Wednesday, December 29, 2010

Seven 'Mega-Trends' We See Shaping U.S. Food & Grocery Retailing in 2011

1. Food and Groceries 'Everywhere'

Never before in history have American consumers been able to buy fresh food and groceries at so many different format stores and retail venues - supermarkets, neighborhood grocery stores, mass merchants (Walmart, Target, ect.), club stores, convenience stores, drug stores, dollar stores, natural foods and specialty stores, online/home delivery, farmers markets and more.

This "channel blurring" increased even more in 2010, over 2009 - and will continue to increase in 2011 - as mass merchants like Walmart and Target, drug chains like Walgreens and CVS, and numerous other format retailers continue to offer more and more food and grocery items in their stores, along with traditional grocers. This means increased competition, particularly for the traditional supermarket channel. It also means grocers will have to continue to add value, or else the sheer number - and growing - of formats and venues offering variations of what they specialize in - food and groceries - will continue to take away sales. There's only so much share-of-stomach and share-of-pantry, after all.

2. Value, Value, Value

Low price was king, with a handful of retailer exceptions, in 2010. For 2011, price will still be very important - but perhaps just a mere prince rather than a king, in terms of its significance.

While we expect price to remain one of the key factors influencing food and grocery shopping behavior next year, value beyond price will be even more important, in our analysis. By value we mean the ability to add value to the total shopping experience, beyond just offering a low-price message.

Such value comes in many forms for food and grocery retailers of all formats: good merchandising and promotions, exceptional customer service, signature product offerings, community involvement and more. Those retailers that are able to put all the elements of value together in a coherent "value proposition," and communicate the proposition in a clear and comprehensive way to shoppers, will be among the winners in 2011.

3. Health & Wellness

Despite the passage of health care reform legislation this year - and opponents argue because of it - the cost of health insurance and health care will continue to rise by double digits in 2011, according to the federal government and independent analysts. As a result, the health and wellness or prevention message, which has been gaining steam over the last couple years, is even riper for innovative food and grocery retailers to embrace. It's something consumers of all income groups are hungry for.

Grocers like Whole Foods Market, Colorado-based Natural Grocers, Wegmans and others who are currently doing a good job adding value by focusing on health and wellness as part of their overall merchandising and communications programs know this to be the case.

Food and grocery retailers of all formats, in large part because of their ubiquity in society and in communities and neighborhoods, along with the fact they're the primary distributors of food to consumers, are in a position to become a key part of the growing health and wellness movement. And if done well, a strong health and wellness message can be one of the key points of adding value beyond price discounting for food and grocery retailers in 2011.

4. Social Media: The Customer-Advisor

Food and grocery retailers took to social media sites like Twitter and Facebook in a big way in 2010 - and we expect the trend to continue in 2011 in even greater numbers and varieties of use.

This type of interaction with shoppers, particularly among the headquarters folks who run the social media sites, was non-existent less than a decade ago. Instead, nearly all customer-grocer interaction took place at store-level, most often never making its way to headquarters in the case of chains.

However, with the advent and use of social media, the customer-food retailer interaction has now been expanded. The result: Communications and information-sharing between customers, food retailer headquarters people and store-level management is becoming more of a continuous communications loop, at least in the case of those retailers that are using social media to communicate rather than merely to post advertising or related messages.

Food retailers, such as Whole Foods Market, Wegmans, Safeway Stores, Tesco's Fresh & Easy Neighborhood Market and others, are also using their respective social media sites to invite customers and potential customers to offer suggestions on a variety of operational aspects, including where the retailers should locate new stores and what types of new private brand products they should consider developing. In return, followers of these retailers' social media sites are responding to these and other requests for input in droves.

This social media process is evolving into what we believe is becoming a new role for consumers vis-a-vis the food and grocery business - that of a customer-advisor to retailers. It's more for many of these folks than just offering suggestions. They follow up on their ideas with the retailers and want to know if they will be implemented - and if so when.

Never before since the days of the neighborhood grocer, where "everybody" in town shopped, have consumers and customers felt and acted in a more empowered way towards food and grocery retailers than today. This is due to retailers use of social media but also because of increased community involvement, which has been enhanced and made easier because of the widespread use of the Internet, particularly social media sites and blogs.

This new model of customer-retailer behavior is also leading to community members throughout the U.S. wanting more of a stake than ever before in the ways retailers design, build and remodel stores in their respective neighborhoods, including if they gain approval from city and county governments.

Walmart and Safeway Stores understand this fact. Both retailers now set up special websites and seek community input when developing new stores or remodeling existing units in areas and neighborhoods where their might be some controversy. Walmart is currently doing it in Washington D.C., for example, where it wants to build a number of new stores. And Safeway is doing it in the San Francisco Bay Area, where it's attempting to enlarge and renovate stores in a number of cities. Community members can kill or help make these projects happen, in many cases.

An excellent example of the customer or community member as adviser happened this year in Houston, Texas with the H-E-B supermarket chain. Early this year H-E-B announced it plans to build a new 78,000 square-foot supermarket at Dunlavy and West Alabama in the city's Montrose neighborhood. When the final plans for the store were presented, many neighborhood residents didn't like numerous aspects of the store's design, saying it didn't fit the character of their neighborhood. An organized group of residents even protested against the planned store.

