Changing channels

More than a few heads of supermarket companies are aware of, and rightly worried about, the siphoning off of food dollars to other channels. At the same time, many of the chief marketers, strategists, and other key decision-makers at some of those same companies are busily reciting the mantra that it's all about the consumer—that identifying shoppers' needs, or, better yet, influencing their behaviors, ought to be the fulcrum of tomorrow's retail strategy. So why do so many companies still seem to be missing the mark? What if all of their strategies are based on a reference point that's irrelevant to shoppers?

Today, when consumers say they're going grocery shopping, they might not be thinking of a supermarket at all—so a forward-thinking grocer perhaps shouldn't be thinking of itself in those terms, either.

Wilton, Conn.-based Cannondale Associates is asking these questions out loud, and is proposing some ideas about a new frame of reference, in a new study called Redefining the Retail Landscape: From Channels to Shopper-Centric Retailers Segments.

The marketing and management consulting firm conducted its first-ever large-scale consumer study in partnership with Lightspeed Research, an online market research firm with a consumer panel of 17 million worldwide, including 7 million in the United States. Both companies are owned by communications conglomerate WPP. Together they fielded an online survey in the fall of 2005, tapping 5,028 shoppers of groceries and household basics who shop at a range of banners across the nation.

The researchers asked shoppers who they are, where and when they shop, why they choose certain stores, what they buy at those stores, and how they shop them. They posed questions based on 22 attitude metrics, all of them revolving around convenience, selection, discounting, and environment. To this they added three behavior measurements based on spending, shopping frequency, and trip time.

The respondents rated their stores across these metrics, which yielded a better understanding of how the shoppers themselves currently group retailers. Cannondale layered a structure over that organic segmentation, and then identified actions that retailers and manufacturers should consider taking, relevant to those shopper-centric segments—what would set a retailer apart, and how to change at retail to improve the shopping experience and align it more with shopping segments, rather than channel characteristics.

Researchers made sure to cover all relevant types of retail in selecting survey participants. Overall the surveyed shoppers evaluated more than 1,100 retail banners.

The analysis quickly exposed a need for redefining the retail landscape through the lens of consumer perception, not industry tradition. Shoppers choose retailers for specific reasons, but those reasons aren't necessarily related to what channel a given store considers itself to be in. This might sound intuitive, but for modern retail practitioners it's not so easy to translate into a new way of thinking.

Cannondale's leap of insight was to develop a shopper-based approach to retail segmentation, based on real-world attitudes, behaviors, and missions (the specific occasions and purposes that drive trips), and, further, to assert that "the approach, rather than the actual segments, are most important."

Declining loyalties

Many of the study's findings confirm what, for conventional supermarket operators, are sobering messages that have been circulating for some time. For one thing, loyalty, at least as conventionally defined, is clearly becoming less instrumental in shaping why and how consumers choose to shop a given store. More than three-quarters of shoppers said that they shopped at five or more banners during the three-month period just before they were surveyed. All of this hopping around did take some coherent shape however; many consumers are shifting their attention increasingly to value formats. As a result supercenters, small-format value shops, dollar stores, and warehouse clubs are capturing a growing share of trips and dollars.

The larger picture is of the grocery segment still at the top of the heap with regard to trips per year, household penetration, and dollars spent per trip, but in each case the segment's hold is slipping, while the above-mentioned channels, as well as some others, are gaining.

Based on the crunching of statistics and estimates from Progressive Grocer, NACS, NACDS, and its own analysis, Cannondale proposes that by 2011 the traditional grocery community will have lost 20 share points, compared with the 46 percent of the market it held in 1996. That chunk of market share will have been siphoned off by nontraditional retailers, especially supercenters, which will have gained 20 share points; warehouse clubs, expected to increase by four points; drug chains, with a rise of 11 points; and even dollar chains, with an expected gain of three points.

Wal-Mart will no doubt play the lead role in this upheaval, but it won't be a solo act. Cannondale's own PoweRanking survey pointed to a potentially telling amount of jockeying among the members of a projected Top Ten list of future power retailers, especially when compared with what that list looked like in 1998. The list is determined by manufacturers' predictions of who the powerhouses will likely be in 15 years.

The 2005 list reflects gains that align with the shopper study's conclusions: Wal-Mart at pole position and up 22 percent, and Target up 23.6 percent, holding the No. 2 position. The top conventional grocers, on the other hand, are all expected to have lost power by 2011, with Kroger down 2.1 percent, Publix slipping 4.8 percent, Safeway off 13.9 percent, and Albertsons down 5.5 percent. Perhaps most telling are the new entries to the future power leaders since 1998: Costco, Walgreens, Dollar General, and Whole Foods.

