January 23, 2013
Clubs Eating Grocers’ Breakfast, Lunch and Dinner
In the early to mid 1990s there was great concern in supermarket circles about so-called "alternative channels." Of particular concern, as I recall, was the rise of warehouse clubs. At least one year at FMI’s annual convention (BTW, it’s coming back annually) was largely dedicated to the club threat. There were numerous pronouncements that traditional grocers were about to go the way of the dinosaurs as this emerging new retail species was coming in to drive them out.
Well, as everyone knows, warehouse clubs have been very successful, although not to the point of driving supermarkets out of business. Costco, as well as Sam’s Club and BJ’s, have found niches within the vertical to achieve success on somewhat different terms.
Now comes a study from Deloitte, which shows that consumer packaged goods (CPG) executives — 89 percent in fact — see clubs as the channel where they will achieve the most growth over the next three years.
Only 49 percent of execs who spoke with Deloitte see sales growing through grocery channels in the next three years and 18 percent expect sales through supermarkets to decline over that period.
"Club retailers have been remodeling existing stores, including allocating more space for food — particularly organic, healthy and fresh offering — and personal care products," said Pat Conroy, vice chairman and consumer products leader, Deloitte, in a statement. "These retailers also continue to provide a variety of services and benefits to members — whether it is for personal consumption or for the member’s business.
CPG execs believe that clubs are doing more than other channels to make themselves attractive shopping destinations for a wider range of consumers. Previous research by Deloitte found that clubs are especially attractive to higher income households.
"Economic uncertainty and consumers’ focus on value has made club stores a more important channel for many consumers, including those who are at the higher end of the income scale and represent a more lucrative target customer for retail and consumer products brands," said Mr. Conroy.
Discussion Questions
Do you think warehouse clubs are better positioned to gain greater share of the CPG market in the next three years? Do you see an opportunity for another major warehouse club chain or some form of hybrid to enter the market in the years to come?
Poll
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There’s always an opportunity for another competitor to surface, particularly if traditional supermarkets do, in fact, decline.
As to whether or not clubs will gain share, the answer is almost self-evident. If they can hold share and supermarkets decline as predicted than clubs’ total share will have to increase. But, this may tell us more about the failure of supermarkets than it does the success of clubs.
Much of what happens and doesn’t happen in Washington affects shopping patterns … and the pot still boils wildly inside the beltway.
Currently warehouse clubs are well positioned to gain a greater share of the CPG market particularly Costco. But that raises another question: Is the CPG market well positioned to grow itself in the next few years?
As to the future, any horizon projects a perceived opportunity there will be an aggressive retail entry.
Target, Walmart, drug chains, and dollar stores are better positioned than warehouse clubs to gain share of the CPG market. None require you to join in order to shop, nor do you have to buy huge sizes or a multiples of an item. All of them also offer a greater degree of location convenience.
I was a bit surprised by the percent of execs picking Club. I would have expected dollar stores to be more competitive in that prediction. Perhaps these expectations are driven by a feeling that dollar stores expansion of food was “last year’s big thing,” and that they won’t be able to lap the growth rate. That could be true. It might also be due to the sheer volume the Clubs offer when they throw their weight behind an item. If more space for food means more new item authorizations, the absolute and run-rate growth will be substantial.
Supermarkets continue to be the primary channel where consumers purchase groceries but are continuing to face challenges from other retail formats. PRS’ survey results indicate that supermarkets are still where most shoppers (91%) have purchased groceries in the past 3 months (in line with last year’s 92%), and Mass Merchandisers are still their largest competitive threat (73% purchase groceries there – down from 76% in 2011). But this year’s data shows that Dollar Stores are gaining momentum as the percentage of shoppers who purchase groceries at Dollar Stores has increased, from 32% in 2011 to 35% in 2012.
This survey also reveals that shoppers target specific retailers for different needs, specifically:
– Supermarkets for selection
– Mass Merchandisers and Dollar Stores for price
– Drug and Convenience Stores for convenience
Ever since the Great Recession of 2008, shoppers have been trying to reduce their grocery bills. Significantly more shoppers claimed to have switched brands to curb costs (61% vs, 49%). And while this might not be surprising among older shoppers who may be having to make due with less, it is also apparent among 18-24 year olds who are establishing shopping patterns for many years to come. This could have broad implications for brand manufacturers.
