Supermarkets are using customer experience to differentiate themselves in the hypercompetitive grocery sector
Last year, the world’s leading consulting firm, McKinsey & Company, issued a report containing a dire warning: “To put it bluntly, much of the $5.7 trillion global grocery industry is in trouble.”
The report, “Reviving grocery retail: Six imperatives,” continued just as pessimistically, despite the grocery sector’s top line of recent steady growth. “Although it has grown at about 4.5% annually over the past decade, that growth has been highly uneven—and has masked deeper problems. For grocers in developed markets, both growth and profitability have been on a downward trajectory due to higher costs, falling productivity, and race-to-the-bottom pricing. One result: a massive decline in publicly listed grocers’ economic value.”
McKinsey went on to predict a coming era in grocery marked by mergers and acquisitions. From a customer experience standpoint, many grocers are now indistinguishable from one another. Mandy Rassi, Kroger’s head of brand building, acknowledged in a recent press release this “sea of sameness” in grocery retail advertising, the quickest escape from which starts and ends with rethinking customer experience.
Kroger’s new agency of record, DDB New York, is its first in its 130-year history. The agency’s challenged with “developing a refreshed, stronger brand identity” for the supermarket and retailer giant. For clues as to the direction in which Kroger may be taking its advertising, check out the 12-minute “Cooking with Jeff Goldblum and Special Guest” comedy video released on Funny or Die that features actors Goldblum and Bryce Dallas Howard cooking a meal with ingredients purchased at the grocer.
In-store distinctions exist as well. In June, the latest version of the Food Marketing Institute’s (FMI) U.S. Grocery Shopper Trends reports that just 13% of Americans limit their food shopping to a single retailer. A typical household makes 1.6 trips to a grocery store each week, spending a weekly average of $113.50. By the end of the month, an American shopper will visit an average of 4.4 different stores in one month, up from 4.1 in last year’s report. For millennials and Generation Z, that number is even higher, recording an average of five and 6.2 different retailers per month, respectively.
However, most shoppers (92%) say that they have a single favorite store where they do the bulk of their shopping. This is a place they know by name and where they spend the lion’s share of their grocery budget. For 49% of shoppers, this place will be a supermarket. But FMI researchers have identified four additional purchasing behaviors that cause all shoppers to look past their preferred store. These behaviors are informed by experience—people want different in-store experiences at different times.
First is the stock-up strategy, which FMI classifies as separate from regular bulk shopping. Rather, it denotes times when shoppers are looking to replenish household staples intended to last weeks or months. Shoppers will usually perform this type of strategy at warehouse, supercenter or discount stores.
Then there are specialty-item visits, undertaken when consumers are seeking unique items or brands that are specific to one location. Trader Joe’s is a cornerstone for these trips, offering an abundance of special products that its devotees cannot live without. Yet another type of visit is driven by the pursuit of quality, which can draw thrifty shoppers into more expensive environs to hunt for premium produce, meat or seafood. Finally, there is the need-it-now shopping behavior for harried households that need a basic item or two from the most convenient locations.
Shoppers may believe that warehouses are the best places to buy in bulk, but not if they need items in a hurry. For that, they choose the closest, most efficiently organized or most advanced self-checkout options. Pricy joints might scare away budget-conscious consumers, only to lure them back when they are shopping for a special occasion. For everything else, there’s the mainstay supermarket. The type of experience shoppers require determines where they will go.
Grocers need not become all things to all people. Struggling stores would be wise to concentrate on a single area, and all grocers should take care that they don’t fall too far behind in any single category. As Steve Markenson, FMI’s director of research, writes, “Perhaps the question retailers should ask themselves is, ‘How can I get a larger share of my grocery shopper’s spend?’” The operative word is “my”—grocers need to define what experience their core buyer needs and cater to it.
Another way to get a handle on customer experience divorced from shopper strategy is to view customer satisfaction scores, benchmark them by industry and break them down by company. This method, albeit indirect, reveals where customers do and don’t love to shop.
