FMI 2010: What the Industry Isn’t SPEAKING About

May 12, 2010

Commentary By George Anderson

It didn’t come as a surprise that a good portion
of yesterday’s FMI SPEAKS 2010 session on industry trends was focused on the "changing
consumer" and
their mission to find value (aka save money). As was made clear by various
members of the panel, the grocery industry has come through the "Great Recession" understanding
that shoppers are much more deliberate in their shopping: creating lists
that they stick to once they get to the store, making greater use of coupons
(print, online and, increasingly, mobile) and purchasing store brands that allow
them to buy a similar volume of goods, but at a lower ring.

Leslie Sarasin, president
and chief executive officer of the Food Marketing Institute, said, "The
psychology of the shopper has changed. These economic times have been unsettling
for customers and companies alike. We’re now at a point of separating myth
from the reality about about how the recession will affect consumer behavior."

Sarasin went on to ask, "How long will consumers be cautious? Without
question, people are becoming more accustomed to being more frugal. Now one
knows where or how people will undo that sense of caution … You will see
unmistakable signs that the economic downturn has caused new shopping and eating
behaviors. Everyone has been affected. Price is a key value driver today."

While preliminary
findings of the SPEAKS research were generally well-presented on the pricing
front, we came away thinking that there were some important things not being
said. The "elephant in the room" was the lack of discussion on what makes supermarkets
generally more expensive than competitors in other channels, specifically dollar
stores, limited assortment grocers, club operators, mass merchandisers and
supercenters. That in a nutshell is a (grocery) business model that is focused
on making money in buying goods versus selling them.

As Jamie Tenser, principal
of VSN Strategies and a RetailWire Braintrust
panelist, pointed out in a conversation (Note: Jamie was ball-parking to make
a point so let’s not quibble over the precise number), supermarkets are expecting
to lose one percent on the sale of actual products in their stores with the
expectation that various upfront fees will generate a positive two percent
bump to let stores arrive at their roughly one percent (give or take) net profit.

why the rehash of what we already know? Isn’t it time that supermarkets become
more price competitive across-the-board on an everyday basis by switching to
net pricing?

We know of a couple of cases where chains, in cooperation with
price optimization firms, are testing net pricing in key categories to determine
if it works. At least in one instance that we are aware of, initial results
are promising, particularly because they are in categories where weekly promotions
are the rule.

As one hi-lo retailer involved in one of these tests that focused
on everyday prices recently told us, nearly 70 percent of total sales were
on promotion before the test. That number was cut by something
like 60 percent with an actual increase in units moved. Perhaps it’s time for
grocers to understand that to get to the low price that their shoppers are
looking for requires something other than hot deals run one week while prices
jump up on other items to cover margins. Maybe it’s time for grocers to stop
complaining about others, such as Wal-Mart, that are selling goods at everyday
prices below what they can offer at a promoted price and question how they’re
going to market. Perhaps it’s time for a whole new approach to buying and selling
goods. Maybe, the time to start is now.

Discussion Questions: Is it time for grocers to change from a business
model that focuses on making money from manufacturer funds to a net pricing
model? Should industry associations engage in an intervention of sorts
and try to get members that are hooked on upfront fees off the habit?

Please practice The RetailWire Golden Rule when submitting your comments.

Join the Discussion!

15 Comments on "FMI 2010: What the Industry Isn’t SPEAKING About"

Sort by:   newest | oldest | most voted
David Biernbaum
12 years 4 days ago

Supermarket executives had made their own bed with short sighted SKU rationalization implementation that has resulted in almost every store in the country carrying exactly the same product assortment and the same SKUs. And now, these same executives wonder why the consumer bases most of her purchasing decisions based only on price and value? What else can she do?

Between SKU rationalization and your decisions to make it unaffordable to newer innovative brands to gain placement, you have created a shopping environment that has little or no points of differentiation other than price and value for all the very same products, flavors, and sizes, carried the same as by all of your competitors. Price and value are your only remaining points of differentiation.

