The state of retail

Wal-Mart continues to dictate the way retailers conduct business

Looking back, the 2002 retail year was best characterized by the “Wal-Mart Effect,” a veritable retail phenomenon that struck a resoundingly profitable cord with cash-strapped consumers. But while Sam Walton’s discounting tactics rang up billions in sales for the country’s reigning No. 1 retailer, Wal-Mart’s retail competitors reeled in the wake of decreased consumer traffic and bruised sales. In 2003, Wal-Mart continued to rank at the top of its field and its competitors still struggled to implement long-term rebound strategies designed to reclaim consumers and boost bottom lines.
What’s making it especially tough is that Wal-Mart’s Supercenter expansions are continuing at an even faster pace, according to Todd Hale, senior vice president, ACNielsen Homescan Consumer Analytics, Schaumburg, Ill. “Some industry experts have suggested that every new Wal-Mart Supercenter leads to the demise of one to two grocery stores,” he says. “Based on Wal-Mart’s plans, this could mean that 400 grocery stores will close their doors in 2004.”
Industry watchers are closely following the events transpiring in California’s greater Los Angeles area, where Wal-Mart is endeavoring to find suitable locations for 40 new Supercenter stores. City legislators, working at the behest of grocery retailers and others, are attempting to halt Wal-Mart by creating ordinances that would curtail non-unionized work outfits.
In fact, it’s said that Wal-Mart’s non-unionized, cost-cutting reputation is the primary impetus behind the ongoing grocery strike in Southern California, where 70,000 union employees have been locked out of their jobs at Ralphs, Vons and Albertsons chains because the companies have sought concessions from their unionized workers in order to compete with the retail giant.
Hale says competing for key Wal-Mart shoppers in the low/middle income bracket through the use of “Every Day Low Price” strategies and lower service levels puts retailers at risk. “Retailers who are dedicated in their positioning of their food and perimeter departments and service levels (e.g., Hannaford brothers and Wegmans) are in a much better position to deal with Wal-Mart expansion,” he says.
Hale adds that other retailers who offer value and convenience, such as dollar stores, have expanded their store counts much faster than Wal-Mart and appear to be immune to Supercenter expansion, while limited-assortment retailers such as Aldi and Sav-A-Lot, are using Supercenters as anchors to drive traffic to their stores, again leveraging convenience and low prices to compete.
Retail channel breakout
As the retail industry advances further into 2004, each of its six channel segments (grocery, mass, warehouse/ club, dollar, drug and convenience) will encounter a unique set of challenges. The most interesting occurrence that continues to reshape each of the channels is the disintegration of traditional channel characteristics. While this “channel poaching” caters to all time-pressed consumers, it’s hammering the draw and retention capability of the grocery store channel at an alarming rate.
To put the plight of grocery stores in perspective, ACNielsen estimates that the lack of consumer loyalty has cost grocery stores roughly $900,000 per store since 1998, which is attributable to 10 lost trips per household. The average basket size has shrunk to $33 in trading areas with 3,000 households — this is equivalent to losing 8.3 percent of the frequent shopper base.
A key area for improvement in the grocery channel is strengthening perimeter departments and reminding consumers that grocery stores are in business to help consumers with meal preparation, says ACNielsen’s Hale. “There are big challenges in terms of how the grocery channel deals with their shrinking center store as alternative retailers leverage traffic and basket power.”
The most important factor to shape the grocery channel is the challenge of cost cutting while holding on to service. “[They] must also find a way to maintain or increase their service levels — either through technology or through real people,” says Hale.
In the mass merchandise channel, Hale says Target is well positioned to succeed. In an attempt to leverage more business from Wal-Mart, Target has enlarged the food selection in its stores. According to ACNielsen reports, the company’s $3.4 billion budget enhancement included funds for 94 additional stores, 32 of which are Super Targets with grocery facilities.
