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Supermarket & Grocery Industry Eileen Min Byul Kim / Garrett Lane / Katherin Carver- Mera / Santiago Salazar

Supermarket & Grocery Industry

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Supermarket & Grocery Industry. Eileen Min Byul Kim / Garrett Lane / Katherin Carver- Mera / Santiago Salazar. AGENDA. Introduction Industry Analysis Pricing Strategies Recommendations. Why the Industry?. Competitive industry Homogenous products Pricing is crucial in the industry - PowerPoint PPT Presentation

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Page 1: Supermarket & Grocery Industry

Supermarket & Grocery IndustryEileen Min Byul Kim / Garrett Lane / Katherin Carver-Mera / Santiago Salazar

Page 2: Supermarket & Grocery Industry

AGENDA• Introduction• Industry Analysis• Pricing Strategies• Recommendations

Page 3: Supermarket & Grocery Industry

Why the Industry?Competitive industry

Homogenous productsPricing is crucial in the industry

Interesting to see ways of differentiation

Page 4: Supermarket & Grocery Industry

Industry Analysis

Page 5: Supermarket & Grocery Industry

Industry Definition The supermarket and

grocery stores industry makes up the largest food retail channel in the US

These establishments are primarily engaged in retailing general lines of food products

Primary Activity Retailing a general line of food

Major Products

28%

17%

15%

10%

10%

8%

7%5%

SalesOther food items

Meat, fish, poultry and delicatessen items

Other non-food items

Drugs and health products

Fruit and vegetables

Dairy products

Beverages (including alcohol)

Frozen foods

Page 6: Supermarket & Grocery Industry

Customer

Typical grocery store customer: female head of a household

Household with children spend considerable more on groceries than childless households

Page 7: Supermarket & Grocery Industry

Customer

Page 8: Supermarket & Grocery Industry

Cost

Purchases72%

Wages10%

Rent3%

Depreciation2%

Utilities1%

Other10%

Profit2%

Page 9: Supermarket & Grocery Industry

Distribution Effective supply chain

management crucial Keeps costs low

Large companies Manufacturers

Small chains & independent retailers Wholesalers

Number of distributors Food brokers Volume discounts Trade funds

Distribution centers? Direct shipments?

Page 10: Supermarket & Grocery Industry

Competition

HHI = 384.89

C4= 35.8

About 65,000 supermarkets with combined annual revenue of $470B

Competition high Trend is increasing

Concentration low Very fragmented

17%9%

6%

69%

Market ShareThe Kroger Co. Safeway Inc.Supervalu Inc. Others

Page 11: Supermarket & Grocery Industry

The Kroger Co. Est. 1883

$70B company

Operates over 2,400 grocery stores

68% supermarkets

16 banner names

32 states

696 convenience stores, jewelry stores, along with manufacturing facilities

Uses private labels to differentiate products and to compete How?

40 food-processing plants 14,000 private label items on the

shelves Sold in three tiers

Private Selection Banner Brand Kroger Value

Page 12: Supermarket & Grocery Industry

Safeway Inc. Est. 1914

$40B company

Operates over 1,700 grocery stores

West, midwest, mid-Atlantic regions in US

Self-titled supermarkets + independent grocery stores

32 manufacturing plants US and Canada Bread, soft drinks, and pet foods

New store lifestyle format Newer, bigger outlets

Wider variety of perishable food, organic products and high-end groceries

Designed to compete with groceries and high-end specialist stores

Page 13: Supermarket & Grocery Industry

Supervalu Inc. Est. 1870

Operates over 2,400 grocery stores 875 licensed locations

Retail food + food distribution Retail food segment

Extreme Value stores Regional Price Superstores Regional Supermarkets

35 distribution centers Largest publicly held distributor to

grocery retailers in the US

Emphasis on distribution and third party logistics

Early 2009, closed abt. 50 locations Effort to scale back

spending

Page 14: Supermarket & Grocery Industry

Other Companies Walmart Stores Inc. (N/A)

Largest external competitor of the industry

Walmart supercenters 2,746 supercenters Open 24 hours Wide assortment of general

merchandise and groceries Low prices Walmart’s recent focus on

groceries 54% of revenue $135B in grocery sales

Fresh & Easy

Aldi's

Whole Foods Market

Great Atlantic & Pacific Tea Company

Delhalze America Inc

Publix Super Markets

0 2 4 6

1

1

1.7

3.5

4

4.7

Percent

Page 15: Supermarket & Grocery Industry

Competition Price, location, and convenience

Key factors of competition

Saturation due to homogeneous nature Low barrier, large number of players

Consumers conscious on price Reliance on large volume of sales with small per-item markups

Differentiation By range and quality of products offered Store layout and location

