It's tough to get ahead in the grocery business today. Shoppers are disloyal, discounters create mounting price pressures, and customers demand more in quality and service.
This drama is playing out in many countries, but we decided to take a closer look at the situation in Australia, where we surveyed more than 2,500 supermarket shoppers. Our findings were unsettling: more than 80% of respondents told us they routinely cross-shop and spend almost 40% of their grocery budgets outside of their primary supermarkets.
To win shoppers, grocers need to lower prices while raising quality and service, and they need to adapt costs to fuel these investments. But earning customer loyalty also requires a differentiated proposition, beyond price -- and all signs point to fresh food. In our survey, high-quality fresh food ranked at the top, tied with price, as the most important criterion for choosing a grocery store. Fresh food sales have grown 2.5 times faster than sales of dry groceries in Australia.
The Halo Effect of Fresh Food
Shoppers told us that buying fresh food is the main reason for 65% of visits to their primary store. During those trips, they typically also buy non-fresh items. So the prize for getting the fresh proposition right extends beyond that department, having a halo effect.
Global retailers are investing in a range of tactics. Many have created in-store theatres to showcase their fresh offerings, with chefs preparing sushi, for example, or baking bread from scratch. Others offer locally sourced or organic produce. In addition, winning companies are adding ready-to-eat salads and other prepared meals, and employing specialists to answer shoppers' questions about such matters as cheese pairings. Others have rebuilt their supply chains to deliver fresh food from farms to stores, in record time.
But while the fresh food section may hold great promise for differentiation, it has traditionally been less profitable than other departments, due to higher costs in shrinkage, store labour, rent and merchandising. How, then, do supermarkets invest for differentiation without hurting their profit margins?
First Move: Defining A Fresh Strategy
The best grocers thoughtfully define a clear strategy for balancing customer differentiation and profit imperatives. With an average of 820 fresh SKUs in each store, US discounter Trader Joe's simple, low-price, high-quality selection is designed to keep its costs low. By comparison, Whole Foods Market stocks an average of more than 3,000 fresh SKUs. This broad assortment is designed to deliver high sales. While these grocers have taken decidedly different routes, both earn high marks for customer advocacy.
After defining a strategy, winning grocers understand that they need to break down the silos and ensure highly effective cross-functional collaboration among merchandising, supply chain and store operations.
Grocers also need to take a whole-store view of fresh economics -- for example, factoring in the implications of an in-store bakery on total basket size and transaction numbers.
Acknowledging that the fresh food department could make less money, the best grocers also identify the decisions that will help them beat the odds, such as when to bake the doughnuts to take advantage of optimal store traffic. Many of these decisions can only be made at the local level, so the head office needs to empower local store managers.
Based on our research and work with companies, we identified four areas of focus for any grocer hoping to make traction in fresh food. Let's look at them one by one.
- Get the assortment right. Having the highest-quality fresh fruits and vegetables topped the list of 14 criteria for choosing a grocery store for fresh food, according to our survey. The second most popular criterion: a large selection of fresh produce. Shoppers' perceptions of quality is shaped by the abundance and aroma of fresh produce, as well as the look and feel of the fresh food area.
A wide product range builds credibility with the customer, but it will increase the store's supply chain, in-store labour and shrinkage costs. The answer is to pick the spots to differentiate. Beyond the core 50 to 100 items, localise your assortment. The best retailers now employ advanced analytics techniques to mine basket and loyalty data, to understand where to make the smart trade-offs in assortment.
- Pay attention to product presentation. There's an inherent challenge when it comes to presenting fresh food. Customers like to see tomatoes piled high -- remember, abundance is a very important criterion for shoppers. The concern is that with abundance comes high labour costs and the potential for a high rate of shrinkage.
Grocers will need to work with suppliers to ensure produce is delivered in the right quantities to match the velocity of sales. They should also install fixtures that are best suited for the pace of turnover. Trader Joe's fixtures are narrow but well stocked, creating a sense of abundance without contributing to waste.
- Be smart about in-store labour. Customers want employees who are trained to know about the fresh products, but labour costs can be daunting. Offering a high level of service and such features as freshly stocked salad bars means spending three to seven times more in labour costs for fresh food than for other departments.
Winning means allocating your best people to fresh food, providing them with the right tools and training, and rewarding them accordingly. An important component: invest in a dedicated training team that travels to stores to build employees' capabilities and identify improvement opportunities.
Whole Foods has set the standard in store labour by paying above-average salaries to attract and retain the best people, operating its stores as a series of product teams and providing incentives based on team and individual performance, down to the lowest-level employees. It also collects daily data on store and team sales, product costs and store profitability, making that information available to staff to spur continuous improvement. Whole Foods invests in regional and in-store training, with a focus on inventory management.
- Build a supply chain to support fresh food. The goal of the supply chain should be to move products from farm to fork in record time while improving the customer experience. The best grocers avoid delays that affect shelf time and contribute to shrinkage. They reduce handling time by coordinating delivery with store staffing so produce doesn't lie around on pallets for hours. In the best situations, grocers provide a one-day turnover pace for more than 80% of the stock in their distribution centres, with five to seven deliveries to stores each week.
A profitable fresh food department requires thoughtful attention to assortment, presentation, store labour and supply chain. That isn't easy, but fresh food increasingly is where shoppers will be won or lost.
Melanie Sanders and Yngve Andresen are Bain & Company partners based in Melbourne. Allan Schulte is a partner based in Bangkok.