts offered
in response to the security breach
3%
Had my debit/credit card used fraudulently
2%
2%
Had my debit card spending and cash withdrawal
limits lowered by the bank that issued the card(s)
1%
2%
None of these
46%
11%
12%
10%
9%
35%
Boxes indicate significant difference between all shoppers and monthly Target/SuperTarget shoppers
(95% confidence level)
Source: Kantar Retail ShopperScape®, January 2014
53%
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Figure 4: CEO Gregg Steinhafel Apologizes for the Data Breach, Extends 10% Off In-Store Shopping
“We’re in this together,
and in that spirit, we
are extending a 10%
discount ... to guests
who shop in U.S. stores
on Dec. 21 and 22.”
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Source: ABullseyeView.com
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their payment card accounts. Only 4% of
monthly Target guests said they would visit
Target less frequently in the future, and only 2%
stated they would stop shopping Target entirely.
Furthermore, extra discounts were an effective
lever in attracting 9% of these core guests back
into the store after the breach occurred, suggesting that Target was able to rely on the loyalty
of its “best guests” to help weather this storm,
suffering only a 2.5% drop in comps, despite a
5.5% fall in transactions for the quarter.
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Figure 5: How Target Shoppers Have Been Affected by Target Data Breach, by Demographic Segment
(among all shoppers aware of data breach)
Have monitored my credit/debit account more closely
46%
Still shop at Target, but only pay with cash
Though core Target guests appear to be largely
sticking with the retailer during this tough time
(at least for now), the response has not be equal
across all cohorts of regular Target guests
(Figure 5). Monthly Target guests who fall into the
Baby Boomer cohort are more likely to now be
paying with cash at Target, suggesting that the
retailer may face a tougher road among these
guests in the months ahead in coaxing them
to adopt, or continue to use, REDcard Rewards
credit or debit cards. The youngest Target guests
are more likely to indicate that they experienced
fraudulent charges as a result of the breach; it
does not appear to have affected their attitude
toward Target greatly. Finally, although few
regular Target guests indicated they had stopped
shopping at Target, Target’s Gen X guests were
significantly more likely to indicate having done
so. This is very much in line with the significant
decline in Target’s penetration among Gen X
guests in general.
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13%
More likely to pay with cash going forward wherever I shop
12%
Had to change my debit card PIN number
10%
Shopped at Target to get the extra discounts offered in response
to the security breach
Less likely to shop Target going forward
Boomers
9%
4%
Had my debit/credit card used fraudulently
2%
Had my debit card spending and cash withdrawal limits lowered by the
bank that issued the card(s)
2%
Have stopped shopping at Target
2%
Gen Y
Gen X
Segments in boxes significantly more likely to be affected in named way vs. all monthly Target/SuperTarget shoppers (90% confidence level)
Source: Kantar Retail ShopperScape®, January 2014
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Target’s recent data breach touched upon a sensitive fault line within American
life today, likely ensuring the explosive level of interest in the news. Regardless
of the actual problems experienced by shoppers, Target may be receiving an
outsized share of rage, as shoppers focus on a target they can finally punish
for lapses in data security and privacy. Over the last few years, Americans have
suffered myriad indignities of modern life—the targeting of online advertising
through Facebook or learning that their mobile call records are being logged
by the NSA. No doubt, some of their sublimated frustration came out in the
weeks following the breach, resulting in shoppers’ aversion to visiting Target.
The retailer is at a critical inflection point, as it strategizes how to win back
the confidence of shoppers at large. While the breach caused an immediate
blow to sales, and will affect traffic for some time to come, it also exposed the
larger longstanding issue of Target’s fragile relationship with its less-engaged
guests. While monthly guests demonstrated their commitment to Target since
the data breach, the same is not true for the less-engaged. Despite significant
efforts in the last year to woo back shoppers who were skeptical of Target’s
value proposition, these shoppers remained resistant to the retailer’s
courtship. Furthermore, large discounts in December were not sufficient
in regaining their patronage or trust in late December—even among
lower-income households.
Target and Its Supplier Implications
Target’s leadership has determined that the company’s future success relies
on building trust with guests through the full disclosure of the incident. The
long-term implications of that choice will depend on the results of the ongoing
investigations, and is outside Target’s control.
In the meantime, Target and its suppliers should scrutinize the reasons for
guests’ loyalty, or attrition, among the various guest segments. It has never
been more important for Target and its suppliers to keep best guests pleased
with Target’s assortment and experience—particularly Gen Y, mothers, highincome households—as they navigate the bumpy next few months ahead. At
the same time, Target must take a hard look at the current strategies aimed at
less-engaged guests—particularly Gen X and lower-income households. The
predominantly price-focused “Pay Less” initiatives will need to be transformed
into an “Expect More. Pay Less” value proposition that resonates and generates long-term loyalty.
Implications for All Retailers
Target’s data breach should be taken as a firm warning for other retailers to
reassess their data security risks. The fallout from this breach has caused
widespread financial damage, and ultimately Target will pay the final price in
both financial and reputational cost. As shoppers consolidate their retailer set,
trust will become an even more critical differentiator as they winnow out
retailers that they cannot trust with their money or time.
And while the seriousness of the payment card and contact information
exposure cannot be underrated, retailers that play in the health care space
also are cautioned to assess the security of their systems. It may be costly to
reissue credit cards and bank account numbers, but the exposure of personal
health care information is irreparable.
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First Takes: Safeway and Albertsons Merger
By: John Rand
Once again, Cerberus and its investment partners
are dramatically stirring the supermarket industry pot, as a definitive agreement was announced
to merge Safeway and Albertsons into a single
company by the end of the year. There is a long
process to go through to complete this deal and an
even longer one afterward before we will be able
to tell with certainty what the real impact of this
merger will really be.
As analysts, we can thank Cerberus and Albertsons for regularly creating massive amounts of
uncertainty for us to sift through and try to understand. We appreciate the work, but in all fairness, I
have my reservations about this one, as I did when
the first link of this chain of events was forged
years ago with the combination of Supervalu
and Albertsons.
The Official Announcement in Brief
The headline from Cerberus is that Safeway
shareholders get USD40 per share. Of course,
USD7.60 of that is from selling pieces of Safeway
itself, essentially monetizing some of the non-core
assets. These include liquidating Safeway’s
investments in the Blackhawk gift card business,
selling its minority interest in Casa Ley in Mexico, and selling its Property Development Centers
(although it wouldn’t surprise me if this last unit
was bought by a Cerberus partner with expertise
in real estate).
That will leave approximately 2,400 stores in 34
states, 27 distribution centers, and 20 manufacturing plants that will form the core of the new
company. The combined volumes of these two
groups of stores last year totaled approximately
USD56 billion.
Robert Edwards, current President and CEO of
Safeway, will hold these same titles in the new
entity. Current Albertsons CEO Bob Miller has
been named the Executive Chairman. Edwards had
been primarily a financial officer for most of his
career before succeeding Steve Burd at Safeway’s
top job. On the other hand, Miller’s background is
much more operational and merchant focused,
having been a long time leader and self-described
“grocery man” at the original Albertsons before it
was scattered and then glued back together after
the Supervalu episode.