Kmart has emerged from bankruptcy and seems to be doing well by targeting important growth segments like ethnic consumers, “but they have a real challenge in improving their image and in getting shoppers back in their stores,” Hale says.
In the warehouse and club channel, chains such as Costco, BJs and Sam’s Club have also seen success, but primarily among small business consumers. Although each chain is battling expenses and gross margin impacts, Costco triumphed in 2003 by attracting the biggest per-club customer spending an average of $94.72 per checkout. Costco was also the nation’s No. 1 wine merchant and the No. 3 grocer.
The value proposition of dollar stores continues to resonate with cash-strapped consumers, but they are also attracting more affluent consumers with household incomes in excess of $70,000. Dollar General store counts have doubled since 1996, with 622 stores added in 2002 alone, and the chain expects its store number to hit 7,300 by the end of 2004. Family Dollar and Dollar Tree have also done well, scoring excellent earnings and sales increases, which are projected to translate into more store openings and improved operational technologies.
The chain drug channel watched its ever-fluctuating store count drop by 9,403 stores, although most were small, independent outfits, while large chain openings appeared to happen at the same fast clip. The aging population continues to be the driver behind chain drug success, and thus far, Hale says Walgreens has been the most successful at taking advantage of this trend through store expansion.
“The channel is seeing improvements in front-end sales,” he says. “Challenges will continue as big-box retailers look at adding Rx in their stores and from mail order Rx offerings. Major chains have all announced that they will not add new insurance carriers who promote Rx mail order. Look for these retailers to get into mail order business.”
C-Stores at a crossroad
The convenience store segment — which tallied 132,424 stores in 2003 — encountered a number of roadblocks last year. After several years of strong store growth, the convenience channel experienced about 1,800 store closings as pressures from big-box retailers (for gasoline sales) and from low-priced tobacco specialty stores cut into two of their most important businesses.
 The good news is that an array of new beverage options can be parlayed into exciting product offerings that could appeal to a diverse customer base. “Consumers expect to find cool new products they can sample in our stores — unlike the big-box stores where you might have to purchase a case or so of the product — and manufacturers are delivering with more new products.” says Jeff Lenard, director of communications at the National Association of Convenience Stores, Alexandria, Va.
The bad news: shrinking cigarette sales are taking a huge bite out of c-store foot traffic. “The loss of cigarette customers impacts all sales at a convenience store,” says Lenard. “If a customer is not coming to your stores to purchase cigarettes, they are not coming to your stores to purchase coffee, sandwiches or beverages. And because they also are not purchasing them online when they order cigarettes, it is an issue that should be of concern to all suppliers to the convenience store channel.”
Bad news aside, Lenard says coffee is a top draw c-store beverage attraction. “Consumers stop to buy coffee more than they fill up their cars, so convenience stores have a great opportunity to build loyalty and repeat sales with their coffee programs,” he says. “The challenge is to make sure you can manage peak sales periods (typically in the morning) and ensure the experience is convenient for all of your customers.”
He says that when it comes to dispensed beverages, c-store proprietors encounter some of the same challenges as restaurants, where cleanliness and consistency are paramount in the customer’s eyes. Packaged beverages present a different challenge. “Convenience stores are mostly known for single-serve sales,” says Lenard. “You have to make sure you manage the cooler doors to ensure that your products are cold and that you don’t have out-of-stocks. And with the plethora of new product introductions, it’s vital that you have a solid category management system in place to track what sells and what doesn’t.”

