Evolution & Revolution in Food Retailing

Tom Gillpatrick Center for Leadership Center Portland State University February 24, 2014 [email protected] http://www.pdx.edu/retail-leadership/ Students! Executive Education

 Today’s Managers: Tomorrows Leaders 2014

 20 years , 621 alumni, Skamania Lodge

Albertsons: 58 C&K: 14 Cash & Carry: 11 Franz: 36 : 64 : 18 Mission foods: 21 Nestle: 11 P&G: 18 QFC: 30 : 38 Tillamook: 11 Unified: 55 Winco: 7 Also: , Henningsen, Western Family, New Seasons, , Pepsi, Hy-Vee and others! Agenda • An Industry with Tradition of Constant Evolution

• Key Retail Industry Trends

• Consumer Shopping Trends

• Selected Implications & Conclusion Food Retailing in USA: A Story of Innovation & Evolution YYesterdayesterday TodayToday Top Retail Food Trends

 Top Trends in Retail Food Industry

 Continued Consolidation & Channel Blurring

 Fragmentation of Shoppers & Formats

 Small Footprint Stores on the Move

 Growth in value retailers and high touch retailers

 Consumer Shopping Behavior is Changing

 Alternative Delivery comes of Age: Online & Mobile

 Healthcare and wellness becomes more important

 Expanding Demand for Food Internationally

Globalization of Retail

 Global Retail Consolidation

 Top 100 Retailers Global market share  - 1998 15%  - 2008 25%

 - 2018 40%

 Emerging markets are seen as key to growth strategies  More companies are evolving from International to global growth strategies Concentation Ratio’s for the U.S. Retail Food Industry 1992-2009

9 Top 10 Grocery Retailers Today 1980 1990 1999 1 Safeway Am. Stores Wal-Mart 2 Kroger Kroger Kroger 3 A & P Safeway Costco

4 Lucky A & P Safeway Target

5 Winn Dixie Winn Dixie Ahold Safeway/ABS

6 Am. Stores Albertsons

7 Winn Dixie Ahold Gen. 8 Grand Union Publix Loblow HEB

9 Albertsons Ahold Publix Delhaze USA

10 Supermarkets Von’s A & P Gen.

$55 B $96 B $241 B $700+ Source: Progressive Grocer & News top lists 2014 Top Grocers & Market Share

Source Supermarket News 2014 Top 75 and Wall Street Journal Feb. 2014 11 Hartman Group Report 3/12

12 Supermarket Sales of Packaged Foods 1998-2012

Source Hartman Group Strategy (2013) “Re-imagining the American Supermarket 13 for a New Era in Food Culture.” Everyone is a Food Retailer Biggest Sales Gains by Grocers

15 SuperMarket News 2014 Small Footprint Store Growth

 Six of 8 top Banners are small-box formats

 Top Three Banners in Sales growth by 2018

 City Target, + 31.5 %

 Walmart Neighborhood Markets, + 30.5%

 Dollar General, + 17.8%

 7,000 new value stores in next five years

’s new DC in California 2014

According to Planet Retail 3/21/14, “US Grocery Retailing-Top Trends” 16 Shoppers & Consumer Shopping Behavior is Changing

17 13%

2011

US Hispanic population, 2009-19

“The total number of Hispanics is expected to increase by 12% over the next five years. All age groups are projected to grow by more than 5% with those aged 55+ increasing the most.” MINTEL 2014

Source: Mintel 2/2014 20

Consumer value drivers are fragmenting Living in a world of extremes

Extreme shifts in: 20th Century 21st Century Homogenous Consumers Fragmented Consumers Age

Wealth/Income

Ethnicity/Culture % of population % % of population of % Lifestage patterns

Household composition

Value systems

Source: IBM Institute for Business Value analysis Buyer Behavior Changing

‘Customers needs and expectations are changing. They want to shop, when they want & how they want, and we are transforming our business to meet their expectation.” Bill Simon, Walmart USA