What We Expect Next
The deal is not expected to close before Q4 2014,
which is not too much time for the work that
clearly will have to be done. The most immediate
question, of course, is what locations will have to
be divested for this merger to be approved. Overlaps abound, as can be seen in the accompanying
map of locations by state (Figure 1).
It seems inevitable that the FTC will have concerns
about concentrations in California, in the Pacific
Northwest, and possibly in Arizona, although
it will certainly be argued that there are plenty
of competitors in the markets. Texas may be a
discussion area as well. Although the combination
will not create anything approaching dominant
share overall, specific towns and market areas will
be scrutinized, and if necessary, decisions about
which stores to keep and which to divest will be
made on a case-by-case basis.
It also seems likely that further divestitures
will follow the closing of the deal, as Cerberus
is unlikely to wait long before reducing its cash
investment and selling off assets, as Safeway was
already doing on its own. So we expect to feel the
reverberations of this deal well into 2015, before a
more stable picture of it emerges.
How Well Will It Work?
One has to wonder how the very different cultures
of these two companies will merge and function.
The two leaders exemplify their respective organizations: Edwards, the financial man who, like Burd
before him and like much of the board at Safeway,
is primarily stockholder oriented and financially driven. Safeway has always put profits before
growth, margins before traffic, central control
before local decisions, and stockholders before
shoppers. Miller, on the other hand, is a more
traditional retailer, with an orientation to stores
and execution, a preference to simplify at store
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Figure 1: Overlap of Operations
ABS & NAI Supermarkets: 2410
Safeway: 135 Supermarkets
169
60
99
41
500
181
12
30
6
33
19
32
10
10
3
5
6
22
1
1
45
1
175
112
21
4
42
48
114
41
4
29
1
108
121
19
4
28
22
Note: Safeway supermarket store count noted in red, ABS & NAI supermarket store count in black
Source: Kantar Retail analysis, Safeway Merger Agreement Conference Call
NH (28)
VT (19)
MA (78)
RI (8)
CT
NJ (48)
DE (4) (12)
MD (65) (5)
D.C. (13)
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level but not necessarily unify at headquarters, and
a focus on shoppers and store traffic that Safeway
has simply lacked.
Safeway and Albertsons, in their original forms,
competed for many years. There will certainly be
deep differences of outlook, internal metrics will
need to be revised and aligned, and the total will
be two very different retail brands that will co-exist
uneasily across banners and markets for a long
time to come.
What to Watch For
Perhaps the best advice, as trite as it may be, is to
watch the money. The Supervalu deal failed,
ultimately, because Supervalu was saddled with
too much debt and was unable to invest or
operate effectively with the cash flow left
after debt service.
How much money will Cerberus pull out of this
combination, and how it structures the costs of
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acquisition, will be the first key to the outcome.
Will it be treated as a long-term investment, or will
Cerberus want to cash out as much and as soon as
possible? If cash and cost reduction dominate the
thinking, we will see reduced staff at many levels,
consolidation of divisions, and possibly a long
period of additional divestment and restructuring.
Certainly some streamlining will take place, and
may even be positive. But when Albertsons was
re-established last year, important elements such
as its loyalty card system were discarded, and
decisions remain somewhat confusingly dispersed
and promised investments in price at the shelf
never became compelling enough to drive significant share growth.
Although the merger will create a very large
customer, with store counts that approach those of
Kroger (not counting any eventual divestments)
many challenges will remain. At a rough level,
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Kroger stores’ average per store volume is nearly
USD34 million per year, based on last year’s
performance, while the combined Safeway/
Albertsons entity would average just under USD23
million. This substantial level of difference in
effectiveness will be reflected throughout the
enterprise in a lack of comparative efficiency
and profitability. Kroger’s position as the number
one supermarket company is not in any
immediate danger.
It will be some time before we can say with
certainty that this new combination is a key
element of channel growth or merely a transitory
phase for a number of proud banners that have
been through supremely difficult times.
We will all be watching closely—including many
competing grocers, who will probably be keenly
interested in which stores will become available as
the new Safeway/Albertsons entity emerges.
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Assessing the Club Trip:
What Drives Member Purchasing?
By: Sara Al-Tukhaim, Timothy Campbell
Despite the challenges of selling through clubs,
success there comes with high volume rewards
and access to one of the most affluent, welleducated, and loyal shopper bases in retail. But
once members are signed, what drives their trips
and purchases? Trip and purchase drivers for
each club are varied and there remain strong
opportunities for conversion.
Note: The shopper data in this article are from
Kantar Retail’s August 2013 ShopperScape® survey
of 929 Sam’s Club shoppers, 780 Costco shoppers,
and 256 BJ’s shoppers.
Unique Products, Routine Behaviors, and
Food Largely Drive Trips
Items and pack sizes unique to club are the
primary drivers of club trips (Figure 1). This is
followed by the integration of a club into overall shopping routine, supported no doubt by the
sunk cost of membership that bolsters loyalty and
incentivizes return trips. Each club has unique trip
drivers as well.
Sam’s Club shoppers are more notably driven
to the retailer for club pack purchases.
Sale or coupon items are more significant
drivers for Costco and BJ’s shoppers.
Special occasions or events are more likely to
spur Sam’s Club and BJ’s shopping trips.
Services play a stronger role in driving trips
for Costco, followed by Sam’s Club, shoppers.
Once in the box, the vast majority of club shopping is driven by edible grocery, as is most of
members’ actual club purchasing (Figure 2). BJ’s
shoppers skew slightly higher toward shopping
and purchasing non-edible grocery, potentially due
to its expanded assortment and variety, as well the
more regular “supermarket-like” trips the retailer
captures. For similar reasons, although shoppers
are more likely to shop for HBC products on trips
to Costco than they are on trips to BJ’s (no doubt
a function of Costco’s treasure hunt), shoppers
are more likely to purchase HBC products at BJ’s.
Figure 1: Primary Reason for Last Trip to Club Retailer
To buy particular types of products or pack sizes I can
only get at the club
No specific reason, this was my regular, routine trip to
the club
To buy specific items advertised on sale/featured in
coupon book
To browse the club to see what's new
To buy gas, did not go into the club
To buy gas and then I ended up shopping
To buy supplies for a special occasion or event
To use an in-club service such as the pharmacy, optical
center, or auto center
To sample items in the club
To make purchases for a business or organization
To participate in a health screening
To participate in a club event (e.g., open house, book
signing, etc.)
