US Grocery Retail Perspectives

Wilson Perumal & Company

Grocery Retail: Perspectives
October 2013

Introduction and Background
• Even by grocery retail standards, the industry is undergoing high levels of
change, creating sizeable complexity as well as new opportunities
• Wilson Perumal & Company*, a management consultancy, works with retailers to
find advantage in this fast-changing environment
• In the course of our work, we have developed a point-of-view. In this
document, we wish to share with you our perspective on key trends
• The 5 key trends we discuss are:
1. Localization a “must-do”; question is what scope/how far to go
2. Race to Omni-Channel impeded by execution issues
3. As traditional promo strategies fail to drive lift, need for innovation in
promotions + promotional efficiency increases
4. Big Data “arms race” means that many personalized offerings are now
expected and for free
5. Contraction and consolidation of large grocery chains requires update of the
Operating Model
*For further information on Wilson Perumal & Company, see Appendix 2, pg 35

Wilson Perumal & Company, Inc.

2

Five key themes that are shaping the industry
Grocery retail trends

Pages

1

Localization a “must-do”; question is what scope/how far to go

4-5

2

Race to Omni-Channel impeded by execution issues

6-7

3

As traditional promo strategies fail to drive lift, need for
innovation in promotions + promotional efficiency increases

8-9

4

Big Data “arms race” means that many personalized offerings
are now expected and for free

10-11

5

Contraction of grocery chains requires revised operating model

12-13

Additional trends and Appendix on supplemental data

14-47

Source: WP&C Retail and CPG research and analysis


3

1 Demographic shifts increasingly apparent...
Trend:

Implications:

Race/ethnicity and age mix changes rapidly, and it is
not equally geographically distributed

Demographic trends require extensive
localization from retailers

Percent of total population
54

2012

2035F
17

White & Oth

12

Hispanic

13
5

Afri. Amer.

6

Asian

2

3

Mixed

$ Share of food spend

• Develop differential pricing
• Understand customer segments
willingness to pay; lead customers
towards high-margin products
• Plan promotions effectively to
meet target audience’s needs

20.0%

Asian

10.5%
70.2%

10.5%

Afr. Amer.

62.5%

Hispanic

7.0%

2012

Footprint &
format

White & Oth

14.0%

5.3%

• Offer products to local demand
• Re-assess price and promote
linkages between products
• Re-select flag-product lines to
ensure stock availability

23

Pricing

64

Product
Range

Population by race and ethnicity (2012, 2035F)

• Select locations that match your
brand image and offering
• Understand local behavior and
adjust format offering
• Plan footprint with a long-term
view on demographic change

2035F

Source: Nielsen consumer reports; US Census Bureau; Euromonitor report 2012; WP&C Analysis


4

…Prompting retailers to determine degree and
scope of localization

1

Our Perspective/Approach:
Scope of Localization1

Degree of localization
•
•
•
•

Economies of scale
Simple supply chain
Easier to manage
No additional CapEx

Standardization

•
•
•
•

Increasing complexity and cost

Unique
clusters

• No localization or
• Each cluster receives
clusters, same
a standard product
offering in every store offering (same
offering for all stores
in each cluster)

•

Localization vs. Scale1

Core /
clustered
• Set a basic or core
offering (i.e. 80%)
carried in all stores
• Vary remaining
offering (i.e. 20%) in
clusters

Core/clustered
/ localized
• Set a basic or core
offering (i.e. 70%)
carried in all stores.
• Clustered offering (i.e.
20%) for clusters
• Local offering (i.e. 10%)
for each store

Few economies of scale
Complex supply chain
Hard to manage
Large CapEx required

True
localization
• All stores have their
own unique offering

Decision on degree of localization is based on: your strategy, size of your
chain, timeline, available data and analytical capability, execution resources (capital and
human), and the flexibility of your operations and organization

1. Additional approaches to localization (scope & scale) are in the appendix to this presentation


5

2

Online channel grows rapidly, creating
opportunity and challenges…

Trend:

Implications:

Online grocery sales continue to grow
rapidly, driving leading grocers to invest in the
sector
2%

Emerging opportunities for grocer in the
online space…

Percentage of total U.S. consumer
packaged food sales purchased from
online grocers in 2012

$6 billion
Revenue generated by online US. grocery sales in
2012, with expected 12.1% growth to 2016

• Selling extended range
• Increasing reach to new customer
segments
• Focused marketing efforts: personalized
offering and promotions

• Improving cross-selling

..as well as new challenges

1,620

• Developing a profitable operating model

Number of online grocery businesses in 2012

• Facing channel and product
cannibalization

55+
Age group that buys the most groceries
online, accounting for 24.5 percent of purchases

• Developing consistent positive customer
experience

$175

• Stock management (balancing holding
costs, waste, stock availability, etc.)

