US Grocery Retail Perspectives
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Transcript of US Grocery Retail Perspectives
Wilson Perumal & CompanyGrocery Retail: Perspectives
October 2013
2Wilson Perumal & Company, Inc.
Introduction and Background
*For further information on Wilson Perumal & Company, see Appendix 2, pg 35
• Even by grocery retail standards, the industry is undergoing high levels of change, creating sizeable complexity as well as new opportunities
• Wilson Perumal & Company*, a management consultancy, works with retailers to find advantage in this fast-changing environment
• In the course of our work, we have developed a point-of-view. In this document, we wish to share with you our perspective on key trends
• The 5 key trends we discuss are:1. Localization a “must-do”; question is what scope/how far to go2. Race to Omni-Channel impeded by execution issues3. As traditional promo strategies fail to drive lift, need for innovation in
promotions + promotional efficiency increases 4. Big Data “arms race” means that many personalized offerings are now
expected and for free 5. Contraction and consolidation of large grocery chains requires update of the
Operating Model
Wilson Perumal & Company, Inc. 3
Five key themes that are shaping the industry
Source: WP&C Retail and CPG research and analysis
Race to Omni-Channel impeded by execution issues
Localization a “must-do”; question is what scope/how far to go
Contraction of grocery chains requires revised operating model
As traditional promo strategies fail to drive lift, need for innovation in promotions + promotional efficiency increases
Big Data “arms race” means that many personalized offerings are now expected and for free
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4
3
5
Grocery retail trends
4-5
12-13
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8-9
10-11
Pages
Additional trends and Appendix on supplemental data 14-47
4Wilson Perumal & Company, Inc.Source: Nielsen consumer reports; US Census Bureau; Euromonitor report 2012; WP&C Analysis
Demographic shifts increasingly apparent...
Race/ethnicity and age mix changes rapidly, and it is not equally geographically distributed
Implications:Trend:
1
2512
17
64
3613
23
54
MixedAsianAfri. Amer.HispanicWhite & Oth
2035F
2012
Population by race and ethnicity (2012, 2035F)Percent of total population
14.0%
10.5%
5.3% 70.2%
$ Share of food spend
2035F
10.5%
20.0%
7.0%62.5%
White & Oth
Afr. Amer.
Hispanic
Asian
• Offer products to local demand • Re-assess price and promote
linkages between products• Re-select flag-product lines to
ensure stock availability
Prod
uct
Rang
e
• Select locations that match your brand image and offering
• Understand local behavior and adjust format offering
• Plan footprint with a long-term view on demographic changeFo
otpr
int &
fo
rmat
• Develop differential pricing • Understand customer segments
willingness to pay; lead customers towards high-margin products
• Plan promotions effectively to meet target audience’s needs
Pric
ing
Demographic trends require extensive localization from retailers
2012
5Wilson Perumal & Company, Inc.
Degree of localization Scope of Localization1 Localization vs. Scale1
1. Additional approaches to localization (scope & scale) are in the appendix to this presentation
…Prompting retailers to determine degree and scope of localization1
Our Perspective/Approach:
Standardi-zation
Unique clusters
Core / clustered
Core/clustered/ localized
True localization
Increasing complexity and cost • Few economies of scale• Complex supply chain• Hard to manage• Large CapEx required
• Economies of scale• Simple supply chain• Easier to manage• No additional CapEx
• All stores have their own unique offering
• Set a basic or core offering (i.e. 70%) carried in all stores.
• Clustered offering (i.e. 20%) for clusters
• Local offering (i.e. 10%) for each store
• Each cluster receives a standard product offering (same offering for all stores in each cluster)
• Set a basic or core offering (i.e. 80%) carried in all stores
• Vary remaining offering (i.e. 20%) in clusters
• No localization or clusters, same offering in every store
• Decision on degree of localization is based on: your strategy, size of your chain, timeline, available data and analytical capability, execution resources (capital and human), and the flexibility of your operations and organization
6Wilson Perumal & Company, Inc.Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites
Online channel grows rapidly, creating opportunity and challenges…
Online grocery sales continue to grow rapidly, driving leading grocers to invest in the sector
Emerging opportunities for grocer in the online space…
• Selling extended range
• Increasing reach to new customer segments
• Focused marketing efforts: personalized offering and promotions
• Improving cross-selling
..as well as new challenges • Developing a profitable operating model
• Facing channel and product cannibalization
• Developing consistent positive customer experience
• Stock management (balancing holding costs, waste, stock availability, etc.)
