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How to create food store formats that thrill customers

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Food is fast in whole new ways for retailers today — and it is dramatically affecting their store formats. Rapidly changing demographics, evolving food preferences, and technological and digital disruption are raising consumers’ expectations to new highs.

Food is fast in whole new ways for retailers today — and it is dramatically affecting their store formats. Rapidly changing demographics, evolving food preferences, and technological and digital disruption are raising consumers’ expectations to new highs.

That can make or break retailers that are building new stores or converting current ones. Scalability and cost efficiency are important, but so is understanding the profound ways in which current trends are affecting food retail. Let’s look at some of those trends, then explore three steps food retailers can take to create store formats that keep pace with the industry — or even move it in new ­directions.

Running Out for Much More Than Butter and Eggs

The U.S. population is fundamentally shifting in age, income, ethnicity and urbanization. As baby boomers retire and Millennials expand their buying power, savvy retailers will get to know well the needs of these segments (and every subsegment), adapt their strategies and develop new delivery models. For example, boomers and Millennials alike have embraced on-the-go food consumption, which has food retailers competing with fast-casual restaurants like never before. Product categories such as ready-to-eat meals, produce and deli are on the rise, while carbonated soft drinks, frozen dinners and canned fruits are declining steadily. Consumers want healthy food options and innovation, variety and convenience. Retailers see opportunity here — the U.S. fresh ready-meals market is expected to grow 35% in the next five years. Given their presence on numerous street corners and blocks in metro and urban markets, drug and convenience store chains have their eye on this growth and are developing ways to grab their share. Dollar chains are doing the same in urban and suburban markets.

Consumers’ craving for healthy food is driving format proliferation. Take organic foods. They represent less than 10% of grocery store sales, but their share is expected to grow 14% in the next five years, even as overall food retail sales will likely grow just 2.5%. The explosive popularity of organic food started at Whole Foods, which targets upscale, health-conscious shoppers, and now is moving mainstream thanks to a push by traditional retailers such as Kroger, the largest grocer in the country.

Technology and digital disruption can further change current formats. While e-commerce has succeeded to date far more in categories such as electronics, food retailers hope to capitalize on this trend by revamping their supply chains to handle a broad range of SKUs and provide more efficient last-mile delivery. Retailers are also investing in mobile engagement with their customers to integrate online and in-store shopping. Now their customers can order online, apply digital coupons, and pick up their purchase in-store or have it delivered. Going forward, e-commerce sales will accelerate for those food retailers that close the cost burden of last-mile delivery while maintaining a positive shopping experience inside and outside the store — an area where hard line and specialty retailers have made significant progress.

Translating Trends Into Successful Store Formats

There are three essential steps for retailers to take to ensure success as they rethink investments in new store formats, repurpose existing footprints and enter new geographies:

• Define the right value proposition. This is probably the toughest nut to crack. Traditionally, retailers base formats on consumer demographics, shopping occasions and competitive overlay. They also may assume that strength in their current segment will translate to equal strength in a new segment. Target’s missteps in Canada are a well-known example of this. While its operational struggles contributed to the failure, underestimating the nuances and differences across geographies played a role. Instead, understanding customer expectations in the targeted market and differentiating against them is far more critical than banking on legacy success.

Aldi offers a success story at understanding customers. It gradually appealed to the value-conscious shopper by providing good quality, private label merchandise at no-insult prices that beat traditional, low-price competitors. German retailer Lidl went one step further by balancing private label and national brand merchandise at low prices. Interestingly, Aldi now is quickly moving away from its down-market reputation by penetrating upscale markets. It realizes that shoppers across all income segments look for value and are responding with a winning merchandising plan that is high on quality while focusing on price, relative to low-price competitors. Understanding nuances like these across demographic and psychographic dimensions is critical to create the right value proposition.

• Test for scalability and cost to serve new-format shoppers. Whether a retailer is creating an entirely new format or refining an existing one, it is important to understand the operational efficiencies to be gained across the value chain. For example, Target struggled initially to enter retail food when it focused only on larger-format stores that could accommodate numerous categories, including refrigerated products. This approach left its fresh-product supply chain geographically thin and widespread and compromised freshness. The chain later adapted its traditional store format to accommodate food, thereby beefing up market density and efficiency.

Retailers with new stand-alone formats will have different issues to solve, such as how to invest ahead of growth. Whole Foods offers a great example: It managed the early stages of growth using a local procurement and supply chain model before moving to a centralized model as it gained scale. The bottom line here is that retailers can achieve a profitable and sustainable new format if they first think through the implications of cost to serve and its impact on return on invested capital.

• Focus on a "test, refine, roll out" mind-set. As we have seen, shoppers want innovation, and they want it fast. They also are fickle and move quickly to the next new thing. So retailers should ask themselves several key questions: What does the new format solve? Is it capturing an emerging shopping trend (such as organics), addressing changes in shopping behavior (such as on-the-go consumption) or capturing an unmet need (such as expectations for freshness)? The answers will determine the format strategy, a supportive operating model, and organizational requirements.

Future Format: Profitable and Flexible

Retailers across the country are intensifying their focus on fresh and prepared foods and are using new store formats to satisfy the appetites of today’s diverse consumers. Some are testing smaller formats in locations that are unsuitable for large-format sites, while others are redesigning their current assets to compete more effectively against all food delivery channels. Successful retailers will find that sweet spot where they can capitalize on a market opportunity that is big enough to be profitable with an organization that can constantly adapt to shoppers’ needs.

Kumar Venkataraman, is a partner with A.T. Kearney and is based in Chicago. He is the lead partner for the Chicago office and is a member of the firm’s global Consumer and Retail Practice. He can be reached at [email protected].


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