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    EXPERT COLUMN: Top 5 Trends in Grocery for 2014

    In 2014, circular investments will continue to shift online, private label products and transaction data will expand, and though drones may not deliver your groceries anytime soon, an increasing number of customers will shop online and pick up at the store. The following emerging trends will begin to change the industry in 2014.

    Click and Collect. Grocery chains of all sizes, including Tesco and Weis Markets, are increasingly experimenting with “click and collect” programs, in which customers select the items they want from an online store, then conveniently pick up their order at the store’s drive-through, where a staff member loads the groceries directly into the car. This new service bears some risk given the possibility of lost opportunities for cross-sell and impulse buying. Most customers are familiar with the experience of entering the grocery store to purchase just milk and eggs and leaving the store having also bought bacon, bread and two boxes of cereal. When those same customers can easily click to order milk online, but are no longer exposed to the broad range of in-store options, it could result in lost sales. The benefits of a “click and collect” program lie in the opportunity to acquire new customers who would not have otherwise shopped in those grocery stores at all. With considerable operational costs and the potential for cannibalization of impulse purchases, testing initiatives like “click and collect” first in a small subset of markets will de-risk broader rollout of these innovative programs. Targeting rollout to only the store profiles that experience significant benefit may also maximize the ROI of these programs.

    Optimizing Circulars. The weekly circular continues to be a key component of grocers’ promotional efforts, but executives are experimenting with numerous strategies to make sure these circulars are still driving the performance required to meet financial goals. Specifically, grocers are considering two key questions: first, should circular distribution be moved partially or entirely online? And second, which products should be included? Answering the first question requires an accurate understanding of the incremental impact of circulars on sales, which we have seen to vary greatly by retailer, market and customer segment. While one customer might compare printed circulars from numerous grocers before making her shopping decision, a different customer might always shop at the same grocery store regardless of promotional offers. Differentiating return by customer segments and market is critical to profitable targeting.

    Grocers are also increasingly leveraging their transaction-level data to determine which products to include in their circulars. Consider a grocer that features discounted beer on the circular, and experiences a significant spike in beer sales as a result. Without the insight of basket-level analytics, the grocer might write off the program as a success and expand the promotion chain-wide. However, through analysis of transaction data the grocer may find that a large percentage of customers are simply cherry-picking the discounted beer, actually hurting margin overall. With insights gained from transactional analysis, grocers can tailor their programs for maximum impact (in this example, the grocer could test whether placing chips and salsa next to the beer would profitably grow baskets containing beer).

    Private Label Expansion. Major players including Safeway, Kroger and others are improving and expanding their private label product lines to take advantage of the favorable unit margin and the significant improvement in consumer interest. According to one study, sales of store brands grew more than 18 percent over the last three years, more than twice as fast as national brands. Given space constraints, it is essential for grocery executives to understand the margin impact of expanding private label product lines, net of halo and cannibalization effects on existing products. In order to profitably accommodate the expanded product lines, grocers may need to strategically rationalize SKUs to avoid significant hits to gross margin through lost transactions. Grocers can optimize the growth strategy of their store brand products by digging into transaction-level data to understand which items are contained in larger baskets and purchased by higher-value customers.

    Targeted Promotions. Compared to other industries, grocery chains have some of the richest customer data available, given the high participation in loyalty programs (over 180 million grocery loyalty memberships nationwide) and the frequency with which customers transact. Executives increasingly will look to use this customer data for targeted promotional offers. The ability to link customer data to transaction data enables grocers to accurately understand nuances including cannibalization and pull-forward effects of each promotion, and how each factor varies by customer. For example, a 20 percent-off soda promotion might drive one customer to make an additional store trip in which he purchases multiple items in addition to the promoted soda. Conversely, the same promotion might cause a different customer to simply purchase a higher quantity of the discounted soda during the promotion, leading to lower future sales at higher margin (a phenomenon often referred to as “pull forward sales”). Testing each offer with a small number of customers decreases the risk of significant margin loss. It enables grocers to understand with which shoppers an offer is driving incremental transactions, and where the grocer is simply giving away margin to customers who would have purchased the promoted product anyway.

    Online/Social Media Marketing. As printed newspaper circulation continues to decline, and millennials make up a greater percentage of the grocery customer base, more ad dollars will continue to shift online. Many grocers use Twitter, Facebook and other online applications primarily as a distribution network for promotions and special offers. Other food retailers are leveraging these sites to increase brand engagement by providing recipes, cooking tips and promotion of in-store events. With many online and social media vehicles like Facebook and Google, ads can be targeted to a subset of markets. This allows executives to compare performance of stores where the ads are shown (“test markets”) to “control” markets that do not receive the ads. Returns on online ad investments vary significantly across markets and customer segments; through in-market testing, grocers can avoid throwing away precious ad dollars and focus their investments only on markets and customers where it will be most profitable.

    Grocers that are able to capitalize on these trends to drive growth and profitability will hold a distinct competitive advantage in the coming year. We have seen industry leaders minimize the risk of innovation and maximize incremental margin by testing each new initiative with a small subset of stores, markets or customers prior to broad rollout. These in-market tests allow executives to accurately predict which programs will work, where they will work best, and how they can be tailored for maximum impact.

    Marek Polonski is VP of Applied Predictive Technologies.

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