Reed Supermarkets: A New Wave of Competitors

Transcription

1 4296 JUNE 17, 2011 JOHN A. QUELCH CAROLE CARLSON Reed Supermarkets: A New Wave of Competitors At 4:30 p.m. on December 6, 2010, Meredith Collins, VP of Marketing for Reed Supermarkets, walked down the sidewalk of the 10-store strip mall that housed Reed s Westgate Plaza branch in Columbus, Ohio. Collins didn t shop; instead she took mental notes about store traffic, first at the Reed store and then at an indirect but increasingly worrisome kind of competitor a dollar store. The Reed was predictably well lit and inviting, and Collins could see three registers open and two or three customers in line at each. Not too bad she thought, but not what I would hope for at this time of day, this close to the holidays. She d felt the same way at two other Reeds she d visited that day. Collins walked on to the Dollar General (DG). A fairly steady stream of shoppers entered DG s doors, their progress slowed by families exiting with plastic bags jammed full. When Collins looked inside, she noticed workers filling what was obviously a new freezer case the first freezer she had seen in a dollar store that day. This DG was doing just as well, to judge from this glimpse, as the Family Dollar she d walked past half an hour earlier at North Valley but no better than the Aldi store she had visited in the morning. That Aldi trip was interesting: a bright and spotless minisupermarket, run by a giant firm from Germany that carried one-tenth the food items that a Reed did and sold virtually no brand names, only private-label but still posed a threat to Reed due to its remarkably low prices. As she drove out of the parking lot, thinking back to last week s discussions with the management team about the newest threats to Reed s position as a leader among the region s supermarkets, Collins wondered how Marketing could target competitors like DG. It seemed clear to her that dollar stores and Aldi both were taking bites from the Columbus region s family food budgets. Moreover, as she recognized from the diverse range of advice provided by her management peers at Reed, defending against these competitors would not be as clearcut a mission as positioning Reed versus other area supermarkets or even against WalMart and Costco had been. Nevertheless, with all these competitive challenges, Reed CEO Jack Morrissey had held firm in his mandate that Reed needed to grow its Columbus share in the coming year. Collins frowned as she drove to another strip plaza to look around. HBS Professor John A. Quelch and writer Carole Carlson prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call , write Harvard Business Publishing, Boston, MA 02163, or go to This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

2 4296 Reed Supermarkets: A New Wave of Competitors Company History Reed Supermarkets was established in 1939, when William H. Reed opened his first grocery store in Kalamazoo, Michigan. By 1960, Reed operated 25 stores in Michigan and Illinois; by 1980, Reed had purchased two medium-sized chains serving Ohio, Indiana, and Wisconsin; and by 2010 the firm had grown to encompass 192 retail stores, two regional distribution centers, and 21,000 employees in five states in the Midwestern United States. While Reed had started as a lower-end retailer 80 years ago, it had continually expanded and upgraded its stores, adding new departments and expanding higher-margin offerings like prepared foods and flowers. For two decades, Reed stores had been considered high-end in the supermarket business. In addition to a full assortment of standard groceries, baked goods, meats, seafood, paper goods, and health and beauty items and a pharmacy, a typical Reed s featured a vast case of mostly fresh seafood, including live lobsters and crabs; imported packaged goods ranging from 27 kinds of mustard to three different brands of snails; and an array of 20 different prepared entrees available for takeaway. The chain was well-known for the quality of its produce and its emphasis on organic produce. Reed also differentiated itself by offering attractive stores, long hours, elegant (and often creative) serving-case displays, and exceptionally attentive customer service. The checkout clerks wore distinctive red aprons, greeters offered free cookies to customers on the weekend, high staffing levels ensured short checkout times, and runners shuttled bags to customers cars no tipping, please. The Columbus Market The Columbus, Ohio, market was relatively stable, but Reed had experienced modest share declines in the past which was why Collins had taken a week away from the home office to eyeball shopping centers there. The Columbus metropolitan area, where 25 Reed stores were located, was the third-largest in Ohio, with a population of about 2 million. Columbus s 2010 median household income of $52,000 was 11.6% higher than the state average and slightly higher than the national median. Population growth from 2000 to 2009 was 11%, slightly above the national rate of 9%, and in December 2010 the unemployment rate was 8.5% compared with the national rate of 9.8% The fight for market share among grocery retailers in Columbus was intense. The metro area contained outlets of three large supermarket chains as well as some smaller regional chains and independents, including lower-priced TopVal, mid-range Galaxy (owned by large player Supervalu), and