The American Customer Satisfaction Index has tracked consumer happiness by industry on a nationwide basis for the past quarter-century. Scores are issued on a 100-point scale and based on a proprietary calculation that factors in perceived quality, customer expectations, perceived value, customer complaints and customer loyalty. Data is collected annually in the form of 180,000 interviews. Separate studies in the Journal of Marketing have found that a portfolio of stocks chosen on high-ranking ACSI companies outperformed both the S&P 500 and the market at large.
“Customer satisfaction is a leading indicator of company financial performance,” says David VanAmburg, managing director of the ACSI. “Companies with high ACSI scores tend to have better-performing stocks than those of companies with low scores. Additionally, changes in customer satisfaction impact the willingness to buy. The more satisfied a customer is, the more likely they’ll become a repeat customer and thus help grow a business.”
In 2018, breweries were the most beloved industry with a score of 85, while cable companies garnered the least love of all with a score of 62. Supermarkets found themselves in the middle with a score of 78.
Looking within the supermarket sector, Trader Joe’s leads the pack with a score of 86. The brand goes all out with its experience, decorating stores with bright colors to fit its nautical theme, training Hawaiian-shirt-clad staff to engage and open any products customers may want to sample, and providing a cornucopia of goodies you can’t get anywhere else.
Wegmans clocks in at No. 2 with an overall score of 85. The northeastern luxury grocery has become the stuff of legend with its assortment of prepared foods, tech integration, locally sourced produce (some from its own farm) and happy workers.
Southeastern chain Publix places at No. 3. More of a conventional supermarket than the top two stores, employee-owned Publix nevertheless wins accolades for its helpful, knowledgeable, well-trained workforce; regionally attuned bakery and deli selections; and competitive prices.
Aldi, a no-frills hard discounter not known for providing an opulent shopping experience, is No. 4. This aligns with the theory that different purchase behaviors drive what makes a good customer experience. Shoppers who want unique, quirky products will find satisfaction in Trader Joe’s; those seeking a fast, affordable stop will be pleased with Aldi.
“Customer experience is the most important part of any campaign for a retailer’s execution,” says Karen Sales, an independent consultant and former Albertsons vice president of shopper marketing. “If you put the shopper first in all of your marketing, operations and merchandising efforts, you have the best chance of winning in today’s environment. Make it easy for the shopper. Make it friendly, local, personalized and at a good value. The grocery stores that can bring those four things together have the best chance of succeeding and winning more of each shopper’s dollar.”
The search for the right elixir has created some truly unique offerings. Giant Food Stores, a chain of 172 stores throughout the northeast and mid-Atlantic, is unleashing googly-eyed helper robots to search for spills. The New York Times tech columnist Kevin Roose captured one on social media in July, tweeting, “My grocery store got a robot that is supposed to monitor the aisles, but it can’t get to the aisles because people just stand around staring at it.”
My grocery store got a robot that is supposed to monitor the aisles, but it can’t get to the aisles because people just stand around staring at it. pic.twitter.com/4dXmszorxt
— Kevin Roose (@kevinroose) July 9, 2019
In the southwest, H-E-B—America’s 15th-largest privately held company—is testing a self-driving delivery van equipped with various climate-controlled sections capable of storing frozen foods, produce and dry goods. Kroger is investing heavily in a subsidiary called Sunrise Technologies that’s charged with developing next-gen tech for its own supermarkets and to license to other stores. Elsewhere, Pittsburgh-based Giant Eagle is experimenting with a checkout-free app, and Albertsons is adding an unlimited delivery subscription service to boost purchase frequency.
Sales, who left Albertsons in May to launch her own consulting service after four and a half years with the supermarket, also gives praise to old-school promotions, such as games and loyalty programs. Albertsons has used a Monopoly-based promotion for 11 years, in which shoppers collect game pieces by making grocery purchases, then match the pieces with spaces on a Monopoly game board for a chance to win cash, grocery products and other prizes. This program has been updated to include an app.