• Ensuring strategy, organization and operational coherence across channels
Implications:Trend:
2
2%Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012
$6 billionRevenue generated by online US. grocery sales in 2012, with expected 12.1% growth to 2016
1,620Number of online grocery businesses in 2012
55+Age group that buys the most groceries online, accounting for 24.5 percent of purchases
$175Average order size of pure-play UK-based Ocado amongst its 360K active customers’ base
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…requiring greater omni-channel integration and coherence2
Growing product lines
Channel marketing
Fragmented supply base
Pace of change
Sources of Complexity The Challenge & Opportunity
Customer & portfolio coherence• Optimize mix of private label & branded• Localize assortment by region
Channel coherence• Align marketing initiatives across channels• Align pricing & promotional strategy
Supply chain coherence• Balance supply chain risk vs. cost• Optimize waste vs. out-of-stock
Strategy & execution coherence• Align processes to effectively exercise
strategic goals across silos
In today’s increasingly complex marketplace, retailers must prioritize coherenceCustomer OfferingStrategy Execution Channel Market Process Output
Our Perspective/Approach:
Wilson Perumal & Company, Inc.
1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions, 2) WP&C client analysis of US grocery chain
Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis, 8
Promotion effectiveness reduced due to complexity of increasing channels
Implications:Trend:
136139
Non-FoodFrozen Dairy
90
120
91
122123128
HBC
9396
Dry Grocery
114119
GM
Promotion1 Average Unit Lift (%) by Department
2012
2011
• Expanding channels in grocery segment have intensified price competition
• Shoppers have many low price options, and are fragmented across retail channels
• Price cuts and promotions remain critical tools to drive traffic/revenue
• However, traditional promotional power is eroding
Grocery retailers are spending significant time/resources on ineffective promotions
Traditional promotional levers are not driving the same level of lift previously achieved…3
% sales uplift units
0 10 20 30 40 50 60 70 80 90 1000
102030405060708090
100110
Case example: Avg. promotion uplift/week 4 month period2
% of promotional SKUs
Low-impact promotions are costly:• Supply chain: Inaccurate forecasting can lead
to out-of-stocks and overstocks• Corporate planning: Detailed planning with
multiple handoffs/rework each week• Store labor: Labor required to stock shelves,
assemble displays, customer service
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…putting more pressure on identifying new promo innovations + efficient execution
The right promotions for the right segments…
…done the right way
EfficiencyEff
ectiv
enes
sLOW HIGH
LOW
HIGH• How well do promotions meet
their strategic goals?
• How well do promotions meet the needs of the customer?
• What is the expectation around promotion lift for product and basket?
• Is the promotion process operating as intended in each segment?
• Are there opportunities to make the promotion process faster / more flexible / more dependable / less expensive?
• What is the right governance to sustain better promotions?
Promotion Check-Up
Evaluate issues from a top-down & bottom-up approach
Top-down: Are promotions meeting the business’ strategic goals and the needs of the customer?
Bottom-up: Are individual promotions performing as expected in both effectiveness and efficiency?
Where we want to be
?
?
?
3Our Perspective/Approach:
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1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2)“Question: What online or interactive tools/sites do you use regularly for planning your grocery shopping trip and/or which specific products you eventually decide to buy?. The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Source: WP&C research and analysis,
Implications:Trend:Grocery retailers are providing more personalized customer experiences to combat intense price competition
Consumers are becoming increasingly accustomed to direct communication1
Personalized, value adding extras are becoming expected services…4
55% 43%
43% 36%
Use my prior purchasing to offer me promotions
Use my prior purchasing to recommend new products
Involve me in new product ideas
Invite me to events
34%31%
Websites
36%35%
List/Notes Function on Phone
Group Buying Sites
7%8%11%
Mobile App.
9%
10%11%
Social Networking
14%11%
2012
2013
Grocery retailers have more access to consumer info than ever before2
– The ‘Just for U’ program gives shoppers digital coupons and deals on items they regularly buy
– Amazon enhances one-on-one interaction with specific product recommendations
– Hyper-local advertising, the ability to target customers by location, is on the doorstep
– Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery
As more companies employ these services, they will become expected rather than value added extras
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…just as Big Data capabilities enable new levels of insight, value, and personalization
Evolution of Big Data trends… …Lead to new opportunities
Source: WP&C analysis
4
Better predictive analytics More effective advertising and service delivery strategies
Deeper Data MiningSuggests further cross-sell, up-sell and new product opportunities
Tailored promotions/cust. experienceIndividual level initiatives maximize sales and customer satisfaction
Accurate future value estimatesAccurate customer future values aid customer acquisition and retention efforts
More dataExponential growth in customer data from online interactions and loyalty cards
Better toolsReduced storage/processing costs, and better analytics tools allow mining of more data
Improved access
Easier testingSimple experimentation allows retailers to test customer responses
Multi-faceted view of customer available from multi-channel interactions & data vendors
Our Perspective/Approach:
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1) 14 trx (total $9.3B) for NA. food retailers, up from $702M in all of 2012 (Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 )
Source: Neilson What’s In Store 2016; Willard Bishop, Includes both grocery and consumables; WP&C analysis
As industry contraction and consolidation continue…
Share of traditional formats continues to shrink , but with slightly lower pace
Heightened consolidation/contraction of chain size and change of ownership in 20131
Contraction/consolidation has direct impact on operating model…• Branch rationalization• Asset/footprint consolidation• Speed of migration• Post merger integration
..and the impact is not only on the physical stores but• Supply chain/inventory• Pricing• Branding• IT
Traditional formats need to also pull other growth levers• New (smaller) format• New categories• Private Label• Customer loyalty-localization• M&A
Implications:Trend:
5
$1.249T
45.0%
55.0%
$1.113T
46.5%
53.5%
2012 2017F
$ Share by Store Format: 2012-2017F
Non-Traditional• Supercenters• C-Stores • Wholesale Club• Drug Stores• Dollar Stores• Other Non-trad.
