Customer Centricity Gains Traction at Food Retailers

When Tesco announced last year that it was planning to introduce its vision for food retailing into the United States, it did not say it would open stores that would be all things to all people. In fact, it is opening what could be seen as the opposite of most traditional, middle-of-the-road supermarkets: Its Fresh & Easy stores will measure 10,000 square feet and offer a limited selection of convenience

When Tesco announced last year that it was planning to introduce its vision for food retailing into the United States, it did not say it would open stores that would be all things to all people.

In fact, it is opening what could be seen as the opposite of most traditional, middle-of-the-road supermarkets: Its Fresh & Easy stores will measure 10,000 square feet and offer a limited selection of convenience foods with an emphasis on prepared and healthful, low-priced offerings. While food retailing in the U.S. is dominated by relatively large stores that seek to alienate no one, Tesco has decided to target a specific customer — not necessarily a specific demographic group, but any customer who's looking for an affordable, healthful meal solution.

The concept of targeting a specific customer segment may be gaining steam in the U.S. food industry as well, as retailers analyze their customer base and merchandise stores to meet the needs of specific shoppers. While food retailers have always catered to local neighborhoods to some degree, they have clung to the idea that they still need to have the kind of broad assortment that wouldn't alienate anyone, mixed in with a hearty helping of the best deals they could get from their suppliers.

“If you go back four years ago, Spartan had more of a wholesale mentality, where you made more money on the buy than the sell,” said Alan Hartline, senior vice president of merchandising, Spartan Stores, Grand Rapids, Mich. “We proliferated our warehouse with a multitude of products that probably were not relevant to the customer.”

As the company has moved toward a more customer-centric model in which each store is merchandised differently based on demographic and product-movement data, it has seen its profits and its stock price soar.

“I don't think there's anything inherently wrong with being all things to all people, but those stores are going to increasingly appeal to a smaller base of customers,” said Mary Brett Whitfield, senior vice president, Retail Forward, Columbus, Ohio. “Shoppers are going to increasingly be focused on stores that seem more finely edited and targeted to ‘me.’ They will seek out the store that meets their needs the best, and in many cases that is not going to be a conventional, all-things-to-all-people supermarket.”

One of the challenges food retailers have faced, she said, is that they lack the analytical tools that could help them process the reams of data they have collected from frequent-shopper cards.

“If I am a retailer, all of my customers might have cards, but how do I take that data and use it to put something out there that really makes sense for my customers?” she asked.

Kroger, Cincinnati, has been one of the leaders in this area through its use of dunnhumby USA, a firm that helps it sort through the loyalty card data that its uses to help tailor its advertising mailing and its merchandising, analysts said.

Other retailers, like Delhaize's Food Lion, Salisbury, N.C., have taken customer segmentation to another level by using it to determine where to build each of three different supermarket concepts — Food Lion, Bloom or Bottom Dollar — and to tailor the offerings to meet the needs of one or more of 13 different clusters of customers the company has identified.

As Minneapolis-based Supervalu has rolled out a remodeling program it calls “premium fresh and healthy,” it has created a modular “plug-in” program that allows it to customize each remodel to meet the needs of individual consumer groups.

These examples represent the direction some analysts said supermarkets need to take as customers increasingly patronize formats that suit the needs of not only specific demographic groups, but also specific shopping occasions.

San Antonio-based H.E. Butt Grocery Co., for example, in some areas places its traditional H-E-B supermarkets, its upscale Central Market stores and its H-E-B Plus supercenters all within close proximity to one another, because the stores are each targeted to meet the needs of different shopping occasions, according to Jeff Smith, glo-bal managing director for Accenture Retail, Chicago.

“They recognize they can capture a different kind of purchase trip by having a different kind of format for loyal H-E-B shoppers,” he told SN. “They can take a trade area and put in different kinds of format variations, layer upon layer, because they are going after incremental purchase occasions, oftentimes from the same fundamental customer.”