However, instead of fighting the residents in court, H-E-B's CEO Scott McClelland and the store design team worked all this year with neighborhood residents to change the plans and store design, resulting in what now appears to be a near-consensus among residents that the store's final plan, just released, fits the neighborhood. Residents offered design changes, additions and deletions, many of which were adopted and modified for adoption. [Local Houston, Texas website Culture Map has followed the long process of working on the H-E-B store's design all year. Read this December 28 piece. Then click hear to read the other stories (look for H-E-B/Montrose), starting with the early 2010 pieces. The contrast from early 2010 to this month is amazing, and a good example of the consumer-retailer collaborative process we're referring to.]

Food and grocery retailers need to take note: Social media has changed much in terms of consumer-retailer interaction. Interactive communication, along with customers as advisers, are both here to stay, unles retailers take down their social media pages. Social media is the new frontier. Retailers that embrace it will be the winners in the years to come.

5. Affordable Indulgence

This holiday season - both when it comes to food and grocery retailing and holiday gift buying -has shown that consumers have a pent-up demand to spend on what we call "affordable indulgences." For example, grocers we've talked to beginning a couple weeks before Thanksgiving, tell us sales are significantly up on specialty and organic food items, premium in-store bakery products, higher-end fresh produce and meats and similar goods. They also tell us they see the "affordable indulgence" trend lasting, albeit not to the same high degree as the holiday season, going into 2011.

Manufacturers and marketers of premium and specialty foods also tell us they see the same trend. Many say sales of higher quality and priced packaged goods items started trending up in about September of this year, which means it's more than a holiday season blip on the shopper trading-up radar screen. It's important to note we're not talking about high-priced caviar and $50 bottles of wine. Rather, the trading up we're referring to involves many shoppers buying super-premium ice cream, gourmet condiments, higher-end prepared foods and other "affordable indulgences," products they've in many cases done without over the last three years. It's a cautious but we think real trading-up - but not a return to pre-2007 premium-specialty grocery shopping and purchasing levels.

If we're correct, this trend offers great opportunity in 2011 for those food and grocery retailers who can offer higher-ticket specialty items while still maintaining value. Such items are good both for increasing a retailer's overall shopper market basket purchase size, as well as gross margins. Reasonable pricing and excellent merchandising in-store are the two keys for retailers in taking advantage of this pent-up shopper desire for premium and specialty foods.

6. Private Brands

The growth of retailer-owned private brands grew significantly in 2009 and 2010, in large part because cash-strapped shoppers have been looking for the best prices they can on everything, from soup to nuts to disposable diapers, something that will continue into 2011 but we think in not such a major way as was the case this year, as the economy continues to slightly improve over next year.

As such, we expect moderate but significant percentage growth for retailer brands in 2011. Much of this growth will be fueled by the fact store brands have improved considerably, as compared to manufacturer consumer packaged goods (CPG) brands, over the last couple years.

Additionally, private brand retailer-leaders like Trader Joe's, Safeway Stores, Target and a few others should see their store brand sales grow even more so than the national retailer average because these grocers are doing real packaged goods brand creation and marketing rather than mere private label product creation.

What we won't see in 2011 but perhaps should: Retailers treating their own brands with the same strict set of criteria as they treat manufacturer brands, including using the same shelf-movement standards for private brand as they do for big brands, charging themselves a slotting fee (an in-house scheme of some sort could be created) for new private brand items like they do consumer packaged goods marketers rather than putting the products on the shelf for free, and holding themselves to the same levels of street money and promotional spends as they hold the CPG brand marketers to. If retailers had to play by the same rules with private brand as the manufacturer-marketers that supply them do, we would see a much higher store brand item failure rate - and thus a more true picture - of the real overall success of retailer brands as compared to big brands.

7. Commodity-Food Price Inflation

The price of basic food commodities like corn, wheat and soybeans are going up, along with the price of oil. This will take its toll not only on packaged food items (and transportation costs for distribution in the case of oil) but also on fresh meats and poultry. Major food makers such as Con-Agra, Kraft and others have recently announced that price increases are coming to wholesalers and retailers at the first of next year.

Retailers, particularly mid-level supermarket chains but also discounters and other format operators, can't merely pass these price increases on penny-for-penny to consumers because competition is too stiff. Therefore, as they have this year, grocers and other format food retailers are going to have to continue to absorb a certain percentage of the price increases, which also will hit their own brands because of the commodity hikes, or risk losing sales to the hard discount retail channel.

The continuing bad economy, albeit it should continue to improve some in 2011 as it's already started to do, also will exert added pressure on retailers to not pass on more than a percentage portion of these price increases. As a result of these factors, retailer margins will once again be challenged in 2011, even if some food inflation at the point-of-sale occurs.

[Readers: We invite you to tell us and your fellow readers what you think will be the mega-trends shaping the U.S. food and grocery retailing business in 2011. Just click the comments link below and offer your opinion. Feel free to list one or more industry-shaping meg-trends for 2011 in your comment]

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