“When shopping online: 51% use mobile AND 61% use tablets”

Amazon 2018 sales rank Estimated to be #9 in USA

Planet Retail MigrationMigration toto thethe PolesPoles  Living in a world of extremes (Food Markets)

Global Local

Fast High Touch High Tech Traditional New and Improved Natural/Unprocessed Slow Food Ready-to-Eat Story Food Low Price Friends/Family Good For You Premium Price All Year Naughty but Nice Seasonal Large-Scale Craft-scale Commodity Market Closed Supply Chain Open Supply Chain

Ira Kalish Delloitte Touche Food Share of 21.0% Consumer 20.0%

19.0% Wallet

18.0%

17.0%

16.0%

15.0%

14.0%

13.0%

12.0% 10.8% in 2012 1980 1985 1990 1995 2000 2005

Source WSJ 4/4/14, USDA data

Commoditization

 Low inflation leads to price sensitivity  High quality leads to high expectations  Access to information negates marketing prowess

 Availability of strong private labels

KeyKey ConsumerConsumer Trends:Trends: AA CulturalCultural ShiftShift ONE STOP NUTRITION Time Factor Consumer Wellbeing Snacking & Grazing Food Plus Heat & Serve Food Minus Meal Assembly Natural HealthHealth ConvenienceConvenience Organic Vegetarian CONVENIENCE The Sweet Spot PLUS

GUILT FREE INDULGENCE PleasurePleasure Social Social Credence Factors Food Miles Environment Sensory Experience Indulgent & Premium BETTER FOR ME & Fair Trade New Flavours MY WORLD Animal-Friendly

Source: Datamonitor Source: Hartman Group The Curious Role of Brand

29 Social: sustainable & green Emerging Trends “Some 12% of those surveyed who are primary grocery shoppers say they also shop at farmers markets when shopping for groceries, further supporting the local mentality.” Mintel 2/2014 Source Hartman Group Strategy (2013) “Re-imagining the American Supermarket for a New Era in Food Culture.” 31 Fresh is Hot! volumetric trends from 2003 until 2009

While most companies would look for category-level causes for volumetric decline in big packaged food categories, the problem is really cultural: food culture is changing in a long-term manner that packaged food companies have yet to truly accept.

Mintel 2014 Organic Trends

 Emphasizing the power of price in the milk category, the other retail channel occupies nearly 80% of share of milk sales. The channel includes supercenters and warehouse clubs, which offer price advantages and convenience for milk buyers.  Sales of milk grew 18% in natural supermarkets, led by continued growth in premium dairy milk along with surges in non-dairy milk brands

 Organic sales grew strongly boosted by organic dairy milk. In particular, glass-bottled milk grew 36.7% between 2010 and 2012. This outpaces the overall dairy milk segment growth of 20.9%, Furthermore, 36.7% of all dairy milk sales were organic in 2012.  Price promotions in various brands, packages, and formats of milk might help to bring in consumers. In addition, promotions that offer a discount on milk with the purchase of complimentary products, such as breakfast cereal, cookies, coffee, and dry pasta mixes, could bring in more consumers. Mintel dairy Report

Mintel 2013 33 Non Dairy “Milk”

 Overall, nearly half of respondents (Mintel Survey) choose other dairy and/or non-dairy milk, including goat and plant-based milk, because it is healthier and one third opt for the varieties because they like the taste.  Non-dairy milk more likely to be purchased by nonwhite consumers- 60% of Hispanics of any race; and 72% of other race

 With the exceptions of whole milk and soy milk, Hispanic households are more likely than respondents of other races and ethnicity to have increased milk purchases compared to the previous year.  “Milk companies could have been faster to recognize the opportunity to create milk-based beverages that met growing consumer demand for more refreshing drinks,” …“They could have added popular, high-margin products such as yogurt and nutrition shakes to their portfolios, to insulate themselves from swings in the demand for milk, instead of letting companies like General Mills move in.” Jan. 4, 2013, Forbes.

