How to Avoid the Pitfalls of Success
The supermarket industry can learn some lessons from the marketing missteps impacting some of the biggest names in retailing.
There has been an awful lot of red ink splashed across the financial pages in recent quarters, much of it coming from some of the biggest names in retailing.
Walmart—the largest of them all—reported anemic same store sales growth of slightly more than one percent at its domestic Walmart family of stores, and below one percent at its Sam’s Club membership warehouses for much of 2015. That is actually an improvement over the flat sales seen in 2014 and declining sales witnessed in 2013, as shoppers fled the chain in droves. Ticked off over out-of-stocks, messy sales floors and long lines, they found a happier shopping environment—and lower prices—at limited assortment and dollar stores.
Archrival Target Corp. has been mired in its own set of problems. A major expansion into Canada failed miserably, and the chain, known for its trendiness, has tripped over several fashion missteps. On top of that, its online sales system crashed on Cyber Monday, 2015, forcing it to offer shoppers a 15-percent across the board discount the next day to placate angry home shoppers.
The department store sector has fallen hard too. JCPenney is stumbling back after a disastrous upscale overhaul by former CEO and one-time Apple exec Ron Johnson brought the retail powerhouse to the verge of bankruptcy. At the other end of the mall, one time shining star Macy’s is permanently slamming down the steel security shutters on at least 40 doors by the end of the year. On top of that, perennially beleaguered Sears Holdings Corp. continues to see sales slide and close dozens of its Sears and Kmart units each year, causing some industry observers to question the venerable retailer’s long-term prospects.
The supermarket industry is not immune either. Industry pioneer A&P bit the dust in 2015, and another pioneer—Whole Foods, which brought the organic concept to the well-heeled masses—has been dealing with sluggish same store sales and profits as competitors including Wegmans, Sprouts Farmers Market, Fresh Thyme and Kroger, stepped up their offerings of similar products at friendlier prices. Smaller competitor, The Fresh Market, is trying to turn itself around after an ill-advised rapid national expansion, insufficient capital expenditures and the departure of top management.
Unfortunately, from the looks of it, many industry observers expect things to only get worse in 2016 for those whom are not on top of their game.
“We are going through a secular shift in retail,” says Ken Harris, managing partner at Cadent Consulting Group, based in Chicago. “It is the most profound shift that has taken place since the advent of the supercenter 25 years ago, and the supermarket 25 years before that.”
Jim Hertel, managing partner at Willard Bishop, based in Barrington, Ill., says today’s troubled retailers have separated themselves from their core value equation, what makes them different. “When other people step up and emulate them, what used to be distinctive is no longer,” he says, citing Walmart. “When Walmart was growing they were the low price leader. The keys were price, and that it was a national brand, so there was that ease of comparison. Over the years they have stepped away from that and other people have come in underneath them, and the limited assortment and dollar stores have muddied some of that value proposition.”
The consumer switch from packaged goods to more fresh products has caught the Walmarts and Kmarts of the world off guard, say observers.
“As consumers pull attention away from center store to the fresh and perimeter departments, that is a new thing for some of these retailers,” says Justin Behar, CEO and founder of Quri, a San Francisco-based CPG retail intelligence technology firm. “This is also why we are seeing some retailers move away from the continued build and investment in their traditional large formats and looking at alternative smaller formats and stores in urban areas.”
Then there is the online threat.
“Online shopping is ultimately going to be around 10 percent of all consumables, which in the U.S. is about a $1.1 trillion category,” Hertel says. “That is $100 billion, which is nothing to sneeze at.”
Al Wittemen, vice president of omni channel shopper marketing at St. John & Partners, based in Jacksonville, Fla., offers up a scary prediction. “I’ve been in this industry for 45 years and I’ve seen more changes in the last five than in my first 40, and there are going to be more changes in this year than in the last five,” he says.
“Consumers today want what they want, when they want it, where they want it, at the price they want to pay for it,” Wittemen says. “If you are not giving them that through an improved shopper experience and developing your retail environment to translate consumer demand into purchase by making it clear, inviting and present, as opposed to confusing, harsh and frustrating, you have no chance of winning. You can’t win on price, products and supply chain alone.”