Source: Kantar Retail ShopperScape®, August 2013
29%
21%
3%
5%
8%
9%
7%
6%
9%
6%
4%
5%
4%
8%
8%
3%
3%
1%
2%
2%
2%
1%
4%
5%
0%
0%
1%
0%
0%
2%
13%
14%
21%
26%
34%
24%
Costco
Sam's Club
BJ's Wholesale Club
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Figure 2: Departments Shopped and Purchased on
Most Recent Club Trip
Costco
Sam's Club
BJ's Wholesale Club
42% 42% 46%
Edible grocery
Non-edible grocery
39% 35%
37%
HBC products
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From which departments did you
actually make a purchase?
Costco
78% 76%
77%
Sam's Club
BJ's Wholesale Club
34% 34% 38%
Edible grocery
Non-edible
grocery
27% 24% 30%
HBC products
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Across the board, there remain strong opportunities to drive shopping and purchasing across
the box while also improving overall conversion,
particularly by building on the edible grocery
trip to improve penetration in HBC and
non-edible grocery.
Categories Play Different Roles in Driving
Trips to Each Club
Which departments did you shop on
your most recent trip to retailer?
83% 82% 83%
F
While edible grocery tops the list of broad departments shopped at all three club retailers, the
specific departments shopped varies somewhat
across BJ’s, Costco, and Sam’s Club (Figure 3).
The top department shopped at each club
falls under the heading of perishable grocery:
meat/seafood at Costco, fresh produce at
Sam’s Club, and frozen foods at BJ’s. The
percent of trips to BJ’s that pass through
frozen foods is notably higher versus Costco
and Sam’s Club, aligning with the retailer’s
more “supermarket-like” value proposition.
Overall, BJ’s shoppers tend to shop across
the box more than their Costco and Sam’s
Club counterparts, in line with its more
“supermarket-like” approach to the club
model as well as a potential influx of new
members given its aggressive efforts to drive
trials and support growth.
On the other hand, during trips to Sam’s
Club, shoppers tend to shop less of the box,
pointing to opportunities to improve crossbox shopping by aligning less frequented
categories with those that are more popular
and vice versa.
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Meanwhile, Costco shoppers stand out by
shopping the meat, seafood, fresh produce,
OTC, and alcohol categories notably more than
Sam’s Club and BJ’s shoppers.
Even more telling, the following conversion rates
reveal which club categories are most effectively
compelling shoppers to purchase (Figure 4). Among
the standouts:
Meat/Seafood: BJ’s exhibits the strongest
conversion of meat/seafood, even though more
Costco shoppers actually shop this category—
this is in line with BJ’s efforts to drive
awareness of its meat/seafood mix as well as
better engage members with its butchers.
Fresh: Costco enjoys the highest conversion
rate in fresh, suggesting its offer (with its
growing emphasis on organic and natural)
is more appealing than that of its club
counterparts.
Frozen: While BJ’s may have the highest
penetration for frozen foods, Sam’s Club’s
conversion is much higher—the retailer has had
its eye on the frozen category for some time
now as a growing trip and membership driver.
Personal Care and Baby: BJ’s is exhibiting a
particularly higher conversion rate in personal
care and baby products than Costco or Sam’s
Club. This aligns with its overall expansion of
SKUs, ongoing focus on moms, and attention
to these categories in particular, including the
rollout of Generation Earth, one of BJ’s newer
private labels.
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Figure 3: Products Shopped on Most Recent Trip to Club Retailer
Costco
Sam's Club
BJ's Wholesale Club
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
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Note: Retailer logos indicate product more likely to be shopped at that club retailer than either of the other two club
retailers; not a test of statistical significance
Figure 4: Conversion Rate* for Consumables on Last Trip to Club Retailer
Costco
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
*Conversion rate=% purchased ÷ % shopped
Sam's Club
BJ's Wholesale Club
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BJ’s captures more trips more often due to the
“supermarket-like” nature of its assortment and
message and this is clearly reflected in its shoppers’ higher rates of cross-category purchasing.
Meanwhile, Costco and Sam’s Club purchases may
reflect more of their larger family and business
member purchasing in key departments such as
fresh and frozen. Overall, both of these retailers
possess clear opportunities to better drive basket
across the box.
Meat/seafood
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28%
26%
HH cleaning/paper products
OTC/vitamins/supplements
10%
12%
13%
Snack foods/candy/gum
8%
28%
18%
Purchased product
Fresh produce
34%
Meat/seafood
Frozen foods
Milk
10%
28%
9%
25%
8%
21%
7%
20%
6%
Non-alcoholic beverages
19%
7%
Personal care products
15%
Deli items
13%
8%
13%
8%
13%
6%
15%
12%
10%
10%
Beer, wine, and/or liquor
13% 7%
Apparel 5% 14%
Pet food and supplies
11% 8%
Books/DVDs/video games 5% 13%
Electronics 4% 11%
Office supplies 5% 8%
Furniture 3% 10%
Baby supplies
5% 6%
Auto center 4%6%
Jewelry 2% 7%
Mobile services 2% 6%
Apparel
8%
25%
Milk
Deli items
8%
26%
Boxed or canned food items
7%
13%
35%
Bread/bakery
12%
31%
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Shopped but did not purchase
9%
9%
A
Figure 6: Products Shopped and Purchased on
Last Trip to Sam’s Club
13%
32%
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Sam’s Club also suffers from similar conversion
gaps as Costco, though they are wider or narrower
depending on category (Figure 6). Books/DVDs/
video games, meat/seafood, fresh produce, apparel, bread/bakery, personal care products, and
electronics are among those departments with the
most notable conversion gaps.
38%
25%
T
In comparing Costco’s departments shopped
versus those actually purchased from, the retailer’s treasure hunt is clearly at play (Figure 5).
As with Sam’s Club and BJ’s, Costco shoppers
are shopping and browsing departments across
the box but only “biting” certain categories along
their race track. Apparel, books/DVDs/video
games, bread/bakery, meat/seafood, frozen, fresh
produce, personal care products, deli, electronics,
35%
Frozen foods
Bread/bakery
S
and furniture are among those departments with
the most notable conversion gaps.
Fresh produce
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Club Trips Are Ripe with Opportunities to
Better Convert
Figure 5: Products Shopped and
Purchased on Last Trip to Costco
Purchased product
I
20%
6%
11%
6% 12%
Books/DVDs/video games 5% 13%
Beer, wine, and/or liquor 9% 7%
Office supplies 6% 8%
Electronics 3% 10%
Baby supplies
6% 4%
Furniture 2% 7%
Jewelry 1% 7%
Auto center 2% 5%
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Similarly, conversion gaps in BJ’s shopping
versus purchasing are most apparent in bread/
bakery, frozen foods, fresh produce, books/DVDs/
video games, non-alcoholic beverages, and
electronics (Figure 7).
in significantly fewer departments. One way to help
address this is to better understand the influence of
various club promotions on purchase.
While there are similarities and differences in club
conversion rates, the challenge for all three retailers and their suppliers is how to narrow these
gaps knowing that shoppers are shopping many
departments, but clubs are only closing the sale
The clubs offer a portfolio of promotional platforms
for vendors looking to influence awareness and
drive purchasing in their categories. However, the
effectiveness of these efforts varies widely by
retailer (Figure 8).