Traditional
• Supermarkets
• Ltd. Assortment
• Fresh Format
• Other Traditional
’1217.3%14.9%
8.7%5.4%2.4%4.9%
39.8%2.7%1.1%2.9%
’17F18.2%16.0%
9.0%5.5%3.1%3.2%
36.5%3.4%2.1%3.0%
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Structured & strategic approach to integration will shorten timeline and smoothen transition
During the migration or integration of stores and back-end processes, complexity can arise exponentially unless carefully managed
Conducting holistic pre-integration planning is key to integration’s success
• Strategic fit and coverage• Operational and capability
assessment• Analytics and planning
From our experience this planning is frequently only done partially
… retailers facing new challenges in revising operating models & integrating acquisitions
Take the integration opportunity to cut complexity and set cost saving target
• Holistic business integration• Complexity reduction in org.,
processes and product lines• New strategic plan in new market,
if necessary
5Our Perspective/Approach:
Post
-inte
grati
onPr
e-in
tegr
ation
Organization
Value add
Non-value add
The Complexity Cube
Complexity is:
Too much complexity
is bad:
Product Process Organization
Number of products and services you offer
Number of assets, facilities, entities, partners, etc.
Number of processes, steps, handoffs, etc.
• Unwanted prod.• Cust. confusion• Poor service
• Duplication• Rework• Work-arounds
• Disarray• Confusion• Functional silos
Wilson Perumal & Company, Inc. 14
Additional trends in the grocery retail space to consider
Range growth
Fragmented, global supply base
Blurring across sectors
Influence of social media
Trend Description
Preparing for mobile commerce
Trust in private label
Cons
umer
Ope
ratio
nal
Indu
stry
1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013, 2) Market Force Information
New challengers (e.g., Dollar, Convenience, Drug, Online stores) enter the market while traditional grocers also expand (e.g., prescriptions)
Narrow margins force the continued optimization between cost, risk, and speed/flexibility in supply chain operations
In an effort to reach new segments, grocers continue to expand SKU ranges, often without control processes in place
Both consumers and grocery retailers are preparing for the new wave of mobile commerce. As demand increases, business flexibility will be critical
Nearly all consumers buy private label products when grocery shopping2. As quality to improve, trust in PL brands will grow
Social media is increasingly integrated into society, and a growing force in purchase decisions/awareness. Savvy grocers are already making their presence felt in this space
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We will be happy to discuss with you…
1) Are these issues affecting your business?
2) Are you seeing other trends that can benefit or pose a threat to the business?
3) How are you reacting to these? Are you ahead of the game?
4) What is your competition doing to take advantage of these trends?
5) How can we help you in thinking through strategy and operations?
North America EuropeTwo Galleria Tower
13455 Noel Road, Suite 1000Dallas, TX 75240
+1 972-716-3930
Longcroft House2/8 Victoria AvenueLondon, EC2M 4NS
+44 (0)203 206 1496
Contact Us:
www.wilsonperumal.com
Stephen WilsonAnn Bryan
[email protected]@wilsonperumal.com
Asaf NavotSteve Liguori
[email protected]@wilsonperumal.com
APPENDIX 1: Additional data and analysis by trend
APPENDIX 2: Wilson Perumal & Company background
18Wilson Perumal & Company, Inc.Source: WP&C press search and experience drawn from previous work with retailers on localization
Localization of stores is a “requirement” now, the question is how much localization is right
• Localization is a retailer’s norm nowadays. Customers expect local offerings with local marketing & local supply chains
– Younger generation values speed & healthiness; Higher income/more educated value a premium experience, from knowledgeable staff to wide product selection
– Consumer demographics are changing, and so are localization requirement—it needs to be dynamic
• Localization has moved beyond rule-based assortment planning to “Shopper Data” localization. Localization decision should be strategic and data-driven, but not IT-driven
• Retailers struggle to create the right level of localization and how to make it dynamic
Kroger is still ahead of the localization game—maintaining over 20 grocery banners, Kroger was able to cater to local market needs
“Increasingly you are going to hear us talk about the concept of localization and how important that is to our future going forward.” - Robert Edwards, President and CEO
Safeway (Jul 2013)
Walgreens’ localization strategy called “mass localization” uses cluster-based approach (since it has 7,000+ stores). This has led to 160 different planograms
Company Example:Trend:
1
Wilson Perumal & Company, Inc.Source: US Census Bureau, WP&C analysis 19
Demographic shifts become increasingly apparent US population by age and sex (2012, 2035) Population continues to age…
• The population above age 65 is expected to grow by 92% by 2035
– In 2056, the older, 65+ is projected to outnumber the young, under 18, for the first time in U.S. history
• Share of working-age (18 to 64) expected to decline from 63% to 57% by 2035
1
2012 2035Age
(years)
2512
17
64
3613
23
54
MixedAsianAfri. Amer.HispanicWhite & Oth
2035
2012
Population by race and ethnicity (2012, 2035)Percent of total population
…while race and ethnicity mix change rapidly • The Hispanic population expected to
