Todd Hale
Senior Vice President
Consumer Insights
ACNielsen

Reader’s Note: This represents the second installment of a two-part article based on the FMI/ACNielsen study titled   Winning Strategies for Your Most Important Shoppers. Part 1 was featured in the Spring 2005 issue of Consumer Insights magazine. A detailed discussion of the research design can be found in a sidebar to Part 1.

Consumers are voting with their feet, and long-established retail formats like grocery, drug and mass merchandisers have forfeited customers, stores and shopping trips to newer concepts such as warehouse club stores, supercenters and dollar stores. It would appear that “value trumps assortment” has been the key for winning formats during the December 2000 to 2004 period.

Although supercenters have a much broader set of individual items than club and dollar stores, limited category assortment has been a contributing factor to their success, driving value pricing and simplifying the consumer shopping experience [See chart 1].

Supercenters supersized, opening 826 more stores over the last four years, achieving 38% growth and a total count of 2,175 units. Dollar stores added outlets at a breathtaking 46% rate, building an additional 5,387 units, raising the dollar store count to 17,070. The warehouse club footprint extended by 193 stores or 23%, topping off at 1,034 outlets.

C-stores upped their convenience quotient even further by adding an awe-inspiring 20,286 outlets in the 2000Ð 04 timeframe, achieving a 17% growth rate.

To give a sense of relative scale for this channel, there are 138,205 convenience stores, which outnumber the other six channels combined by almost 30,000 stores!

On the reduction side, mass merchandisers closed 25% (1,574 stores), attributable in large part to the conversion of Wal-Mart Division 1 stores and the closing of 600 underperforming Kmart stores. In the grocery aisle, slow but steady erosion continued, as 1,175 food stores slipped from sight, dropping the channel count by 3%. In some cases, large food/drug combinations and supermarkets replaced the store closings by national chains, independents and small chains, shoring up the overall store count at 45,268.

Drug stores faced a consolidation headache, shuttering 1,272 outlets or 3% of the store base, as small independents took their leave, making way for larger formats with expanded food and beverage sections.

Chain Reaction
Target and Wal-Mart set the chain growth pace for the almost five-year period studied and maintained that momentum on a year-to-year basis, unlike some competitors that recorded growth over four years, only to lose stores in 2004. Target added 335 stores, hitting all expansion goals with a 34% growth rate [See chart 2].

Wal-Mart nurtured its organic growth pattern, upping the store count by 592 units for a 19% increase to 3,668 outlets. In the aggregate, Ahold boasted an impressive 31% hike for a total store count of 1,274 units, but store divestitures in the past year will yield a smaller store base.

Safeway pushed forward by 7% (105 stores) over the combined period, paving the way to profits with 1,584 outlets. Kroger flexed its market muscle and bulked up by 7% (169 units), achieving market strength with 2,537 retail stores. The savvy acquisition of some 202 Shaw’s and Star Markets jump-started Albertsons’ performance, for a net gain of 93 outlets and 5% growth.

Kmart finished at the bottom of its class, lighter by some 628 stores for an almost 30% reduction in overall units.

Dollar Power
To put the extraordinary expansion of dollar stores in perspective, a benchmark may prove helpful. Long-recognized as the pacesetter when it comes to aggressive store expansion, Wal-Mart added almost 600 new stores between 2000 and 2004 [See chart 3].

During the corresponding period, the five leading dollar store chains added almost 10 times the number of units (5,809), reaching an unprecedented store count of 16,011 outlets. In addition to bumping up the store universe, dollar stores have shuffled their merchandise mix, taking a bite out of grocery sales by focusing more on food and beverage items, making it more convenient for consumers to divert a trip to this format.

A Healthy Outlook
On the whole, club and drug operators maintained a healthy expansion pace. CVS withstood the pressure of rapid growth, upping its store count by 28% to 5,393 units via the Eckerd acquisition. Walgreens delivered on its promised growth trajectory, charting the addition of 1,415 facilities and running 4,622 stores by the end of 2004. The prognosis for continued Walgreens growth was good, with an eye on opening another 3,000 outlets by 2010. RiteAid lost momentum and 12% of its stores, dropping to 3,374 units [See chart 4].

All three major club retailers (BJ’s, Costco and Sam’s) added new stores for a total chain count of 154, 320 and 551 outlets, respectively.

Alternative Views
So-called traditional formats like grocery, drug and mass face fierce competition from nimble competitors with significant household penetration, poised to lure away customers with a strategically chosen assortment of niche food and beverage offerings. The potential threat is at defcon levels, considering that 80% of American shoppers already visit a hardware and home improvement store.