Looking ahead, Sales points to digital shelf tags and displays as the new untapped frontier in grocery. Digital shelf displays rethink the shelf space between rows of products, typically filled in with physical price tags. They replace the analog tags with a digital display that flashes dynamic advertising and nutritional information to passersby and their smart phones.
“The technology, cost of equipment and Wi-Fi solutions are now at a point where scale is possible,” Sales says. “Along with e-commerce, this will be the biggest game-changer in grocery and mass retail over the next few years.”
Aldi’s aisles are wide, the assortment is well-placed, checkout moves swiftly and the prices are cheap. The small inconveniences customers endure would be unheard of at other stores. First, there’s the requirement of depositing a quarter in a shopping cart to unlock a basket (customers get the quarter back when they return the cart). Aldi’s product assortment is smaller and departments are limited to what gets delivered in trucks. There’s no bakery cranking out fresh pastries, no deli assembling sandwiches. Patrons are expected to do their own bagging with totes that they’ve brought, or else pay extra for in-store bags.
Once dismissed as the bottom-feeders of the grocery ecosystem, deep discounters such as Aldi have ramped up quality while proudly wearing their reputation for low prices as a badge of honor, refashioning themselves into formidable competition in the process. In Germany, Aldi enjoys a market share between 20% and 50%, according to McKinsey.
Closer to home, Aldi is angling to do something similar. The chain is amid an ambitious five-year plan to transform itself into one of America’s largest grocers. IBISWorld estimates that Aldi’s U.S. revenue totaled $13.5 billion in 2017, only about one-tenth of Kroger’s $97 billion. To close that gap, the company will open 800 new stores in the U.S. and remodel older ones while upgrading its assortment. By 2022, the company projects to reach a store count of 2,500 locations, more than any other grocer besides Kroger and Walmart.
Jan-Benedict Steenkamp, a professor at the University of North Carolina’s Kenan-Flagler Business School, was so impressed by the performance of hard discounters that he made them the subject of his fourth book, Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters. He sees Aldi and similar stores as the main disruptor in the grocery world at the moment, with an impact more outsized than that of online channels.
“There are very few national chains,” Steenkamp says of the U.S. market. “Most are regional. Many of those chains are not particularly strong, meaning that consumer satisfaction with them is low. Perceptions of key store attributes is low.”
Joining Aldi is Lidl, a German-based hard discounter. The chain first made waves in the U.S. four years ago when it announced that it would enter the American market. The first stores opened in 2017, and there were plans to launch 100 by the summer of 2018. However, only 68 U.S. locations are in operation as of the end of June. Steenkamp admits that Lidl’s American invasion was fraught with missteps—the director of Lidl’s parent company called the rollout a “catastrophe.” But where Lidl has taken hold, it’s had an impact. Steenkamp reports that retailers operating near Lidl stores must drop prices on their private labels by an average of 10% to remain competitive.
The discounters are adding pressure to what is already under siege. Supermarkets may never face existential obsolescence the way newspapers or coal mining might—we all need to eat—but the options for food shopping at non-traditional grocers have never been more numerous. If left unchecked, $200 billion to $700 billion could shift to discount, online and nongrocery channels by 2026, according to McKinsey industry analysis.
In the FMI report that outlines different experiences customers seek when grocery shopping, Aldi arguably makes a strong showing in three of the five categories: The chain has become the preferred bulk destination for many shoppers. Though it can’t offer the large quantities of a Costco or BJ’s Wholesale Club, it doesn’t charge an annual membership and its low prices encourage shoppers to stockpile nonperishables. Finally, its limited assortment and barebones checkout possess obvious appeal when shoppers shift into need-it-now mode.
“Sometimes, it’s nice to shop at a store and find some new things. There is some shopping experience there,” Steenkamp says. “But there is another type of shopping experience, which is also highly valuable: no hassle. Get in, get out.”
