Expert Column: Top Retail Trends in 2015

As deep-pocketed online players, big box retailers, and convenience and drug stores ramp up their efforts to steal share of wallet from grocery stores, the most successful grocers will be those that can anticipate impending changes and capitalize on the opportunities they create. Here are five trends to watch over the coming year:

1.

Promotions Turn Personal: The days of coupon clipping in the Sunday paper may be numbered. For years, grocers have been reducing FSI circulation, and the smartest retailers have done so with a scalpel rather than a hatchet – testing which markets will profitably respond to transitioning some of their print circular distribution to digital. As more grocers further enrich their wealth of customer data – and as consumers make digital an even bigger part of their lives – the race to offer the most relevant promotions for each customer will continue to intensify. 

In 2015, we can expect to see more programs like Safeway’s “just for U,” which offers personalized coupons to its customers. As grocers look to further increase share of wallet, they may also turn to in-store technologies, such as indoor positioning systems, to push customized offers in real-time. A handful of retailers are already piloting “beacon” technologies that enable them to blast promotions to customers’ smartphones as they stroll through the aisles. 

Determining which offers to send to which customers at what time is challenging, as grocers need to avoid giving away money to customers who would have purchased promoted items at full price. Grocers can leverage transaction- and customer-level data to ensure they are designing promotions that are not likely to result in giving away too much money to customers who would have purchased that combination of products anyway (e.g., if a customer commonly buys two boxes of cereal, don’t promote a buy-one-cereal-get-another-free; instead, offer a discount on the third box). To further evaluate and refine their targeted promotions, grocers should test different offers to understand which discounts truly generate larger baskets and incremental trips. 

2.

Groceraunts and Wine Tastings Hope to Drive Traffic: From introducing beer cafés to offering cooking classes, grocers are increasingly challenging the notion that customers should only visit their stores to grab weekly staples. Some grocers are even organizing social activities, such as wine tastings. Others have introduced “groceraunts” - in-store eateries, cafés and gourmet delis - in direct competition with restaurants. As more grocers pursue similar projects to turn their stores into destination spots, the lines between convenience stores, drug stores, restaurants and grocery stores are likely to continue to blur.  

All transformative additions bear risk of not quickly paying back, or even destroying value. For example, adding an in-store restaurant not only costs significant capital and potentially causes a sales disruption, but it also requires taking away floor space from another category, re-allocating or adding labor, and optimizing the offering within that restaurant. Grocers should test these initiatives on a small scale first to understand the true incremental impact, taking into account potential gains and losses to other categories, and measure whether nearby stores are cannibalized before committing to broader rollout.

3.

Grocers Continue to Respond to Convenience-focused Consumers: Grocers are seeing customers frequent grocery stores more often and buy less with each trip. As this trend continues, grocers should better identify opportunities to grow basket size. Grocers can pinpoint these opportunities by rapidly exploring their transaction-level data to understand which items are included in larger baskets and purchased by higher-value customers. Using the resulting insights, grocers can implement well-designed adjacencies, end-caps, and bundled promotions to convince customers who were simply planning on making a quick stop to grab a single item to instead leave the store with a bag (or two). For example, a grocer may find that customers who are buying ice cream are often “cherry-picking” that category, or not purchasing any additional items. As a result, merchants could move the ice cream to the back of the frozen aisle, which requires customers to pass more items on their way, encouraging impulse purchases and increasing basket size.  

4.

Enhanced Fuel Rewards: As fuel rewards programs become more commonplace, it is increasingly important for grocers to differentiate their programs from the sea of competitors. Examples of recent fuel rewards initiatives include introducing loyalty tiers, advertising one-day only $1.99 gas prices, and offering “5x gas rewards” on select grocery products. In the coming year, we expect grocers to continue to experiment with creative promotions, marketing campaigns, and pricing strategies to differentiate their programs and incentivize customers to spend more in their stores. 

Like with other promotional programs, grocers must be cautious as they design their fuel rewards strategies since they bear substantial risk of giving away money. In the past, customers have gained notoriety for working the system—building up fuel reward points by purchasing large quantities of gift cards for other stores, rather than merchandise. To prevent becoming one of these cautionary tales, grocers should leverage transaction-level data to measure each promotion’s “implied cost”—the margin being “given away” to customers who would have purchased the items anyway – and test each proposed promotional program on a small scale. Equipped with these insights, grocers can more accurately gauge which promotions increase sales and decrease unprofitable rewards giveaways, which pull demand forward, and which should be tailored to engage the most valuable customers.    

5.

Delivery Services: Tech-giants (e.g., Amazon Fresh), newcomers (e.g., Uber), and established industry players are all buzzing about the potential for delivery services to reach more convenience-focused consumers. Peapod by Giant will be debuting its latest experiment this spring—a delivery service that drops groceries off at select Washington, D.C. Metro stations, rather than customers’ doorsteps. With many of these programs in their infancy, there remain many questions about their profitability. For example, will transaction frequency increase enough to offset the capital and operational investments necessary to execute these programs and the potential decline of in-store impulse purchases? 

As established players expand their programs to additional markets, and smaller grocers experiment with delivery services (as well as click-and-collect), it will become increasingly important for grocers to have evidence to answer these difficult questions. It’s also likely that delivery services could be a roaring success in some locations, and a costly failure in others. Gaining these key insights can help grocers target rollout decisions—ensuring each location that introduces delivery services also delivers value to the retailer’s bottom line.  

As grocery executives strategize about how to profit from these trends, they should consider what Harvard Professor Stefan Thomke and APT Founder and Chairman Jim Manzi argue in a recent Harvard Business Review article: “Big data can provide clues only about the past behavior of customers—not about how they will react to bold changes… Managers can, however, discover whether a new product or business program will succeed by subjecting it to a rigorous test.”