Figure 7: Products Shopped and Purchased on
Last Trip to BJ’s Wholesale Club
Purchased product
Frozen foods
37%
12%
32%
11%
Bread/bakery
31%
12%
32%
9%
Meat/seafood
32%
9%
32%
Electronics
Beer, wine, and/or liquor
Baby supplies
6%
25%
Deli items
Apparel
10%
28%
Office supplies
7%
26%
Milk
Books/DVDs/video games
6%
29%
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Costco and BJ’s purchases are most
influenced by their coupon books.
Half of BJ’s shoppers frequently or
occasionally purchase items they read
about in the retailer’s Member Journal,
compared to far fewer Sam’s Club and
Costco shoppers who are influenced by
those retailers’ magazines.
Figure 8: Club Purchase Drivers
(% of members who say factor “frequently/occasionally” prompts them to purchase item at club)
Fresh produce
The Influence of Club Promotions on
Purchase Varies by Retailer
H
7%
19%
14%
8%
14%
7%
9%
11%
10%
9%
8%
9%
8%
6% 10%
8%
8%
9% 5%
Jewelry 5% 8%
Furniture 5% 8%
Auto center 6% 5%
Saw item in club coupon book
Sampled item at the club
Item part of instant savings promotion at club
Item featured in front aisle when first walk in the club
Friend/family member recommended item
Had never seen item anywhere else before
Item was promoted in club email newsletter
Read about item in club magazine
Item was featured on club Web site
Saw item in a roadshow
Received text offer/alert from club about item
Item was featured in club member's blog
Heard about item on club's Facebook page/Twitter feed
72%
33%
38%
53%
50%
48%
61%
57%
46%
36%
39%
42%
39%
47%
39%
31%
38%
30%
26%
36%
29%
22%
50%
21%
19%
30%
20%
15%
17%
15%
14%
Costco
17%
14%
Sam's Club
13%
16%
BJ's Wholesale Club
11%
11%
14%
81%
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BJ’s shoppers also are more likely to point
to various promotional efforts as having an
influence on their purchase, reflective of the
retailer’s more “try anything and everything”
outreach. While this may be having an impact,
the question remains as to whether it
is sustainable.
Samples are the strongest drivers of
purchase at Sam’s Club, with more than
half (53%) of its shoppers indicating they
frequently or occasionally purchase items
they sampled in the club.
Costco shoppers’ purchases are notably more
influenced than either BJ’s and Sam’s Club
shoppers by fence or cart rail placement,
samples, unique SKUs, and road shows.
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To a lesser but nevertheless significant extent,
the clubs’ digital efforts including Facebook, text
alerts, and blogs also are positively driving
club purchases.
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Costco, Sam’s Club, and BJ’s shoppers’ shared and unique trip and purchase
drivers point to three core opportunities for the clubs and their suppliers to
better maximize basket across the box.
1. Understand where you fit in each club’s trip. While there are several
shared trip-driving categories across the channel, there are also notable
variations for each club. Improve success by better aligning with each
club’s top drivers through more integrated, solution-based offers.
-- Better align club offers to shoppers’ core trip routines. Direct
efforts toward supporting club shoppers’ desires for unique club
products/packs and better integration into their food-driven
shopping routines.
-- Focus on those drivers that are unique to each club. Realize club
packs matter more to Sam’s Club shoppers, sale items drive more
Costco and BJ’s trips, and special occasions spur more Sam’s Club
and BJ’s trips.
-- Give members more reasons to return. Identify promotional
opportunities to better integrate and maximize the role of
services and events in driving club shopping trips and overall
membership value.
2. Focus on narrowing conversion gaps. While club shoppers are shopping
across much of the box, that shopping activity is not uniformly converting
to purchases. The impetus is on suppliers to make their products’ (and
ultimately the club’s) value propositions stickier. Generate awareness,
appeal, and retention through customized, exciting, and too-good-to
resist offers.
-- Support Costco’s need to better convert in core categories. Apparel,
books/DVDs/video games, bread/bakery, meat/seafood, frozen, fresh
produce, personal care products, deli, electronics, and furniture
departments stand out with particularly wide conversion gaps.
-- Support Sam’s Club’s need to better convert in core categories.
With some similarities to Costco, books/DVDs/video games, meat/
seafood, fresh produce, apparel, bread/bakery, personal care
products, and electronics are among those departments with notable
conversion gaps.
-- Support BJ’s need to better convert in core categories. Conversion
gaps at BJ’s are most apparent in departments like bread/bakery,
frozen foods, fresh produce, books/DVDs/video games, non-alcoholic
beverages, and electronics.
3. Weigh the ROI of different promotional vehicles. The effectiveness
of promotional efforts varies widely by club. While it is important to
consider each platform in the context of the club story you are trying to
build (e.g., awareness, education, savings), not all promotional vehicles
are equal in their impact on purchasing.
-- Influence purchasing through coupons. While participating in
coupons and instant savings are an investment, they do have a strong
impact on purchase. Costco and BJ’s purchases are most influenced
by their Multi-Vendor and Big Brand Mailers, respectively; as Sam’s
Club’s Instant Savings Book gains awareness, it will likely have a
similar impact.
-- Drive purchase at BJ’s through its Member Journal.
Disproportionally higher than their Costco and Sam’s Club
counterparts, half of BJ’s shoppers purchase items they read about
in the retailer’s Member Journal.
-- Focus on samples at Sam’s Club. Samples are Sam’s Club’s
strongest drivers of purchase, influencing purchases for more than
half (53%) of its shoppers.
-- Stand out at Costco through its fence. Costco shoppers’ purchases
are notably more influenced than both BJ’s and Sam’s Club shoppers
by the retailer’s fence or cart rail, samples, unique SKUs, and
road shows.
-- Consider the growing influence of digital. To a lesser but
nevertheless significant extent, club digital efforts leveraging
Facebook, text alerts, and blogs also are positively driving
club purchases.
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Drug Shoppers’ Digital Behavior Varies
By Retailer, Cohort
By: Jessica Campbell
Over the past year, all three major drug
retailers have begun to focus more on digital
and multi-channel strategies than ever before.
CVS, Walgreens, and Rite Aid have all increased
their investment in this space, improving their
offer and hiring for groups that aim to create a
seamless brand experience between the physical store and digital properties. However, though
online sales are growing for these retailers, they
still represent less than 1% of total retail sales.
This is due to the fact that drug retailers are not
Website & Mobile App Penetration
Kantar Retail’s ShopperScape® data shows that,
at the total shopper level, online shopping incidence at the big three drug retailers is rather low.
