OPINIONIndustry Partners

How Grocers Can Stop Losing 25% of Purchase Volume to Competition

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The good news? The COVID pandemic is winding down. The bad news for grocers? Everything else. With the shelter-in-place, eat-at-home volume surge dissipating, the 15% to 20% increase in profits for grocery retailers are gone.

It will cost retailers more to operate the post-COVID store. Labor costs are up, driven by widespread mandated minimum wage hikes and hazard pay ordinances in certain parts of the country. And then there’s the increased in-store labor costs associated with a higher level of online ordering post-COVID. We have already seen aggressive grocers such as Kroger embracing numerous initiatives designed to decrease in-store costs, primarily by shifting checkout labor from costly in-store personnel to “free” self-checkout labor from shoppers themselves.

Even worse, basic CPG volume is not growing. Retailers can cut costs only so much. At some point retailers must grow volume and that’s hard to do when virtually every CPG category is growing slowly, if at all.

So, the challenge for retailers in the post-COVID era is: How do I grow my business in a no- growth environment?

There’s an obvious answer: sell more stuff to the shoppers already in your store. That’s where incremental volume is hiding right under the retailer’s nose.

Every retailer is leaking at least 25% of its own shoppers’ average purchase volume to other retailers. Therefore, the biggest opportunity for increased volume is to reduce this leakage. Or, said more positively, to increase shopper loyalty. Retailers need to be testing numerous initiatives to increase shopper loyalty across the board. Unfortunately, few retailers have deployed well-conceived data-driven programs to increase loyalty and decrease leakage.

In the table below, at Chain No. 1 shoppers are satisfying about 75% of their carbonated beverage needs with that grocer, but those same shoppers are spending the balance of their carbonated beverage dollars (about 25%) at other retailers.

The chart also indicates that no retailer is getting 85% or more of their own shoppers’ volume in any one category. In the average category, these retailers are squandering 25% of their own shoppers’ volume.

Average Percent of Shopper Needs Met by Category in Typical Major Retail Chains

CategoryChain No. 1Chain No. 2Chain No. 3Chain No. 4Chain No. 5
Bread and baked goods82.2%75.8%65.5%68.8%72.1%
Carbonated beverages75.4%67.6%61.4%66.0%66.1%
Packaged meats–deli74.9%66.3%51.3%63.8%63.8%
Prepared foods–frozen68.0%60.7%46.8%54.8%55.7%
Snacks77.6%70.3%60.1%63.8%67.5%
Cheese76.4%68.2%55.3%61.9%64.9%
Fresh produce76.6%74.5%57.8%62.1%69.5%
Milk78.1%68.8%58.0%61.0%68.7%
Dressings/salads/prep foods–deli69.8%64.0%51.3%54.9%59.2%
Paper products59.3%56.1%39.6%47.5%46.6%
Cereal66.2%61.6%45.3%50.2%51.2%
Pet food48.0%47.9%25.5%38.1%40.5%
Condiments, gravy and sauces72.2%66.9%54.0%61.9%62.4%
Yogurt66.9%62.3%44.7%44.8%46.1%
Juices, drinks–shelf-stable66.4%57.7%44.5%54.1%51.7%
Candy66.4%55.7%46.1%42.9%46.8%
Beer49.5%22.7%33.0%40.3%40.3%

And so, the challenge to the retailer is recapturing the revenue leaked to competition. Retailers need to identify the shoppers and categories leaking volume and focus on recapturing that lost volume with specific initiatives.

Where to start?

First, organization: Someone in the organization must be charged with the responsibility of increasing loyalty/decreasing leakage. That person must meet specific measurable goals and receive appropriate bonuses for meeting them.

Second, what shoppers should be targeted?: Experience suggests the shoppers on which the retailer should focus are in the so-called “fifth to seventh loyalty deciles.” These are shoppers that are buying in-store or online frequently and are buying almost half of their needs from that retailer, but they’re clearly leaking volume from many categories and therefore offer the most attractive target for revenue recapture.

Third, analysis: To recapture that revenue, the analysis needs to proceed along four pathways in each target category: assortment, price, in-store presentation and promotion. These are the four levers available to the retailer to recapture revenue from leaking shoppers. 

  • Assortment: Is the retailer offering the proper assortment or are those target shoppers buying items unavailable in Chain No. 1 from Chain No. 2?
  • Price: Is the retailer competitive on price in those categories where the target shoppers are leaking volume? Is the retailer pricing in multiples that result in satisfying a higher percentage of shopper annual needs?
  • In-store presentation: Is the retailer giving enough space in the key categories to the key items and placing the categories in higher traffic locations with more frequent endcap displays?
  • Promotion: Is the retailer promoting the right products at the right price in larger multiples at the right frequency in the categories where the target shoppers are leaking volume? Is the retailer simultaneously promoting items in different category segments in target categories? Promotion is the area where retailers have the biggest opportunity to capture incremental volume by thinking creatively. For example, can the retailer target specific multi-item offers to specific shoppers that by definition increase the percent of category needs for the shopper?

Special Initiatives to Targeted Shopper Cohorts

Retailers should be personalizing offers digitally, paying special attention to shoppers who changed their behaviors as they shifted to online purchasing during the pandemic. They should offer personalized “performance bonuses” to targeted shoppers who meet higher loyalty purchase goals over time. For example, a percent rebate for increasing purchases by a certain dollar amount.

The COVID sales bonanza is over, and the underlying business is flat. Costs are up, and retailers can’t afford to return to what they did pre-COVID. Retailers must make changes to increase loyalty and decrease leakage.

Gordon Wade is a longtime thought leader in CPG. He was one of three people who created the discipline of category management for the CPG industry in 1993 and then led a 17-company industry consortium in updating CatMan 2.0 in 2017. He has written white papers on multiple subjects, including AI, in-store robotics and e-commerce data analytics. He is an honors grad of Harvard and an alumnus of P&G’s marketing department. He can be reached at gwade@retailperformancegroup.com.

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