The last quarter saw the largest drop in U.S. gross domestic product in nearly 80 years. Amid all the chaos and heartache that COVID has caused, it has also created an opportune time for grocery executives to reassess their business. Consumers are reevaluating their lifestyles and budgets, with Q2 personal savings rates rising to 25.7% from just 9.5% in the previous quarter. The focus for many retailers is generally on the current month and the events that impact the current month, which has become even more important during the COVID chaos. But this near-term perspective can come at the expense of addressing the bigger longer-term structural issues with the business. Addressing the easier short-term issues may keep one treading water, but the bigger structural issues is where organizations learn to outperform the market.
Retailers often blame poor performance on weather, a recent election or that their local professional team did not make the playoffs this year. However, the central issue for retailers should be finding out why sales, units and visits have been trending down for years? Inmar’s 2019 Future of Food Retailing Report states that traditional banners' market share has fallen from 90% in 1988 to 44% in 2019. The reasons for this shift are still driving share changes today. Retailers should be asking, "Why have our prices increased faster than the rest of the market, and how is this impacting customer perceptions, their emotional connection and the bottom line?" While short-term events may explain a part of the short-term variation, it is the negative longer-term trends in scale, cost and customer perceptions that are slowly killing the traditional grocery retailer.
COVID Breathing New Life Into Struggling Regional Grocery Retailers
Regional grocery retailers have been struggling since the Great Recession but have seen new life during COVID. This resurgence is due to a shift in customer’s needs. Specifically, consumers are trying to minimize their exposure to the coronavirus so they are visiting fewer different retailers, making fewer trips and building bigger baskets. Pre-COVID, shoppers were consistently visiting about four different grocery retailers each week to meet their food needs, according to dunnhumby’s annual Grocery Retail Preference Index. Recent data analyzed during the pandemic suggests this number has been cut in half. Many consumers have shifted to valuing one-stop shopping more and worrying less about price. This fits nicely into the traditional grocers’ value proposition where they are often strong on one-stop shop but struggle when it comes to price perception.
Source: 2019 US RPI for Grocery
This also helps to explain why limited SKU banners such as Trader Joe’s and Costco, who were dominant pre-COVID, have had performance issues in March and April of this year. It is simply more difficult to do a full shop in these stores.
How long Will the Tailwinds Last?
So how long will this trend last? We see a couple of factors that will be a tailwind for traditional grocers. First, uncertainty will likely continue to limit consumers’ trips and the number of different retailer’s visited, so as COVID cases grow, this should help traditional retailers. Moreover, consumer’s uncertainty is limiting spending in other areas of the economy as people seek to reduce exposure to the virus, which has increased grocery retailer’s share of overall stomach. Before COVID, food-at-home expenditure was about 6% of household income, but during COVID, this has jumped 2 percentage points. While this may not seem consequential, each percentage point is worth about $10 billion per month for food-at-home which translates into double-digit year-over-year increases for grocery stores even as GDP and unemployment have reached historically low numbers.
The biggest boost for grocery has been the struggling restaurant channel, which has diverted many of those dollars into the grocery channel. During April, food away-from-home was down 49% year over year. Restaurants are expected to continue to struggle as COVID uncertainty remains high.
Source: US Census, advanced retail sales
Government financial support has also helped to keep shoppers less price sensitive and less likely to shop multiple banners. If this support is cut or reduced, we would expect price sensitivity to rise for many households.
Life After the Vaccine
So what happens when we have a widely available vaccine and the cases begin to fall? We believe people will become more confident and less uncertain. As we saw in May and June, consumers will be ready to spend and reengage in their pre-COVID lives. There will likely be some permanent behavior change with regard to e-commerce and some lingering concerns around safety. We think this will have more impact how people shop and less impact on where people shop.
Our expectations for a post-COVID world are shaped by our Retail Preference Index which has consistently found that the combination of prices and the quality of the product/store experience is what drives store preference. It is what people get for their money that drives choice more than whether they shop online or in-store. Consequently, post-COVID—as was the case pre-COVID—a retailer could have the best website, the best e-commerce tools and the best delivery/pickup options, but if the price and the assortment are not in line with the shoppers needs, that large digital investment will not drive incremental traffic.
Post-COVID, we also expect consumers will once again visit more retailers both online and in-store to find their preferred combination of price and quality. This means price will become more important and one-stop shop will become less important. Moreover, as people become more comfortable in public, restaurants will significantly pick up and erode groceries share of stomach. As such, the current tailwind that most traditional retailers are benefiting from will begin to subside as uncertainty falls and people become more comfortable in public.
Improving the Value Perception
So how can the traditional retailer improve their overall value perceptions? First, focus on systemic core issues that have amplified since the Great Recession. Over the past 12 years, traditional banners have lost shares to limited SKUs and discount banners who are delivering more value to a larger proportion of the population. We also know that premium supermarkets have struggled as more premium and natural and organic products are carried at lower priced banners such as Trader Joe’s, Costco, Sprouts Farmers Market and Kroger.
Price mattered pre-COVID, and we fully expect it will matter as much post-COVID, so traditional banners with price perception issues must address why their prices are higher in order to be competitive. And a good part of this price gap is due to scale, so to counter this reality, these banners can become more targeted with customer data and insights to influence price perceptions through targeted price optimization, assortment and merchandising, the store experience, private brands, real estate and personalized messages and experiences both in-store and online. This can only be done by creating a customer focused strategy that carefully connects each of these dots to leverage synergy and a unifying message across all channels.
Time to Transition to a Customer-Centric Approach
To start this journey, retailers must make the transition to a more customer-centric approach within their merchant and marketing departments. Those that can deliver relevant products at good prices to their target customers will be best positioned to thrive in the post-COVID world. This means CPGs and even a retailer’s short-term financial performance might need to be de-emphasized to shift the focus and the priorities on understanding and shaping the business around your best customer’s needs. Thus, transaction data, systems and processes should be developed to help retailers inject the customer into the center of pricing, assortment and communication decisions.
This also will require retailers to seek out and hire people who have completed this type of work. At the UBS Global Consumer and Retail Conference in March, McKinsey cited that only about 10% of retailers were truly using customer data to drive the business. This finding underscores that it is a skill to understand and apply customer information to the business and that skill set is needed to effectively make the transition.
One of the key obstacles to becoming more customer-focused is the influence of CPGs on retailers pricing, promotion and assortment decisions. Retailer, CPG and customer needs do not always align. Many retailers are caught in a cycle that continues to distance themselves from their customers. CPGs pay for shelf space, which struggling retailers gladly accept to help shore up declining performance. This often results in an over-SKU'd shelf that diminishes the shopping experience. This negatively impacts performance, which further increases a retailer’s need for CPG funding. To break this cycle, retailer’s need to reconnect with customers and rebuild those relationships with more relevant pricing and product choices, and this can only happen if the customer is at the center of pricing and assortment decisions.
In the throes of COVID, it is the perfect time to rethink the business and the brand. If you were struggling pre-COVID, you will likely be struggling post-COVID, even if things are looking rosy today. The focus needs to be on the customer, and now is the perfect time to assess what data, systems and processes you need to leverage this key asset. In the long run, it is those retailers that are best aligned with their customer’s needs who will win.
Eric Karlson is head of customer strategy, North America, for dunnhumby.