However, when looking at this data in terms of
an online shopping ratio (the percentage of drug
retailers’ past four-week shoppers who shopped
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Figure 2: % of Retailer’s Shoppers Who Have Retailer App
(among shoppers who have shopped retailer in the past 6 months)
Figure 1: % of Shoppers Who Shop Retailer’s Website
(among past 4-week shoppers of retailers)
Gen Y
14%
CVS.com
those retailers online), penetration is a bit higher
(Figure 1). Since 2009, Walgreens has typically had
the highest percentage of its own shoppers using
the website, with CVS typically a close second—
though in February 2014 Rite Aid edged out CVS by
less than 1 ppt. There also is a seasonal impact on
website shopping, with peaks around the holidays,
and dips during the warmer months.
using their mobile and online presence solely
to sell products; they’re using it to connect with
shoppers and drive engagement.
Walgreens.com
Gen X
Boomers
All
shoppers
of retailer
Seniors
Rite Aid.com
12%
30%
10%
25%
8%
27%
26%
24%
21%
20%
6%
15%
4%
19%
14%
16%
12%
11% 10%
10%
17%
15%
9%
2%
5%
Source: Kantar Retail ShopperScape®, January 2009–February 2014
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Jul-12
Oct-12
Apr-12
Oct-11
Jan-12
Jul-11
Apr-11
Jan-11
Jul-10
Oct-10
Apr-10
Oct-09
Jan-10
Jul-09
Apr-09
Jan-09
0%
0%
Walgreens
CVS/pharmacy
Source: Kantar Retail ShopperScape August 2013
®,
Rite Aid
12%
8%
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Mobile apps have proven to be the more successful
platform in attracting shoppers than drug retailers’
websites. In terms of mobile, Walgreens has the
highest overall capture rate (i.e., the percentage of
Walgreens shoppers who have the Walgreens app),
with slightly less than 2 in 10 shoppers having
downloaded the app (Figure 2). The capture rate by
cohort differentiates Walgreens from CVS. Not too
surprisingly, the percentage of shoppers who have
a retailer’s app is higher among Gen X and Gen Y
shoppers for all retailers. However, CVS actually
captures a higher percentage of its own Gen Y
shoppers (26%) than Walgreens—which captures
more of its Gen X shoppers than CVS (27% and
21%, respectively)—despite the fact that both
retailers have very similar shopper demographics.
CVS Shopper Digital Behavior: Deal Seeking
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With so little sales being generated online, the
natural question is “what are shoppers doing on
the CVS website and mobile app?” The top activities are tied to deal-seeking behavior (Figure 3).
Viewing the circular, checking ExtraCare rewards,
and searching for coupons are among the top five
activities for both web and app usage. Most CVS
shoppers report using the website to browse the
weekly ad (22%), while the most-used feature on
the mobile app is searching for coupons (17%).
When it comes to actual shopping, CVS shoppers
are more likely to use the website versus the
mobile app (15% and 10%, respectively). The rate
of shoppers checking ExtraCare rewards is almost
the same across online and mobile, displaying the
broad adoption of the retailer’s loyalty program.
Overall, this digital behavior is representative of
the traditional drug shopper that is highly deal
seeking, plans trips, and shops on circular.
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There are some key differences among
generational cohorts when it comes to use of
CVS.com (Figure 4):
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shopping list. They’re also significantly less
likely to look at the circular online.
Boomers, on the other hand, are more
concerned with managing their trip to the
physical store and continuing the channel
tradition of deal seeking. One-quarter of
Boomer CVS shoppers report using the
Gen Y shoppers are significantly more likely
than the average CVS shopper to use the
website for transactional things such as
ordering a prescription refill or making a
Figure 3: Use of CVS Website, Mobile App
During the Past Six Months
(among shoppers who shopped CVS in the past 6 months)
Rank
1
2
3
4
5
CVS.com
Browsed the weekly ad
(22%)
Checked my ExtraCare rewards
(17%)
Shopped for products
(15%)
Searched for coupons
(14%)
Ordered a prescription reﬁll
(12%)
CVS Mobile App
(17%)
(16%)
(15%)
(10%)
Made a shopping list
(9%)
Figure 4: Use of CVS Website During the Past Six Months
(among shoppers who have shopped CVS in the past 6 months)
Sample size
Ordered a prescription refill
Ordered photo prints to pick up in a store
Searched for a store location
Checked for drug interactions
Searched for a MinuteClinic location
Used pill identifier
Ordered photo prints to be shipped to my home
None of these
All CVS
Shoppers
1381
22%
17%
15%
14%
12%
6%
5%
5%
3%
3%
2%
2%
55%
Shopped CVS in the Past 6 Months
Gen Y
Gen X
Boomers
Seniors
15%
19%
15%
11%
17%
10%
10%
9%
6%
4%
4%
4%
49%
20%
14%
12%
14%
12%
5%
5%
5%
4%
3%
4%
3%
56%
25%
19%
17%
16%
11%
7%
4%
4%
2%
1%
0%
1%
55%
24%
13%
16%
11%
9%
2%
2%
1%
3%
1%
0%
1%
57%
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520
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website to browse the circular, and slightly
fewer than 2 in 10 use the site to check
ExtraCare rewards.
Both Boomers and Seniors are less likely
than all CVS shoppers to use the more healthoriented features like refill prescriptions, or
the pill identifier.
Walgreens Shopper Digital Behavior:
Rx Refill Drives App Usage
The top three behaviors of Walgreens shoppers are
similar to those of CVS shoppers, but beyond that
there are some differences (Figure 5). Walgreens
shoppers are also most likely to browse the ad
and shop for products online, but they are much
less likely to use the site to manage their Balance
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Rewards points. In fact, the top two actions taken
on the mobile app are refilling prescriptions and
managing the loyalty program.
Walgreens’ scan to refill feature is utilized much
more than on the CVS app, which has a similar
feature. The fact that Walgreens shoppers are more
likely to manage their Balance Rewards account on
the app versus the website, and also are more
likely to use the app for this purpose than CVS
shoppers, is reflective of the fact that Walgreens
increasingly approaches its digital initiatives with a
“mobile first” mentality.
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Figure 5: Use of Walgreens Website, Mobile App
During the Past Six Months
(among shoppers who shopped Walgreens in
the past 6 months)
Rank
1
Walgreens.com
(21%)
2
(14%)
3
Checked Balance
Rewards points
(12%)
Ordered a prescription
refill
(11%)
(10%)
4
5
Walgreens Mobile App
Ordered a prescription
refill
(18%)
Checked Balance
Rewards points
(18%)
(15%)
Search for coupons
(11%)
Searched for a store
location
(8%)
Source: Kantar Retail ShopperScape ®, August 2013
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As with CVS, there are differences in web
usage among generations of Walgreens
shoppers (Figure 6):
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Boomers are significantly more likely to
browse the weekly ad than all shoppers,
which, like CVS shoppers, is indicative of
traditional drug channel deal seeking.
These shoppers were conditioned to shop
on the circular and are now shifting this
behavior online.
Gen X Walgreens shoppers display higher
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incidence of leveraging website features
than do Gen X CVS shoppers. This cohort is
significantly more likely than the average
Walgreens shopper to manage their Balance
Rewards accounts online. Gen Y shoppers,
on the other hand, are the most likely of all
cohorts to search for coupons online and
search for clinic locations.
