SKUs Fall; Price Gaps Widen
Future of Food Retailing report identifies key changes in the year ahead
BARRINGTON, Ill. -- While last year's inflation has turned into this year's recession, those who have benefited from the various forms of consumer downtrading are Wal-Mart, private-label and limited-assortment retailers. Unfortunately, the convenience channel has not. Such were the findings in "The Future of Food Retailing," a webinar presented Tuesday by The Food Institute and Willard Bishop, a retail consulting firm.
While many segments of food retail saw healthy gains from June 2008 to todayincluding a 14.3% increase in sales from limited assortment stores (Aldi and Trader [image-nocss] Joe's, for example) and a 12.4% increase for super warehousesconvenience stores saw their overall share of the retail food business decrease by nearly one full share point.
"Everything that happens has a cost, and that cost is really coming from that of our friends in the convenience channel as we see their numbers begin to decline over time," said Craig Rosenblum, a partner at Barrington, Ill.-based Willard Bishop.
"For the last several years, that has actually been one of the hotter growth formats, so it really has represented, I think, a change in the last year," added Jim Hertel, managing partner at Willard Bishop.
In the next year, Hertel and Rosenblum expect to see food suppliers focus their resources on top-tier retailers. Meanwhile, retailers will slash non-value-adding SKUs and continue to ramp up private label. Those SKUs that will fall include brands in slow- or no-growth categories that lack innovation.
They point to Wal-Mart, who two years ago began looking at category role development. For this food-retail leader, categories must either show disproportionate, bottom-line growth or offer a convenience without being showcased.
For items that fall into the first group, such as everyday staples, Wal-Mart's strategy is to ask suppliers to invest in growth. "That's shorthand for, 'We'd really like to see a 2% or 3% price advantage,' " said Hertel. This strategy has been in motion for a year already.
The showcase products, such as frozen vegetables, will experience significant rationalization of SKUs, brands and even suppliers. This is where Wal-Mart's Great Value private-label brand will shine.
Speaking of private label, Hertel and Rosenblum stressed the importance of creating such a program to compete with Wal-Mart and other top-tier retailers as the price gap continues to widen. They point to both dairy (twice as profitable and twice the velocity as branded) and grocery (50% faster and more profitable) as strong categories to pursue private label.
With suppliers needing to replace sales lost to rationalization, and next-tier retailers needing to find non-price-based differentiators to compete with the top tier, Hertel and Roseblum see mutual opportunities for the two camps if suppliers renew their focus on them by offering intellectual property and other non-price-based resources.
So what if you aren't one of the top 10 food retailers (Wal-Mart, Kroger, Supervalu, Safeway, Publix, Ahold, Target, HEB, Shoprite and Costco, according to Willard Bishop)? "This is not by far any sort of a death knell for those who aren't on this list. But you truly have to think about how you differentiate your shopping experience in the eyes of your shoppers; how you better understand what you can do to make sure you do provide value beyond product and price. You have to take advantage of understanding your geography, your community, your shoppers and staying closest to them.
"More importantly, you have to turn around and make sure you have the analytics and processes in place to understand where things are doing well and where thing are beginning to slip."
The presenters offered five key takeaways from the webinar:
In the long-term, food-price inflation is still a risk. Winners in today's turbulent times have strong price-value positions. There will be a growing concentration of share and supplier focus on the top 10 to 15 retailers. Retailers are embarking on "the next big thing": rationalization of SKUs, delisting of line extensions, brand names and entire product sets. Branded suppliers and next-tier food retailers will see significant challenges to the traditional business model, including widening price gaps and inability to compete at such price premiums.