top-range Delfina. Also in the competitive mix were three Whole Foods Markets, concentrated mainly in the city s affluent suburbs; 10 discount stores that included large food markets (five WalMart Supercenters, four Target Superstores, and one regional chain); and five warehouse-club outlets (three Costcos and two Sam s). (See Exhibit 1.) The area thus reflected dramatic changes that had occurred in the U.S. food retailing industry in the past few decades. Many of those changes had made it more difficult for conventional supermarket chains to prosper. Despite this, Reed continued to attract higher-end shoppers in the Columbus market the median income of a Reed shopper was 12% higher than the area household average. The U.S. Food Retailing Industry In 2010 the average American household spent $5,200 annually on grocery items and made 2.1 supermarket trips weekly (2009 had been a difficult year for food retailers, with food-at-home prices increasing by only.05% according to the Bureau of Labor Statistics). In the 12 months ending April 2010, the consumer price index for food at home was flat. 2 BRIEFCASES HARVARD BUSINESS SCHOOL

3 Reed Supermarkets: A New Wave of Competitors 4296 Several important consumer trends had shaped the industry over the past decade. First, there had been a significant dwindling of customer loyalty. Traditional supermarkets could no longer count on the loyal weekly shopper, who had been replaced by a savvy consumer who shopped several different stores and formats in search of the best deals. The growth of warehouse and superstores had attracted bulk-buying budget shoppers, while low-priced promotions drew consumers to specific supermarkets, discount merchandisers, and dollar stores. In fact, supermarket poll data showed that, relative to shopping habits a few decades earlier, when the weekly trip to the supermarket was typical, only 40% of all shoppers made regular stock-up trips once a week, while 60% made regular fill-in trips, purchasing 11 items or fewer, at least weekly. A second seismic trend had been the growth of private label merchandise. Private label foods were 17% of total food and beverage sales up from 14% in Seeing the higher margin potential of private label goods, retailers had worked aggressively to market these products and had been reasonably effective at shedding the lower quality image many consumers had perceived. Another key trend: American consumers had also become more health-conscious, and this had enabled the growth of stores such as Whole Foods, as well as the expansion of health and organic departments or product selections at conventional supermarkets like Reed. Food retailer margins were low (with a few exceptions), so individual company profitability depended on maintaining high sales volume and operating efficiency. Larger operators could offer wider product selection and had scale advantages in purchasing, distribution, and marketing. Smaller companies could compete effectively on location, product specialization, and customer service. Supermarkets were the most widespread type of food retailer and the longest established. For a few decades, supermarkets encountered competition mainly from other supermarket chains, but by the 1980s new competitors including warehouse clubs and supercenters like WalMart had forcefully entered the scene, driving supermarket chains such as Reed to new kinds of competitive strategy. Specialty grocery retailers like Whole Foods and Trader Joe s (owned by a German trust) expanded dramatically in the early 2000s. The same period saw the emergence or expansion of multiple lower-end channels, including the introduction of food items at traditional drugstores like CVS or Walgreens, the entry by dollar store chains into food sales, and the expansion of food selections at gas station mini-marts and convenience stores. All of these competitors helped to threaten supermarkets traditional dominance of the American grocery dollar. Supermarkets had complex, collaborative relationships with food manufacturers. Large companies such as General Mills, PepsiCo, and Nestle were major suppliers and participated with retailers in trade promotions. The growth of private label products had created more pressure from the manufacturers to promote branded products (although many manufacturers also produced private label products), and during the economic downturn tensions had emerged as supermarkets pressed manufacturers to reduce prices to improve customer retention while manufacturers promoted product innovation in an attempt to increase share while maintaining margins. Supermarkets and the first generation of competition Supermarkets evolved in the 1950s and were widespread in the United States by the 1960s. The U.S. supermarket industry in 2010 was relatively concentrated, with the 50 largest companies generating 70% of revenue. Curiously, no major player was present throughout the country, but near-national brands like Kroger, Safeway, and Supervalu had large footprints, and they competed with regional chains like Reed and a shrinking number of independent retailers. HARVARD BUSINESS SCHOOL BRIEFCASES 3