Average order size of pure-play UK-based Ocado
amongst its 360K active customers’ base

Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites

• Ensuring strategy, organization and
operational coherence across channels

6

2

…requiring greater omni-channel integration and
coherence


In today’s increasingly complex marketplace, retailers must prioritize coherence
Strategy

Execution

Customer

Sources of Complexity

Offering

Channel

Market

Process

Output

The Challenge & Opportunity

Pace of change

Strategy & execution coherence
• Align processes to effectively exercise
strategic goals across silos

Growing product lines

Customer & portfolio coherence
• Optimize mix of private label & branded
• Localize assortment by region

Channel marketing

Channel coherence
• Align marketing initiatives across channels
• Align pricing & promotional strategy

Fragmented supply base

Supply chain coherence
• Balance supply chain risk vs. cost
• Optimize waste vs. out-of-stock

7

3

Traditional promotional levers are not driving the
same level of lift previously achieved…

Trend:

Implications:

Promotion effectiveness reduced due to
complexity of increasing channels

Grocery retailers are spending significant
time/resources on ineffective promotions

• Expanding channels in grocery segment have
intensified price competition
• Shoppers have many low price options, and are
fragmented across retail channels
• Price cuts and promotions remain critical tools to
drive traffic/revenue
• However, traditional promotional power is
eroding
Promotion1 Average Unit Lift (%) by Department
139
128
119

123

2011
2012

114

96

Dry
Grocery

93

HBC

91 90

Frozen

Dairy

Non-Food

GM

Case example: Avg. promotion uplift/week
4 month period2
% sales uplift units

136

122 120

Low-impact promotions are costly:
• Supply chain: Inaccurate forecasting can lead
to out-of-stocks and overstocks
• Corporate planning: Detailed planning with
multiple handoffs/rework each week
• Store labor: Labor required to stock
shelves, assemble displays, customer service

110
100
90
80
70
60
50
40
30
20
10
0

0

10

20

30

40

50

60

70

80

90 100

% of promotional SKUs

1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions, 2) WP&C client analysis of US grocery chain
Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis,

8

3

…putting more pressure on identifying new promo
innovations + efficient execution


Promotion Check-Up

The right promotions for
the right segments…

• How well do promotions meet
the needs of the customer?
• What is the expectation around
promotion lift for product and
basket?
Evaluate issues from a top-down &
bottom-up approach
Top-down: Are promotions meeting
the business’ strategic goals and the
needs of the customer?
Bottom-up: Are individual
promotions performing as expected
in both effectiveness and efficiency?

HIGH

?

Where we want
to be

LOW

?

?

LOW

Effectiveness

• How well do promotions meet
their strategic goals?

HIGH

Efficiency

…done the right way
• Is the promotion process operating as intended in each segment?

• Are there opportunities to make the promotion process faster /
more flexible / more dependable / less expensive?
• What is the right governance to sustain better promotions?

9

4

Personalized, value adding extras are becoming
expected services…

Trend:

Implications:

Grocery retailers are providing more personalized
customer experiences to combat intense price
competition

Consumers are becoming increasingly
accustomed to direct communication1

– The ‘Just for U’ program gives shoppers digital
coupons and deals on items they regularly buy
– Amazon enhances one-on-one interaction with
specific product recommendations
– Ahold is leading the way with consumer choice
for online orders, in-store pickup or delivery

55%

43%

Use my prior purchasing
to offer me promotions

Use my prior purchasing to
recommend new products

43%

36%

Invite me to
events

Involve me in new
product ideas

Grocery retailers have more access to
consumer info than ever before2
35% 36% 34%

2012

31%

2013

– Hyper-local advertising, the ability to target
customers by location, is on the doorstep
11%

As more companies employ these services, they
will become expected rather than value added
extras

Websites

Email

14%

10% 11% 8% 11%
7% 9%

Social
Group List/Notes Mobile
Networking Buying Function
App.
Sites on Phone

1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2)“Question: What online or
interactive tools/sites do you use regularly for planning your grocery shopping trip and/or which specific products you eventually
decide to buy?. The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing Source: WP&C research and analysis,

10

4

…just as Big Data capabilities enable new levels of
insight, value, and personalization


Evolution of Big Data trends…

…Lead to new opportunities

More data

Better predictive analytics

Exponential growth in customer data from
online interactions and loyalty cards

More effective advertising and service
delivery strategies

Better tools

Deeper Data Mining

Reduced storage/processing costs, and better
analytics tools allow mining of more data

Suggests further cross-sell, up-sell and new
product opportunities

Improved access

Tailored promotions/cust. experience

Multi-faceted view of customer available from
multi-channel interactions & data vendors

Individual level initiatives maximize sales and
customer satisfaction

Easier testing

Accurate future value estimates

Simple experimentation allows retailers to
test customer responses

Accurate customer future values aid
customer acquisition and retention efforts

Source: WP&C analysis


11

5

As industry contraction and consolidation
continue…

Trend:

Implications:

Share of traditional formats continues to shrink , but with
slightly lower pace
$ Share by Store Format: 2012-2017F
$1.113T
$1.249T

Contraction/consolidation
has direct impact on
operating model…

53.5%

46.5%

55.0%

45.0%

Non-Traditional
’12
• Supercenters
17.3%
• C-Stores
14.9%
• Wholesale Club
8.7%
• Drug Stores
5.4%
• Dollar Stores
2.4%
• Other Non-trad. 4.9%