Steve Montgomery
12 years 4 days ago

Changing the business model to focus on making money on selling versus buying is a difficult process, whether it is supermarkets or distributors. A lot of it is cultural–buyers are bonused on how much money they can generate through buying “right.” They have honed their buying skills; whether it is straight up purchasing, slotting/placement money, or alternative product sourcing, they understand how to do it.

As noted in the article, the entire business is built on it. Should the industry go down this path, the changes can be far reaching. As Mr. Biernbaum stated, more products may find their way to the shelves, major companies might not own space in the store, etc.

Bill Bittner
Bill Bittner
12 years 4 days ago
It seems there are really two questions here: Should supermarkets reduce their dependency on “fees,” by asking the manufacturers for their best net cost? And, should the supermarket use the revised costs to move from a high-low to an everyday low retail format? There is no doubt in my mind that fees and purchasing discounts in general make it difficult to manage margins, i.e. retails. But there are a few basic situations where the fees and discounts make sense from a business perspective. Ironically, I think slotting fees are one of them. By putting a cost on their entry, retailers discourage manufacturers from stuffing the shelves with slow movers just to increase their exposure. In fact, it is often the range of varieties in supermarkets that distinguishes them from the other formats. Manufacturers should understand the need to supplement the cost of shelf space for varieties that don’t sell more. The other instance where discounts make sense is when the manufacturer wants to unload warehousing costs for seasonal merchandise by encouraging pre-season buy-ins. Manufacturers offer… Read more »
Kevin Mahon
Kevin Mahon
12 years 4 days ago

I feel like I have stepped back five years on this discussion topic. This change has already happened in our center-store, non-food categories. As grocery experienced share erosion, they shifted away from fixed fees to pay for performance based on actual product moved during a promotion. While they waited too long and allowed Mass and Club to establish strong loyalty with their customers, they made changes at least five years ago.

Ralph Jacobson
12 years 4 days ago

Without pushing pricing collusion laws, there are indeed more issues facing this than mere pricing strategies. Procurement models must evolve in the grocery business to allow buyers to drive turns and revenue without heavy promo quotas. It can and is being done at retailers around the globe. The old adage of “Buying what we sell, rather than selling what we buy” holds more truth today than ever with the new consumer.

Kevin Price
Kevin Price
12 years 4 days ago

In a funny (odd) sort of way, this is really a meaningless question. Grocers can change their business model in any way they wish but, at the end of the day, it’s the consumers who will decide what happens…and not the execs. So, the REAL question is: Which business model will attract the most consumer $$$?

Obviously, each market may be different competitively. And there are likely to be strong feelings within every organization. Yet, Walmart’s success ought to be a clue as to which game plan might be preferred by the consumer.

W. Frank Dell II, CMC
12 years 4 days ago

The supermarket industry has never had the backbone of non-food retailers. Sam Walton transformed an industry that made money two months a year by making money every day on every item.

Supermarkets today have a mix of hi-lo and EDLP in their stores to remain competitive on categories they lost control of years ago, and most still don’t know how to manage gross margin. Most of the supplier money is to get retailers to do something. Does being in the Category Captain position benefit customers? Frequent shopper programs were designed to minimize weekly newspaper specials and they have fallen into coupon redemption and tiered pricing. What will supermarkets do when there are no newspapers?

The supermarket deal addiction is the easy way out, requiring little work. It’s time for supermarkets to buy everything at dead net cost and manage the business.

Ed Rosenbaum
12 years 4 days ago

It is apparent the supermarket industry is realizing things are not going to return to “the way it used to be” just because there is a slight easing in consumer buying.

I wrote earlier on a similar topic that my family buying tendency is not going to return to spending $4.00 on an item that we can continue to purchase for two for $4.00 (both numbers rounded off) at another local market.

I hope this wake up call is more than them thinking it was a bad dream.

Richard J. George, Ph.D.
12 years 4 days ago

Getting retailers to change their dependency on manufacturers’ promotional allowances is similar to asking a drug user to go “cold turkey.” As long as the manufacturers play the game it will be difficult to become weaned off this retailer drug of choice. At the same time retailers need to focus on the front doors for growth and profits.