4 4296 Reed Supermarkets: A New Wave of Competitors A typical supermarket averaged about 46,800 square feet, carried nearly 50,000 different items, and generated weekly sales of $485,000. Supermarkets generally served customers who lived within a one- to three-mile radius, making store location selection a key driver of any chain s profitability. With net profit margins typically in the 1.5% to 2.5% range (lower for troubled chains), there was little room for error in marketing and merchandising. Traditional supermarkets distinguished themselves on selection, with nearly all offering a complete range of departments such as in-store bakeries, seafood, meat, cold cuts, produce, various packaged foods, cleaning products, health and beauty aids, and other departments. While these departments created value by offering one-stop shopping, during difficult economic times, such as the downturn of , consumers tended to opt for value over such convenience. Supercenters In the 1980s, supercenter stores large discount department stores that stocked both general merchandise and grocery items grew quickly. First WalMart and then Target exploited the opportunity to use groceries to drive additional traffic and general merchandise sales. WalMart already the nation s largest retailer became the leader in food retailing as supercenter growth accelerated during the 1990s and continued to grow through the early 2000s. The food section of a typical supercenter featured décor and organization like a typical supermarket but was much bigger, commonly occupying nearly 70,000 square feet of a 170,000 square foot store. Typically housed in large free-standing buildings in suburban areas, they provide convenient one-stop shopping for multiple needs and were notable for prices below those of standard supermarkets. Despite longer travel times (supercenters might be 5 10 miles away), the concept resonated with cost-conscious consumers. Warehouse clubs This segment was dominated by Costco, Sam s Club, and smaller BJ s Wholesale Club. These stores looked more like airport hangars than supermarkets; most items were merchandised straight from manufacturers packing crates stored on gray industrial shelving. Most carried one brand of soup, one brand of butter. With retail prices as much as 20% below conventional supermarkets, yet similar operating profits, these no-frills providers drew a wide range of customers. Although merchandise was often bulk-packed (six boxes of pasta, two to four jars of spaghetti sauce), an idea obviously inviting to large, middle-class families, many of these warehouse outlets also drew smaller, prosperous families with large homes (and large storage areas) that valued the opportunity to buy, say, six months worth of paper towels at a discount price. They also drew small business owners. The second generation of competitors emerges: Dollar and limited selection stores Dollar stores. The dollar store market was dominated by three large chains Dollar General, Dollar Tree, and Family Dollar that together accounted for 60% of the category. The 33,000 dollar stores in the U.S. sold a mix of packaged food, housewares, clothing, seasonal items, and other general merchandise often priced at $1 per unit or at low-dollar multiples. The typical size of dollar stores was 7,000 to 10,000 square feet, and net sales per square foot ranged from $158 to $190 in With an average total shopping ticket of $7 to $10, dollar stores targeted a different kind of shopping expedition a fill-in trip instead of a full grocery run. Dollar stores typically devoted an aisle or more to food lines, and included a very limited range of breakfast cereals, canned meats, cookies, snack food and other packaged items, including a mix of national and private brands. They also competed with supermarkets and drugstores by devoting significant space to selling a wide 4 BRIEFCASES HARVARD BUSINESS SCHOOL

5 Reed Supermarkets: A New Wave of Competitors 4296 array of paper products, cleaning supplies, and lower-priced health and beauty items. Some dollar stores had started to offer refrigerated dairy products and were beginning to stock frozen food items, but virtually all avoided perishables such as produce items and meat. A limited range of brands and a high proportion of merchandise bought on-deal as closeouts or overstock, as well as low operating costs, enabled dollar stores to operate with a lean cost structure. This cost structure was often apparent in the cluttered feel of the stores, lower maintenance levels, and sometimes haphazard stocking, but consumers seemed willing to overlook these liabilities if prices were sufficiently attractive. With average gross margins of 32% and SG&A margins of nearly 24%, major players maintained net margins of over 8% vastly better than the roughly 2% that most supermarket chains earned. (See Exhibit 2.) While their core consumer was a low- to middle-income earner, dollar stores did not rely exclusively on these buyers. A recent survey had found that 65% of consumers with households incomes under $50,000 had shopped at a dollar store over the previous six months, and 47% of households with incomes over $100,000 had done so as well. The threat these markets posed was limited. Meredith Collins had seen research from the Grocery Retail Industry Association comparing markets nationwide which demonstrated that dollar stores, once they were well-established in a market, occupied a niche position and never seemed to rise above 3% market share even after these stores expanded their food offerings. But Collins also knew that supermarkets could not afford the luxury of dismissing dollar stores as a minimal