Many local outlets prominently include front-of-store and end-of-aisle displays featuring cases of soft drinks and water as well as salty and sweet snacks, a limited number of health and beauty aids, non-food and general merchandise items. Staples plans to distribute Starbucks whole bean and ground coffees throughout its U.S. stores. Circuit City and Best Buy feature cooler units for soft drinks and other beverages. The new Sears Grand format boasts a prominent convenience foods section with frozen pizza and milk.

The penetration threat extends to other formats such as electronics and office supply stores, which reach half of all households, and bookstores, auto supply and pet stores, which attract roughly one-third of shoppers. While posing a threat to established channels, the alternative outlets represent a distribution opportunity for consumer packaged goods manufacturers.

Category Gap Analysis
In what categories do top-spending shoppers spend money outside their preferred format? The answer differs by channel. Supercenter shoppers leave the fold (negative gaps) to purchase high frequency categories like carbonated beverages, milk, bread and baked goods, but remain in the channel (positive gaps) to pick up medications/ remedies, hair care and oral hygiene products [See chart 5].

Hi/Lo grocery shoppers can be found on foreign turf loading up on stationery and school supplies, electronics, records and tapes, candy, tobacco and accessories, as well as health and beauty aids. When it came to pantry items, top-spending Hi/Lo grocery shoppers remained channel-loyal, buying bread and baked goods, milk, fresh produce, cheese, deli and packaged meats, condiments, gravies and sauces. The general trip pattern was the same for EDLP grocery shoppers, with a few minor differences in the size of the gap and number of trips.

Food for Thought
While the grocery channel still accounts for more shopping trips than mass merchandiser, supercenter and drug store trips combined, grocery trip frequency numbers continue their downward slide. The erosion persists unabated, and will only accelerate with the continued store expansion by challenger channels. More outlets boosts alternative channel convenience ratings, making it easier for shoppers to divert dollars.

Survival rests with grocery’s ability to understand top-spend shoppers’ needs and wants, and then differentiate offerings accordingly. Value pricing is here to stay. Consumers want it, and all formats will have to deliver it to compete. One solution rests with assortment: reducing SKU counts without sacrificing unique items that appeal to shoppers and differentiate the format.

It all comes down to that retail basic: know your customer. Study buying patterns, identify cross-selling opportunities, evaluate lifestyles and merchandise accordingly. That old chestnut about location still carries value, so leverage the location advantage and format convenience.

Retail Opportunities Knock
Hi/Lo grocers’ customer-centric retail strategies include:

• Growing via acquisition and new stores
• Reducing center store assortment
• Adding natural and organic foods
• Expanding entertainment SKUs
• Offering limited home goods products
• Providing a comprehensive range of services (e.g., pharmacy, coffee shop, on-premise gas, cooking lessons)
• Targeting offers to the high value and specialty segments (e.g., seniors or ethnic markets)
• Forging alliances and creating store-within-a-store concepts (e.g., gift cards, sampling stations, cross- shopping rewards)
• Focusing on some basics such as feature activities, fresh food, convenience and value-priced center store

EDLP grocers can feed off supercenter locations, treating them as anchor stores to draw customers, trading on the high customer interaction with supercenter formats. Top-spending EDLP customers prefer small to mid-size formats, and while they’re not terribly service-driven, EDLP shoppers exhibit high interest in self–check-out lanes. Seek out the economically challenged such as the elderly, ethnic consumers, a young/emerging households. While somewhat strapped economically, these households respond to seasonal offerings and value pricing.

Specialty grocers, as their name implies, enjoy a unique niche. Sited in affluent urban and suburban areas, specialty stores trend toward smaller physical plants with a more intimate feel. The specialty shopper may be an empty nester, dual income middle-aged couple or single, but all will be affluent. Not averse to convenience and savings appeals, specialty shoppers appreciate the self–check-out option and respond to smaller club packs. The big attraction for specialty grocery shoppers is food quality, whether it’s fresh food, prepared food or specialty items.

Supercenters looking to grow store count might consider converting existing discount store locations, as well as adding new stores in new markets. Large stores attract supercenter customers seeking the stock-up experience. A slightly scaled down store would work well in areas where community opposition to big box stores prevails. Expand quick fix and prepared meal offerings to retain top-spending supercenter customers.

Anything that adds to the convenience perception is a plus, whether it’s store-to-car delivery or self check-out. Preferred customers skew heavily toward families, ethnic households and economically challenged households. One specific technique for attracting shoppers is the “dollar merchandise” section or special promotion. The two themes resonating with supercenter top spend clients are value pricing and one-stop shopping.

At the end of the day, it’s up to the customer. The number of format options continues to proliferate, and smart merchants are chipping away at grocery’s easily duplicated advantages, such as location and assortment. Monitor the pulse of your top-spending customers to keep your store’s offerings competitive and to leverage every available point of differentiation. Tap into the treasure hidden in your frequent shopper data to shape a relationship with your customer base.