However, value is more than low prices. My definition of value is benefits received divided by burdens endured. We need to enhance the benefits and reduce the burdens that our customers endure if we expect to be successful in the long run. There are a myriad of non-price options to do this – limited only by one’s imagination.

Roger Saunders
12 years 4 days ago
Tough to flip a cultural/operational practice on short notice. If mid-size and large grocers were to do this, it would take them months to put it into play, and then they have the daunting task of sticking with it. A better play is to stay closely attuned to the consumer, and work with manufacturers in bringing promising solutions to the store. Both parties have to see the fact that the way human beings (consumers) feel impacts how they act. Watching the ‘attitudinal’ trends of points about consumer confidence — Are you Better off, Worse off, or the Same as last year? — are all vital to flexibly adjusting. The April Consumer Intentions & Actions (CIA) Survey points out that only 32% of the U.S. adult population feels “Confident / Very Confident” about the economy over the next 6 months. The consumer is being impacted by the fact that they are NOT better offf (only 16% say they are) than last year. They are watching unemployment issues (G6), the prices at the gas pump, etc. The… Read more »
John Roberts
John Roberts
12 years 4 days ago

So many “buzz” words … so few real answers!

Retailers need to use loyalty card data in an effort to better understand their customers. The purchasing patterns of consumers will identify those that are profitable and what they value within the store. Currently such data is seen as revenue producer–charging suppliers who use it in an attempt to switch consumers from one brand to another or to introduce new items.

The data should be used to inform all merchandising decisions; product authorization, shelf placement, and space allocation; promotions; features; displays; consumer advertising. Retailers who rely on suppliers to manage product categories and control the data used in merchandising decisions are losing competence in the key to their success–knowing their own customers. Retailers who are all about sharp buying and grasping any and all promo dollars without regard to their customers desires will end up with a consumer base totally motivated by and loyal only to low prices.

Ed Dennis
Ed Dennis
12 years 4 days ago

You might want to look first at the players in the industry who are successful. They should show everyone the way to do business. Pricing is a non-issue as long as it is fair. The key is customer service and it is much harder to do than simply changing pricing formats. You see, it can’t be done with a computer, or a consultant. It requires work. You have to hire right and train right. You have to go to the trouble to find people who have the intelligence to realize that the consumer is the engine that drives the train. This requires work and today’s management doesn’t have the stomach to do what is required to be a success.

Why would anyone think that pricing formulas are the answer? I guess it’s just another lazy manager looking for a silver bullet.

Herb Sorensen, Ph.D.
12 years 3 days ago

May I make a modest suggestion? How about supermarkets focusing on margin profits from CPG, IN ADDITION TO manufacturer funding? Weaning from manufacturer funding is simply not going to happen. This is an industry that allowed Walmart to become the world’s largest corporation by their own refusal to reduce their reliance on manufacturer funding. Meanwhile, their failure to directly profit from shopper sales assures that they know very little about shopper sales, period. The entire industry is in a massive state of denial on this issue!!!

Calvin Clary
Calvin Clary
12 years 3 days ago

There is no secret that the business and consumer climate is not going to change quickly back to the spendthrift days we knew a couple of years ago. In that light, we should all think about new ways to cut costs, especially in light of slotting allowances. They are a drain on profit for many reasons, not the least of which the accounting it takes to keep up with them and how they volley back and forth on the actual items’ profit. These fees also put many other who would otherwise be home runs for retailers, yet these manufacturers cannot afford the initial expense of a slotting allowance and thus, innovation is stymied. The simple buying and selling of products are the driving force behind the success of retailers in other classes and should be returned to for the grocery business as well.

jack flanagan
12 years 3 days ago

What Frank Dell said!!!


Take Our Instant Poll

Should grocery chains change their model from buying items with factors such as slotting allowances, failure fees and other charges to net pricing models?

View Results

Loading ... Loading ...