Mintel 2013 34 Cultural Perceptions

 “the up market segment of the population continues to move away from traditionally process foods and beverages and the brands built on the IP lying behind them,” (A cultural Approach to Food Quality from a New Era, The Hartman Group.)  Consumers want information, transparency from food companies A survey of consumers by Sullivan Higdon and Sink found that only 31% thought food companies were transparent about their practices. To help build trust, 56% of consumers want better labeling of both nutritional information and key production elements like where the product was grown. Half of those surveyed said they would like the production facilities or farms to open for public tours, and 43% want a website where their questions would be honestly answered. FoodProductionDaily.com (3/30)  http://www.usdairy.com/health-and-wellness/consumer-trends-and- preferences

35 Alternative Delivery Hits its Stride

Fresh Continues Rollout  InstaCart Comes to LA  More traditional competitor’s will rethink strategy

36 Online & Mobile

 On the go consumers- retailers are not going to be able to wait for consumers to come to them but will need to go where the shopper is. (Planet Retail 4/14)

 More small box outlets, close to home & work.

 Expect to see more from Walmart as it re-engineers its supply chain to support small and online.  “Online and mobile sales reached $225.5 billion in 2012, up nearly 16% from 2011.” Growth of 47% is expected by 2017, reaching $331.4 billion. Planet Retail 4/14 Mintel Online Report 201337 Occasion-Based Consumption

38 Types of retailers shopped

Most often shop Also shop at % % Supermarket (eg. Kroger, Safeway, Albertsons, 45 51 Publix, etc.) Walmart 30 52 Warehouse club (eg Costco, Sam’s Club, BJ’s 5 27 Wholesale) Target 4 28 Dollar stores (eg Family Dollar, Dollar General, Dollar Tree) 3 21

Whole Foods Market 2 11 Drug stores (eg Walgreens, CVS, Duane Reade) 1 22 Trader Joe’s 1 10 Farmers market 1 12 Other natural food store(s) (other than WF or TJ’s) 1 6

Convenience stores (eg 7-Eleven, bodega, “corner 1 6 store”) Internet retailers (eg Peapod, FreshDirect, - 3 Amazon.com) Specialty food store(s) - 4 Mintel Other 5 8 11/2013 None of the above - 4 39 Key Social Media Metrics

Facebook/Mintel 2014 40 Innovations/Improvements desired when grocery shopping, 11/2013

“What innovations/improvements would you most be interested in using when shopping for groceries?”

Source: Mintel, Feb. 2014 Grocery Report 41 Omni-channel Retailing Social Media Adver sing Website

Signage Email

Kiosk Apps

Checkout Mobile Website

Employees SMS

Catalog Direct Mail The Customer is the Center National Retail Federation of the Universe Big Show 2014 42 Intimacy Scientific Stairway To Heaven Intelligence Retailing Efficiency Optimization technology and Technology applications:

• Assortment planning • Pricing • Promotions • Strategic sourcing • Space optimization

CP Company

Consumer Data accelerate the innovation process Shopper Data POS Data $ RFID Data Time to market Accelerated and more sustained revenue Time Time compression and greater efficiencies Gamification of Loyalty

 This is the process of rewarding the shopper when they have completed a set of objectives or tasks. Example, m- perks- shoppers unlock rewards based on frequency of category purchase.

Kantar Retail (2014) Changing Fortunes: 2014 Predictions 44 Leapfrogging Loyalty Cards

 With a full rollout of “Scan & Go” in 2014 (Walmart’s mobile checkout app), Walmart hopes to predict shopper lists based on past purchases and suggest Rollback items based on shopping behavior and allow real-time targeting of shoppers mid-trip.