ACNielsen’s Hale says c-store retailers should focus on prepared meals and fast foods as staples for future growth. “This is a channel that could use help in making their stores more female friendly and maybe think about taking some business away from Starbucks,” he says.


Top retailers by fiscal year sales (in billions)

Retailer Sales Retailer $Sales
Wal-Mart $244 Safeway $32.4
Carrefour $72.0 JCPenney $32.3
Ahold $59.3 (2001) Intermarche $31.5*
Home Depot $58.2 Kmart $30.7
Metro $54.0 Walgreens $29.7
Kroger $51.8 Edeke $29
Target $43.9 Auchan $28.8
Sears $41.3 Tenglemann $28.2
Tesco $39.5 Lowes $26.4
Costco $39.4 J. Sainsbury $25.9*
Albertsons $35.6 CVS $24.1
Rewe $35.2 Ito Yokado $23.3
Aldi $33.7


Source: ACNielsen Consumer Insight Report Fall 2003

Beverage challenges and opportunities
In addition to trying to keep pace with Wal-Mart, retailers have had other issues to contend with. But in terms of beverages, Kim Feil, beverage and snack practice leader at Information Resources Inc. and chief executive officer at Mosaic InfoForce, Chicago, Ill., says the issues currently impacting the sale, image and positioning of beverages at retail can pretty much be boiled down to space — or the lack of it.
According to Mosaic InfoForce, which measures displays and shelf space in 5,300 grocery, drug, mass merchandiser and convenience retailers weekly, space ranks as the single biggest issue affecting retail.
“Last year, the average grocery store stocked more than 35 percent more SKUs on its displays and wedged more than 20 displays in its stores to accommodate the huge demand for greater promotion exposure and new product support,” says Feil. “The largest displayed categories, such as carbonated beverages, water and juices, are all losing share of retailers’ total store displays as they are reallocated to a range of new items and categories entering the market.”
What’s causing the space crunch? Feil suggests there are three reasons why beverage space at retail is at such a high premium. First, every major beverage company is touting its own “total line” of beverage products.
“PepsiCo speaks of ‘total liquid refreshment’, Coke is about ‘choice,’” she points out. “With consumers increasingly changing their beverage consumption habits away from sugared and caffeinated products (due to Atkins regimens, obesity concerns and general health awareness), the full line represents a competitive advantage to these companies. You’ll see this particularly carried out in high-impulse channels [in] coolers in all venues, vending machines [and] fountains.”
Along the lines of health awareness, Feil’s second reason for the space crunch centers on the surging popularity of low-carbohydrate/Atkins/
obesity well-being trends. The growing product list associated with these healthier lifestyle choices isn’t just limited to the obvious bread, cookies and candy; rather they are impacting the entire food and beverage category spectrum.
“Beverages are benefiting from introducing new varieties that cater to these issues [and] I think more small manufacturers who have logical or ‘scientific’ alternatives are able to get into retail outlets when once they may not have attracted retailers’ attention,” she says.
Last among the three beverage-shaping influences is the heightened proliferation of available new beverages such as flavored and fortified milks, yogurt, soy, dairy products that target everyone from babies to mom’s to teen boys. Feil says products such as Dr Pepper/Seven Up’s Raging Cow flavored milks and General Mills’ Nouriche yogurt drinks are great examples of this trend.
In order for retail to improve its future outlook, Feil says those involved must focus and improve on internal and external relationships. “Retailers, particularly grocery and drug, are already combating the loss of shoppers to mass merchandisers, club and dollar stores by heightening the ‘experience’ factors in their stores... creating excitement in the perimeter (for example, deli, produce, entertainment areas, coffee shops) so their shoppers can enjoy the experience,” says Feil. “The center of the store, shelf and display for core grocery products, are not very exciting and are losing out to the ‘Krispy Kreme Center’ and ‘Starbucks shop.’”
Feil goes on to encourage grocery product and beverage manufacturers to find ways to partner with retailers to assist them in attracting and entertaining the shopper, especially when it comes to beverage promotion. She offers examples such as a beverage manufacturer “sponsoring” the deli section, and more cross-category promotions and in-aisle events that extend beyond the usual cardboard sweepstakes.
“Manufacturers also have to help the retailer do category management of his total store displays,” she says. “We at MIF think that retailers don’t realize they are eroding beverage display frequency to accommodate these other new categories, primarily because manufacturers usually analyze display within their own categories rather than across categories.”
RFID:Retail’s next big thing?
Though it’s been around since the 1940’s, Radio Frequency Identification (RFID) has recently received a lot of press thanks to its exciting, yet controversial, implications for retail. The tenets of RFID involve the placement of a tiny, pre-programmed, silicon memory chip containing specific product data on individual products. The chip is identified by a receiving device that transmits the product data to a host computer for processing. This data gleaned from the chip can be used to streamline a variety of applications and is most typically used right now for warehouse inventory tracking. A second RFID work-in-progress is the notion of “Smart Shelf” shopping, whereby a cart of RFID-tagged goods could be wheeled through a portal that instantly scans the tags, making checkout quick, accurate and line-free.
Online shopping gains momentum
A recent Internet study conducted by the University of California-Los Angeles revealed that 61 percent of Americans consider the Internet to be an “extremely” or “very” important information source in their daily lives. According to ACNielsen’s Consumer Insight report, the World Wide Web is expected to grow by 30 percent between 2001 and 2005, compared to television consumption which should increase only 2 percent.
America’s desire for the type of immediate information that only the Web can provide is a fact that’s not lost on corporate America. A growing number of companies are striving to create a stronger Web connection with consumers and this phenomenon is translating into increased retail sales and stauncher brand loyalty. In fact, eight of the top 15 most impressionable consumer product goods companies advertising online are beverage industry pillars such as PepsiCo, South African Breweries, Brown-Forman, Anheuser-Busch, Nestle USA, Procter & Gamble, Unilever and Sara Lee.
“Internet sales were very strong this past holiday season, giving time-starved consumers convenient shopping from their personal computers,” observes ACNielsen’s Todd Hale.