’17F
18.2%
16.0%
9.0%
5.5%
3.1%
3.2%

Traditional
• Supermarkets
• Ltd. Assortment
• Fresh Format
• Other Traditional

36.5%
3.4%
2.1%
3.0%

39.8%
2.7%
1.1%
2.9%

2012
2017F
Heightened consolidation/contraction of chain size and change
of ownership in 20131

•
•
•
•

Branch rationalization
Asset/footprint consolidation
Speed of migration
Post merger integration

..and the impact is not only
on the physical stores but
•
•
•
•

Supply chain/inventory
Pricing
Branding
IT

Traditional formats need to
also pull other growth levers
•
•
•
•
•

New (smaller) format
New categories
Private Label
Customer loyalty-localization
M&A

1) 14 trx (total $9.3B) for NA. food retailers, up from $702M in all of 2012 (Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013 )
Source: Neilson What’s In Store 2016; Willard Bishop, Includes both grocery and consumables; WP&C analysis

12

5

… retailers facing new challenges in revising
operating models & integrating acquisitions


Pre-integration

Structured & strategic approach to
integration will shorten timeline and
smoothen transition

Non-value add
Value add

Conducting holistic pre-integration
planning is key to integration’s success
• Strategic fit and coverage
• Operational and capability
assessment
• Analytics and planning
From our experience this planning is
frequently only done partially

Post-integration

During the migration or integration of stores and
back-end processes, complexity can arise
exponentially unless carefully managed

Take the integration opportunity to cut
complexity and set cost saving target
• Holistic business integration
• Complexity reduction in
org., processes and product lines
• New strategic plan in new
market, if necessary

The Complexity Cube
Organization

Product
Complexity
is:

Number of
products and
services you offer

Too much • Unwanted prod.
complexity • Cust. confusion
is bad: • Poor service

Process

Organization

Number of
Number of
processes, steps, h assets, facilities, e
andoffs, etc.
ntities, partners, e
tc.
• Duplication
• Disarray
• Rework
• Confusion
• Work-arounds
• Functional silos


13

Additional trends in the grocery retail space to
consider
Industry

Trend

Description

Operational

Fragmented, global supply base

Narrow margins force the continued optimization between
cost, risk, and speed/flexibility in supply chain operations

Range growth

In an effort to reach new segments, grocers continue to
expand SKU ranges, often without control processes in place

Preparing for mobile commerce
Consumer

Blurring across sectors

New challengers (e.g., Dollar, Convenience, Drug, Online
stores) enter the market while traditional grocers also
expand (e.g., prescriptions)

Both consumers and grocery retailers are preparing for the
new wave of mobile commerce. As demand
increases, business flexibility will be critical

Trust in private label

Nearly all consumers buy private label products when grocery
shopping2. As quality to improve, trust in PL brands will grow

Influence of social media

Social media is increasingly integrated into society, and a
growing force in purchase decisions/awareness. Savvy
grocers are already making their presence felt in this space

1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013, 2) Market Force Information


14

We will be happy to discuss with you…
1) Are these issues affecting your business?

2) Are you seeing other trends that can benefit or pose a threat to the
business?
3) How are you reacting to these? Are you ahead of the game?

4) What is your competition doing to take advantage of these trends?
5) How can we help you in thinking through strategy and operations?


15

Contact Us:

North America

Europe

Two Galleria Tower
13455 Noel Road, Suite 1000
Dallas, TX 75240

Longcroft House
2/8 Victoria Avenue
London, EC2M 4NS

+1 972-716-3930

+44 (0)203 206 1496

www.wilsonperumal.com
Stephen Wilson swilson@wilsonperumal.com
Ann Bryan
abryan@wilsonperumal.com

Asaf Navot
Steve Liguori

anavot@wilsonperumal.com
sliguori@wilsonperumal.com

APPENDIX 1: Additional data and analysis by trend
APPENDIX 2: Wilson Perumal & Company background

1

Localization of stores is a “requirement” now, the
question is how much localization is right

Trend:

Company Example:

• Localization is a retailer’s norm nowadays.
Customers expect local offerings with local
marketing & local supply chains
– Younger generation values speed &
healthiness; Higher income/more educated
value a premium experience, from
knowledgeable staff to wide product selection
– Consumer demographics are changing, and so
are localization requirement—it needs to be
dynamic

• Localization has moved beyond rule-based
assortment planning to “Shopper Data”
localization. Localization decision should be
strategic and data-driven, but not IT-driven

• Retailers struggle to create the right level
of localization and how to make it dynamic
Source: WP&C press search and experience drawn from previous work with retailers on localization

Kroger is still ahead of the
localization game—maintaining
over 20 grocery banners, Kroger
was able to cater to local market
needs
“Increasingly you are going to
hear us talk about the concept of
localization and how important
that is to our future going
forward.”
-Robert Edwards, President and CEO
Safeway (Jul 2013)

Walgreens’ localization strategy
called “mass localization” uses
cluster-based approach (since it
has 7,000+ stores). This has led to
160 different planograms

18

1 Demographic shifts become increasingly apparent
US population by age and sex (2012, 2035)

Age
(years)

2012

Population continues to age…
• The population above age 65 is
expected to grow by 92% by 2035
– In 2056, the older, 65+ is
projected to outnumber the
young, under 18, for the first
time in U.S. history
• Share of working-age (18 to 64)
expected to decline from 63% to
57% by 2035

2035

Population by race and ethnicity (2012, 2035)
Percent of total population

64

2012

54

2035

17

23
12

13
5

White & Oth

Hispanic

Source: US Census Bureau, WP&C analysis

Afri. Amer.