Bigger Doesn’t Mean Better
“There are always the challenges of being the biggest,” says Wendy Liebmann, CEO and chief shopper at WSL Research, based in New York. “Whether it is Walmart—the largest retailer in the world—or Macy’s with 800 stores. Their size and scale make it very hard to continue to sustain the kinds of growth one has as an emerging or start-up company.”
Turmoil has been brewing at Walmart for at least 15 years, since founder Sam Walton’s hand-picked successors retired from the company in the late 1990s, says Burt P. Flickinger III, managing director for the Strategic Resource Group, based in New York. “Walmart had a lot of bad research work, a lot of poor promotions by the board of directors,” he says. “People with no significant retail operations experience were running the company. They were cost cutters, not business builders. They made bad international acquisitions. With the exception of Walmart Canada and Walmart Central America, they are struggling with their international operations, many of which were really ill-considered or ill-advised.”
According to Flickinger, while today Walmart has excellent leaders in president and CEO Doug McMillon, and Walmart U.S. president and CEO Greg Foran, a few years back it should have expanded its online division instead of buying back stock and increasing dividends. “Walmart will be a light-year behind Amazon.com and AmazonFresh.com five years from now when their $20 billion in stock purchase buyback runs its course, versus the less than $2 billion they have invested in online retailing,” he says.
Flickinger notes that over the past decade Walmart has increased its U.S. sales by $78.1 billion, but on an equivalent basis today has 390,000 less hourly workers. “They don’t have enough people to stack the shelves and they have tremendous turnover because the board of directors continues to cut costs, rather than invest satisfactory sums of money to build Walmart.com and restock the stores,” Flickinger says.
Out-of-stocks and bare shelves send a negative message to shoppers, and can permanently shoo them away, say observers.
“In categories where there are improvements in the on-shelf availability of product consistently, there is a real opportunity to impact sales on the order of a point or two,” says Behar. “In an industry that is growing at a level of flat to up two points, that is significant.”
The labor crisis is a key issue facing retailers today, especially for those struggling, where morale may be down in the dumps.
“If an employee is checked out about their job while they are serving you, there is no question that has a direct impact on sales,” says Joshua Ostrega, COO and co-founder of WorkJam, a Montreal-based workforce management solution firm. “Today’s employees are looking for something more—a connection with the company they work for. They want to be proud of the company, what it does, how responsible it is, and how everybody is treated and embraced.”
According to Ostrega, employment issues facing today’s retailers include adapting to the Millennial workforce; customer expectations of better service; the tightening labor market; rising labor costs; and government policies, such as a recently passed San Francisco law requiring retailers to offer employees predictable schedules several weeks out in advance.
“If the retailer makes changes less than two weeks out they have to start paying the employee predictable pay, which means there is a penalty the retailer has to pay if they shorten their shift at the last minute,” Ostrega says. That can be especially damaging to a fragile retailer like Sears, which may wish to redeploy associates from a dead weeknight to fewer hours on a busier Saturday morning.
Cumbersome laws may be the least of troubled retailers’ worries in 2016, however. This year German limited assortment retailer Aldi is dramatically stepping up its nationwide expansion and archrival Lidl is opening its first stores on U.S. shores.
“Everybody has caught up to Walmart on price and now they are having competition from fast-fashion retailers like H&M, dollar stores and limited assortment stores, like Aldi,” says Richard J. George, Ph.D., professor emeritus, food marketing, Haub School of Business, at Saint Joseph’s University in Philadelphia. “Even Walmart management refers to them as ‘ankle biters.’”
According to the How America Shops studies issued by Liebmann’s WSL Research firm, today one in five shoppers already shops with regularity at Aldi. That is quite impressive given that Aldi stores still have relatively limited distribution around the country.
In recent years, Aldi has transformed itself from selling strictly lower-end private label pantry basics to including more branded offerings, gourmet products similar to sister chain Trader Joe’s, and general merchandise and nonfoods items. A pre-Christmas Aldi circular, for example, featured high-quality pots, pans and chafing dishes, Anchor Hocking glass storage sets, Cosco folding chairs and tables, Remington grooming kits, women’s bathrobes, men’s leather gloves and a two-page spread ofStar Wars merchandise.