grow by 63% in 20 years, from 53.3M in 2012 to 87M in 2035, and more than double to 128M by 2060
• Projections show the older group would continue to be predominately non-Hispanic white, while younger ages are increasingly minority
Wilson Perumal & Company, Inc. 20
Growing demographics not equally distributed…
Geographic variation emphasizes the need for localization of stores
2011 U.S. Hispanic % of designated market area
Source: Nielsen report
Changing demographics is more evident in certain areas…
1
Wilson Perumal & Company, Inc. 21
…and currently have higher grocery spending
Source: Nielsen consumer reports, Euromonitor report 2012; WP&C Analysis
14.0%
10.5%
5.3%
70.2%
Share of food spend - 2012
Forecasted share -2035
Changing weight of overall spend
10.5%
20.0%
7.0%62.5%
White & Oth Afr. Amer.
HispanicAsian
1White Asian Afr. Amer. Hispanic
#Shopping trips/HH/yr 149 152 167 142
$ per trip $47 $46 $37 $52Total $
spent/yr $7,003 $6,992 $6,179 $7,384
Interesting shopping
characteris-tics
Caucasian women purchasing decisions in store are influenced by promotions more than any other group
Bring home far more produce, nuts, dried fruit, pasta, yogurt, soup, juice, and drinks compared to US avg. 31% of purchase on deal are bought by Asian
Frequent dollar stores, c-stores, more than other groups
Spend more on categories which include baby products, hair care, toiletries, and beverage
Basket analysis of purchase categories by ethnicity is part of localization planning
Wilson Perumal & Company, Inc. 22
Demographic trends require extensive localization value proposition from retailers
• Adjust product offering to local demand
• Understand linkages between products to better price and promote
• Adjust choice of flag-product lines to ensure stock availability
• Select locations that match your brand image and offering
• Understand local shopping behavior and adjust format offering accordingly
• Plan your footprint with a long-term view on demographics change
• Develop differential pricing to match local willingness to pay
• Lead your customers, where possible, to high-margin products
• Plan promotions effectively to meet your target audience’s needs
Prod
uct r
ange
Pric
ing
Foot
prin
t and
fo
rmat
1Racial/ethnicity-mix shift/Aging population
• Extend growing demographics’ preferred product groups (e.g. for Hispanics: dried vegetables, baby products, etc.)
• Adjust product & expand value offering to meet aging population demand: healthy, fresh, home cooking
Required activities from retailers
• Launch differential pricing where possible • Consider foreign language promotions/ads.• Develop Private-Labels for growing
demographics’ preferred products• Manage simpler promotion offering
through channels fitting elderly communities
• Identify demographic trends; match store formats to population size and mix
• Analyze shopping behavior; adjust customer journey accordingly
• Plan accessible stores, with well-trained store ops
Areas of required localization
23Wilson Perumal & Company, Inc.Source: WP&C analysis and perspective
Localization effort is iterative and broader than just product offerings
• Retailers utilize sophisticated tools on “shopper data” such as assortment planning, flow modeling, price, promotion, and store size optimization
• Marketing, supply chain, and organizational structure need to be modified to maximize localization benefits• Pilot test in small # of stores recommended. Could start in certain product categories first. Capture
performance and feedback before nation-wide roll-out
Big Data & analysistechniques
Impact of demographic
changes
Localization overarching
strategyLocalized product
assortment and services
Dynamic process as consumers and competitors are constantly changing
Localization Scope
1
Loyalty programs
Advertising Promotions
Customer service
Social Media
Merchan-dizing
Localized Supply Chain
Pricing
Change to Org
Structure
24Wilson Perumal & Company, Inc.Source: WP&C’s Vantage Point: Localization with Scale; interview with Terry Lundgren, CEO, Macy’s
Localization with scale is possible
• Smaller, coordinating role • National initiatives on
“opt-in” basis• Less ability to leverage
national scale
National level
• Less resources at local level• Not empowered to
respond to local tastes and preferences
Local level
• Buying, planning centralized at regional level (~100 stores)
• Command & control relationship over stores
• Operate largely independently from national level and other regions
Regional level
• Buying pulled up to national level, with aggregate local input
• Greater strength with suppliers, leading to greater ability to tailor offerings
National level
• Inventory planning pushed down to local level (~ 10 stores)
• More responsive/ customized stores with greater employee ownership
Local level
and
Previously regional functions
stretched up to national
down to local level…
…requiring greater, richer and asymmetrical information flow between local and national levels
National
Local
Regional
National
Local
PREVIOUS REGIONAL STRUCTURE HYBRID LOCAL-NATIONAL STRUCTURE
My Macy’s InitiativeRestructured operating model with richer information flow allows stronger national scale and greater responsiveness to local customers
1
25Wilson Perumal & Company, Inc.Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites
Omni-channel strategy and integration a must2
Online has potential to be a leading segment
2%Percentage of total U.S. consumer packaged food sales purchased from online grocers in 2012