6

Asian

2

3

Mixed

…while race and ethnicity mix change
rapidly
• The Hispanic population expected to
grow by 63% in 20 years, from
53.3M in 2012 to 87M in 2035, and
more than double to 128M by 2060
• Projections show the older group
would continue to be predominately
non-Hispanic white, while younger
ages are increasingly minority

19

1 Growing demographics not equally distributed…
Changing demographics is more evident in certain areas…

2011 U.S. Hispanic % of designated market area

Geographic variation emphasizes the need for localization of stores
Source: Nielsen report


20

1 …and currently have higher grocery spending
White

Asian

Afr. Amer.

Hispanic

Changing weight of overall spend
Share of food spend - 2012
14.0%
10.5%
5.3%
70.2%

#Shopping
trips/HH/yr

149

152

167

142

$ per trip

$47

$46

$37

$52

Total $
spent/yr

$7,003

$6,992

$6,179

$7,384

Interesting
shopping
characteristics

Caucasian women
purchasing
decisions in store
are influenced by
promotions more
than any other
group

Bring home far
more produce,
nuts, dried fruit,
pasta, yogurt, soup,
juice, and drinks
compared to US
avg. 31% of
purchase on deal
are bought by Asian

Frequent dollar
stores, c-stores,
more than other
groups

Spend more on
categories which
include baby
products, hair
care, toiletries,
and beverage

Forecasted share -2035
20.0%
10.5%
7.0%

62.5%

White & Oth

Afr. Amer.

Asian

Hispanic

Basket analysis of purchase categories by ethnicity is part of localization planning
Source: Nielsen consumer reports, Euromonitor report 2012; WP&C Analysis


21

1

Demographic trends require extensive localization
value proposition from retailers
Required activities from retailers

Product range

• Adjust product offering to local
demand
• Understand linkages between
products to better price and promote
• Adjust choice of flag-product lines to
ensure stock availability

• Extend growing demographics’ preferred
product groups (e.g. for Hispanics: dried
vegetables, baby products, etc.)
• Adjust product & expand value offering to
meet aging population demand:
healthy, fresh, home cooking

Pricing

Racial/ethnicity-mix shift/Aging population

• Develop differential pricing to match
local willingness to pay
• Lead your customers, where
possible, to high-margin products
• Plan promotions effectively to meet
your target audience’s needs

• Launch differential pricing where possible
• Consider foreign language promotions/ads.
• Develop Private-Labels for growing
demographics’ preferred products
• Manage simpler promotion offering
through channels fitting elderly
communities

Footprint and
format

Areas of required localization

• Select locations that match your
brand image and offering
• Understand local shopping behavior
and adjust format offering accordingly
• Plan your footprint with a long-term
view on demographics change

• Identify demographic trends; match store
formats to population size and mix
• Analyze shopping behavior; adjust
customer journey accordingly
• Plan accessible stores, with well-trained
store ops

22

1

Localization effort is iterative and broader than
just product offerings
Localization Scope
Localization
overarching
strategy

Pricing

Impact of
demographic
changes

Localized
product
assortment
and services

Promotions

Localized
Supply
Chain

Merchandizing

Social
Media

Loyalty
programs

Big Data
& analysis
techniques

Advertising

Change
to Org
Structure

Customer
service

Dynamic process as consumers and competitors
are constantly changing
• Retailers utilize sophisticated tools on “shopper data” such as assortment planning, flow
modeling, price, promotion, and store size optimization
• Marketing, supply chain, and organizational structure need to be modified to maximize localization benefits
• Pilot test in small # of stores recommended. Could start in certain product categories first. Capture
performance and feedback before nation-wide roll-out

Source: WP&C analysis and perspective


23

1 Localization with scale is possible
PREVIOUS REGIONAL STRUCTURE

National level

National level
• Smaller, coordinating role
• National initiatives on
“opt-in” basis
• Less ability to leverage
national scale

HYBRID LOCAL-NATIONAL STRUCTURE

National

• Buying pulled up to
national level, with
aggregate local input
• Greater strength with
suppliers, leading to
greater ability to tailor
offerings

National

Regional level
• Buying, planning
centralized at regional
level (~100 stores)
• Command & control
relationship over stores
• Operate largely
independently from
national level and other
regions

Regional

…requiring
greater, richer
and asymmetrical
information flow
between local and
national levels

Local level

Local level
• Less resources at local level
• Not empowered to
respond to local tastes and
preferences