Threat from large retailers

Page 16: Supermarket & Grocery Industry

Barriers to EntryHi

ghLow

Competition

Capital IntensityLife Cycle Stage (Mature)Technology Change

ConcentrationRegulation and Policy

Barriers to entry in this industry are medium and is increasing

Page 17: Supermarket & Grocery Industry

Key Success FactorsProximity to key

markets

Access to multiskilled and

flexible workforce

Ability to control stock on hand

Close monitoring of competition

Access to the latest available

and most efficient

technology

Page 18: Supermarket & Grocery Industry

Pricing Strategies Primary Pricing / Secondary Pricing

Page 19: Supermarket & Grocery Industry

Primary Pricing

Everyday Low Pricing (EDLP)

High-Low Pricing (Hi-Lo or Promotion)

Hybrid Pricing (EDLP + Hi-Lo)

Page 20: Supermarket & Grocery Industry

Everyday Low Pricing (EDLP) Supermarkets have low prices all the time Do not offer many deep-discounts Attracts Price Sensitive Customers In the USA, most popular in the South than

Northeast Wal-Mart is the leader on EDLP strategy

Page 21: Supermarket & Grocery Industry

Examples of EDLP Strategy Used

Firm Stores % Promo %HYBRID % EDLPKroger 1,399 47 40 13Safeway 1,165 52 43 5Albertson’s 922 11 41 48Winn-Dixie 1,174 3 30 67Lucky 813 35 38 27Giant 711 29 60 11Fred Meyer 821 22 60 18Wal-Mart 487 1 26 73Publix 581 13 71 16Food Lion 1,186 2 12 86A&P 698 55 30 15H.E. B. 250 1 3 96Stop & Shop 189 50 43 7Cub foods 375 26 34 40Pathmark 135 42 25 33

Page 22: Supermarket & Grocery Industry

Advantages of EDLP

Consistency Low operating costs

General discount not as steep as

Hi-Lo stores

Page 23: Supermarket & Grocery Industry

Profitability of EDLPProfitability depends on Walmart’s plan

Increase competitive checks

Partner closely with suppliers

Price matching policy

Broaden product assortment (8,500 items)

Demand

Page 24: Supermarket & Grocery Industry

Reduced Price Items: EDLPChain Areas Served No. Reduced

Price ItemsSample Items

WEGMANS Rochester, NY;Princeton NJ;Fairfax, Va.

10,000 Peter Pan peanut butter in 18oz. Jars used to sell for 2.29; went on special 4 times/year for $0.99. Now it sells for 1.79 daily. No longer goes on special

GIANT EAGLE Pittsburg and Cleveland

4,300 General Mills Cheerios in a 15 oz. box, used to sell for $4.39. Now for $3.11

RALEY’S Sacramento, CalReno, Nev. Albuquerque, N.M.

7,000 1 lb. packs of stick butter used to sell for $4.49, went on special 8 times/year: 2 for $5. Now, $2.99

Page 25: Supermarket & Grocery Industry

High-Low Pricing

High-Low Pricing (Hi-Lo or Promotion) Everyday-high-prices with frequent promotions Attracts Price Sensitive Customers Key low-priced items on local newspaper adv.,

store coupons, or flyers (soft drinks, frozen entrees)

Other items priced at regular price

Page 26: Supermarket & Grocery Industry

Example of Hi-Lo Strategy Used

Firm Stores % Promo (hi-Lo) %HYBRID % EDLPKroger 1,399 47 40 13Safeway 1,165 52 43 5Albertson’s 922 11 41 48Winn-Dixie 1,174 3 30 67Lucky 813 35 38 27Giant 711 29 60 11Fred Meyer 821 22 60 18Wal-Mart 487 1 26 73Publix 581 13 71 16Food Lion 1,186 2 12 86A&P 698 55 30 15H.E. B. 250 1 3 96Stop & Shop 189 50 43 7Cub foods 375 26 34 40Pathmark 135 42 25 33

Page 27: Supermarket & Grocery Industry

Reasons to Use Hi-Lo Pricing

Promote store traffic

• Low prices in attractive products will bring customers to the store

Persuade low prices with few discounts

• Number of discounts offered rather than cumulative savings

Overall Store Profitability

• Loss leaders’ products shelved in inconvenient locations

Page 28: Supermarket & Grocery Industry

Profitability of Hi-Lo

Increased Revenue

Revenue Lost

But how?

