Jim Prevor’s Perishable Pundit, October 20, 2016
Bruce Peterson – the founder of the Wal-Mart produce program – has graced the stage at many of our events providing insightful analysis that we recorded in pieces such as these:
Now, in the aftermath of the merger of Ahold and Delhaize, he heads to the very heart of the European produce industry — the Netherlands — to share what the experience of building the largest produce program in the world taught him about retail differentiation.
We asked John Aiello, Contributing Editor at Pundit sister publication PRODUCE BUSINESS to find out more:
Bruce Peterson
President
Peterson Insights
Former Senior Vice President and
General Merchandise Manager
of Perishables for Wal-Mart Stores, Inc.
Bentonville, Arkansas
Q: Can you give us a sneak preview of the topic you will cover at The Amsterdam Produce Show and Conference in November?
A: Yes, there is an interesting phenomenon going on with regard to retail supermarkets right now — consolidation. For example, Ahold and Delhaize have merged, and there has been a lot of other consolidation going on as well. And this phenomenon creates the question of how one company can differentiate itself from another. In Amsterdam, I will be talking about the different ways that can happen.
Q: How do you define Retail Differentiation?
A: Retail differentiation can be defined as the things that make a company stand out from its competitors. How this happens is of utmost importance — what a company does has a direct impact on the consumers; it can make them buy more or buy less, or it can drive them away entirely.
Q: How do you think shoppers view these consolidated stores? Is there any data or surveys that have been collected in terms of this question?
A: Many times, a customer doesn't ever really know consolidation has occurred unless the dominant company does things to change the name of the store, the look of the store, or the product line being carried. But I am not personally aware of any data that has been collected on the question.
Nonetheless, retailers need to be very careful after a merger in terms of the changes that are made. People don't really like change. And if you start making [too many] substantial changes, you risk losing customers. Shoppers go to a particular store based on the look of the store and the products carried there. For example, you have to be very careful if you change the name of a store after consolidation.
Stores have a history in the community and people get used to that history. But if you do end up changing the name, you have to be very thoughtful about how you present that change. Ultimately, retail executives must be both aware of how consumers will perceive a merger as well as how a merger will impact the bottom line. Sometimes things that seem to make sense, say consolidated procurement, can have an impact on the consumer experience that leads to unexpected consequences.
Q: Amazon Fresh continues to make further inroads into the world of produce. And recently, the Wall Street Journal reported that Amazon plans to infiltrate the grocery business with a chain of convenience-style stores and drive-through pickup depots called Project Como. Where do you see this push going in terms of produce sales?
A: Ever since online companies like Amazon Fresh surfaced, the brick-and-mortar industry has been concerned that they were going to lose shoppers as more and more people buy online. And I don't think this has been true. Pure online shopping for fruits and vegetables is never going to be a major part of the produce business in the United States.
Q: Why not?
A: First off, 80% of fruit and vegetable sales are made on impulse. People make these kinds of shopping decisions when they are in the store. If it looks good at the time when they are there, they buy it.
Ultimately, the selection of fruits and vegetables is a highly personal experience. People buy fruit the way they like it. Some like bananas half ripe, others all yellow. People want to see and squeeze a piece of fruit to determine if it meets their personal criteria. And this can't be done when you're buying from the computer.
Even those consumers who doubt their own expertise and would happily pass along produce selection to a Fresh Direct or Amazon Fresh, can only do that with items they know they want to buy. So much of produce is bought because the item is attractive. They never intended to buy blackberries, but they see ones that look so delicious.
Q: How do you expect Amazon Fresh to impact the overall market long term?
A: Even though pure online shopping won't be a major part of produce sales, what does have the potential for great success is what's known as “brick- and-click.” This refers to a blending of the online and personal shopping experiences. With brick-and-click, people order online and then go to the store to collect their items.
This allows them to see what they're getting and make sure that it's to their liking. Amazon Fresh has recognized that this does not have to be an 'either-or' proposition and that the online and traditional brick-and-mortar experiences can be blended.
It is also true that “brick-and-click” offers a different kind of convenience than home delivery. Most people don’t have maids, many don’t want strangers in their home or garage and, many do not want to be tied down to a delivery schedule. But if they can drive through on the way home from work and their order is ready – that defines convenience for many consumers.
