Wal-Mart still reigns but competitors are charging back; and retailers across the board are pinched by the carbonated slump

The 2004 year in retail can best be characterized as one of shifting sands. Wal-Mart still possesses inexorable growth, traditional grocery is still having trouble with positioning, and alternative channels continue to encroach on grocery’s business. But Ken Harris, founding partner at Cannondale Associates, Wilton, Conn., says the fundamentals are the same but there is an undercurrent that’s throwing off the predictable sense of balance. “Wal-Mart today is very different from who they used to be a year ago in terms of their positioning,” he says.

Who would have thought that a company besieged by legal actions, labor unions, class action suits and international setbacks all in the same time span could still finish the year with the biggest slice of the retail pie chart? Amazingly, Wal-Mart’s fiscal performance makes its troublesome roadblocks seem like nothing more than white noise as it proceeds seemingly undaunted, growing its business by blowing away the competition on the basis of lowest prices, clearest company strategy and store branding. But one thing has changed since last year: the competition is finding new and original ways to respond and it’s starting to resonate with consumers.

A formidable Wal-Mart competitor is the club store, and club stores are enjoying increased sales due, in part, to increasingly diverse product offerings. ACNielsen’s Consumer and Market Trend Report 2004 likens club store shopping trips to treasure hunts, “where unexpected bargains are a staple and seasonal merchandise adds holiday flair to an otherwise unadorned concrete expanse.”

“No one will beat Wal-Mart by responding to Wal-Mart,” Harris says. “The best chance a competitor has lies in creating its own path and following it.”

Harris lumps notable examples into two categories: “the innovators” such as Whole Foods, Trader Joe’s and Aldi; and aggressive regional competitors in tightly confined areas which, Harris says, have “simply taken it to Wal-Mart in a way that’s unique to the company. HEB won it on demographics; Publix won it on clean, well-lit stores; Wegman’s beat them on the ambient shopping experience; and Safeway’s Lifestyles shopping experience is on the road to success, although it’s too early to tell.”

Regarding consumer loyalty, Harris recounts a recently read article that argued the demise of consumer brand loyalty. “It’s an initiative that retailers are perusing with the argument that people care more about the stores they shop in than the brands that are offered,” he says. “That’s why store brands are doing much better than they used to. If you play that through to its natural conclusion and the retailer starts to brand its store, then other factors may start to weigh in in terms of how consumers are looking at the importance of the retail shopping experience.”

The recently issued Cannondale Associates PoweRanking Survey 2004, which identifies the best retailers and manufacturers, as evaluated by their trading partners, ranks Wal-Mart as the leader in many key strategic and business fundamentals categories, but also gives credit to competing retailers. “The balance of power in the PoweRankings is shifting: from supermarket retail to ‘super-regionals’ like HEB, Publix and Wegmans, who are all privately held and have a lot more latitude and flexibility,” Harris says.

 “Dollar stores are continuing to grow, club stores are continuing to encroach on traditional supermarkets, and most importantly, consumers are a lot more fickle than they used to be,” he says. “Right now, retailers are trying to decide where to reposition themselves, while manufacturers are trying to decide where to invest their energy.”

On the manufacturing side, Procter & Gamble continued its reign as the No. 1 ranked manufacturer. Those surveyed appreciated P&G’s innovative marketing, especially when it came to the company’s monthly Brand Savers coupon advertising program, something retailers tied into for better leverage.

P&G also ranked high for its ability to provide accurate consumer insights. This type of information has proved helpful for retailers as manufacturers are working to positively influence shelving, assortment, pricing and merchandising recommendations. Anheuser-Busch was cited for its insight into the impact a beer consumer has in stores, extending beyond the purchase of beer. A-B also won kudos for its straightforward category management program, which uses simple terminology to convey how beer sales can improve total store sales.

Quaker Beverages & Foods made its debut on the 2004 PoweRanking Survey, earning high marks for its clear company strategy, its combination of growth and profitability, its salesforce/customer teams, its ability to provide helpful consumer information and its supply chain management. Conversely, Pepsi-Cola and Coca-Cola’s performance rankings took a noticeable dip.