He cites Harris Teeter as an example.
The retailer is leveraging its frequent shopper program and the Internet to communicate promotions to its card members in categories that card members have previously purchased.


Many retailers have quietly embraced and applied the technology, but Wal-Mart was the first retailer to create a public stir when Chief Information Officer Linda Dillman announced last year that the company wanted its top 100 suppliers to implement RFID technology for use by 2005. Wal-Mart’s intentions were twofold. Its first plan entailed the use of RF-enabled pallets and case packages for shipping, warehousing and inventory purposes. The second goal was to test the feasibility of Smart Shelf shopping technology. While the first objective is still proceeding slowly, the latter experiment was quickly grounded after Wal-Mart invested a sizeable sum only to realize the technology for that application simply wasn’t perfected yet. And that’s the problem hindering the success of RFID technology, according to Robert Clarke, Ph.D., an associate professor who founded the RFID Packaging Lab in Michigan State University’s School of Packaging, East Lansing, Mich. “Despite the marketing applications driving the RFID initiative, the actual technology is not developing the way marketing had hoped it would,” he says. “Wal-Mart, and many of its suppliers, intended to create an ‘ideal’ use for the technology: they wanted every item tagged at the shelf level so that, ideally, they could be put in a plastic cart and wheeled through a portal that would scan each item for an automatic checkout.”  
Clarke says one German supermarket called Future Store, which is owned by Metro Group, recently opened with great fanfare because its use of multiple Auto ID technologies including RFID, barcodes, smart cards and magnetic stripes within the store was heavily hyped. “In actuality, [the store’s] focus is directed at a series of smart shelves involving a limited number of products,” he says. “The store also utilizes RFID case and pallet tags for incoming products on about 1,500 SKUs of the 37,000 SKUs handled there.”
In a plan to move RFID forward, Metro Group announced this past January that it will require approximately 100 suppliers to place RFID tags on pallets and cases for delivery to 10 warehouses by November 2004. This directive is similar to the Wal-Mart requirement which is slated to begin in January 2005.
On the surface, RFID seems like an embraceable convenience straight out of The Jetsons, but there’s been a wave of backlash from consumer privacy advocates who equate the technology to a veritable homing beacon for Big Brother. Although experts are quick to dismiss that idea, the paranoia spread quickly. California lawmakers have convened to discuss the privacy ramifications of the technology, and last June an organization called CASPIAN (Consumers Against Supermarket Privacy Invasion and Numbering) unveiled federal legislation, “RFID Right to Know Act of 2003,” which called for mandatory disclosures on consumer products containing RFID chips to “protect consumers against unwittingly purchasing products embedded with remote surveillance devices.”
Tom Coyle, vice president of supply chain solutions at Matrics Inc., Columbia, Md., a provider of RFID technology and visibility solutions, says the focus of RFID in the retail and consumer goods manufacturing industry is the supply chain. “Knowing what goods have been received quickly and efficiently, where they are in the supply chain and where they have been are the first steps in providing visibility throughout the supply chain,” he says. “There are many applications for smart shelves beyond the retail market. High-value or high-risk items are perfectly suited for smart shelves in clinics or warehouses or store backrooms (and) the features of RFID can be used to combat counterfeit products and simplify recall procedures.”
Coyle adds that electronic product code guidelines to protect consumer privacy have already been issued and are currently administered by EPC Global Inc., Brussels, Belgium. “Each tag will have a ‘kill’ or disable feature that will render the tag unreadable. For example, this could be performed during check-out,” he says.