Retailers must understand their competitive strengths and capitalize on them, while also making the necessary adjustments to their offerings to seize opportunities for a larger slice of the pie as shoppers are more open to new shopping possibilities than they have been since the 1950s with the advent of large, supermarket chains.
There is no one format that is currently poised to to gain major market share. There is a lot of experimentation being done with new formats. The format that can provide what consumers frequenting a particular store in a particular location and across all channels want will be successful. With the fragmentation of consumer segments, this means that different retail formats are likely to be successful in different locations.
Clubs are steady growers, certainly, but our projections don’t show much share gain in grocery-equivalent products. And Mass is likely to lose share. Dollar stores certainly win more than this poll suggests.
The poll reflects a deeper problem with senior executive mindsets—they over-focus on the biggest customers and lose track of small but important opportunities that are collectively critical. Regional grocery companies like Hy-Vee, H-E-B and Publix are doing just fine, but they see Supervalu and Safeway and apply that to the channel as a whole.
One of the fastest growing companies in grocery is Whole Foods. But the majority of CPG companies have not figured out a credible way to approach Natural and Organic. So they ignore it.
Too much strategic leadership is focused on home runs with big customers, and that’s not where the growth is coming from.
Unless there is a radical change in Washington politics, economic stagnation and perhaps decline over the next three years will make warehouse clubs more attractive for the middle class due to the savings from bulk buys.
As far as the potential of high-end consumers as customers: All you have to know is that Mitt Romney and his wife were photographed shopping in Costco shortly after the election. You think he knows something about our economic future that the majority of voters do not?
The clubs have a great impact on our sales because of the special packs they sell, and we cannot buy. I am in the minority on this, so I’ll behave myself. But the continuing uneven playing field makes it tough to build sales, and the clubs are another competitor that can crush us on the staples.
I think the food service wholesalers have felt the loss of sales for many years, as they can not even come close to the prices the clubs charge for many restaurants. I see lots of chefs in their stores, and small convenient store owners who stock up on paper, gum, pop, and candy in huge volumes.
I have a 12 food wholesale club pack section, with mostly Costco, and Sam’s Clubs products, that does very well, and I mark it up 15-20% gross margin. This keeps some customers happy, and out of the Club stores, which helps me sell them more meat and deli stuff. It is a big Rubik’s Cube of buying from the best wholesaler out there, and the Club stores have the best prices on many institutional foods to help boost my margins. I’ll continue to use them for my bottom line.
Clubs are just one of the alternative formats that have taken grocery growth away. Since the ’80s, eating-away-from-home, supercenters, clubs, drug, dollar, and natural stores have taken all the population growth volume.
To date, a mini-club format has not worked, only the large format. This being said, there are a finite number locations for a large format, thus it is unlikely they will take much more share from supermarkets.
Clubs are no answer to the food desert opportunity. These locations would have supermarkets if sufficient land was available. The number of daily or bi-weekly household shoppers at clubs is small. Most households make pantry buys at clubs and fill-ins with supermarkets. Clubs may add some share, but it will be small.
This is remarkable: not one person has mentioned online, even though it was a poll choice and is regularly trotted out as the be-all-and-end-all (mostly “end-all”) of retailing’s future. I actually agree with this (absence) since I’ve never thought (e)mail-order toothpaste makes much sense, but the about face is surprising.
Warehouse Clubs have a unique relationship with their member shoppers and it makes a difference in their ability to maintain the range of products their members want. They have figured out what attracts their higher income shopper , using member profiles, shop history, club specials, etc. – and what keeps them coming back. They know what products sell, diligently maintain consistent quality, while exploring new products through live demos and road shows to qualify shopper interest.
Costco grew through the recession, adding higher value items and sizes, likely to keep going ahead. Hard model to duplicate, but some areas are underserved, and fresh/organic/ natural focus might work in some regions.
I think there are a variety of formats that are nipping away at supermarkets. Whether they are dollar stores, supercenters, drug stores, online, or other channels, everyone is taking share.
Clubs have a certain appeal and demographic to which they appeal. Of course you also have to be a member. Certainly clubs have impacted supermarkets, especially with bulk items. But I don’t believe that they are better positioned to gain greater share of the CPG market in the next three years, any more so than a number of other channels.
Yes. They offer better pricing, minimize out of stocks, and their SKUs offer better perceived value to the consumer. Add to this an incredible house-branding effort and you have many of the reasons why clubs continue to grow in an otherwise flat retail market.