by Adam Hartung | Oct 23, 2013 | Current Affairs, Defend & Extend, Food and Drink, Leadership, Lifecycle
On 11 October Safeway announced it was going to either sell or close its 79 Dominick's brand grocery stores in Chicago. After 80 years in Chicago, San Francisco based Safeway leadership felt it was simply time for Dominick's to call it quits.
The grocery industry is truly global, because everyone eats and almost nobody grows their own food. It moves like a giant crude oil carrier, much slower than technology, so identifying trends takes more patience than, say, monitoring annual smartphone cycles. Yet, there are clearly pronounced trends which make a huge difference in performance.
Good for those who recognize them. Bad for those who don't.
Safeway, like a lot of the dominant grocers from the 1970s-1990s, clearly missed the trends.
Coming out of WWII large grocers replaced independent neighborhood corner grocers by partnering with emerging consumer goods giants (Kraft, P&G, Coke, etc.) to bring customers an enormous range of products very efficiently. They offered a larger selection at lower prices. Even though margins were under 10% (think 2% often) volume helped these new grocery chains make good returns on their assets. Dillon's (originally of Hutchinson, Kansas and later purchased by Kroger) became a 1970s textbook, case study model of effective financial management for superior returns by Harvard Business School guru William Fruhan.
But times changed.
Looking at the trend toward low prices, Aldi from Germany came to the U.S. market with a strategy that defines the ultimate in low cost. Often there is only one brand of any product in the store, and that is likely to be the chain's private label. And often it is only available in one size. And customers must be ready to use a quarter to borrow the shopping cart (returned if you replace the cart.) And customers pay for their sacks. Stores are remarkably small and efficient, frequently with only 2 or 3 employees. And with execution so well done that the Aldi brand became #1 in "simple brands" according to a study by brand consultancy Seigal+Gale.
Of course, we also know that big discount chains like WalMart and Target started cherry picking the traditional grocer's enormous SKU (stock keeping units) list, limiting selection but offering lower prices due to lower cost.
Looking at the quality trend, Whole Foods and its brethren demonstrated that people would pay more for better perceived quality. Even though filling the aisles with organic
products and the ultimate in freshness led to higher prices, and someone nicknaming the chain
"whole paycheck," customers payed up to shop there, leading to superior
returns.
Connected to quality has been the trend, which began 30 years ago, to "artisanal" products. Shoppers pay more to buy what are considered limited edition products that are perceived as superior due to a range of "artisanal quality" features; from ingredients used to age of product (or "freshness,") location of manufacture ("local,") extent to which it is considered "organic," quantity of added ingredients for preservation or vitamin enhancement ("less is more,") ecological friendliness of packaging and even producer policies regarding corporate social and ecological responsibility.
But after decades of partnership, traditional grocers today remain dependant on large consumer goods companies to survive. Large CPGs supply a massive number of SKUs in a limited number of contracts, making life easy for grocery store buyers. Big CPGs pay grocers for shelf space, coupons to promote customer purchases, rebates, ads in local store circulars, discounts for local market promotions, sales volumes exceeding commitments and even planograms which instruct employees how to place products on shelves — all saving money for the traditional grocer. In some cases payments and rebates equalling more than total grocer profits.
Additionally, in some cases big CPG firms even deliver their products into the store and stock shelves at no charge to the grocer (called store-door-delivery as a substitute for grocer warehouse and distribution.) And the big CPG firms spend billions of dollars on product advertising to seemingly assure sales for the traditional grocer.
These practices emerged to support the bi-directionally beneficial historically which tied the traditional grocer to the large CPG companies. For decades they made money for both the CPG suppliers and their distributors. Customers were happy.
But the market shifted, and Safeway (including its employees, customers, suppliers and investors) is the loser.
The old retail adage "location, location, location" is no longer enough in grocery. Traditional grocery stores can be located next to good neighborhoods, and execute that old business model really well, and, unfortunately, not make any money. New trends gutted the old Safeway/Dominick's business model (and most of the other traditional grocers) even though that model was based on decades of successful history.
The trend to low price for customers with the least funds led them to shop at the new low-price leaders. And companies that followed this trend, like Aldi, WalMart and Target are the winners.
The trend to higher perceived quality and artisanal products led other customers to retailers offering a different range of products. In Chicago the winners include fast growing Whole Foods, but additionally the highly successful Marianno's division of Roundy's (out of Milwaukee.) And even some independents have become astutely profitable competitors. Such as Joe Caputo & Sons, with only 3 stores in suburban Chicago, which packs its parking lots daily by offering products appealing to these trendy shoppers.