In other words, however they're defining themselves and setting their strategies, many supermarkets might be poorly aligned with how shoppers look at shopping and make their venue choices. Cannondale used its freshly collected array of shopper attitudes and behaviors to create a matrix that places retailers in the context of shopper-centric segmentation. It populated the matrix with 34 retailers, each of which had received a significant number of mentions by the consumers surveyed who prefer to shop at that store for groceries and other household basics. (The plotted group was intended as a representative sample, and Cannondale chose not to plot all of those with a significant number of mentions.)

The retailers fell into four new retail segments: Routine Replenishment, Big Shops, Experience Makers, and Quick Shops.

The Routine Replenishment segment is the home for the retailers whose shoppers make frequent trips and like their shopper card programs, array of store services, and wide, consistent selections. Routine Replenishment operators excelled at frequency, spending, stock-up trips, and most attitude measures. Interestingly, their shoppers had the most positive attitudes, as measured by the 22 factors related to convenience, selection, discounting, and store environment. Many of the operators in this segment are traditional supermarket chains: Albertsons, Giant Food, Publix, SuperTarget, Safeway, Kroger, and Wegmans.

The Big Shops are the merchants whose shoppers spend a lot per trip and like the availability of bulk-packaged products. Obvious examples are Costco, Sam's Club, and Wal-Mart. Although shopper attitudes toward the Big Shop adherents indexed lower, their overall behavior indices, consisting of spending, shopping frequency, and trip time, were nonetheless above the average. The Big Shop banners outperformed all other segments in spending and time spent per trip.

Experience Makers are retailers whose shoppers spend less time shopping, but praise the unique products they find there. Banners here include Whole Foods, Wild Oats, and Trader Joe's, plus three big drug chains.

Quick Shops are the operators with shoppers that spend the least time and money of all inside their walls, but go there because they can get in and out of the store efficiently. Representative chains here are 7-Eleven, Dollar Tree, and other c-store and dollar-format banners.

Some surprises are found in each of the segments, in the form of banners that don't conform to their channel affiliations. Again, this is because from the perspective of a shopper's motivation, distinguishing a store as a supermarket vs. a drug store is meaningless; what matters is which store fits the bill for the specific shopping purpose in mind at the time.

Save-A-Lot and Food Lion, for example, were grouped with Big Shops; Target worked its way into Experience Makers due to the less time and money typically spent there, and the lower shopping frequency, compared with the Big Shops, while its channel counterparts were in Big Shops, and its hybrid cousin, SuperTarget, was lumped in with Routine Replenishment. Rite Aid found itself with Quick Shops rather than with other drug chains as Experience Makers; it was being penalized with lower ratings on all selection factors. Both Wal-Mart and Wal-Mart Supercenter landed in Big Shops, however, as did Stop & Shop, which qualified because it registered a high spend and time per trip, and proved a harder challenge for consumers to find items in than at Routine Replenishment examples.

Routine rut

The shoppers of Routine Replenishment stores are there a lot, and they spend a lot. They give high scores to shopper loyalty programs. They praise the wide variety. That's the good news. However, they admit that the voluminous SKUs might be causing shopability problems. They also don't like the lack of unique products, as well as a dearth of fun in the shopping experience.

Looking forward, the picture not surprisingly darkens. As a segment Routine Replenishment operators deliver the status quo, and that's a commodity diminishing in value.

"While these retailers have positive shopper patronage today, in terms of spending and frequency they may be at risk of losing shoppers to retailers that better differentiate themselves," says Cannondale.

This situation wouldn't apply to all Routine Replenishment banners, however: HEB and Wegmans break the mold by overindexing in every attitudinal measure when compared with the average.

But back to that mold: The Cannondale report provides a detailed representative example of the segment, by focusing on an unnamed retailer that exhibits current strengths, but also clear signs of atrophy. While 74 percent of Routine Replenishment shoppers' trips are to this retailer, for example, those same shoppers have also visited an average of six stores in the past three months.

It's clearly the preferred retailer for most groceries and household basics, but that hold is tenuous: Almost half of shoppers add that they'd bolt if the core items on their lists, such as baby care, hair care, and soft drinks, weren't available on their next visit. A fourth of its shoppers browse each aisle, but the browsing's better elsewhere: More than one-third of shoppers at Costco and Sam's, for instance, browse each and every aisle for the treasure hunt.