threat. Limited selection stores. Limited selection retailers, a rapidly growing category, had smaller store formats and typically specialized in private label food items particularly staples. They may offer produce and baked goods but typically do not have in-house meat departments or bakeries. An example is Trader Joe s, with 353 stores nationwide and $8 billion in annual sales. With store sizes averaging 8,000 12,000 square feet, a limited inventory of about 1,500 items per store (85% private label) and an emphasis on imported and specialty food items, President Doug Rauch boasted in 2001 that his chain had the highest sales per square foot of any grocery chain in America. Owned by a German-based trust that also owns the Aldi chain, Trader Joe s had maintained a specialty store image while managing to increase its margins through an efficient operating model and its private label selection. Limited selection stores had also expanded at the lower end of the market. Famously low-priced German operator Aldi entered the United States in 1976 and by 2010 had grown to over 1,000 stores. Well known for a very lean operating model, Aldi targeted efficient operations and high volume (a 15,000 square foot Aldi could generate the same sales as a 35,000 to 40,000 square foot supermarket.) Like Trader Joe s, Aldi relied on a high proportion of private label merchandise (95%), a limited selection (1,400 items), and heavily discounted prices vs. conventional players. A typical Aldi combined the clean, bright, pleasant ambience of a modern supermarket with the no-frills, out-of-thecarton presentation of a warehouse club. (Exhibit 2 compares estimated Aldi s margins with those of dollar stores and Reed.) Similar to dollar stores, research indicated that limited selection stores market share appeared to be capped at 3% 5%. But Collins realized that if well-funded players like Aldi opened new stores aggressively they could be in a position to top that estimate. Reed s Position in Columbus: 2011 Meredith Collins believed that Reed s competitive position was challenging, but she was encouraged by the fact that the company had continued to grow revenues by an average of 1% to 2% per year across its markets. Reed had worked hard to maintain margin over the past decade by adding specialty items, widening the selection of higher-end prepared foods (e.g., salmon fillet with crab stuffing), increasing the private label mix, and using weekly promotional specials to drive traffic. HARVARD BUSINESS SCHOOL BRIEFCASES 5

6 4296 Reed Supermarkets: A New Wave of Competitors The company had expanded the chain by two to three new units per year in areas that promised above-average population growth, and these stores had achieved similar margins to existing stores within two years. In Columbus, Reed had added no new stores and none were planned. Reed led food retailers in the Columbus area with a 14% market share. This number had remained stable for two years, although it was slightly lower than the 15% Reed had held five years earlier a decline that Reed executives attributed to the peak in encroachments by superstores and warehouse stores. Even so, Reed s CEO had set a Columbus market share target of 16% by Collins described Reed's positioning strategy in the Columbus market: "We have always emphasized quality and service in our operations and advertising. Our problem is that, as a result, many consumers perceive our prices to be high." A monthly tracking study (see Exhibit 3), which used consumer interviews to develop a price and quality index for the major chains in the market, appeared to support this analysis. A second study (see Exhibit 4) showed that prices were, in fact, higher at Reed. Because of this, and their full service offerings, Reed s average sale value per transaction of $31.48 was 18% higher than the national supermarket average. Each of Reed's major competitors in the Columbus market had slightly different positioning. Like Reed, Delfina was considered high-end, with large stores offering a balance of conventional and gourmet/organic items, above-average service, and a bright, clean ambience. The Galaxy chain, owned by near nationwide chain Supervalu, also advertised weekly price reductions on selected items. Many of its stores, however, were old, poorly located, and only marginally profitable. It was rumored that the chain was considering selling some or all of its Columbus stores. TopVal followed a different pricing policy. Rather than offer deep discounts from regular list prices on a narrow range of items each week, they offered everyday low prices; up to 2,000 high-turnover items, often including several brands in the same product category, were continually offered below regular list price. TopVal was headquartered in Columbus, and Collins believed its management would be aggressive in attempting to maintain its market share if challenged. At the upper end of the market, Collins was also worried about the entry of Whole Foods Market. It currently had three stores in the metro area, two of which had been added during the past five years. Although their market share was a low 1.2% (see Exhibit 1), Collins was unhappy about their encroachment on the already crowded upper end of the market where it played along with Delfina. But, she also knew that Whole Foods had dramatically slowed their expansion, so she was willing to put her concerns on the