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Figure 6: Use of Walgreens Website During the Past Six Months
(among shoppers who have shopped Walgreens in the past 6 months)
Unlike CVS shoppers, Boomers are less
engaged with the Walgreens website. They’re
significantly less likely to do things such as
refill a prescription, search for stores, order
photo prints, or set pill reminders.
A
Sample size
Checked my Balance Rewards points
Ordered a prescription refill
Ordered photo prints to pick up in a store
Searched for a store location
Ordered photo prints to be shipped to my home
Managed Steps with Walgreens account
Searched for a Healthcare Clinic (Take Care Clinic) location
Transferred prescription to Walgreens from another retailer
Set a pill reminder
Arranged to get prints from Instagram
None of these
All WAG
Shoppers
1355
21%
14%
12%
11%
10%
9%
6%
5%
4%
3%
3%
3%
2%
2%
54%
Shopped WAG in the Past 6 Months
Gen Y
Gen X
Boomers
18%
18%
12%
13%
14%
13%
8%
8%
7%
5%
6%
6%
4%
3%
52%
20%
16%
14%
13%
10%
12%
8%
8%
5%
2%
4%
4%
4%
4%
55%
24%
13%
12%
9%
10%
8%
4%
2%
2%
1%
2%
1%
1%
1%
67%
196
413
517
Seniors
229
19%
13%
7%
10%
6%
4%
2%
1%
2%
1%
0%
2%
0%
1%
67%
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Despite having low eCommerce sales, all three big drug retailers are investing
in online and mobile to reach shoppers across mediums. In fact, Walgreens
has even stated publicly that it doesn’t see “omnichannel” as a way to sell
product; the retailer sees it as a way to build relationships with and be available for shoppers whenever and however they need. In the drug channel
specifically, digital offers a way for shoppers to manage their health, get expert
advice, and learn about conditions or treatments. It also speaks to the promotional nature of the channel, with many of the actions taken by shoppers
being deal seeking.
For suppliers, takeaways include:
Remember that online doesn’t just mean eCommerce. Drug retailers
are trying to engage their shoppers online, so partner with them to offer
tips, education, or expertise around your products. Also try to work
with complimentary brands to offer total solutions to fulfill a specific
need, and tie into health & wellness strategies wherever possible.
With Walgreens, take a stance on whether your product belongs on the
“happy” or “healthy” side of its positioning.
Promotions and loyalty are still priorities. Old habits die hard, and
shoppers are conditioned to seek out deals from drug retailers. Take
advantage of digital offers like Walgreens’ mobile and online coupons or
CVS’s personalized circular, MyWeekly Ad. Create value for the shopper,
whether that’s with dollar savings or value-adds that go beyond just price.
Cohorts are leveraging online and mobile differently. How you engage
shoppers will not only differ from retailer to retailer, but from shopper
to shopper. Get more granular with your planning and have strategies
to connect with Gen Y, Gen X, Boomers, and even Seniors. How can you
engage older shoppers and encourage them to leverage digital?
Bring innovative ideas to retailers. Walgreens, CVS, and Rite Aid are
looking to improve their digital strategies and are open to trying new
ideas. Leverage expertise you have in this area to help them elevate their
offer and partner with them to connect with shoppers. Position yourself
as a trusted advisor, both in the digital space for retailers and in your
category for shoppers.
As eCommerce sales grow, CVS, Walgreens, and Rite Aid will expect suppliers
to offer any in-store product online. However, the real goal is to aid the shopper, build that relationship, and have that added value drive in store sales.
Online sales may not be going anywhere, but instead of distinguishing between
selling product online versus in-store, retailers are positioning themselves to
capture shoppers versus other retailers; wherever that sale happens.
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Supeco: Carrefour’s Newest Price
Contender in Europe
By: Tudor Popa
Supeco’s growth has taken many by surprise,
including its parent company, Carrefour. Although
there is no official long-term expansion plan for
the format, Carrefour is expected to reward this
success by opening additional stores in Europe.
For suppliers working with Carrefour, this means
that you not only need to understand how to
merchandise this new format, but it also means
you need to be ready to discuss your strategies
in your next top-to-top with the retailer. Kantar
Retail takes you through the Supeco story in order
to prepare you for this upcoming discussion.
A Little Bit of History. Repeated.
Supeco is Carrefour’s Spanish “hypercash”
format. It belongs to a generation of hybrid store
formats that have been intensively developed
over the past 10 years. The hypercash model has
a strong presence in Latin America with Atacadao (Carrefour), Todo Dia (Walmart), MaxxiAtacadao (Walmart), Changomas (Walmart), and
Assai (Casino). Walmart also runs this format in
Africa (Cambridge Foods) and in India (Best Price
Cash & Carry). This format will grow in emerging markets and will continue to expand in retail
neighborhoods where there is little or no modern
trade. Hypercash’s discount price model is a
logical next step from traditional trade outlets,
particularly so for lower-income markets.
Supeco is based on the Atacadao “discount-hypermarket” network that emerged in Brazil during the
1980s. Carrefour acquired the Atacadao network in
2007, following two decades in which the network
grew to 34 units and 21,400 square meters of selling area (6,700 square meters average). Carrefour
then converted part of its old Brazil hypermarket
set to the format, which reached 90 units by 2012.
In the meantime, the retailer exported the format
to Colombia (renamed Carrefour Maxi in 2011),
Argentina, Morocco, and Italy (named Gross Iper).
What Is Supeco and Why Is it Here?
In Europe, and especially Western Europe, where
the hypermarket format has witnessed tough
times over the last five years, Supeco’s hybrid
model enters as a tested, viable alternative to
revive underperforming hypermarkets (The Atacadao model was used in Brazil by Carrefour to
reenergize some of its underperforming and/or
smaller hypermarkets that were converted to the
hypercash model). At the same time, it provides a
low-cost market-entry model to tackle discounters and small cash and carry operators. Along
with Carrefour taking the opportunity to establish
a stronger base and generate profitable growth,
the move also constitutes a counterattack to the
planned entry of Costco in Spain.
Supeco has arrived in Europe after a period
where the retail landscape and shopper attitudes
have altered significantly, where middle and low
incomes are converging, and where catering to
the real needs of shoppers is make-or-break for a
retailer. In this tough economic Europe—an landscape with cash strapped shoppers and small
businesses, the format is standing up to the
opportunity (Figure 1).
And Supeco is not the only one who sees prospects; U.S.-based Costco has announced its plans
to enter the market in 2014 as it “sees hope” in
Spain (Figures 2,3).
Costco’s Spain entry is a second step in Europe,
after a firm first step was set in the UK where
it already operates around 25 stores. Supeco’s
current Spanish presence comprises four locations: Chiclana (1,600 square meters), Los
Palacios (2,000 square meters), San José de la
Rinconada (1,500 square meters) and Madrid Parla
(2,700 square meters). Costco is currently setting
the founding stone of their 13,000-square-meter
store in Sevilia, and the retailer is also planning a
2014-2015 opening in Madrid.