Previously
regional functions
stretched up to
national and
down to local
level…

Local

• Inventory planning
pushed down to local
level (~ 10 stores)
• More responsive/
customized stores with
greater employee
ownership

My Macy’s
Initiative
Restructured
operating model
with richer
information flow
allows stronger
national scale and
greater
responsiveness to
local customers

Local

Source: WP&C’s Vantage Point: Localization with Scale; interview with Terry Lundgren, CEO, Macy’s


24

2 Omni-channel strategy and integration a must
Online has potential to be a leading segment

Many retailers invest to pursue that potential

2%
Percentage of total U.S. consumer packaged food
sales purchased from online grocers in 2012

1,620
Number of online grocery businesses
in 2012

$6 billion
Revenue generated by online grocery sales in 2012

23M
Deliveries made by Peapod since it
was established

$9.4 billion
Predicted revenue in 2016, on an estimated 12.1
percent growth

$400M
Sales for FreshDirect in 2012

8.8%
Market share of largest online grocer
Peapod, followed by Fresh Direct with 5.7 percent

20
Number of predicted urban areas
AmazonFresh will expand to by 2014

46%
Of shoppers said they were at least slightly likely to
buy products directly from food producers online

$4 billion
Estimated online grocery sales of
Tesco.com in the UK in 2011

55+
Age group that buys the most groceries
online, accounting for 24.5 percent of purchases

$175
Average order size of pure-play UKbased Ocado amongst its 360K
active customers’ base

Source: IGD repot 2012; IBISWorld ; Reuters; Bloomberg; Retailers’ websites


25

2

Emerging challenges and opportunities arise from
online operations
Extended Range

Opportunity:
• Selling extended range
• Centralized stock source for
premium products
Challenges:
• Product cannibalization
• Stock management (holding
costs, waste, stock
availability, etc.)

Improved Cross-selling
Opportunity:
• Improved cross-selling (e.g.
“customers who bought X, also
bought Y”)
Challenges:
• Maintaining easy and simple
online customer experience

Focused Marketing

Extended
range

Potential
benefits of
online
operations
Improved
crossselling

Opportunity:
• Personalized offering and
promotions
• Improved customer understanding
Challenges:
Focused • Misaligned marketing messages
marketing
between channels
• Channel cannibalization and
customer confusion

New Customer Segments

New
customer Opportunity:
segments • Attracting customers that are
out of current geographical
reach or are unlikely to enter
your stores
Challenges:
• Maintaining a profitable delivery
model
• Avoiding channel cannibalization Click

&
Collec
t 26

2

Retailers continue trying to develop a sustainable
and profitable omni-channel operating model
Grocery retailers worldwide use different operating models to serve customers

Fulfilment

1

Delivery

2

Stores / dedicated onlinestores
Advantages:
• Utilizing existing workforce
• Lower fixed-costs
model, facilitating slow
expansion
Disadvantages:
• High picking costs erodes profits
• Dist. and merchandizing remain
major costs, low stock
availability

Directly from stores
Advantages:
• Utilizes existing geographic
presence
Disadvantages:
• Higher cost-to-serve due to
lower scale
• Inefficient delivery planning

Source: Press search; WP&C analysis and perspective

A dedicated warehouse

A hybrid model

Advantages:
• Centralized model with cost
saving of store distribution and
ops-time
• Automation of the picking process
Disadvantages:
• Requires significant scale to justify
the high capital expenditure

Advantages:
• Allows centralized model for high
scale regions with localized
solutions for low-scale regions
Disadvantages:
• Hard to capture long-term scale
benefits: prevents investments in
technology and equipment

Warehouse / via satellite
stations

Click & Collect

Advantages:
• Lower waste-level / higher stock
availability
Disadvantages:
• High operating costs to serve
remote areas
• Requires profound analysis and
optimization planning of delivery

Advantages:
• Utilizing existing workforce
• No distribution costs
Disadvantages:
• Does not serve some needs of
online shoppers
• Could cannibalizes store profits


27
27

3

Unit sales of promotions are up, but percentage
lift is on decline
Promotion1 Average Unit Lift % by
Department

% of Unit Sales with Promotion1
42.6

139

2011

136

2012
128
123
42.4

122

119

120

114

42.2
96
93

42.1

2009

2010

2011

2012

Dry
Grocery

HBC

91 90

Frozen

Dairy

NonFood

GM

Traditional promotion power is eroding
1) Promotion includes Temporary Price Reduction, Feature Ad, Display Promotions
Source: Nielsen Planners, Total US Food, Calendar Year 2011, C52 WE 9/1/2012 , WP&C research and analysis


28

In response, retailers should identify truly effective
promotion levers and ensure efficient execution

3

WP&C Case Example:
Small percentage of promotional SKUs
driving majority of uplift…
Avg. promotion uplift/week – 4 month period

…But low-impact promotions still impact
the business operations
Supply chain
Promotions put a strain on supply chain operations
that are responsible for keeping shelves full.
Inaccurate forecasting often leads to costly out-ofstocks and overstocks at retail locations