$6 billionRevenue generated by online grocery sales in 2012
$9.4 billionPredicted revenue in 2016, on an estimated 12.1 percent growth
8.8%Market share of largest online grocer Peapod, followed by Fresh Direct with 5.7 percent
46%Of shoppers said they were at least slightly likely to buy products directly from food producers online
55+Age group that buys the most groceries online, accounting for 24.5 percent of purchases
Many retailers invest to pursue that potential
1,620Number of online grocery businesses in 2012
23M Deliveries made by Peapod since it was established
$400MSales for FreshDirect in 2012
20Number of predicted urban areas AmazonFresh will expand to by 2014
$4 billionEstimated online grocery sales of Tesco.com in the UK in 2011
$175Average order size of pure-play UK-based Ocado amongst its 360K active customers’ base
Wilson Perumal & Company, Inc.
Click &
Collect
Emerging challenges and opportunities arise from online operations2
Extended RangeOpportunity: • Selling extended range• Centralized stock source for
premium productsChallenges:• Product cannibalization • Stock management (holding
costs, waste, stock availability, etc.)
Focused MarketingOpportunity: • Personalized offering and
promotions• Improved customer understanding
Challenges:• Misaligned marketing messages
between channels• Channel cannibalization and
customer confusion
New Customer SegmentsOpportunity: • Attracting customers that are
out of current geographical reach or are unlikely to enter your stores
Improved Cross-sellingOpportunity: • Improved cross-selling (e.g.
“customers who bought X, also bought Y”)
Challenges:• Maintaining easy and simple
online customer experience
Potentialbenefits of
onlineoperations
Extended range
New customer segments
Improved cross-selling
Focused marketing
Challenges:• Maintaining a profitable delivery
model• Avoiding channel cannibalization
26
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Advantages:• Utilizing existing workforce• Lower fixed-costs model,
facilitating slow expansionDisadvantages:• High picking costs erodes profits• Dist. and merchandizing remain
major costs, low stock availability
Advantages:• Centralized model with cost
saving of store distribution and ops-time
• Automation of the picking processDisadvantages:• Requires significant scale to justify
the high capital expenditure
Advantages:• Allows centralized model for high
scale regions with localized solutions for low-scale regions
Disadvantages:• Hard to capture long-term scale
benefits: prevents investments in technology and equipment
F
ulfil
men
t
Del
iver
yRetailers continue trying to develop a sustainable and profitable omni-channel operating model2
Grocery retailers worldwide use different operating models to serve customers
Stores / dedicated online-stores
1
2
A hybrid modelA dedicated warehouse
Directly from stores Warehouse / via satellite stations Click & Collect
Advantages:• Utilizes existing geographic
presenceDisadvantages:• Higher cost-to-serve due to
lower scale• Inefficient delivery planning
Advantages:• Lower waste-level / higher stock
availabilityDisadvantages:• High operating costs to serve
remote areas• Requires profound analysis and
optimization planning of delivery
Advantages:• Utilizing existing workforce• No distribution costsDisadvantages:• Does not serve some needs of
online shoppers• Could cannibalizes store profits
27Source: Press search; WP&C analysis and perspective
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Unit sales of promotions are up, but percentage lift is on decline
Traditional promotion power is eroding1) Promotion includes Temporary Price Reduction, Feature Ad, Display PromotionsSource: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis
2012
42.6
2011
42.1
2010
42.2
2009
42.4
% of Unit Sales with Promotion1
119
Non-Food
120
139
Frozen
91
136
122
90
GMDairy
123128
HBC
9396
Dry Grocery
114
Promotion1 Average Unit Lift % by Department
2011
2012
3
29Wilson Perumal & Company, Inc.Source: WP&C client analysis of US grocery chain
In response, retailers should identify truly effective promotion levers and ensure efficient execution
Promotional uplift per week
% sales uplift units
0 10 20 30 40 50 60 70 80 90 1000
10
20
30
40
50
60
70
80
90
100
110
Avg. promotion uplift/week – 4 month period
% of promotional SKUs
Small percentage of promotional SKUs driving majority of uplift…
…But low-impact promotions still impact the business operations
Supply chain
Corporate planning
Store labor
Promotions put a strain on supply chain operations that are responsible for keeping shelves full. Inaccurate forecasting often leads to costly out-of-stocks and overstocks at retail locations
Promotions require detailed planning from cross-functional teams. Multiple hand-offs across category, brand, space planning, and supply chain require significant resources each week
Promotions can only be successful if they are executed effectively. This requires store labor resources to stock shelves, assemble displays, and manage customer needs
WP&C Case Example:
3
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As traditional approaches decline, consumers look for new forms of convenience and overall value
Grocery retailers can leverage new ways to deliver value and convenience outside of traditional printed pricing promotions
Source: 1)“The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing
Websites
31%
11%14%
Group Buying Sites
List/Notes Function on Phone
Mobile App.