Page 29: Supermarket & Grocery Industry

How Revenue is Made: Hi-Lo

Consumer pays for sale item

While purchasing other item at regular price

Revenues increase

Page 30: Supermarket & Grocery Industry

Hybrid Pricing Number of categories put on sale varies

Frequency of sale varies

EDLP Hi-Lo Hybrid

Page 31: Supermarket & Grocery Industry

Example of Hybrid Pricing Used

Firm Stores % Promo (hi-Lo) %HYBRID % EDLPKroger 1,399 47 40 13Safeway 1,165 52 43 5Albertson’s 922 11 41 48Winn-Dixie 1,174 3 30 67Lucky 813 35 38 27Giant 711 29 60 11Fred Meyer 821 22 60 18Wal-Mart 487 1 26 73Publix 581 13 71 16Food Lion 1,186 2 12 86A&P 698 55 30 15H.E. B. 250 1 3 96Stop & Shop 189 50 43 7Cub foods 375 26 34 40Pathmark 135 42 25 33

Page 32: Supermarket & Grocery Industry

EDLPLarger

Households

More Racial

Diversity

Fewer Vehicles

Lower Income

Demographics and Pricing Strategies

Hi-LoHybrid

fewer Households

Less Racial Diversity

More Vehicles

Higher Income

Page 33: Supermarket & Grocery Industry

Secondary Pricing Strategies Psychological

Private Brands

Slotting

Coupons

Loyalty Programs

Page 34: Supermarket & Grocery Industry

Psychological Pricing Method of manipulating and confusing shoppers

(classic $2.99 vs. $3.00) “Rational inattention Theory” (Bergen et al., 2003)

Nominal Pricing more important

Price rigidity

Quantity discounts (3 for $9.99)

Page 35: Supermarket & Grocery Industry

Private Labels: Revenue Trends

Source of revenue growth

8.7% Total Revenue Growth

23.3% PL

2% Increase in PL as a proportion of Total Revenue Source:http://www.ers.usda.gov/Publications/ERR129/ERR129.pdf

Page 36: Supermarket & Grocery Industry

Price Differential

Source: http://www.ers.usda.gov/Publications/ERR129/ERR129.pdf

Baking a

nd Cooking

Boxed dinners

Bevera

ges

Breakfa

st Fo

ods

Canned

Foods

Condimen

ts

Coffee an

d Tea

Dairy

Salad

dressin

g

Frozen

food

Mexica

n

Meat a

nd seafo

od

Package

d bread

Pasta, r

ice an

d beans

Snack

s

Soup an

d chili

0

5

10

15

20

25

30

35

40

17.24

28.45 28.95

26.5923.35

19.25 18.8320.58

16.8819.13

24.61

18.13

33.62

22.64 22.9825.06

Private Label and National Brands Price Differential

% Price Differential

Page 37: Supermarket & Grocery Industry

Private Labels: Evolution

Source: http://www.greenbook.org/marketing-research.cfm/evolution-of-private-brands

Page 38: Supermarket & Grocery Industry

In Ithaca

Cheese Orange Juice Milk Large Eggs $-

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00 PL Price Differences

Pric

e pe

r lb.

(per

qua

rt fo

r bev

erag

es)

Page 39: Supermarket & Grocery Industry

Slotting Slotting arrangements are fees manufacturers pay

grocery chains for shelf space. Since 1980s fees have grown in size and number of

products

Low cost retailers have higher slotting allowances

For manufacturers, lower fees are paid with high market share position

Justification: Asymmetric Information Solution to the problem of adverse selection

Product innovation, reduced risk Solving Moral Hazard

Page 40: Supermarket & Grocery Industry

Shift in Asymmetry?

Page 41: Supermarket & Grocery Industry

Slotting Mostly cash rather than kind

Fees ranged from $2 to $10 per case (Rao and Mahi)

Annual Expenditures on slotting range from 6 to 9 billion 16% of Introduction costs About half of product promotion expenditures

Page 42: Supermarket & Grocery Industry

Coupons

Page 43: Supermarket & Grocery Industry

Coupons 29% of companies focus more on using coupons

Top Grocery Items Couponed Candy and Gum, Refrigerated Meats , Breakfast Foods

Why do companies use coupons for grocery products? 57 % encourage product trial 29% boost retailer support of their product 14% increase brand awareness

Value of Coupons $470 billion of coupon value distributed (2011) $4.6 billion redeemed Average face value of a grocery coupon is $1.17 each

Page 44: Supermarket & Grocery Industry

Coupon Distribution by Volume for Grocery Products

Included in the “Remaining” category are internet and mobile coupons

Page 45: Supermarket & Grocery Industry

Digital Coupons Caused by the decline of newspaper readers

coupled with the emergence of smartphones and internet access

Represent between 0.5% and 5% of coupons distributed

Highest Redemption Rate for any type of distribution – Average of 18%

Lots of room for expansion

Page 46: Supermarket & Grocery Industry

Loyalty Programs More effective for the high

volume, frequent shoppers

Many people who sign up for the loyalty program have shopped there before (88%)

