U.S. Retailing Trends from ACNielsen

Supermarkets have lost share to other retail channels in the past decade primarily because consumers expect more variety, value and convenience in the places they shop, said Todd Hale, senior vice president of consumer and shopper insights at ACNielsen.Hale presented an overview of U.S. retailing trends and implications of multiple channel shopping patterns at the Private Label Manufacturers Association's annual trade show near Chicago in November. Data from ACNielsen's Homescan and Spectra services paint a consistent picture of how alternative channels have eroded supermarket share over the past 10 years.The potential upside to increased channel surfing is that consumers who shop a wider variety of channels also tend to spend a lot more. Households that shop more than four channels regularly, for example, spend an average of $271 on diapers annually, versus $50 for households that shop only one channel, according to ACNielsen research. The same pattern holds true for a variety of packaged goods categories. The key for manufacturers and retailers is to target these top-spend consumers, capitalize on the demographic strengths inherent in each channel, and tailor product offerings accordingly.Store Counts and Expansion"If you look at store count trends, it's club, it's dollar stores, it's supercenters and primarily Wal-Mart that are driving overall store count," Hale said. "Clearly, it's either 'value' or 'convenience' that's winning in the marketplace today."Since 1996, dollar stores have more than tripled their store count, from 5,458 to 18,921 in mid-2006. The number of supercenters, warehouse clubs, and convenience stores also rose in the same period, while supermarket store counts remained flat. (See chart A.) A drop in the number of traditional mass merchants can be attributed to Wal-Mart's transition of more stores to the supercenter format and Kmart's shuttering of more than 700 locations.A decline in the total number of drugstores since 1996 is largely due to the loss of smaller, independent stores, Hale said. Walgreens, CVS, and Rite Aid all have increased store counts dramatically, either via new construction or acquisition of smaller chains. (See chart B.) Wal-Mart, Target and other retailers are relying on expanded packaged food and beverage offerings to help boost shopping frequency. Target plans to increase space devoted to food and beverage by 50% in most stores and add 600 new stores in the next five years, with about 125 of those units expected to be supercenters, Hale said. Likewise, convenience and gas chains have expanded fresh food offerings as a way to recapture gasoline trips lost to big boxes. All three wholesale club chains added stores in the past decade, with Costco performing exceptionally well. Costco has 200 fewer stores than Sam's Club, but outsells its rival by driving higher trip frequency and bigger baskets, Hale said. Supermarkets still account for just over half of all dollars captured, versus 17.7% for drugstores and 31.8% for mass merchants and supercenters. (See chart C.) Hale noted that supermarket share can vary widely by region and often relates to how strong Wal-Mart is in that market."That 50 [percent] average for grocery is kind of deceiving if you look around the country," Hale said. "There are markets out there that have significant share levels for grocery. In Seattle, 73% of the food/drug/mass business goes through grocery. So grocery is still very important in a number of markets," although it has lost share in all markets in the last year, he said.Continued retail consolidation has led to more than 63% of all sales going to the top 10 U.S. retailers. (See chart D.) Wal-Mart leads by a wide margin, with a 23.6% share. Three of the six supermarket chains in the top 10 (Kroger, Publix and Delhaize America) posted share gains in recent months. "It's nice to see Kroger gain. It's nice to see Delhaize and Publix and some strong regional players growing their market. But, by and large, grocery is being challenged in a number of different fronts," Hale said. "This consolidation is going to continue. [Supervalu] did the right thing by swallowing up a big retailer like Albertsons. But in the next year or two you're going to see a lot of shakeout with some of the poorer-performing stores closing."Hale singled out Kroger and Safeway as examples of supermarket retailers adapting to the new landscape. Safeway is on track to remodel 280 stores into its Lifestyle format, which features more upscale lighting and fixtures to merchandise a wider assortment of high-quality fresh foods on the perimeter. "The latest year hasn't been too bad for grocery. They've made some rebounds, they've done some nice marketing," Hale said. "Kroger has done the best job of the national retailers in terms of innovation. They rolled out their Signature stores in Dallas. They're taking the Marketplace format from the Phoenix market and