10% 11%8%
11%
7%9%
Social Networking
35% 36%34%2012
2013
Technology Use Growing1
What online or interactive tools/sites do you use regularly for planning your grocery shopping trip and/or
which specific products you eventually decide to buy?
Traditional Vehicles Losing Impact1
How often does each of the following impact whatyou buy on your grocery shopping trip and/or which
specific products you eventually decide to buy?
34%30%
Coupons you get from store flyer
Store flyers
33%36%
Coupons you clip from newspaper
or magazine
33%
39%
4
Advances in technology and access drive new perception
of value/convenience
31Wilson Perumal & Company, Inc.
1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2) The Economist Intelligence Unit Limited 2013 , 3) Retail Goes Shopping through Big Data – CNBC 04/15/2013
Grocery retail personalization examples
The ‘Just for U’ program gives shoppers digital coupons and deals on items they regularly buy Ahold is leading the way with consumer choice for online orders, in-store pickup or delivery
Amazon enhances one on one interaction with specific product recommendations
Harris-Teeter unveiled a concept around higher service, e.g., in-store wine consultants1
Hyper-local advertising technology, the ability to target nearby customers, is on the doorstep
Company Example:Case example:
FreshDirect, the New York based online food retailer, has used big data to make shopping more personalized. Using previous purchases, from the current shopper - and others purchasing similar items - the online store can suggest ideas relevant to each specific shopping trip
We leverage data that “ranges from things that relate to the shopping ‘trip’ that the customer is currently on, to insights from past trips, to models of customers who are similar in an array of different ways”
- John Leeman, Chief Marketing Officer2
CEO David Dillon has called big data analytics his "secret weapon" in fending off other grocery competitors3
4
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However, aligning operations across many access points is a growing challenge for grocers
Seamless operations necessary to deliver a truly cohesive customer experienceImages: Geekwire.com, formcollective.com, Google images
Customer journey
List preparation for shopping trip
Choice of delivery options
Recipes, tips and reviews
Personalized deals & price match
Loyalty and rewards
4
Social media & community
33Wilson Perumal & Company, Inc.
1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 Source: Neilson What’s In Store 2016; Press search; WP&C perspective and analysis
Contraction both in chain size and store size
Share of traditional formats continues to shrink , but with slightly lower pace• Traditional retail formats (mass merchants
and supermarkets) have yielded share to value formats (club, dollar, and supercenter) and drug stores
• Consolidation & contraction of overall chain size as well as change of chain ownership appears to be the trend of 2013
– 14 transactions announced for NA. food retailers, a total of $9.3B, up from $702M in all of 20121
Store size also expected to be smaller• Store footprints either get supersized for
one-stop-shop or downsized into smaller stores for speedy services, especially for urban areas
– Downsizing stores seems more apparent than supersizing
03/13 Supervalu completes sale of 5 chains to Cerberus for $3.3B
05/13 Bi-Lo acquisition of Delhaize America for $265M
07/13 Kroger acquisition of Harris Teeter for $2.5B
08/13 Canada Safeway sold to Sobey's for $5.8B
09/13 Tesco’s F&E sold to Yucaipa after limited success
Walmart Express, an urban solution one-tenth the size of its typical store show sign of success
Aldi and Trader Joe’s continue their limited-assortment store expansion plans
2013 Company Example:Trend:
5
34Wilson Perumal & Company, Inc.
Share of traditional formats expected to continue to decline and not keeping pace with inflation
In addition to Ecommerce, Fresh Format (e.g., Whole Food, The Fresh Market), Limited Assortment (Aldi, Trader Joe’s), and Dollar stores are physical formats expected to grow rapidly
$ Share by Store Format: 2012-2017
Source: Willard Bishop, Includes both grocery and consumables; WP&C Analysis
3.0%2.9%
5.5%5.4%
$1.249T
Fresh Format
36.5%
C-Stores
Whsl Club
3.4%
Supercenter
DrugDollar
Oth traditional
Oth non-trad.
Supermarkets
Ltd. Assortm’t2.1%
16.0%
18.2%
9.0%
3.1%3.2%
$1.113T
39.8%
2.7% 1.1%
14.9%
17.3%
8.7%
2.4%4.9%
Est. CAGR vs. Inflation: 2012-2017
Trad
ition
alN
on-T
radi
tiona
l
Whsl Club
C-Stores
3.2%
13.4%
3.2%
Fresh Format
Ecommerce
2.7%Supercenter
12.1%
Oth Non-trad.