When it comes to quality or specialty items, Aldi will be never be considered the top of the line. But it has made strides with its private-label items, which now rival or surpass the competition, Steenkamp says. “The quality of the store-brand products offered by Aldi, Lidl and Trader Joe’s is better than what Walmart and Foodline offer,” he says. “They are not catching up—they are better.”
For years, industry-watchers have expected a great online shakeup to mark the next evolution of grocery shopping, but there’s little such evidence. The McKinsey report identified Amazon’s purchase of Whole Foods to be a game-changer, but there is cause for moderation when assessing the immediate future of e-commerce. The U.S. Grocery Shopper Trends report notes that while millennials make up the largest portion of online grocery shoppers, their numbers have remained flat for the past two years, suggesting that the growing acceptance of online grocery shopping in Gen X and Gen Z might plateau as well.
Steve Dennis, founder and president of SageBerry Consulting, sees a customer experience problem. Grocery is lumped in as part of retail, but food shopping is vastly different than buying clothes or hardware. This is apparent in online shopping: Traditional e-commerce design doesn’t lend itself to grocery shopping.
“In most parts of e-commerce, you’re usually going to buy an item or two,” Dennis says. “If you’re buying multiple items on Amazon, you’re usually on a mission. Grocery, to me, is not a search-driven business, it’s more of a browsing-driven business. … It’s a hassle to put together a shopping basket on most grocery websites.”
Delivery itself is also a hurdle. McKinsey points to the cost of delivery infrastructure as a thorny and expensive issue. If grocers aren’t willing to find partners or develop their own advanced analytics, warehouse relocation and automation system, online delivery will never reach the point of workability.
FMI reports that 17% of grocery deliveries are made through standard package-shipping services, while another 17% are set aside at kiosks for consumers to pick up themselves. Thirteen percent are delivered by a store’s specialized delivery service, and 8% of online grocery purchases are delivered as part of recurring subscriptions. The mishmash of last-mile solutions explains why center-store goods, such as salty snacks and other longer-shelf-life items, dominate online grocery purchases. Sixty-nine percent of consumers say regular supermarkets do a better job of preserving freshness than online delivery.
What’s a grocery store marketer to do? The first step is to embrace either end, or both, of a stratifying marketplace. Major middle-class grocers might be unique with their “sea of sameness” conundrum, but they are far from the only retail sector that is seeing the market gravitate away from the middle. Deloitte calls this phenomenon “the great bifurcation,” and Dennis has studied it extensively.
“You see this spilt between retailers. On the higher end, more experimental, unique product retailers are doing well,” Dennis says, adding that toward the bottom of the spectrum are the Aldis of the world. “But the folks that are in the middle that aren’t particularly convenient or low-cost—or they aren’t particularly high-interest or high-service—are sunk.”
Grocers looking to avoid the drain must decide if they want to go bougie or go budget. There are a few options in each playbook, which Steenkamp calls offensive or defensive.
“Defensive is touching the price of the shopping basket,” Steenkamp says, the most obvious tactic being to slash prices and bleed your competitors before they bleed you. Introducing a line of store-brand economy products is another lever to pull. The most well-heeled and far-reaching initiative is to spin off a separate brand of hard discounters. There’s no U.S. model for this route thus far, but iconic British grocer Tesco launched a cheaper version of itself last year called Jack’s, which advertises itself as “the cheapest in town.”
Marketers need not limit themselves to a smashmouth race to the bottom. They can go on the offensive by adding value to the shopping experience. In-store elements—such as a unique assortment, extra service, in-store experience and curbside pickup—are all proven options that attract most shoppers at least once or twice a month.
Above all, Dennis encourages experimentation. “Too many companies, not just the grocery industry, have been afraid to fail,” he says. “There’s a big process to decide what to invest in and things get averaged out and become not that interesting. If it turns out it doesn’t work, then you have to go back to the drawing board and you’ve lost a year and a half or two years.”