% sales uplift units
110
100
90

Promotional uplift per week

80

Corporate planning

70

Promotions require detailed planning from crossfunctional teams. Multiple hand-offs across
category, brand, space planning, and supply chain
require significant resources each week

60
50

40
30

Store labor

20
10
0
0

10

20

30

40

50

60

70

80

90

100

Promotions can only be successful if they are
executed effectively. This requires store labor
resources to stock shelves, assemble displays, and
manage customer needs

% of promotional SKUs

Source: WP&C client analysis of US grocery chain


29

4

As traditional approaches decline, consumers look
for new forms of convenience and overall value
Traditional Vehicles Losing Impact1

Technology Use Growing1

How often does each of the following impact what
you buy on your grocery shopping trip and/or which
specific products you eventually decide to buy?

What online or interactive tools/sites do you use
regularly for planning your grocery shopping trip and/or
which specific products you eventually decide to buy?

39%
36%
33%

33%

2012

34%
30%

35% 36% 34%
31%

2013

Advances in technology and
access drive new perception
of value/convenience

14%
11%

Coupons you clip
from newspaper
or magazine

Store flyers

Coupons you get
from store flyer

Websites

Email

10% 11%

11%
8%

7%

9%

Social
Group List/Notes Mobile
Networking Buying Function
App.
Sites on Phone

Grocery retailers can leverage new ways to deliver value and convenience outside of
traditional printed pricing promotions
Source: 1)“The Why Behind the Buy, Spring 2013, Acosta Sales and Marketing


30

4 Grocery retail personalization examples
Case example:

Company Example:

FreshDirect, the New York based online food
retailer, has used big data to make shopping more
personalized. Using previous purchases, from the
current shopper - and others purchasing similar
items - the online store can suggest ideas
relevant to each specific shopping trip
We leverage data that “ranges from things
that relate to the shopping ‘trip’ that the
customer is currently on, to insights from past
trips, to models of customers who are similar
in an array of different ways”
- John Leeman, Chief Marketing Officer2

CEO David Dillon has called big data
analytics his "secret weapon" in
fending off other grocery competitors3
1) IBV Retail 2013 From Transactions to Relationships: Connecting with a Transitioning Shopper Study 2) The
Economist Intelligence Unit Limited 2013 , 3) Retail Goes Shopping through Big Data – CNBC 04/15/2013

The ‘Just for U’ program gives
shoppers digital coupons and deals
on items they regularly buy
Ahold is leading the way with
consumer choice for online
orders, in-store pickup or delivery
Amazon enhances one on one
interaction with specific product
recommendations
Harris-Teeter unveiled a concept
around higher service, e.g., instore wine consultants1

Hyper-local advertising
technology, the ability to target
nearby customers, is on the
doorstep

31

4

However, aligning operations across many access
points is a growing challenge for grocers

Recipes, tips
and reviews

Personalized deals
& price match

Choice of
delivery options

Customer journey
List preparation
for shopping trip

Loyalty and
rewards

Social media &
community

Seamless operations necessary to deliver a truly cohesive customer experience
Images: Geekwire.com, formcollective.com, Google images


32

5 Contraction both in chain size and store size
Trend:

2013 Company Example:

Share of traditional formats continues to
shrink , but with slightly lower pace

03/13 Supervalu completes sale of
5 chains to Cerberus for $3.3B

• Traditional retail formats (mass merchants
and supermarkets) have yielded share to
value formats (club, dollar, and supercenter)
and drug stores

05/13 Bi-Lo acquisition of Delhaize
America for $265M

• Consolidation & contraction of overall chain
size as well as change of chain ownership
appears to be the trend of 2013
– 14 transactions announced for NA. food retailers, a
total of $9.3B, up from $702M in all of 20121

Store size also expected to be smaller
• Store footprints either get supersized for
one-stop-shop or downsized into smaller
stores for speedy services, especially for
urban areas
– Downsizing stores seems more apparent
than supersizing
1) Bloomberg, Arden to Ingles Beckon as Supermarket Targets: Real M&A, July 2013
Source: Neilson What’s In Store 2016; Press search; WP&C perspective and analysis

07/13 Kroger acquisition of Harris
Teeter for $2.5B
08/13 Canada Safeway sold
to Sobey's for $5.8B

09/13 Tesco’s F&E sold to Yucaipa
after limited success
Walmart Express, an urban
solution one-tenth the size of its
typical store show sign of success
Aldi and Trader Joe’s continue their
limited-assortment store
expansion plans


33

5

Share of traditional formats expected to continue
to decline and not keeping pace with inflation
$ Share by Store Format: 2012-2017

Traditional

Non-Traditional

$1.113T
Oth non-trad. 4.9%
2.4%
Dollar 5.4%
8.7%
Drug
Whsl Club
17.3%
Supercenter
C-Stores
14.9%
Oth traditional
Fresh Format 2.7% 1.1% 2.9%
Ltd. Assortm’t
Supermarkets

39.8%

$1.249T
3.2%

3.1%

Est. CAGR vs. Inflation: 2012-2017
Fresh Format

5.5%
9.0%

Ecommerce

18.2%

13.4%
12.1%

Dollar

Ltd. Assort

6.2%
6.0%

Drug
16.0%
3.4%

2.1% 3.0%

3.4%

Whsl Club

3.2%

C-Stores

3.2%

Supercenter

2.7%

Oth Trad.
36.5%

2.1%

Supermkt

0.2%

Oth Non-trad.