H-E-B recognizes that the same consumer can be a number of different kinds of customer, Smith said, based on their needs at any given time.

BEYOND DEMOGRAPHICS

Richard George, professor of food marketing in the Haub School of Business at St. Joseph's University, Philadelphia, said retailers may put too much stock in demographic data when segmenting their offerings and not enough to actual shopping patterns.

“The problem with demographic analysis is that I'm not sure it's a real good predictor of how people are going to behave,” he said. “People are shopping for convenience and speed on the weekdays, and on the weekends they are shopping for different reasons.”

George suggested traditional supermarkets need to take themselves out of being in what he called “the big middle” — where department stores have struggled against more targeted specialists, for example — and make a commitment to target one group of customers or another.

“It's very tough to do, because the people running these companies say, ‘If I do that, what that says to some people is that they're not my target market,’” he said. “And that's true, but what you are doing is you are giving up some of the people who the store doesn't appeal to and you're going after someone who sees you as not just one of many options, but the best option.”

As an example, he cited a retailer who might decide that its target market for a particular store might be young mothers with children. That store could offer such amenities as a play area, special parking spaces and a broader selection of baby foods, for example.

“It's all about making a place where mothers can say, ‘Hey, that's the place for me,’” he said. “This is the place that takes care of me. And just because you are focusing on mothers with young children, it doesn't mean that the senior citizen is not welcome.”

The model of tailoring stores to the individual has been dubbed “customer centricity” — a term used by both Spartan Stores in its merchandising effort and by Best Buy, the Minneapolis-based electronics retailer that has embarked on a remerchandising program in which each store is stocked based on a specific target demographic it is seeking to reach, such as scrapbooking mothers or young male technology geeks.

“They are thinking about the stores more from a customer perspective rather than a product perspective,” said Whitfield of Retail Forward.

“All large retailers are beginning to think about this, because many of the large players are reaching a point where the majority of their growth is not going to come from physical expansion,” she added. “The goal for many retailers in the next few years is how do I maximize sales from existing stores. There's going to be a point, whether it's three, six or eight years out, where they are just not going to be able to open stores at that same rate.”

COUNTERINTUITIVE

Merchandising stores on an individual basis seems to run counter to the efficiencies of scale that food retailers have worked hard to build, however.

“I think efficiencies do take a hit in this type of environment, and then it becomes incumbent upon the retailer to make sure that customers recognize you for that and reward you for that,” Winfield said.

For supermarkets, she envisions an approach to customization not unlike the one taken by Supervalu, in which a suite of custom components, mostly in the perishables departments, can be “plugged in” as needed.

“I still think there will be a core of merchandise across different stores, as there is now,” she said. “But I think a lot of this differentiation will take place around the perimeter of the store in different departments. It will be like a Chinese menu approach, where you take one from Column A and one from Column B — a modular way of going about segmentation and differentiation, where one store is ‘XYZ’ and another store is ‘ABC plus X and Y, but not Z.’”

Another big challenge retailers face is deciding which products not to carry, Smith said. Analyzing the behavior of customers often leads to the discontinuation of product lines or offers that are not, on the whole, beneficial to the bottom line.

“That decision to stop accepting a certain volume of business because it is bad for your business is a very hard thing for retailers to step up to,” Smith said. “Retailers think that even if a trip is a loss leader they'd rather get it, that way they'll get a profitable trip on the weekend, but in the real world it is not quite as simple as that.”

George of St. Joseph's agreed that there is a psychological hurdle retailers must overcome in order to maximize the benefits of customer segmentation.

“I think the biggest impediment is philosophical,” he said, “This is where the independents have more power. The large chains tend to consolidate everything at the corporate level, and we have tended to like that model because of its efficiency. It takes real passion to say, ‘This is the way we're going to run our stores, and we're going to run our stores the way Main Street wants, and not according to Wall Street.’

“For a long time, our stores were 20% different and 80% the same,” he said. “Now, I think you are going to start to see stores that are 80% unique and 20% the same. I think retailing is a local phenomenon.”