“Lidl is similar to Aldi and is really going to be the next big disrupter,” says Liebmann. “But Lidl is a bit faster to move on things. They are not only going to disrupt Aldi, but they are both going to disrupt Walmart.”
“Lidl is going to be like Aldi on steroids,” says George. “I’ve seen the Lidl markets in Europe and they are terrific. They will be a foe.”
Harris sees Aldi and Lidl as the “400 pound gorillas” in the room. “They sort of offer the Costco scenario of a ‘treasure hunt’ but in reverse, with only 500 SKUs,” he says.
“The dollar stores’ drumbeat was that they were growing like a weed because of expansion,” Harris says. “That is going to come to an end and they are going to have to deal with Aldi like everybody else, and then deal with Lidl. Once Lidl gets their feelers out—retailers in the U.S. have never seen the kinds of battles that go on between Aldi and Lidl—the consumer wins hands down. It is unbelievable what happens when those two guys start to engage. That is a game to be played.”
Harris predicts the manufacturing community will forge new relationships with both chains, further hampering certain chains’ turnaround efforts.
“The reality is that as shoppers migrate from discount retailers in general, and Walmart in particular, to Aldi, which is heavily balanced to private label, manufacturers cannot afford to lose the kind of business that potentially Walmart would lose to Aldi, so they are going to figure out how to work with Aldi,” Harris says.
“That may look a lot different than anything these manufacturers are used to,” Harris says. “Aldi will stock brands, but only to stimulate sales. The reality is many may start producing private label for Aldi, or special promotions or packs. Then Walmart will say, ‘If you are doing it for Aldi, you better do it for us,’ and the manufacturer is going to have to make a choice.”
Whole Foods, the largest organics/natural retailer, also has growth issues.
“Whole Foods certainly has some of its own challenges,” says Liebmann. “As they have gotten bigger they are being challenged more, in terms of what they are saying and doing. That can happen to any retailer as they get bigger.”
Hertel points out that since its founding Whole Foods has stood for natural, organic, fresh, authentic and credible. “They were kind of the first, most prominent and created an aura of authenticity around what they offered and they were really, really hot,” he says. “Other supermarket operators noticed that, as well as competitors in that space, like The Fresh Market, Sprouts and others. So Whole Foods is struggling right now. Their message is still very resonant, but it is not that distinctive now from what a lot of other people are bringing to the table.”
According to George, “Even Target is now doing a great job with organics. All these other little pieces that used to be the ownership of Whole Foods, other people have taken on now, without the Whole Foods pricing.”
Wegmans, Trader Joe’s and Sprouts Farmers Market are today’s retail shining stars, but observers caution that by no means are they infallible. In fact, the same issues confronting today’s struggling chains can befall them if they are not careful.
“Ironically, in the year that A&P is filing for liquidation, Wegmans is showing signs of making the mistakes that A&P made in the 1960s when it had twice the market share that Walmart has today,” Flickinger says. “They are focusing way too much on private label.”
Flickinger notes that this past fall students in a class he teaches at Cornell University did consumer surveys and found that many Wegmans shoppers are also going to Tops, Olean Wholesale Supply, BJ’s, Price Chopper, Hannaford, Stop & Shop and other stores for certain items. “They find they can’t buy the customary No. 1 brands on their Thanksgiving dinner shopping lists because Wegmans has swung the pendulum so far to the private brand side,” he says.
“Wegmans is doing 99 44/100ths percent of everything right, but they are literally giving loyal customers a roadmap to the competition to buy well-established national brands. There could be an erosion as they face more capable, better capitalized competition, particularly in their expansion markets.”
Retailers have to be wary of overexpansion, say observers.
“With the fresh format stores you can run out of target consumers,” Hertel says. “If your proposition is to go after 20 percent of the marketplace and you reach that 20 percent, it is going to be tough to grow beyond that.”
But Hertel points out that reaching a massive size does not have to necessarily trip up a retailer.
“Kroger is somebody who is as big as they come, the No. 2 grocer after Walmart, and Kroger still continues to deliver with excellence. That says that size is not a death sentence,” Hertel says.