Drug 3.4%
Dollar 6.0%
Ltd. Assort 6.2%
2.1%Oth Trad.
0.2%Supermkt
-6.3%
Assume 3% inflation
2012 2017F
5
Wilson Perumal & Company, Inc.
CoverageWhat are the gaps or
overlaps between the two firms? What is the value proposition, geographical
and customer segment coverage? Where and who
is the competition?
StrategyHow does the target
company’s offering align with our strategy?
How does this merger serve our strategy?
CapabilitiesHow is portfolio complexity impacting performance?
Is the organization set-up to implement change?
OperationsWhat are the implications on end-to-end operations? Can
our range be delivered effectively?
AnalyticsWhat is the economics of the new business? What synergies can we
capture from this deal? What is the level of scale benefits we could monetize?
BenefitsFrom where will benefits be realized? At what point are there step changes in cost?
StrategicFit
Operational Assessment
Analyticsand Planning
Structured & strategic approach to integration will shorten timeline and smoothen transition
Pre-integration approach
5
35
APPENDIX 1: Additional data and analysis by trend
APPENDIX 2: Wilson Perumal & Company background
37Wilson Perumal & Company, Inc.
Wilson Perumal & Company, at a glance
• A management consultancy with offices in the US & UK, combining operations strategy experience with depth in retail
• We are thought-leaders and hands-on practitioners: we have a unique perspective on the challenges facing grocery retail, and have a passion for helping grocery retail achieve results
• We focus on getting things done in the areas that matter to you: Enterprise performance; Range & Promotions; Customer & Channel; Supply Chain & Sourcing, and Operations Excellence
• We enjoy 100% client reference-abiliy
Wilson Perumal & Company, Inc.
We help retailers across 4 service areas
• Range optimization & localization• Pricing & promotion effectiveness• Product-lifecycle management• Operating model alignment
• Inventory management• Supply chain & sourcing optimization• Cross-channel fulfillment• Distribution model analysis
• Operations development• Lean retail & end-to-end operations• Store operations improvement• E-commerce process optimization
• Store & format strategy• Omni-channel integration• Customer insight & segmentation• Localization & clustering strategy
38
Strategy, Customer, Channel
Range & Promotions
Supply Chain & Sourcing
Operations Excellence
Strategy
Operations
Wilson Perumal & Company, Inc.
“This was a quick and painless way to understand our true product
profitability, and it challenges how we think about our business. I am
extremely pleased with the results.”—Fernando Palacios
EVP and Chief Integrated Supply Chain OfficerMillerCoors LLC
“WPC’s approach to complexity is the most direct route to an
efficient, profitable enterprise.”—Ed Lonergan
CEO of Diversey Inc.
“WP&C is helping us transform our business. Their insights are
phenomenal!”—David Hoogmoed
President, Land O’Lakes Purina Feed
“You are analytical and smart, but you also get things done!”
—Head of Commercial DevelopmentLeading European Retailer
“Best work I have seen in Operations Development. A case study for us as a
business”- CEO, European Electronics Retailer
“Very insightful work…it was a pleasure working with you and your
team.”-Senior Operations Director, Global 100 Retailer
39
Our clients attest to our ability to impact their bottom line
“I truly believe you got to some of the key issues at [Retail Co.]”
-Director of Supply Chain, Grocery Chain
40Wilson Perumal & Company, Inc.
We bring a team with deep sector and operational strategy experience (1 of 2)
Ann Bryan, Manager• Seasoned strategy manager with 15 years of experience in strategy & consulting• Previous project experience includes store clustering, portfolio review, new retail
format expansion, ecommerce strategy, and complexity management for various retailers and consumer goods companies
• Former Project Leader with BCG• Former Director of Corporate Strategy, Applied Materials Inc.• Hand-on operational experience through two successful entrepreneurial ventures • MBA (Kellogg); MS Operations Research UC Berkeley
Stephen Wilson, Managing Partner• More than a decade of experience advising senior executives globally on issues
relating to cost-competitiveness, operations and strategy• Recognized as a thought-leader on the topics of complexity, cost-reduction,
operating models and innovation; co-author of Waging War on Complexity Costs• MBA from the Wharton School in Strategy and Finance• Deep experience in grocery retail in a variety of key issues in a variety of
capacities: engaging with the board on operating models, helping build and deploy cost-reduction programs, to “walking the process” during overnight replenishment
41Wilson Perumal & Company, Inc.