And then there's the Trader Joe's brand. Instead of being all things to all people, Aldi created a new store chain designed to appeal to customers desiring upscale products, and named it Trader Joe's. It bares scance resemblance to an Aldi store. Because it is focused on the other trend toward artisinal and quality. And it too brings in more customers, at higher margin, than Dominick's.
When you miss a trend, it is very, very painful. Even if your model worked for 75 years, and is tightly linked to other giant corporations, new trends lead to market shifts making your old success formula obsolete.
Simultaneously, new trends create opportunities. Even in enormous industries with historically razor-thin margins – or even losses. Building on trends allows even small start-up companies to compete, and make good profits, in cutthroat industries – like groceries.
Trends really matter. Leaders who ignore the trends will have companies that suffer. Meanwhile, leaders who identify and build on trends become the new winners.
by Adam Hartung | Jun 26, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership
"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline. It seems one of the unintended consequences of this recession will be forced consumer goods innovation!
For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game. When I was young there was one jar of Kraft Miracle whip on the store shelf. It was one quart. This container was so ubiquitous that it coined the term "mayonnaise jar" – everybody knew what you meant with that term. Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes. This product proliferation passed for innovation for many people. Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population.
Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?" Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels. Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu. Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.
Expanding varieties is too often seen by marketers as innovation. I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation. But did it drive additional Oreo sales? Unfortunately for Nabisco, no. It was plenty easy to count out the number of cookies you want and put in a baggie. Or buy fewer cookies altogether in these new, smaller packages.
These sorts of tricks are the stock-in-trade of Defend & Extend management. Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product. Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf – in effect bribing him to stock the product. But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf. The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining. But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin. The D&E manager is trying to keep up revenues, but at the expense of profits.
Simultaneously, this kind of behavior keeps the business from launching really new products. The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta. His point of view was that protecting Velveeta sales was worth more than launching new products – and at that time the last new product launched by Kraft was 6 years old! Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable – while killing the rate of return on new products by discounting potential sales and inflating costs!
This D&E behavior isn't good for any business. Consumer goods or otherwise. And it's interesting to read that now retailers are starting to push back. They are cutting the number of product variations to cut the inventory carrying costs. As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory – and simultaneously reduced "turns" – thus making the margin per foot of shelf space, and the inventory ROI, poorer. Even with those "shelf fee" bribes the consumer goods manufacturer paid.
For consumers this is a great thing! Because it frees up shelf space for new products. It frees up buyers to look harder at truly new products, and new suppliers. The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new. This action is a Disruption for the individual retailer – pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.
This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption. It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues. It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers – rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system. And it changes what the manufacturer's salespeople have to do.
The companies that will do well are those that now implement White Space to take advantage of this Disruption. As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores. It allows them to get creative about pitching their products in an effort to help the retailer compete on product – not just price. And for any existing supplier, they will have to use White Space to get more new products out faster. And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.
Markets work in amazing ways. Almost never do things happen as one would predict. It's these unintended consequences of markets that makes them so powerful. Not that they are "efficient" so much as they allow for Disruptions and big behavior changes. And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed. For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!
by Adam Hartung | Apr 17, 2009 | Uncategorized
Adam Hartung helps companies innovate to achieve real growth. He began his career as an entrepreneur, selling the first general-purpose computing platform to use the 8080 microprocessor when he was an undergraduate. Today, he has 20 years of practical experience in developing and implementing strategies to take advantage of emerging technologies and new business models. He writes, consults and speaks worldwide.
His recently published book, Create Marketplace Disruption: How to Stay Ahead of the Competition (Financial Times Press, 2008), helps leaders and managers create evergreen organizations that produce above-average returns.
Adam is currently Managing Partner of Spark Partners, a strategy and transformation consultancy. Previously, he spent eight years as a Partner in the consulting arm of Computer Sciences Corporation (CSC) where he led their efforts in Intellectual Capital Development and e-business. Adam has also been a strategist with The Boston Consulting Group, and an executive with PepsiCo and DuPont in the areas of strategic planning and business development.
At DuPont Adam built a new division from nothing to over $600 million revenue in less than 3 years, opening subsidiaries on every populated continent and implementing new product development across both Europe and Asia.
At Pepsi, Adam led the initiative to start Pizza Hut Home Delivery. He opened over 200 stores in under 2 years and also led the global expansion M&A initiative acquiring several hundred additional sites. He also played a lead role in the Kentucky Fried Chicken acquisition.
Adam has helped redefine the strategy of companies such as General Dynamics, Deutsche Telecom, Air Canada, Honeywell, BancOne, Subaru of America, Safeway, Kraft, 3M, and P&G. He received his MBA from Harvard Business School with Distinction.