back burner while she focused on more immediately troubling competitors, like dollar stores, that were expanding rapidly and targeting price-sensitive buyers. Reed had conducted extensive consumer research and this data, coupled with data mining from its loyalty program, had learned much about its customers on both a store and market level. Across all markets, a Reed customer was somewhat older, more affluent, and had a smaller household size than the typical consumer. Curiously, pet ownership was 20% higher than average among Reed shoppers, supporting the company s decision to carry three lines of organic pet food. In mid-2010, Reed had surveyed Columbus consumers (those that were principal food purchasers in their households.) and found that 61% of respondents reported they were conveniently located near a dollar store vs. 36% five years earlier. However, the likelihood of regularly shopping at these retailers had increased only marginally from 7.5% to 8% in Columbus according to consumer surveys. Similarly, customer intent to shop at supercenters and warehouse stores had also stabilized. Customers less interested in these alternatives cited inconvenient store locations and a lack of service. This seemed to confirm market research from the Grocery Retail Industry Association that Collins had seen indicating that, at best, warehouse stores and supercenters could expect to capture a 17% share in a market like Columbus. Likewise, dollar and limited selection stores together were thought unable to achieve more than 8% share because of their limited offerings. But Collins knew that these 6 BRIEFCASES HARVARD BUSINESS SCHOOL

7 Reed Supermarkets: A New Wave of Competitors 4296 low-cost competitors had drawn away customers during the recession, and she estimated they d keep much of that business when the economy revived. As she drove back to Kalamazoo, Collins mulled the options that Reed might consider in Columbus and potentially roll out companywide. Should they do more to convey their value to consumers? Compete more aggressively on price? Consider other strategies? She planned to use her weekly team meeting to generate ideas. Reed s Options and Collins s Dilemma The next morning, after her long drive back to Reed s Kalamazoo headquarters, Collins walked into the windowless conference room with trepidation. She knew that her team disagreed about how to handle positioning in the Columbus market, and also that they believed their approach to the competitive situation there might be a test case for the rest of the company. A special point of tension at Reed headquarters was a dollar special campaign the company launched in June 2010 to combat its high priced image. Each week Reed offered about 250 items at dramatic discounts from regular sale prices. The items occupied their regular shelf positions, where they were flagged with attention-getting signage. The campaign became the focus of Reed s print, broadcast, and online advertising. Management had hoped that the campaign would reinforce store loyalty among regular customers, dissuading them from transferring all or part of their business to competing stores. They also hoped that consumers would use the dollar specials for price comparisons across chains a process facilitated by weekly print ads and that Reed would thus attract new customers. However, some executives believed that the campaign detracted from Reed s quality image. They argued that Reed should cede customer s periodic stock-up trips to the discounters and focus on reinforcing the range and quality of their offerings. A complication had also emerged: the dollar special campaign seemed to be too close to the offerings of dollar stores, and several executives worried that this would at least confuse consumers, and at worst muddy Reed s image through association. The financial impact of increased traffic via dollar specials seemed compelling. Reed s experience in other markets was that dollar specials had increased same-store traffic by 3%. Collins also saw that, during a typical week, 4% of sales were for dollar special items. But the discounts were steep: the average price reduction was from $2.70 per item to $1.50, and since few if any of the items were purchased on deal, they lowered overall margins. In fact, Collins s preliminary analysis showed that, on average, the items selected for dollar specials had the same overall margin as total sales. Still, she was enthusiastic about the potential of dollar specials to increase share. Competing views of Reed managers What we need to do, argued Merchandising Director Brad Johnson, is terminate the dollar specials. The only way we can get our price message across is to move to an everyday low pricing model, just like TopVal. The dollar specials haven t eased our high-priced image, and customers are cherry-picking visiting our stores to take advantage of the deals while buying their meat and produce at WalMart. Look at the sales analysis data. When customers buy three or more dollar specials in a single order, the total transaction value is 40% of our average ticket. Advertising and promotions manager Ellen Ross disagreed: I don t think we ve given the dollar specials program enough time. In another six months we can change the customer s perception that we have higher prices, and we can keep our quality image. Our advertising consultant s data shows HARVARD BUSINESS SCHOOL BRIEFCASES 7