We bring a team with deep sector and operational strategy experience (2 of 2)
Steven Liguori, Case Team Leader• Experienced Case Team Leader with focus on product and process complexity,
portfolio optimization, market analytics, and growth strategy• Grocery segment experience centered on promotional strategy & effectiveness,
portfolio transformation, and process improvement• Additional Retail and CPG experience in distribution strategy, space planning, and
operational efficiency • Previous experience as an Operations Strategy Consultant at George Group
Consulting and Scientist/Manager at Pfizer• MBA from Emory University and BA in Physics from College of the Holy Cross
Asaf Navot, Case Team Leader• Experienced Case Team Leader with focus on omni-channel integration, portfolio
optimization, operational improvements, and complexity management• Retail experience include omni-channel operations, space planning optimization,
stock management, ranging and promotions effectiveness, and process improvement
• Previous experience as F-16 fighter pilot and project manager at the Israeli Air Force, ranked Captain. Asaf is also a former Israeli national swimming champion.
• MBA from INSEAD, France/Singapore
Wilson Perumal & Company, Inc. 42
Increased EBITDA by 22% for major retailer by diagnosing issues and leading change program
“The best work I have seen from any [operations development] team in my time with the company”
-Group CEO
+ £18M in incremental Operating Profit
Captured £75M in lost sales
Doubled Online Market Share within 18 months
Exceeded initial project savings estimates by 3x
Eliminated missing SKU issues and over/under selling
Improved customer retention and drastically reduced
cancelled sales
• Competing in an Omni-channel world – One of Europe’s largest retailers was the leading player in the brick&mortar market , yet lagging behind in the fast growing online market. Omni-channel operations were dysfunctional: 15% of online SKUs were unaccounted for on the website, poor Exit Management led to channel cannibalization, and stretched-out operations affected both brick & mortar and online performance
Situation
Approach
Impact
Conduct top-down ecommerce diagnostic Optimize online operations Developed and led
mobilization plan
3-4 weeks
• Analyze ecommerce operations – analysis reveals that Product Setup process and Exit Management hindered the execution of online strategy
3-5 weeks
• Improve Product Setup process –reengineered Product Setup process to track SKUs from ranging to online launch
• Optimize Exit Planning –optimize exit across all channels. Created a decision tool to guide exit planning based on channel profitability
4-5 weeks
• Support client teams training
• Develop KPIs to measure recommendations implementation, and process compliance
Wilson Perumal & Company, Inc. 43
Reduced promotional costs by 40% while improving execution quality at $1B regional US grocery chain
Situation
• Struggling through strategic change - $1B regional US grocery chain was struggling through change from “every day low price” to “hi-low” promotions. Promotional planning tools and business rules were rules not in place as the process grew organically on the fly. The volume of promotions had grown unchecked, execution became slow and laborious, and promotional effectiveness plummeted.
Approach
Impact
• Top-down analysis - Leverage top-down thinking to quickly define benefit potential and implement quick wins to build momentum. Use hypothesis driven, answer-first tactics to avoid attempting to “boil the ocean” of over 25K annual promotions.
• Strategic alignment – Partner with management to align around process principles and overall promotion strategy. Close collaboration, especially at early stages, is vital to project success.
• Process redesign – Develop blueprint for process around leaner promotion model and just-in-time delivery. Segment process according to true lead times, remove non-value add steps, increase accountability, and track the correct metrics from initial concept to promo exit.
• High-impact business rules – Evaluate uplift, basket size, back margin, etc. to create simple business rules which reduce the number of low-impact promos to increase effectiveness while reducing costs.
“I truly believe you got to some of the key issues at [Retail Co.]”-Director of Supply Chain
40% reduction in costs $4-$5M overall benefit Improved effectiveness
Optimized selection, reduced volume, process redesign, forecasting improvements
Major impact from only 3 month project
Freed up execution resources to redeploy into
effectiveness planning
Wilson Perumal & Company, Inc. 44
Contributed £10M p.a. in incremental margin by leading analysis and PMO for complexity reduction
• Complexity in space layout and range– An £8B big-box retailer going through major turn-around, had identified that optimised effectiveness of new stores and store refit is a key competitive factor
• However, overly complicated space planning processes, put together with ineffective performance tracking and unclear process ownership, led to an underperforming retail space
• Management needed to understand space productivity while maintaining range and space flexibility
Situation
Approach
Space diagnostic and PMO structure establishment
Remove complexity from space planning
Align organizational space planning
processes1-2 months
• Map existing space processes
• Create database to capture current space accurately, analyse space financial performance
• Develop a 3-months transformation plan
1 month
• Analyse space usage and remove infrequently used space blocks to simplify future layouts
• Create a Standardization Scorecard to compare execution across stores and readily pinpoint future improvement areas
1-2 months
• Align Space Planning processes– redesigned key space processes: Annual Space Reviews, Trials, Range Change, and New Store Opening
• Develop a standard process for all space planning activities, including defining key decision points, business rules, and KPIs
+ £10M annual margin Saved 7,100hrs of unnecessary labor
Standardized and improved product densities
Processes facilitate less experienced employees and
free up expensive management resources
Reduced space blocks by 75%
527
2,673
Unattach-ed
Display Blocks
Unsupport-ed
New Target
Low Use
Impact