Kantar Retail (2014) Changing Fortunes: 2014 Predictions 45 Opportunities for Dairy

 Super-fresh is a High Growth Category?  Tech is changing the shopper decision journey  Retail is becoming more globally integrated  Ethnic foods expand into new categories, more “exotic” will expand into mainstream  Omni-Channel will be come increasing important  Re-engineer based on culture change in consumers

46 Conclusions

 What’s the word- Disruption  No more one size fits all- more customization in offering & promotion  More opportunities for collaboration (eg. TPA)  Occasion based products & promotion  Consumer cultural relationship with food is changing- rethink value proposition

Selected Sources

 The Hartman Group (2013) Re-imagining the American Supermarket for a New Era in Food Culture, Volume 3, issue 3, Hartbeat Executive.

 Esterl, Mike (2014) “Diet Soda Business in a Freefall”, Wall Street Journal, 3/31-14.

 Hartman, Harvey (2014) Recipe for Growth in Consumer Packaged Goods, Hartman-group.com.  Kantar Retail (2014) Changing Fortunes: 2014 Predictions

19th Annual Center for Retail Leadership

May 13, 2014 Portland, Oregon http://www.pdx.edu/retail- Industry Conference and Awards Dinner leadership/

Keynote: With Keynote speaker Mike Ellis, President and COO Kroger Co.

Franz Family Bakery, Bimbo, Procter & Gamble, Northwest Grocery Association, Unified Grocers, Ste Michele Wine Estates, Henningsen Cold Storage, Trailblazer Foods, MillerCoors, King Retail Solutions  Hispanics, Blacks interested in more single-serving packaging  owns nearly 56% of the market share in the milk

category, showcasing the power of price in what frequently is a household staple purchase.

51 Key performance indicators, dairy and non-dairy milk brands, March 2013 Market Share Forecast

Source: Willard Bishopp Future of Retailing 2013 Kantar Research  Transformers

 ......

 “The only way to win is not to play”: Retailers Learn about Black Friday

 from War Games

 ......

 The 2014 Buzzword Is “Embedding”

 ......

 Gamification of Loyalty

 ......

 Shapers

 ......

 Home Improvement Retailers Embrace the Showroom

 ......

 Walmart Leapfrogs Loyalty Cards, Predicts Shoppers’ Needs

 ......

 Target Will Scale Back

 ......

 Urban/CityTarget 2.0 Arrives

 ......

 Grocers Will Grow and Gain Market Share

 ......

 Reflectors

 ......

 Dollar Stores Will Become Health and Wellness Destinations for

 Price-Sensitive Shoppers

 ......

 Clubs Reach an Inflection Point

 ......

 Drug Retailers Focus on Communicating Value to Stay Competitive

 ......

 Ethnic Foods Expand into New Categories

 ......

 For Grocers: Eat Well, Be Well, Act Well

 ......

To define the fundamentals of your business strategy, you need only to answer three questions: 1. Who is the target customer? 2. What is the value proposition to that customer? 3. What are the essential capabilities needed to deliver that value proposition

What is Strategy?

“Strategy is an integrated set of choices that uniquely positions the firm in its industry so as to create sustainable advantage and achieve superior value relative to the competition“…

“A strategy is an integrated and coordinated set of five choices: a winning aspiration, where to play, how to win, core capabilities, and management systems.”

A. G. Lafley & Roger Martin (2013) Playing to Win , p. 5. Ok. Where to Start?

• What are goals? • What is scope/level of strategy? • Who is (needs) to be involved? • Diagnose the situation?

58 Key Change Drivers in the Value Chain Consolidation -Retail Consolidation New Competition Consumer Trends -Mergers & Acquisitions -Growth of Value & Premium retailing -Time-rushed consumers -Purchasing Collaboration -Growth of food services -Easiness & quickness -Vertical integration & proprietary channels -Experience economy Product Trends -Aging population -Own Labels Convergence -Growth of purchasing power -Product Safety -With other industries -Home meal replacement -Packaging -New entrants/expansion -Health & wellness -Intnl. Purchasing -Online services -Continuous Innovation