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Figure 1: Supeco.es Homepage Features the Format’s Bold Message:
“If you think you are buying cheaper you don’t know us, we break prices.”
Source: supeco.es
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Figure 2: Consumer Confidence and Retail Sales Are Recovering
Figure 3: Supeco, Costco See Opportunity in Spain and Beyond
Source: Instituto de Crèdito Oficial, Eurostat
Source: Kantar Retail research
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Supeco’s Key Traits
Brand
Supeco brings a focused, simple price
message: “the more you shop, the cheaper.”
It employs an aggressive price proposition
strategy supported throughout the store by
messages like, “We can offer you low prices
because we save on: power, marketing, storage space, transport and loyalty programmes”
(Figures 4, 5). During the recent Spanish
openings, the retailer boldly displayed similar
shopping trolleys from competitors Dia and
Mercadona highlighting an overall savings of
10% to its advantage. The in-store shopping
experience is not a key focus area for Supeco,
similar to its advertising and marketing. The
format relies on the attractiveness of its offer
to bring shoppers back, and this message is
consistent both inside and outside the store.
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Figure 4: Supeco’s Low Cost
Philosophy
Advertised In-Store
Source: www.fanahorro.com, www.desdemiatalaya.com
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Figure 5: Checkout Dividers Featuring the Message:
“If you thought you bought cheap that’s because
you never met us.”
Operations
Supeco exploits simplicity to the max; its
design is simple both inside and out. With
limited staff, wide aisles, extended opening hours, and minimum merchandising,
it emphasises efficiency (Figures 6, 7).
For suppliers, the format’s merchandising
provides multiple packaging options for the
same product and lower distribution costs
helped by pallet merchandising, which also
eases any disruption to the browsing shopper.
Figure 6: Supeco’s Simple Store Design
Figure 7: Wide Aisles Allow for Easy of
Navigability and Restocking
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Finance
The format targets high RONA (Return on Net
Assets), employing a low start-up and operating
cost, and aims to rapidly generate profits though
it’s accelerated turns.
Figure 8: Aisle Endcaps Feature
Promotional Displays
Figure 9: Axe Deodorant Price Cut
(Before: EUR1.00; Now: EUR0.92)
A Supeco store costs a little more than EUR0.5
million to set up, excluding the plot of land, sometimes even less than a discount store, and boasts
an average selling area of 1,600 square meters.
The format utilizes a limited staff of around 60
people and aims to maintain low operating
costs though the simplicity of the store layout
and fittings.
Pros and Cons
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As there is no such thing as a balance between
product, price, promotion, and position, the Supeco
format has its advantages and disadvantages.
The pros derive from the format’s
cost-efficiency-driven operating model:
It relies on the simple proposition of
guaranteed low prices on bulk purchases.
Promotions and price cuts are ongoing events
(Figures 8, 9).
The store can adapt to multiple pack sizes of
the same product and can be utilized to test
shopper preferences.
The cost-effective merchandising facilitates
savings in logistic costs as most of the
assortment is displayed directly on pallets,
on the central aisle, or on the towering fourlevel shelves.
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Operating hours between 0900 and 2200
everyday, including holidays, makes it a
destination of choice for corner shops that
wish to replenish stocks as well as for
late-night shoppers.
It has low set-up costs (EUR0.6 million for a
new store) and remodeling costs, as well as
operational costs, along with the small staff
required to operate the store (50 to 60
people, as compared to 150 to 200 for a
classic hypermarket).
Figure 10: Carrefour Private Label Takes a
Fair Share of the Store Assortment
Figure 11: Endcaps Featuring Frozen Goods
The cons come from Supeco’s low price strategy,
supported by its low-cost philosophy:
The format poses a risk for price erosion in
brands adopting its regressive pricing model.
The pricing model cumulated with promotions
can create confusion for shoppers trying to
make the best choice.
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The limited marketing and display space
will also make it difficult for suppliers to
differentiate in-store (Figure 10).
The store’s basic design and dim lighting
is scarce in eye-catching design elements,
making it less appealing than discount stores,
projecting a warehouse feeling (Figure 11).
The format’s limited selling area (1,500 to
2,500 square meters) provides little room to
play with, moreover the assortment of 2,500
SKUs results in around 1.5 SKUs/square meter,
which is very narrow. Given the proportion
of bulk merchandising the formats need to
accommodate, there is a constraint in terms of
width and breadth for each category.
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What to Expect from Supeco in 2014 and Beyond?
The format will benefit from Carrefour’s established position and improving brand image across geographies (Carrefour has continued to develop its
network systematically for the past couple of years through its supermarket
and convenience networks, mostly through franchises). While Supeco brings
an attractive price proposition, it also brings the risk of creating confusion
with shoppers (Figure 12). But so far, the entry into Western Europe has
proven beneficial and we should soon hear about plans to expand to
other geographies.
Romania
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Poland
Poland is unlikely to be considered an opportunity for expansion as the highly
competitive and over-saturated retail landscape is a strong barrier for entry.
Carrefour is already undergoing a massive franchise expansion programme in
the market where its store base has been growing at around 100 new stores
per year for the past three years.
Figure 12: Supeco Offers a Unique Proposition in Europe
GOOD PRICE
PERCEPTION
HIGHLY
PROMOTIONAL
EDLP
Romania is already in Carrefour’s expansion scope for Supeco’s footprint.
The market has leapfrogged in recent years, having witnessed an exponential development of supermarket and discounter networks as well as hypermarkets that continue to adapt and still find space in the retail landscape.
Carrefour’s improving brand awareness in Romania will be only one of the
key internal strengths that will support the assimilation of the new format.
An additional opportunity comes from the wide acceptance of the discount
formats. Lidl has proven to be a great success with local consumers, but then
again, Lidl invested massively in marketing while Supeco defers from doing so.
Supeco will bring an additional blow to an already weakened Metro, but will
face tough competition from Transgourmet’s Selgros, which recently invested
massively in refurbishing stores and getting more personal with customers.
Moreover, heavy investments in marketing from Lidl and exponential development of other discount networks like Penny and Profi have given them a head
start over Carrefour.
carry formats in the market: Docks, Docks Market, and Gross Iper, totaling
some 20 stores. Its experience in Italy goes beyond this channel though, as the
retailer’s total 1,300 multi-format store base places it in the top five retailers
in the market.
Italy
Italy could well be one of Supeco’s next destinations, for the same logic as
Spain’s entry. Despite overall challenging economic conditions, the market still
offers opportunity for growth. Local grocers such as Coop Italia and Conad,
though challenging for Carrefour, stand proof of the market’s potential. Coop
reported 12.6% sales growth in sales for 2012, Conad reported 7.3% sales
growth in 2012 and 5.4% in 2013. Carrefour already operates three cash and
POOR PRICE
PERCEPTION
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Belgium
Belgium is also unlikely to be on Supeco’s European itinerary, as Colruyt’s
discount hypermarkets are dominating an already highly competitive retail
landscape. Current Sunday trading regulations would also be a big impediment
for Supeco, as it relies on attracting shoppers any day of the week.