Provide useful data for store managers

Doubt as to whether or not they create brand loyalty

Since there is no sign-up fee people sometimes become members at more than one store

Many people base loyalty to a certain store based on other characteristics Distance Customer Service Selection

Page 47: Supermarket & Grocery Industry

Loyalty Member Clusters

1. Ideal, highly loyal shoppers– 1.05%

2. Half loyal shoppers – 9%

3. Late but enthusiastic followers – 2%

4. Shoppers who lost their enthusiasm – 36%

5. Very infrequent card shoppers – 13%

6. Shoppers who wanted to like it but did not – 38%

Page 48: Supermarket & Grocery Industry

Loyalty Programs: Wegmans vs. Top’s

Shoppers Club Additional Savings on

different products weekly

Subscription to Menu Magazine

Online Account

Access to W-Dollars Program

Product Recall Notification

Bonus Plus Savings Discounts

Pre-Priced Discounts Double Coupons Buy-One Get-One Deals

Gas Station Discounts

Online Account

Page 49: Supermarket & Grocery Industry

Drag picture to placeholder or click icon to add

Ithaca Grocery MarketAldi’s, Greenstar, Target, Tops, Walmart, Wegmans, Wilson Farms

Page 50: Supermarket & Grocery Industry

Our Basket Bananas 2% Milk Potatoes Baby Carrots Apples Orange Juice Eggs White Bread Chicken Noodle Soup Ground Beef Sliced American Cheese Cheerios

We used as many name brand products as possible, but not every store carried those products.

Page 51: Supermarket & Grocery Industry

Our trip to the local grocery stores

Page 52: Supermarket & Grocery Industry

0

2

4

6

8

10

12

14

16

WegmansTop'sAldi'sGreen StarTargetWalmartWilson Farms

Price

(in

dolla

rs)

Pricing Comparisons of the Ithaca Grocery Market

Page 53: Supermarket & Grocery Industry

Bananas (per lb)

Milk 2% (per qt)

Potatoes (per lb)

Baby carrots (per lb)

Apples (per lb) Orange Juice Tropicana (per

qt)

Eggs Lands Best (per lb)

Bread (per lb)0

0.5

1

1.5

2

2.5

3

3.5

WegmansTop'sAldi'sGreen StarTargetWalmartWilson Farms

Price

(in

Dolla

rs)

Comparisons of the 8 lowest priced goods

Page 54: Supermarket & Grocery Industry

Classic Grocery Stores: Wegmans and Tops

Wegmans prices are roughly the median of all the stores in the Ithaca area

Competitive Advantage – Customer Service and Market Department

Most popular of the stores

Tops prices higher than Wegmans

Promotes highly its BonusPlus loyalty program for the best deals

Has its own gas station to encourage shoppers to make one-stop shopping trips

Classic Grocery Stores: stores whose main focus is selling grocery products, often use hybrid pricing strategies

Page 55: Supermarket & Grocery Industry

Supercenters: Walmart and Target

Walmart has prices lower than either of the Classic Grocery Stores

Many perceive the product quality and customer service as below average

Target only recently opened a grocery department in the Ithaca area

Very competitive pricing, comparable to Walmart less than Tops and Wegmans

Convenient location could lead to large growth

Supercenters: Stores that sell a wide variety of products, have a grocery department but it is not the main focus, use hybrid pricing

Page 56: Supermarket & Grocery Industry

Specialty Grocery Stores:GreenStar and Wilson Farms

GreenStar sells organic and natural foods

Can price higher because it serves a special niche market segment

Higher cost of inventory because of the organic nature of the products

Wilson Farms is in a prime location for most Cornell students

Being the only major grocery store in Collegetown gives them a competitive advantage

Lack of competition leads to higher prices

Specialty Grocery Stores: Stores that focus on grocery products but have a specific target market, can price higher due to specialization

Page 57: Supermarket & Grocery Industry

Value Grocery:Aldi’s

Sells off brand items at extremely low prices

Sometimes leads to skeptical shopping behavior of customers, especially with produce and meat

The store is not organized to display products in a comparable manner to other stores

Value Grocery Store: store that focuses on grocery products but sells products it can sell at an extreme discount, every day low pricing

Page 58: Supermarket & Grocery Industry

Recommendations

Page 60: Supermarket & Grocery Industry

Opportunity Mobile Coupons

High redemption rate Easy for people to access

Private Label Expansion Vertical Integration – Reduce Costs Creates Brand Differentiation Better Serving Customer needs

Recommendation for Ithaca Market Bring a EDLP/Hybrid store closer to Cornell Campus

Page 61: Supermarket & Grocery Industry

Thank You!

Questions & Answers