Grocery retailers can employ a countless number of tactics to compete in today’s dynamic market. The issue is not the ability to do many different things at once—which retailers are often good at—but that resources are finite. It’s important to determine the right strategies to prioritize investments and which tactics to stop entirely.
Many organizations, and not just in retail, struggle to focus resources and attention on the areas that are most important to the health of the business. This often results in organizations chasing too many priorities, with few areas receiving the attention required to make meaningful improvements. Retailers that cannot markedly improve the business in areas that drive value perceptions and visits will find it difficult to navigate an increasingly fragmented and competitive market. The issue is further exacerbated by thin profit margins and scarce resources that require an even more thoughtful and strategic allocation of resources.
At the root of the problem is the inability to systematically assess and diagnose key issues across the business. Without the right data, systems, and processes, coupled with silos and day-to-day demands, diagnosing key macro issues is quite difficult. As a result, few organizations spend the resources or time needed to carefully align their strengths and weaknesses with the demands of customers, competitors, and technology.
The inability to confidently diagnose also leads to a largely internal focus and a planning process that centers on marginally adjusting next year’s spend, hoping the following year will be better.
Over time, this internal focus can result in a disconnect with customers and too much influence from external organizations with conflicted priorities. This customer disconnect causes a misalignment between the evolving customer needs and the retailer’s value proposition, which opens the door for competitors and new market entrants. This was the case with Walmart, Trader Joe’s and Costco, who have all significantly expanded their market share over the last 20 years at the expense of traditional supermarkets. Ironically, this also happened with discounters in the U.K., who now control over 12% of the grocery market.
If a retailer can confidently diagnose key issues and identify opportunities, knowing that performance will improve, they can be more confident reallocating available resources. More importantly, they will have the knowledge and information to scale back in areas less important to the health of the business.
“The essence of strategy is choosing what not to do.” Michael Porter – What is Strategy, HBR 1996
However, reducing or reallocating resources is difficult for most organizations. Relationships, culture and legacy are baked into many systems, processes and activities that are simply disconnected from the customer and the overall performance of the business.
For example, many inwardly focused traditional grocers failed to recognize the shift in the consumer and the market in the post-recession period. Looking at gross margins in the post-recession period, industry-wide gross margin as a percent of sales fell from 28.9% in 2007 to 26.7% in 2014.
Yet, other traditional retailers continued to incrementally increase their gross margins as they did in the pre-recession period. This may have helped them hit their short-term financial goals, but it damaged their long-term value perception. By 2006, Costco, Walmart and Trader Joe’s had expanded into many markets and leveraged their strong value proposition in the post-recession period to steal significant share from supermarkets.
If traditional grocers diligently monitored the external market, noting customers’ changing needs and diagnosing key issues, they might have responded by aggressively cutting back on expenses and investments. Consequently, they might have better managed the price perception gap and share loss over the long-term, rather than having to close stores today.
For example, a major retailer had a gap of two percentage points in gross margin during the pre-recession market period, and today the gap is greater than five percentage points. The premium price gap begins to reach a point where some retailers are simply no longer price competitive. dunnhumby research has shown that this lack of price competitiveness erodes not only financials, but also the emotional connection which used to be a strength for many regional grocers. Once the emotional connection starts to fade, it becomes increasingly difficult to win customers and their wallets back.
So how can retailers improve the ability to consistently identify key issues and take advantage of opportunities? It starts with a combination of people, process and data analysis to build the evidence-backed business case that can be used to develop a consensus across departments and alignment throughout the company. Depending on internal resources, this can include enlisting a partner like dunnhumby to help connect all available data sources, like customer information from transactional data, market research and online sources. In dunnhumby’s upcoming strategy posts, learn more about strategic frameworks and other requirements to isolate key business issues and identify new and important opportunities.
This post is sponsored by dunnhumby