Subcontractors Manufacturer Retailer Store Shopper

IT enabled Trends Sustainability Regulation/deregulation -Loyalty programs Internationalization -Corporate responsibility -Store hours -Automations/operations -Growth of Emerging Mkts. -Environmental trends -Sales of alcohol -Outsourcing -Saturation of home Mkts. -Employee policies -OTC meds -RFID; NFC, GS1, etc. -Local community relations - Anti-trust rules -Multi-channel retailing Retailing 2014: New World Assets Old world assets • Inventory • Factories • Real Estate • Equipment

2014 assets • Brands • People • Customer Relationships • Information Retail Store Formats

Traditional Supermarket - Stores offering a full line of groceries, meat, and produce with at least $2 million in annual sales and up to 15% of their sales in GM/HBC. These stores typically carry anywhere from 15,000 to 60,000 SKUs (depending on the size of the store), and may offer a service deli, a service bakery, and/or a pharmacy.

Fresh Format -Different from traditional supermarkets and traditional natural food stores, fresh stores emphasize perishables and offer center-store assortments that differ from those of traditional retailers—especially in the areas of ethnic, natural,and organic, e.g., Whole Foods, Publix GreenWise, , and some independents.

Superstore - A supermarket with at least 30,000 sq. ft., generating $12 million or more annually and offering an expanded selection of non-food items. Specialty departments and extensive services are offered.

Warehouse Store - with limited service that eliminates frills and concentrates on price appeal; items may be displayed in their original shipping cartons rather than placed individually on shelves. Stores may also sell bulk food and large size items. Super Warehouse - A high-volume hybrid of a large Traditional Supermarket and a Warehouse store. Super Warehouse stores typically offer a full range of service departments, quality perishables, and reduced prices, e.g., , , and Smart & Final. Retail Store Formats

Limited-Assortment Store - A low-priced grocery store that offers a limited assortment of center-store and perishable items (fewer than 2,000), e.g., Aldi, Trader Joe’s, and Save-A-Lot.

Wholesale Club - A membership retail/wholesale hybrid with a varied selection and limited variety of products presented in a warehouse-type environment. These 120,000 square-foot stores have 60% to 70% GM/HBC and a grocery line dedicated to large sizes and bulk sales. Memberships include both business accounts and consumer groups, e.g., Sam’s Club, Costco, and BJ’s.

Supercenters - A hybrid of a large Traditional Supermarket and a Mass Merchandiser. Supercenters offer a wide variety of food, as well as non-food merchandise. These stores average more than 170,000 square feet and typically devote as much as 40% of the space to grocery items, e.g., Walmart Supercenters, Super Target, Meijer, and Fred Meyer.

Mass Merchandiser - A large store selling primarily hardlines, clothing, electronics, and sporting goods but also carries grocery and non-edible grocery items. This channel includes traditional Walmart, Kmart, and Target stores, etc. Retail Store Formats

Dollar Store - A small store format that traditionally sold staples and knickknacks, but now sales of food and consumable items at aggressive price points account for at least 20%, and up to 66%, of their volume, e.g., Dollar General, Dollar Tree, and Family Dollar.

Drug Store - A prescription-based drug store that generates 20% or more of its total sales from consumables, general merchandise, and seasonal items. This channel includes major chain drug stores such as Walgreens and CVS but does not include stores/chains, e.g., The Medicine Shoppe, that sell prescriptions almost exclusively.

Military Commissary - A format that looks like a Conventional grocery store carrying groceries and consumables but is restricted to use by active or retired military personnel. Civilians may not shop at these stores which are referred to as commissaries

Other - The small corner grocery store that carries a limited selection of staples and other convenience goods. These stores generate approximately $1 million in business annually. Non-Traditional Grocery Growth in Stores

SuperMarket News 2014 The Evolution of Retail

Before 1980s The Future Distributed POS Omni channel model retail puts it in • Basic cash the customer’s register and cash hands drawer

Source Hartman Group Strategy (2013) “Re-imagining the American Supermarket for a New Era in Food Culture.” Source Hartman Group Strategy (2013) “Re-imagining the American Supermarket for a New Era in Food Culture