Harris attributes the deterioration of Coca-Cola’s standing to the fact that it is experiencing so much internal turmoil. “They haven’t had a clear message in the past few years; they haven’t had the kind of marketing programs that they’ve historically been known for and they haven’t had a consistent message,” he says.

Pepsi on the other hand, turned in an outstanding performance but lagged because its new team strategy had not taken flight at the time of the PowerRankings. “They used it as a call to action,” Harris says. “It’s impressive — from Steve Reinemund down, Pepsi is laser-like riveted on improving their overall performance, which they will then probably translate into the PoweRankings. In some respects, they’re a company to be emulated in terms of how they’ve responded to what they perceive to be not particularly strong results.”

The grocery segment prides itself of the breadth of its beverage offerings. According to Jeff Lowrance, spokesman for Food Lion, Salisbury, N.C., beverages are an especially important part of business. “Consumers in the Southeast and Mid-Atlantic are known for loving beverages, especially soft drinks,” he says, adding that energy drinks have shown great growth potential for the company.

Attaining a merchandising balance through the proliferation of new brands and flavors has proved especially challenging for Food Lion. Lowrance says his company continues to give beverages a great deal of shelf space, balancing the need to introduce new products while maintaining appropriate space for longtime brands and flavors.

For most retailers, the sugar and/or carbonated bubble has popped. Fortunately, other beverage varieties have flourished.

“With increasing customer focus on living healthier lifestyles and consuming health-oriented foods and beverages, combined with ongoing media coverage on important issues such as child and adult obesity, we continue to witness flat sales with respect to the traditional high fructose corn syrup, sugar-based items,” says Janet Milan, director of direct store delivery at Giant Eagle, based in Pittsburgh. “The main growth in this category is in the diet/light beverage segments, with new item introductions including Tropicana and Minute Maid Light items. In addition, the flavored waters and energy drink categories have experienced strong growth.”

Because beverages play such a vital role in the overall meal experience, Giant Eagle supermarkets carry approximately 450 beverage items on average, including soft drinks, water and flavored waters, teas and energy drinks. “Our goal is to ensure that we offer an extensive variety and selection of beverages that accommodate various lifestyles (natural and organic, single-serving containers, multi-packs, etc.) and flavor preferences,” Milan says.

She adds that Giant Eagle continues to experience an increasing presence of adult beverages that are positioned as offering health benefits. “There are several companies that are manufacturing sodas in the natural category that have a 70 percent juice content or higher, but maintain the sweet flavor associated with sodas as opposed to a more fruit juice flavor,” she says. “An example of a soda product that includes non-traditional soda ingredients is Steaz soda, which offers a soda with green tea.”

Giant Eagle supermarkets carry approximately 60 SKUs that offer a larger natural and organic product variety, and Milan says the company is committed to offering USDA-certified organic sodas to “accommodate the needs of our customers who practice an organic lifestyle.”

Wild Oats also sells a wide range of progressive, all-natural beverages, from spring water to 100 percent fruit juice to energy drinks. “We offer both shelf-stable and fresh juice blends and beverages packed with nutritional benefits, including ‘green’ drinks, soy-based beverages, and juice blends made with exotic ingredients, such as Sambazon Açaí, an antioxidant-rich berry grown in South America,” comments Laura Coblentz, senior director of brand marketing at Wild Oats Markets, Boulder, Colo. “We sell Italian sodas as well as carbonated beverages not sweetened with high fructose corn syrup — as a matter of fact, Wild Oats Italian sodas and canned sodas are one of the very few carbonated beverages made with sugar, as opposed to high fructose corn syrup.”

Because Wild Oats is able to offer a wide selection of unique beverages, they are an important part of the grocery business. “Wild Oats offers products not available elsewhere for great prices. For example, pomegranate juice has become wildly popular this past year due to the discovery of the fact that it contains high levels of powerful antioxidants — it was even featured in Time magazine,” Coblentz says. “Wild Oats is able to offer this product under the Wild Oats label at a lower price than the brand leader, providing a great value to the customer.”