2012

Assume 3%
inflation

-6.3%

2017F

In addition to Ecommerce, Fresh Format (e.g., Whole Food, The Fresh Market), Limited Assortment
(Aldi, Trader Joe’s), and Dollar stores are physical formats expected to grow rapidly
Source: Willard Bishop, Includes both grocery and consumables; WP&C Analysis


34

Structured & strategic approach to integration
5 will shorten timeline and smoothen transition
Pre-integration approach
Strategy
How does the target
company’s offering align with
our strategy?
How does this merger serve
our strategy?
Coverage
What are the gaps or
overlaps between the two
firms? What is the value
proposition, geographical
and customer segment
coverage? Where and who
is the competition?

Strategic
Fit

Operational
Assessment

Analytics
and Planning

Benefits
From where will benefits be
realized? At what point are
there step changes in cost?

Capabilities
How is portfolio complexity
impacting performance?
Is the organization set-up to
implement change?
Operations
What are the implications on
end-to-end operations? Can
our range be delivered
effectively?

Analytics
What is the economics of the new
business? What synergies can we
capture from this deal? What is the level
of scale benefits we could monetize?

35

Wilson Perumal & Company, at a glance
• A management consultancy with offices in the US & UK, combining
operations strategy experience with depth in retail
• We are thought-leaders and hands-on practitioners: we have a unique
perspective on the challenges facing grocery retail, and have a passion
for helping grocery retail achieve results
• We focus on getting things done in the areas that matter to you:
Enterprise performance; Range & Promotions; Customer & Channel;
Supply Chain & Sourcing, and Operations Excellence
• We enjoy 100% client reference-abiliy


37

We help retailers across 4 service areas
Strategy
Strategy, Custom
er, Channel

• Store & format strategy
• Omni-channel integration
• Customer insight & segmentation
• Localization & clustering strategy

Range &
Promotions

• Range optimization & localization
• Pricing & promotion effectiveness
• Product-lifecycle management
• Operating model alignment

Operations
Supply Chain
& Sourcing

Operations
Excellence

• Inventory management
• Supply chain & sourcing optimization
• Cross-channel fulfillment
• Distribution model analysis
• Operations development
• Lean retail & end-to-end operations
• Store operations improvement
• E-commerce process optimization

38

Our clients attest to our ability to impact their
bottom line
“WPC’s approach to complexity is
the most direct route to an
efficient, profitable enterprise.”
—Ed Lonergan
CEO of Diversey Inc.

“This was a quick and painless way
to understand our true product
profitability, and it challenges how
we think about our business. I am
extremely pleased with the results.”
—Fernando Palacios
EVP and Chief Integrated Supply Chain Officer
MillerCoors LLC

“WP&C is helping us transform our
business. Their insights are
phenomenal!”
—David Hoogmoed
President, Land O’Lakes Purina Feed

“You are analytical and smart, but you
also get things done!”
—Head of Commercial Development
Leading European Retailer

“Best work I have seen in Operations
Development. A case study for us as a
business”
- CEO, European Electronics Retailer

“I truly believe you got to some of the
key issues at [Retail Co.]”
-Director of Supply Chain, Grocery Chain

“Very insightful work…it was a
pleasure working with you and your
team.”
-Senior Operations Director, Global 100 Retailer

39

We bring a team with deep sector and operational
strategy experience (1 of 2)
Stephen Wilson, Managing Partner
• More than a decade of experience advising senior executives globally on issues
relating to cost-competitiveness, operations and strategy
• Recognized as a thought-leader on the topics of complexity, costreduction, operating models and innovation; co-author of Waging War on
Complexity Costs
• MBA from the Wharton School in Strategy and Finance
• Deep experience in grocery retail in a variety of key issues in a variety of
capacities: engaging with the board on operating models, helping build and deploy
cost-reduction programs, to “walking the process” during overnight replenishment

Ann Bryan, Manager
• Seasoned strategy manager with 15 years of experience in strategy & consulting
• Previous project experience includes store clustering, portfolio review, new retail
format expansion, ecommerce strategy, and complexity management for various
retailers and consumer goods companies
• Former Project Leader with BCG
• Former Director of Corporate Strategy, Applied Materials Inc.
• Hand-on operational experience through two successful entrepreneurial ventures
• MBA (Kellogg); MS Operations Research UC Berkeley

40

We bring a team with deep sector and operational
strategy experience (2 of 2)
Asaf Navot, Case Team Leader
• Experienced Case Team Leader with focus on omni-channel integration, portfolio
optimization, operational improvements, and complexity management
• Retail experience include omni-channel operations, space planning
optimization, stock management, ranging and promotions effectiveness, and
process improvement
• Previous experience as F-16 fighter pilot and project manager at the Israeli Air
Force, ranked Captain. Asaf is also a former Israeli national swimming champion.
• MBA from INSEAD, France/Singapore