moving that into Columbus and Cincinnati, getting ready for Wal-Mart to move into those cities."Value channels, which include warehouse clubs, dollar stores and supercenters, all have increased household shopper penetration and trips per household since 2001. (See charts E and F.) Annual trips to supercenters increased from 20 in 2001 to 26 in mid-2006. Meanwhile, trips to supermarkets dropped from 72 to 62 in the same time period.Strong competition from value channels also drives price compression in other formats. (See chart G.) Pennsylvania-based Giant Eagle responded to Wal-Mart by reducing prices by 15% on 4,000 items in early 2006 and by 12% on one thousand more items in September 2006, according to Progressive Grocer. Supermarkets have been squeezed in the past decade as smaller convenience formats grabbed a greater share of short shopping trips while value channels took away share of larger, stock-up trips. (See chart H.)"More [supermarket] trips are smaller, fill-in trips, but [grocers are] caught in the middle because they're competing for those trips with the c-stores, the drugstores and the dollar stores," Hale said. "And they're caught in the middle for those larger trips from the big boxes."Among specialty alternative channels, both toy stores and department stores posted significant declines in household shopper penetration between 2001 and 2005. (See chart I.) These specialty channels have relatively low shopping frequency (See chart J), but they boast fairly large shopping baskets. (See chart K.) The average basket ring is $50 for hardware and home improvement channels and $96 for electronics chains.While these channels present even more competition, they also can provide opportunities for both traditional retailers and manufacturers, Hale said. "If you're a grocery retailer today, my guess is you'd much rather see your shoppers go to Best Buy or Circuit City. Sell them gift cards in your stores. Don't let them go to Wal-Mart or Target to buy electronics."Likewise, manufacturers can capitalize on the unique shopper demographics of specialty outlets. Auto supply stores skew heavily male, for example, while bookstores skew female, so it may make sense to push for new distribution in those channels if your product is a good fit."People, when they shop these formats, spend a lot of money. So there is an opportunity for manufacturers to maybe do some trial packs and ... enter into a format to drive some incremental sales," Hale said.Heeding DemographicsAs might be expected, big box retailers generally do better at driving sales among larger households, while drug and convenience formats do better with smaller households (See chart L.) Some researchers have wondered whether the growing number of smaller households (driven by an increase in empty nesters) would spur growth in smaller format stores, but the data actually suggests otherwise. Even older households are taking advantage of supercenters and leaving grocery with the same frequency and volume as the average household, Hale said.Younger female shoppers tend to shop supercenters, supermarkets and mass merchants more frequently, while older women shop drugstores more often. (See chart M.)Club stores boast the highest percentage of affluent shoppers. Almost half of club store shoppers were considered affluent, versus only 14% of dollar store shoppers. (See chart N.)"We think club is probably a bigger threat or as big a threat to grocery as supercenters.... So keep your eye on club stores as well as the competition you're going to get from supercenters," Hale said.Hale suggested the following areas present enduring growth opportunities for both manufacturers and retailers:Older consumers are likely to drive changes in store sizes and formats, the growth of functional foods and packaging sizes and technology. Ethnic populations offer opportunities, but they must be tailored to the needs/tastes of regional and local markets.On-the-go consumers have continued need for products with portability and easy, quick preparation.Health and wellness should be a key component of product formulation and messaging whenever possible. Manufacturers and retailers must respond more quickly to diet and eating trends. Rising fuel costs will be an ongoing problem for retailers as consumers opt to stay home more often. Capturing dwindling shopping trips will be key, so retailers should try to provide relief in the form of value pricing, at-home meals, gas cards and other perks.Private label acceptance and growth -- even among the most affluent consumers -- suggests retailers have an opportunity to reduce the price gap between store brands and national brand competitors.Channel shopping diversity presents an opportunity for manufacturers by expanding product distribution into alternative channels with tailored product offerings matched to each channel's demographic strengths or shopping patterns.

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