The success of Wild Oats’ imported Italian sodas in flavors such as tangerine, grapefruit and passion fruit, is indicative of a trend toward products with greater flavor impact, Coblentz says. In addition to pomegranate juice, she says single-fruit juices such as antioxidant-rich blueberry and cranberry, are purchased by those who desire a beverage with health benefits. Along the same vein, “green juices,” made with spirulina and chlorella, have also proved popular with Wild Oats customers.  

“Wild Oats customers are always looking for a great-tasting beverage plus one that offers health benefits; our customers are very knowledgeable about nutrition,” she  says. “Another popular category is the drinkable yogurts sold in the dairy section. These are a big hit with parents and kids because they provide calcium, vitamin C and probiotic benefits.”

Coblentz adds that Wild Oats’ biggest beverage challenge at retail revolves around the efforts that go into maintaining the company’s exacting standards, while still providing the products consumers are looking for. “We are continually searching for products that appeal to customers but do not contain high fructose corn syrup, which is preferred by manufacturers because it is inexpensive relative to sugar or evaporated cane juice,” she says. “The Wild Oats label has an even stricter standard, whereby we prohibit the use of bleached sugar or high fructose corn syrup in our private label products so that we offer the best quality products. For example, Wild Oats fresh lemonade is made with evaporated cane juice while our competitors’ products are sweetened with high fructose corn syrup. We are continually striving to offer the highest quality products at the best prices possible.”

The convenience store segment enjoyed 13.7 percent growth acceleration in 2004 in-store sales — more than double those seen in 2003, according to figures recently released by the National Association of Convenience Stores (NACS), Alexandria, Va. This growth also surpassed that of virtually every competing channel, according to U.S. Department of Commerce data. The only channel that saw growth surpass that of the convenience store industry was warehouse clubs/superstores, which grew 13.8 percent. Overall retail climbed 7.6 percent, and other competing channels didn't match that level, including drug stores (+7.1 percent), grocery stores (-1.8 percent) and discount department stores (-0.3 percent). Surprisingly, the strong growth in c-store sales was driven by particularly strong merchandise sales, which grew 9.6 percent per store, as opposed to foodservice (-1.1 percent).

Packaged beverages ranked sec ond only to cigarettes in the lineup of top convenience sales items, accounting for 12.2 percent of all sales. Beer ranked as the fourth-highest sales category (following foodservice) and accounted for 11.9 percent of all sales.

But when it comes to in-store business, the biggest c-store concern, according to Jeff Lenard, spokesman for NACS, is adjacencies, or remerchandising based on shopping experience as opposed to product categories. “Convenience stores get the bulk of their revenues and traffic from fuel (66.5 percent of revenue in 2004), but less than 40 percent of their profits from gas,” he says. “Therefore it is critical to grow in-store sales, and grow them beyond individual item purchases, especially since so many other channels are also in that space.”

The convenience sector also continues to be challenged by the upswing in channel blurring, where retail channels not usually associated with food and beverages are quietly competing to serve the convenience customer. ACNielsen’s Trend Report reveals that beverage sales ranked as the fourth-largest sales category behind candy for drug store venues. And non-traditional retailers, such as Blockbuster and home improvement stores have beefed up their up-front impulse items to include beverages. The store-within-a-store concept also has taken off — Starbucks kiosks are tucked into Target stores and Dominick’s grocery stores, and Dunkin’ Donuts has even found its way into Home Depot.

Lenard says the increasing encroachment is a call for c-stores to hone in on a way to turn their store into a destination. “It is easier to name channels that don’t look like convenience stores at the counter (selling snacks and drinks) than those that do,” he says. “Drug stores are well into selling beverages, as are some other less obvious channels such as electronics stores, pet stores, craft stores and home improvement stores. It’s not enough to sell drinks, but to sell your store as a destination for something that isn’t being met by others — whether it’s some of the more unique new products that convenience stores carry or combining with other offers such as sandwich programs.”