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Marketing. Given the format’s limited options given to merchandisers,
how will your products help emphasise Supeco’s value proposition,
and how will you differentiate in the eyes of the shopper from your
competitors in-store? Will you have the right marketing mix to capitalize
on Supeco’s proposition?
Pricing. Will you have the appropriate pricing margin strategy ready to be
Supplier Implications
Suppliers that already have a proposition with Carrefour should consider
preparing to engage their consumers through this hybrid format. Consider
the following questions in advance of meetings with the retailer:
Listing Strategy. When Supeco first opens stores in your market, will
you be ready to supply it? How well prepared is your product portfolio to
cater to the specificities of this format? How can you engage Carrefour
in finding the opportunities to support the development of its format
while maximizing your sales? What can you learn from your Spanish
counterparts and apply in your market?
deployed in-store? Will it be flexible enough to adapt to tough negotiations
given the limited shelf and floor space as well as the progressive pricing
model proposed by the format?
Kantar Retail will continue tracking the developments of Supeco; despite its
currently small scale, this format has the potential to disrupt its competitors’
strategies throughout Europe. Similarly, we will keep you up-to-date on other
hybrid channels that are crushing the limits of conventional retailing and livening up today’s European and Global retail landscape.
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Lidl’s UK Checkout Realignment Is Part of a
Bigger Brand Strategy
By: Simon Johnstone
Lidl is in the middle of a balancing act: it’s trying
to achieve a growing like-for-like (LFL) focus in
Europe in conjunction with improving its brand
image. As the retailer looks to sell more in-store,
the checkout will naturally be a key area of focus,
as it’s a place where Lidl can make money from
suppliers as well as leverage the impulse opportunity. However, with plans to remove all chocolates
and sweets from its checkout aisles in the United
Kingdom in response to a growing obesity problem,
Lidl has shown that brand image, where necessary,
will ultimately trump a LFL focus.
Lidl’s brand image has shifted from being simply
about high quality at low prices to a more robust
image of being a destination for healthy, fresh,
high quality products that are locally sourced.
Whilst the improvements in fresh produce, bread
(via in-store bakeries) and meat have been
noticeable over the last five years (Figure 1), the
checkout has remained somewhat untouched. Lidl
understands that to fully reinforce its brand image,
the checkout must also be realigned.
discounter went on a PR offensive throughout the
year claiming, “Since the trial began, turnover of
the Healthy Tills has been 100% higher than that
of the standard tills.” This led to it doubling the
number of healthy tills to 1,200.
Lidl’s discounter model allows it to react quicker to
local shifts than traditional retailers. Lidl has acted
first, and Kantar Retail expects other formats to
also realign their checkouts in the UK (to some
extent). It is no coincidence that Lidl’s latest
announcement comes a few days after predictions about the number of obese and overweight
people in the UK may have been dramatically
underestimated. However, Lidl’s store layout, with
confectionary located at the very front of the
store, means the confectionary category may not
be hit too hard, in comparison to traditional
supermarkets (Figure 2).
Figure 1: Revamped Meat Section (Lidl UK)
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Source: Kantar Retail store visit
Figure 2: Store Layout (Lidl, UK)
Lidl’s first significant move at the checkout was
through the launch of a green till initiative (groentakasse) in the Netherlands, which saw it place
vegetable snacks at tills to promote healthy living.
Last year, it went one step further, introducing its
Healthy Till concept in the UK. Lidl’s Healthy Tills
replace “treat” items such as chocolate with more
nutritional products such fresh fruit. The German
Source: Company materials
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This latest development brings up a number of important
supplier considerations:
Figure 3: FSDUs (Lidl Belgium)
Lidl has shown that where necessary, improving brand image is a higher
priority than growing LFL sales. Suppliers should look to identify where
Lidl falls in this respect in their respective markets. For example, in
Germany, this phenomenon is redundant as the retailer’s brand image is
extremely good, and LFL growth and profitability remains its core focus.
This results in increased activity around streamlining its product ranges.
If, like in the UK, the checkout undergoes a drastic change, there are
still opportunities to consider. Confectionary suppliers have been driving
innovation around free standing display units (FSDUs) in discounters over
the last few years. Whilst the checkout may be off limits in the UK for
the foreseeable future, continued development around FSDUs will allow
suppliers to be in other important parts of the store (Figure 3).
Indeed, if your product doesn’t fall into the “unhealthy bucket,” there is
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a chance to push innovation around the checkout. The right palletised
display will engage with shoppers at a prime location in-store. However,
remember: the efficient model of discounters doesn’t allow for all
checkouts to be open all the time (Figure 4).
Source: Kantar Retail store visits
Figure 4: Checkout Pallets (Hofer, Austria; Lidl, Switzerland)
Over time, Lidl will have to find a perfect balance between LFL growth and its
brand image, meaning many markets may be in a state of flux. Suppliers can
get ahead of this trend if they understand where Lidl’s priorities lie in their
relevant market.
Source: Kantar Retail store visits
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S
Market Insights, Americas
Leadership Team
501 Boylston Street, Suite 6101
Boston, MA 02116
USA
Steve Pattinson
+1.617.588.4100
Phil Smiley
Market Insights, EMEA
24-28 Bloomsbury Way
London, England
WC1A 2PXY UK
United Kingdom
+44.207.031.0272
Asia Headquarters
The Center, 25th Floor
989 Changle Road
Shanghai 200031
China
T
H
A
L
F
Chief Executive Officer—Americas
Chief Executive Officer—EMEA and ASPAC
John Barry
Chief Executive Officer—Market Insights
Supriya Chaudhury
Chief Marketing Officer
Bryan Gildenberg
Chief Knowledge Officer
Mark Mikitka, Global Chief Sales Officer
[email protected]
+86.212.405.0132
Brazil Headquarters
Rua Olimpiadas 205
13o andar
Vila Olimpia - Sao Paulo
SP - 04551 - 000
Brasil
+55 3066 64 54
About Kantar Retail
Kantar Retail (www.kantarretail.com) is the world’s leading shopper and
retail insights and consulting business and is part of the Kantar group of
WPP. The company works with leading branded manufacturers and retailers
to help them transform the purchase behaviour of consumers, shoppers and
retailers through the use of retail insights, consulting, analytics and organizational development services. Kantar Retail tracks and forecasts over 1000
retailers globally, has purchase data on over 200m shoppers and among its
market-leading reports are the annual PoweRanking survey (USA and China),
and Industry Shopper Study Across Retailers. Kantar Retail works with over
400 clients and has 20 offices in 15 markets around the globe.
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kantarretail.com/kantarretailiq.com/kantarretailiq.eu

Breakthrough Insights

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