Q: Given all of these developments, what do you think traditional retailers must do going forward to stay relevant in the produce market?
A: Great question. Basically, they must somehow differentiate themselves in the mind of the customer. You do this in three ways — operational excellence; product excellence; and service excellence. But you have to do it in at least one of these three areas.
For example, Aldi and Wal-Mart dominate in operational excellence. And Whole Foods and Nordstrom’s are noted for their service excellence. Companies like Apple and Whole Foods (again) are recognized for product excellence – people identify these stores with the quality of the merchandise they get there.
Q: And what minefields do they have to avoid so as to not fade and falter?
A: Becoming marginalized. What are Sears and K-Mart noted for today? Their products and service are not excellent. They've become marginalized. And now they're going away.
Q: Given all these changes and all of these new players entering the retail market, will food safety become a more widespread concern and do you think traceability will be impacted?
A: First off, let me say that the safety of a product must never become a marketing tool. You never want to hear that one company's product is safer than that of another company. All produce everywhere should be equally safe. Food safety needs to be a ‘given’ in the mind of the consumer. No matter what, the customers need to feel secure when they're buying fruits and vegetables.
In terms of the second part of your question – traceability is of great importance. Even though people don't want to hear it, produce is not entirely safe. It's low risk, less risky than many other consumables. But it's not entirely safe. There's always going to be a recall somewhere for some reason in the future.
Remember the spinach crisis a number of years ago? That's a great example of what can happen. In virtually every other food business except produce, once a recall happens, a business has the ability to quickly identify and isolate the product and inform the public. But fruits and vegetables are not that way.
To this day, they are still not able to identify what went wrong with that spinach e. coli recall in 2006. It's very difficult to create effective traceability in terms of produce. And that's why a crisis can last for months. And when this does happen, people get scared and stop buying the product for a long time.
Q: How will online retailers such as Amazon Fresh insure that food safety stays a top priority that's not lost in the competition for a bigger market share?
A: I have to believe that Amazon Fresh's protocols regarding food safety must be state-of-the-art, because if anyone ever got sick from one of their products, it could potentially destroy their produce business. It would change the public's perceptions of the safety of the online process, and people probably wouldn't [want to] risk it anymore.
Q: The produce market has always been volatile and susceptible to substantial inflation. What do these changes in the retail schematic mean for pricing? And does the existence of these alternative outlets help insure that people with lower incomes aren't priced out of the market for fresh fruits and vegetables?
A: All retailers price to demographics. Price matters. There are always going to be more poor people than rich people in the world. And everybody likes to save money. Deep discount stores like Aldi and Lidl have taken over a large share of the market because they have set a new bar in terms of [the public's] price expectation. Deep discount stores strive to lower their operating costs. And if you can operate for less, you don't have to have as high of a margin.
Q: Over the past several years, we have seen alternative retail outlets such as Dollar General now competing for produce consumers with the traditional supermarkets. Additionally, you can even find select pieces of fruit for sale in gas stations and convenience stores. What does this mean to the traditional produce schematic in the long-run?
A: What virtually every retailer understands is that when you sell consumable items, you insure that consumers shop with you more often. Consumables increase customer traffic. If somebody knows they can buy bananas at the same place they're buying gas, they may shop there more often to save time. As the Pundit himself once said, it is death by a thousand cuts for the traditional retailers.
Even though the amount of produce these types of alternative outlets are selling is miniscule, there can be thousands of these locations. And they're doing a good chunk of their business based on the number of locations. It comes down to this: For every item a person buys in one of these alternative outlets, it's one item less they're not buying in a traditional store.
Q: How much of the market share do these alternative outlets control?
A: I would say the percentage of the market share they control is probably pretty small, but again, it becomes death by a thousand cuts for the traditional markets because there are so many locations.
Q: There are some newcomers fighting hard for a share of the upscale produce market — places like Fresh Market, Sprouts, Colorado-based Lucky’s. In turn, they've caused the big chains to re-invent themselves. Many of these big chains appear to be creating their own new concepts to compete — for example, Wal-Mart has developed a smaller format store and Publix has launched Greenwise; Kroger is also developing its own small format. Whole Foods is even trying to move into less affluent areas. Do you think they're succeeding?
A: Absolutely. I call it playing "small ball"! With the small footprint comes smaller capital and operating costs. In turn, this helps bring more competitive pricing and a bigger return on capital.