Another limiting factor is store size, and on a larger scale, real estate availability. “Above all, we sell time, so stores can’t become too cluttered with new products or get too big,” Lenard comments. “And with competition for the top street corners fierce from all channels, real estate costs are a limiting factor as well. Stores in some areas can’t afford to get bigger. So the trick is to better manage inventory and understand what sells and what doesn’t and manage the introduction of new products. The other potential challenge is that if you are relying on the customer who wants new things, you must continually deliver, which can be a daunting task.”

As evidenced by the NACS figures, beverages play a vital role in the convenience store product lineup. “More and more retailers are skewing away from the cigarette part of the business; what picks up the slack are the beverage categories,” says Andrew Steele, Shell Trading and Retail Zone (STARZ) product coordinator at Shell Oil Products U.S., Houston. “If you drive by any site — Shell or any other petroleum product marketer — you’re going to find that beverages are pretty prominent, whether that is from an outside display or from a signage display on the street. Five or 10 years ago, there wasn’t that much prominence.”

Steele says once consumers get inside the convenience store, the first thing owner/operators want them to see is beverages, and Shell actively seeks out innovative beverage marketing tools to improve beverage visualization and ultimately drive sales. “Our front-end program was probably one of our best programs — a two-bin front-end cap with two shelves above it,” he notes. “The two bins allow for two types of beverage products to be marketed, along with complementary snack items to be merchandised above them. It allows you to have ‘in-sight’ real estate that can be transitioned each month depending on the promotions.”

Like the grocery sector, convenience stores are experiencing a slow down in non-diet carbonated drinks, but c-stores are feeling a stronger pinch. “It’s such a big part of everybody’s business. When that slows down, even as little as just two to three percent, it’s the equivalent of a 50-percent drop in other categories,” Steele says. “To make up that volume, we listen to our customers who are, right now, into better-for-you drinks like water and isotonics. One category that’s particularly encouraging is enhanced waters. Brands like Glaceau bridge the gap because they’re low in sugar and full of flavor. Morning drinks like yogurt drinks are also growing.”

Convenience stores also are working to overcome the misconception that they are merely a one-stop shop for less-than-healthy snacks and beverages. “We sell so many things that are perceived as less-than-healthy. The big challenge for our retailers and operators will be to separate themselves from that image and find a way to position themselves as a good-for-you outlet,” Steele says. “Part of the solution is by merchandising better-for-you products in prominent locations like a healthy end-cap. Put water wherever you can, be it take home or in a display. Little things do get noticed by customers. Beverages are the leader in terms of conveying an image to customers. You make statements with the brands you carry.” BI

With about 16,000 branded U.S. sites run by around 3,000 owner/operators Shell stores are not franchised, and marketing can vary from store to store. In order to drive category growth and communicate valuable offers to its operators, Shell developed STARZ (Shell Trading And Retail Zone), a Web-based networking tool that allows Shell to directly communicate to its owner/operators, offering direct access to vendor information such as contacts, new products and vendor offers and programs.

“We have a huge audience, but it’s also somewhat fragmented — the same dilemma that many beverage vendors have,” says Andrew Steele, STARZ product coordinator. “We designed STARZ to be an easy, cost-effective mode of communication for everyone involved.”

Launched in February 2004, registered users can log in to the STARZ Web site and peruse the vendor offers available to them. Vendors can change their listings as often as they wish, so that if they have a new product or promotion coming out, they can let the whole network know about it. The site is designed to encourage daily logins thanks to fresh content like daily news updates from industry sources, a training and learning center that gives access to industry best practice information, vendor tips for merchandising and marketing, and National Association of Convenience Store data.

“We saw a big need to get each of the two parties together because there is a lack of consistency in terms of how vendors market to retailers,” Steele says. “We don’t dictate to operators how they have to market, but we do the legwork for them by providing the information we think might be helpful for their respective businesses and leave the decision-making up to them.”