Steven Liguori, Case Team Leader
• Experienced Case Team Leader with focus on product and process
complexity, portfolio optimization, market analytics, and growth strategy
• Grocery segment experience centered on promotional strategy &
effectiveness, portfolio transformation, and process improvement
• Additional Retail and CPG experience in distribution strategy, space planning, and
operational efficiency
• Previous experience as an Operations Strategy Consultant at George Group
Consulting and Scientist/Manager at Pfizer
• MBA from Emory University and BA in Physics from College of the Holy Cross

41

Increased EBITDA by 22% for major retailer by
diagnosing issues and leading change program
Situation

• Competing in an Omni-channel world – One of Europe’s largest retailers was the leading player in the
brick&mortar market , yet lagging behind in the fast growing online market. Omni-channel operations were
dysfunctional: 15% of online SKUs were unaccounted for on the website, poor Exit Management led to
channel cannibalization, and stretched-out operations affected both brick & mortar and online performance

Conduct top-down
ecommerce diagnostic
3-4 weeks
Approach

3-5 weeks

Developed and led
mobilization plan
4-5 weeks

• Analyze ecommerce
• Improve Product Setup process –
• Support client teams
operations – analysis
reengineered Product Setup process to
training
reveals that Product Setup
track SKUs from ranging to online launch • Develop KPIs to measure
process and Exit
• Optimize Exit Planning –optimize exit
recommendations
Management hindered the
across all channels. Created a decision
implementation, and
execution of online
tool to guide exit planning based on
process compliance
strategy
channel profitability

+ £18M in incremental
Operating Profit
Impact

Optimize online operations

Exceeded initial project
savings estimates by 3x

Captured £75M in lost
sales

Doubled Online Market
Share within 18 months

Eliminated missing SKU issues
and over/under selling

Improved customer retention
and drastically reduced
cancelled sales

“The best work I have seen from any [operations
development] team in my time with the company”
-Group CEO


42

Reduced promotional costs by 40% while improving
execution quality at $1B regional US grocery chain
Situation

• Struggling through strategic change - $1B regional US grocery chain was struggling through change
from “every day low price” to “hi-low” promotions. Promotional planning tools and business rules
were rules not in place as the process grew organically on the fly. The volume of promotions had
grown unchecked, execution became slow and laborious, and promotional effectiveness plummeted.

Approach

• Top-down analysis - Leverage top-down thinking to quickly define benefit potential and implement
quick wins to build momentum. Use hypothesis driven, answer-first tactics to avoid attempting to “boil
the ocean” of over 25K annual promotions.
• Strategic alignment – Partner with management to align around process principles and overall
promotion strategy. Close collaboration, especially at early stages, is vital to project success.
• Process redesign – Develop blueprint for process around leaner promotion model and just-in-time
delivery. Segment process according to true lead times, remove non-value add steps, increase
accountability, and track the correct metrics from initial concept to promo exit.
• High-impact business rules – Evaluate uplift, basket size, back margin, etc. to create simple business
rules which reduce the number of low-impact promos to increase effectiveness while reducing costs.
40% reduction in costs

Impact

$4-$5M overall benefit

Improved effectiveness

Optimized selection, reduced
volume, process
redesign, forecasting
improvements

Major impact from only 3
month project

Freed up execution
resources to redeploy into
effectiveness planning

“I truly believe you got to some of the key issues at [Retail Co.]”
-Director of Supply Chain

43

Contributed £10M p.a. in incremental margin by
leading analysis and PMO for complexity reduction
Situation

• Complexity in space layout and range– An £8B big-box retailer going through major turn-around, had
identified that optimised effectiveness of new stores and store refit is a key competitive factor
• However, overly complicated space planning processes, put together with ineffective performance
tracking and unclear process ownership, led to an underperforming retail space
• Management needed to understand space productivity while maintaining range and space flexibility

Space diagnostic and PMO
structure establishment
1-2 months
Approach

1 month

Align organizational
space planning
processes
1-2 months

• Map existing space processes • Analyse space usage and
• Align Space Planning processes–
remove infrequently used space redesigned key space processes:
• Create database to capture
blocks to simplify future layouts Annual Space Reviews, Trials, Range
current space
Change, and New Store Opening
accurately, analyse space
• Create a Standardization
financial performance
• Develop a 3-months
transformation plan

+ £10M annual margin
Impact

Remove complexity
from space planning

Standardized and improved
product densities

Scorecard to compare execution • Develop a standard process for all
across stores and readily
space planning activities, including
pinpoint future improvement
defining key decision points, business
areas
rules, and KPIs

Saved 7,100hrs of
unnecessary labor
Processes facilitate less
experienced employees and
free up expensive
management resources

Reduced space blocks by
75%
2,673
527
Display Unattach-Unsupport- Low Use
Blocks
ed
ed


New
Target

44

US Grocery Retail Perspectives

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