Q: In the end, what's all this mean to the consumer? Are they better served by this jostling for market presence?
A: We are living in the time of the consumer. Shoppers can get anything they want any time they want. And many times they can do it without leaving the house. And I see “brick-and-click” as being the dominant format moving forward. It offers so much to the consumer — competitive pricing; strong customer service; and a wide-assortment of products.
Q: Last question… What are the three biggest changes to the retail scene over the past decade?
A: That's an interesting question. Number one, I'd say it's the continued proliferation of further-processed products –things like packaged salads and pre-cut fruit. Number two, the proliferation of juice. There are so many different kinds of juice now you can't keep track of them; and the amount of floor space given to juice by stores is gigantic now. Third, the proliferation of organic products, which [is something that] continues to evolve.
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Of course, being set in the Netherlands we can expect much talk at The Amsterdam Produce Show and Conference to focus on the recent merger between Ahold and Delhaize. After all these are major chains on both sides of the Atlantic.
The key in looking at the balance between retail consolidation and retail differentiation is this: Retail consolidation is a financial move. Companies buying one another, merging etc., need not have any impact on consumers or on the supply base.
More often than not, however, consolidating companies look to capitalize on consolidation by finding cost reductions.This can mean consolidated procurement programs, eliminating banners to maximize advertising effectiveness and obtain private label efficiencies, standardized training and much more.
Then the impact can be powerful, on consumers and on the consolidated organization.
In order to better compete with Wal-Mart, Safeway famously looked to scale up by acquiring numerous regional US chains, such as Dominick’s in Chicago, Randall’s in Texas and Genuardi’s in Pennsylvania. Genuardi’s became a poster child for how not to do an acquisition.
The Genuardi family created a chain that was focused on an Italian heritage. But Safeway wanted to scale up its private label and so quickly altered Genuardi’s product mix, replacing robust Italian labels and flavors with its own more middle-American private label lines. It was a disaster, and market share collapsed as consumers rejected Safeway’s alterations to the assortment and took their business elsewhere.
The failure was not so much the corporate consolidation as the way Safeway handled the merchandising – although handling it that way may have been inevitable as Safeway’s motivation for acquisition was neither to profitably operate a few stores in Pennsylvania, New Jersey and Delaware, nor to expand the Genuardi’s chain to capture Italian consumers, it was to find outlets for its private label product.
Delhaize itself offered another example when it decided to consolidate procurement between its Food Lion and its Hannaford divisions. We wrote a number of pieces on this subject:
The problem here is that if a company is procurement-driven, always trying to get the best price, this will lead to consolidation on fewer vendors and fewer SKUs – which can be fine but will not work if one is trying to differentiate a banner with, say, a wider product assortment from a larger vendor group!
Competition from online sources adds to the mix. We are not as sanguine as Bruce is over the online threat to physical stores. Impulse-buying can take many forms, and a big part of what Fresh Direct and Amazon Fresh are working on is trying to identify ways to stimulate impulse buys on line. Sure, seeing something nice in a store can stimulate a purchase but so can a digital coupon, a recipe just perfect for the holiday appearing on screen or a promise that today’s melons are particularly flavorful.
In fact because the onscreen experience can be customized, to take into account purchase history, allergies, propensity to use coupons, buy sales, etc. – there is reason to think that impulse buying will eventually be more likely to incur online than in a physical store. In a physical store, it is one-size-fits-all, so that a massive display of, say, peanut butter, will fall on deaf ears to someone allergic to peanuts.
Online, the peanut offer won’t even popup because you have already entered that you don’t buy peanut products.
We are also not certain that we see the proliferation of produce in alternative venues as a zero-sum game. Yes it is entirely possible that making produce available in more venues reduces sales in existing venues, but it is also possible that someone hungry walks into a gas station mini-mart and decides to buy a banana rather than a doughnut.
Retail differentiation is a fascinating topic. In the US, Trader Joe’s differentiates with gastronomic innovation while Aldi differentiates with price. Whole Foods is scrambling to retain a differentiation based on values as its differentiation by product type, notably organics, dissipates.
Come and join the discussion at The Amsterdam Produce Show and Conference!
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Come to the heart of the European produce industry. Come to The Amsterdam Produce Show and Conference!
Source: Jim Prevor’s Perishable Pundit