Slightly more than half, or 55 percent, of the Routine Replenishment operator's shopper trips are for stock-up, but a larger percentage of trips at Meijer (76 percent) and Costco (62 percent) are also for stock-up, and at the same time are enlivened by the availability of special packs or the random treasure find.

Perhaps most foreboding of all: While this Routine Replenishment grocer's shoppers say that they're pleased with its current batch of promotions and its shopper loyalty program, 71 percent of them say they'll be more likely next year to go to a store that offers the lowest price. Says one such shopper, "I prefer Wal-Mart Supercenters when I can get there, because of the prices—more for the money."

And while its shoppers are about average in terms of their demographics, other retailers in its markets—including powerful price operators—are attracting shoppers with higher incomes.

There could be a way around this conundrum, but it might require swallowing the bitter pill that price competition is no longer a formidable weapon in most Routine Replenishment retailers' arsenals. Cannondale suggests that the shoppers that have supported this segment until now are more likely to continue to do so if these stores do a better job at identifying and consistently stocking the products that they need and want, and if these retailers make the shopping experience that they offer more engaging, and less routine.

The study also points to the need to encourage browsing in these stores. How? Customized products, packaging, and promotions could add some excitement and differentiation at the same time. In-store specialty store-within-store sections could also help. Manufacturers could prove to be valuable collaborators in these strategies.

The Big deal

Shoppers at the Big Shops segment log big transactions and appreciate the savings from buying in bulk, but they don't appreciate as much the low level of service, nor the long time it takes to work their way through the store.

The representative Big Shop retailer profiled in Cannondale's research is grabbing 35 percent of its shoppers' total trips, but those shoppers spread the bread around quite a bit: In the past three months they frequented other banners, including Safeway, Albertsons, and Target, and went to grocery stores most often for their food and HBC purchases. Indeed, 73 percent of them go to grocers at least once a week.

To improve their odds, Big Shops ought to consider the advice that more isn't always better. They should analyze more closely the needs of this shopper segment, and revamp assortments accordingly, to provide a more consistent and predicable shopping result. Also, it's time to reconfigure store and aisle layouts to let shoppers get in and out more quickly, says Cannondale; most useful would be a convenience store section with its own checkout.

A fuller Experience

The shopper segment that keeps Experience Makers in business places high value on all aspects of the shopping experience, from unique items, to signage that informs and tells a story, to salespeople and service that are above par. But these shoppers also know that they can't get their staples here, nor many of the name brands to which they're accustomed, so they end up spending less and shopping more often elsewhere.

They also place high value on "value," but define it differently from a typical Big Shop shopper. Price is an issue, for sure, but the representative Experience Maker in Cannondale's analysis creates value through deliberate innovation in product offerings and attention to store design, and it delivers this value consistently in stores across the country.

The challenge is that its shoppers approach its doors with a limited shopping list, usually items they can't find elsewhere—which means they're reserving longer lists for other shopping occasions at other banners.

Experience Makers would have to strategically expand their assortments, adding more mainstream consumables in core categories to boost both trip frequency and basket size.

Cut to the Quick

Quick Shops are good at being at the right place at the right time, good enough that their shoppers are willing to make concessions in their demands for amenities or assortment that they never would at other retail segments. Speed is of the essence, but that's also a limiting factor for the segment. At Cannondale's representative Big Shop, shoppers pine for more products, more brand names, new items, and higher-quality goods.

A well-focused expansion in assortment could go a long way here toward increasing basket size, and building the basket is the primary way Quick Shops can draw more grocery business. However, maintaining focus is key: They can't lose sight of strong points in terms of store layout and shelving configurations tailored to offer a quick shopping environment.

Cannondale's overarching determination is that the retail landscape is transforming right under the noses of many unsuspecting or, at most, unfocused retailers. This transformation is being controlled by consumers' attitudes and decisions, whether retailers are playing a deliberate role or an inadvertent one in contributing to those consumer factors.

The study's conclusions and small set of recommended actions only whet the appetite for a more customized analysis that dives deeper into each new segment, and indeed would go operator by operator to drive retailer differentiation. Still, it ought to provoke some serious soul searching at least, and a resetting of priorities to better understand shopper objectives and how they should influence a retailer's own objectives for departments and categories.

Can shopper insights lead to actions with long-term success? The answer depends on how closely those insights and actions are aligned where the rubber meets the road, with layout, shelving, assortment, merchandising, and pricing. That sounds like basic category management, but with a shopper-centric twist, and a deliberate attempt to rise above the constraints that come with traditional industry-based classifications.