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    WAKE-UP CALL: Organized retail(er) theft

    Sometimes it's okay to steal -- when the booty is innovation.

    By David Diamond

    We all visit stores to "borrow" fresh ideas and copy innovations from leaders in the industry. While every store has something worth seeing, it's important to target the true innovators to maximize your time invested in gathering intelligence.

    I've visited hundreds of stores in my current role as a consultant, as well as in my past experience working for a loyalty solutions firm and a major CPG manufacturer. One thing I've learned is that the true innovators aren't always among the usual suspects.

    What makes our industry unique is that we innovate not from the top or the bottom, but from the middle. What do I mean by this? Most industries follow a bipolar model for innovation -- it comes from the biggest, most powerful players in the industry, or the smallest, most entrepreneurial ones.

    Even in our sister industry, consumer packaged goods, innovation comes from the top -- P&G, General Mills, PepsiCo -- and from the bottom -- the entrepreneurs who started SoBe, Clean Shower, Burt's Bees, Guiltless Gourmet, and dozens of other successful new products. If you're looking for innovation in toothpaste, you can look to Crest or you can go to Maine and talk to Tom.

    But in the supermarket world, things are different. Who's generated the lion's share of innovation in our industry? Has it been the giant operators, Safeway, Supervalu/Albertsons, and Kroger? Well, no. They've made breakthroughs in some areas, but they're not viewed as the innovation leaders. Nor has it been the littlest guys, the single-store operators. While many new ideas have come from single-store operators, these entrepreneurs haven't generated the bulk of innovation.

    The supermarket innovation drivers come from leading regional chains, those large enough to focus on innovation, but not so large that they become consumed by their own operations. I'm talking about chains like Ukrop's, Wegmans, HEB, and Giant Eagle. These operators share key attributes: They dominate their own local markets, they're big enough to benefit from innovation, and they've chosen to challenge the basic assumptions that underlie the industry.

    Why does this dynamic direct innovation in the supermarket industry, and virtually nowhere else? The reasons are straightforward: low margins, the nature of regionalization, the operational intensity of our industry, and the constant short-term pressures on large public companies.

    Let's look at these four factors and their effects. First, the low-margin nature of the U.S. supermarket industry makes budgeting for R&D hard to do, and harder to maintain. Second, the reality that the supermarket industry has traditionally been a region-by-region operation means that the companies that behave most like "big guys" aren't big guys at all, but are regional players who've established high-margin, defendable businesses in their home markets, and aren't focused on adding the additional complexity of managing across multiple markets.

    Third, operational intensity is constantly forcing us to set aside work on the next great idea, because we have to go and "clean up on aisle 3." And finally, the big guys in our industry are all public companies, who are forced to meet their shareholders' needs on a quarter-by-quarter basis.

    So the big four are too busy balancing global and local approaches, and dealing with their demanding shareholders, while the one-store operators are too busy making sure that the lettuce is crisp and the cashiers are moving quickly enough.

    As a result innovation is left to a few brave, profitable, well-entrenched, privately held, forward-looking chains. These chains are, in a real sense, the last players left in our industry that have the ability and the inclination to look at a 10-year horizon in a world dominated by quarter-to-quarter thinking.

    So who are these innovators? They're longtime operators who dominate specific local markets. In Buffalo, N.Y. Wegman's is the supermarket, as HEB is in San Antonio, and Giant Eagle is in Pittsburgh. This local dominance has led to significant profitability, allowing innovation to be solidly funded.

    Follow the leaders

    Add in an enlightened local private ownership, and you have all of the ingredients to make the commitments required to drive innovation. The formula is really pretty clear, and extremely powerful. And it generates enough innovation to fuel the entire industry.

    Of course, there are exceptions. Big gun Safeway, with its Lifestyle concept, is one example of a large chain that has lately focused on innovation. Green Hills, a one-store operation near Syracuse, N.Y., is at the other end of the spectrum -- a true innovator in loyalty marketing programs. But these are exceptions rather than the rule.

    If you're working at one of these innovation leaders, celebrate. And by all means keep innovating like mad. You're in an environment that fosters great things, so make sure that you're part of them.

    But if you're elsewhere, I have a different piece of advice: Steal shamelessly. Look for those true innovation leaders, and steal a few good ideas from them. Once they're proven ideas, they no longer count as innovation, of course, but they're a lot easier to turn into successful profit generators for savvy followers.

    Leaders are leaders. But plenty of glory -- and profit -- can be found in being a great follower.

    By David Diamond
    • About David Diamond

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