From major M&A deals to an increased focus on in-store foodservice and beverages, as well as the ongoing evolution of convenience stores from pit stops to destination spots, convenience retail is evolving – and operators must continuously innovate to keep pace.
The broad reach of the digital revolution now includes the ubiquitous grocery circular. In the first half of 2016, the number of digital coupons available grew by 23.4 percent, while the number of mobile coupon users in the U.S. rose by almost 18 percent. While traditional print circulars are not likely to disappear completely, many grocery chains are now developing circulars specifically for digital and mobile platforms. Wegmans, for example, introduced a mobile app, allowing customers to clip virtual coupons, while Safeway offers a weekly online circular.
During the 2008 recession, 6,200 brick-and-mortar stores closed. In 2017, total store closures are expected to surpass that number, climbing to over 8,600.
Retailers are undeniably facing headwinds, from the growth of e-commerce and online competitors, the decline of the shopping mall, and shifting consumer preferences, among other factors. Yet, while the process of browsing and shopping increasingly shifts to online and mobile channels, consumers still make the majority of purchases in brick-and-mortar stores. Many retailers are already re-evaluating and consolidating their physical store networks in response to these challenges. But how can they drive maximum traffic to their remaining physical stores, and minimize losses from closures?
Convenience retailers are increasingly challenging the notion that customers should only visit their stores to fuel up and grab snacks, especially in light of the rise of car-sharing and hyper-efficient cars. Some, like Kum & Go, are adding features like growler stations. Others are investing in services to drive customers into the store, like Amazon Lockers and USPS goposts, which have been popping up in numerous QuikTrip and 7-Eleven locations. These innovations are no longer just nice to have. They are becoming necessities for profitable brick-and-mortar retailing.
Some convenience stores are also emulating restaurants to draw traffic, adding outdoor seating areas, free Wi-Fi, or drive-thru windows. For example, Duchess designed a prototype store concept with a greater focus on foodservice, including made-to-order menu offerings, an in-store dining area, and touch screen ordering options. Similar to kiosk ordering, some convenience retailers are also adding at-the-pump food order screens.
Taking on these types of capital-intensive projects presents both great opportunity and great risk for executives. If managed correctly, they can drive significant profit growth. However, some of these programs may not pay off. With each new initiative comes questions regarding their implications. For example, which categories should retailers downsize to create space for self-service lockers? Will introducing a made-to-order foodservice concept drive enough incremental transactions and add-on purchases to cover the associated costs? And which locations will respond best to at-the-pump ordering screens?
The best way to answer these questions is to first pilot each concept in a subset of representative locations, then closely monitor their performance. This approach allows convenience retailers to ascertain whether the initiative warrants further investment, based on incremental traffic and sales. Overall, there are three key questions executives must answer before making decisions on broader rollout.
News that limited-assortment grocery chain Lidl plans to open its first U.S. locations this summer has likely already catalyzed grocers’ efforts to refine their strategies in preparation for the competitive incursion. Recent reports show that even fellow European grocer ALDI – which has already established a presence in the U.S. – is also reacting, embarking on a remodel initiative across markets, including those where Lidl is expected to open its first stores.
European discount grocers are not the only disruptors grocery retailers are facing. As other grocers successfully innovate in response to increased competition from online, convenience, and big box players, all grocery chains must evolve to keep pace.
In recent years, there have been many mergers and acquisitions (M&A) in the retail industry. Examples range from Albertsons’ merger with Safeway to Kroger’s acquisitions of Harris Teeter and Roundy’s, to Alimentation Couche-Tarde’s acquisition of CST Brands and Chilean operator COPEC’s acquisition of all MAPCO stores. In a post-merger environment, there are inevitably competing business priorities; this period is one of the most critical times to cross-pollinate ideas from both organizations and identify where there are winning strategies. Failing to evaluate the best ideas across the organization can be a big missed opportunity for many companies.
In post-merger upheaval, it is often unclear which strategies will be most effective moving forward, and implementing any new program or initiative involves both a financial and reputational risk. Merely continuing along the path of the acquiring company can lead organizations to overlook key ways to refine programs across the business. By learning from both companies’ existing programs, successes, and past approaches, the new company can optimize its go-forward strategy and realize the initial investment thesis.
“Going local” has been a key ambition for retailers for years now. Recently, some retailers like Target and A.C. Moore have been using new store formats as part of their localization strategy, focusing on smaller-format neighborhood stores. Others are differentiating themselves in more nuanced ways, altering merchandise allocation in each store or group of stores to meet the needs and preferences of local shoppers. Nike, for example, has localized space allocation in some stores – for example, their L.A. store includes a greater assortment of clothing to appeal to soccer fans and a trial zone with fake grass to test out cleats, due to the sport’s popularity locally.
While localization has been front-and-center in the industry for some time, retailers still have a significant opportunity to drive profit with improved strategies to meet local market demands. There are many components of a successful localization strategy, including curating marketing and pricing strategies to a region’s demographics and competitive environment. However, one often-overlooked facet of an effective localization strategy is a connection to the store space planning process. Understanding how to tailor merchandising strategies for local market demands can ultimately lead to significant profit improvement and a better customer shopping experience.
Since 2012, the meal kit industry has grown, with more than 150 companies competing for their share of the growing market. The rise of brands like HelloFresh, Blue Apron, and others is representative of shifting consumer preferences: Meal delivery kits address key demands for convenience and fresh, healthy options. For grocery and restaurant chains to avoid losing market share as this segment grows, they should respond to meal kit players by innovating, with particular emphasis on convenience.
While meal kit companies are disruptors, they have not completely encroached on grocery and restaurant territory – although they are popular among some consumers, they have yet to gain widespread popularity. They also do present some drawbacks for consumers, namely cost. Purchasing the ingredients for a home-cooked meal at a grocery store, or even eating out in some restaurants, is generally less expensive than many meal delivery kit subscription prices. For example, the average HelloFresh box with three meals for two people is $69, which comes out to $11.50 per person per meal – more than they may spend at many fast-casual restaurants, and more than they would spend on grocery store ingredients.
As meal delivery kits become increasingly popular, grocery stores and restaurants should experiment to prevent share erosion from convenience- and fresh-oriented consumers. This approach empowers grocery and restaurant chains to determine which innovations will drive maximum value in maintaining market share.
Two years after its launch, Amazon Dash – the Wi-Fi connected device that allows consumers to order their favorite products with the push of a button – has grown to offer products from more than 100 brands. With items in categories ranging from grocery to beauty to baby and pets, consumers can fill their homes with various Dash buttons and never again need to trek to the store.
This automated approach to shopping may only be the beginning. “The real long-term goal is that you never have to worry about hitting that button,” said an Amazon spokesperson, following the product’s 2015 release. With Amazon Dash Replenishment already built into some household appliances – such as Whirlpool washers and dryers that can automatically restock laundry supplies, and Brita pitchers that order new filters as needed – Dash could be a mere stepping stone to an even more automated shopping experience.
“Get comfortable with days of inventory, not weeks,” said Home Depot’s senior vice president of supply chain, in The Wall Street Journal.
Home Depot is not alone in reducing inventory levels. Nordstrom and Ross have also joined the ranks of retailers trimming inventory in hopes of slashing backroom and distribution costs, minimizing markdowns, and decluttering stores. Yet retailers that reduce inventory in the wrong way will also mark down their profits. Before shifting strategies, retailers seeking to “right-size” their inventory must consider the impact of limiting inventory on sales both in-store and online.
Companies can pinpoint which assortments and inventory levels fit just right by testing new inventory levels and assortments in a subset of stores, and comparing their performance to that of similar stores.