Chris Hoyt from Hoyt & Company, a consultancy for packaged good companies, takes the conventional grocery industry to task for their dogmatic and seemingly doomed fixation on bringing ever lower prices to market in his latest Reveries article.
Chris writes,
“Wal-Mart's 2004 average gross margin at 22.5 percent is now lower than Kroger's, Albertsons', and Safeway's operating expenses which were 22.7 percent, 24.9 percent and 26.0 percent respectively. Apparently, these folks aren't looking at these numbers because every pronouncement we hear from these supermarkets (or so it seems) is fixated on continuing to lower prices to compete.”
He goes on to point out the fallacy in Safeway’s stated goal to achieve dead-net pricing with vendors and their financial reliance on receiving billions in allowance money from vendors.
Thus, last week, we get the following from Steve Burd, Chairman and CEO of Safeway: "Safeway expects vendor allowance income to decline in the next five years as it seeks more dead-net pricing from vendors," said Burd. "We think the way supermarkets typically buy goods is more complicated than it should be" … "Our goal is to get down to a net cost so allowances go away and price reductions are reflected in the cost of goods."
This, from a company who, according to JPMorgan, managed to extract over $2.3B in allowance money from suppliers in 2001, which was equivalent to 95.85 percent of Safeway's operating profits in that year.
What Mr. Burd doesn't seem to understand is that even if Safeway were able to accomplish this, what it would be left with at the end of 2009 is an EDLP strategy that – based on current numbers – would still put Safeway at an average 3.5 percent price disadvantage versus Wal-Mart. In addition, Safeway would literally have no ammunition left to create excitement in an already boring and commoditized shopping environment.
Since winning on price seems to be unachievable due to the dominance of Wal-Mart, Hoyt recommends conventional grocers “… package and market themselves to appeal to one or more of the plethora of changing consumer needs emerging at present.” Some of the “traction points” he lists include:
The full article is a very good read -- even if you aren't a CPG marketer or involved with the retail grocery industry.
Something else which might help them, do away with the "discount cards." I know it is all marketing related, however I refuse to shop at Dillon's (kroger) 99.9% of the time because of it. If you forget your card, you are punished because they can't track your purchasing habits.
If they can afford to sell the products at a discount with the card, why not sell them at that lower price all the time? I'm sure a lot more people would shop at the store which is in their neighborhood if they did.
Posted by: justin g mitchell | September 21, 2004 at 08:09 AM
To build on Justin’s comments ... you may want to venture over to NoCards.org to read their tirade against retailers using loyalty cards.
Posted by: johnmoore (from Brand Autopsy) | September 21, 2004 at 10:53 AM