8 4296 Reed Supermarkets: A New Wave of Competitors that we need to make multiple impressions over at least six months to move consumer perceptions on price. As the recession subsides and customers spend more, we can offer them something really compelling the best of both worlds. Johnson was unconvinced: We need more high-margin items like prepared foods and fewer of the low-end goods that are promoted in a dollar sale. That has been part of what has helped us grow in every market, and we should stick with it. Ross disagreed: Even if this were feasible, given the fact that Whole Foods has started to take some of our business in prepared foods, it would only help to fatten margins, not build share. And, it does nothing to address the dollars being lost right now to Aldi and dollar stores. Operations Director Jane Wu offered her perspective: We should meet the threat head on. Customers aren t loyal, and price seems to be the only thing that matters. Look at our market research: The number one reason buyers don t shop with us is price, and three quarters of those who do, say that lower prices are important to them. (See Exhibits 5 and 6.) We should show our commitment to low prices in a big way. Let s increase our low-priced specials, expand private label brands, and introduce double couponing. We need to really focus on price. Let s try matching Aldi on a few staples that will bring the customers in. Direction from above? After the meeting, Collins stopped by to see Reed CEO Jack Morrissey. As an industry veteran, his judgment and intuition for providing a distinctive customer experience within the narrow operating constraints of a full-line grocery store had been the foundation of Reed s growth for more than 20 years. Seeing his door open, Collins asked for a few minutes of his time. She described her dilemma: Jack, I really need your advice. We continue to get squeezed in Columbus, and I think we re looking at stagnant growth there this year. I know our goal is to increase our market share there to 16% in 2011, but it s hard to see how we ll do that without new stores. Columbus is our largest market and has a huge impact on revenue growth. We have a range of options, and I ll lay them out clearly when we meet next week for our quarterly review but for now, it s hard to think growth when so much seems to be working against us. Morrissey was not as directive as she had hoped, and he didn t respond to her concerns that their targets might be unrealistic. While saying that everything should be on the table, he reminded Collins that the company was holding the line on capital expenditures at least for the next two years so adding stores in Columbus was not an option. Morrissey said: Meredith, I ve seen this cycle before. Everything we re doing to build up our premium private labels and organic produce selections positions us for growth when the 10% to 15% of Columbus s most prosperous customers get tired of big boxes and picking their cans off pallets. That is the customer segment we want, and even a moderate economic resurgence will help to bring them back to us. We fought the same battle with warehouse stores back in 2003 and we grabbed back that 10% to 15%. Prosperous customers are fickle, but the ones we ve lost during the downturn will be back, and we ll be ready to satisfy their upscale tastes. In the meantime, I m counting on you to maintain our share position, keep sales growth up, and generate enough profit to keep the shareholders happy. Initial steps toward a decision Not entirely reassured, Collins returned to her office to find another from Real Estate director Dan Elder: More storm clouds in Columbus. I had coffee with a local commercial broker this morning. She told me that Aldi has been scouting more locations in Columbus, concentrating on the North and West sectors. I thought she would tell me that they were considering another Trader Joe s, but it looks like they are planning more Aldi units maybe as many as four. 8 BRIEFCASES HARVARD BUSINESS SCHOOL

9 Reed Supermarkets: A New Wave of Competitors 4296 Collins took this in and went on working. She knew that Reed s profitability, and her career, depended on getting her marketing strategy right. Collins had spent much of the past week working through an enormous database of store level results for Columbus, and while this had provided a few small insights, it had not offered clear guidance on the larger strategic question of how to put Columbus on a path to growth. That solution would need to come from a more broad-based program covering all of Columbus. Forcing herself to concentrate on the big picture, Collins started by rechecking her framing of the growth mandate into a financial calculation for Columbus, starting with the 25 stores, factoring in the stores revenues, and calculating how many dollars just 1 point of growth in market share amounted to. The figure was daunting and Jack Morrissey wanted growth of 2 points. She began to sketch out her options for Columbus, starting with whether to change the pricing model or stay the course. On a second page, she started a list of potential options for responding to the Columbus Aldi/Dollar threat. She also began to list pros and cons for maintaining dollar specials program. With one week until her group s quarterly review, she felt pressure to develop a credible strategy for Columbus, and one that might guide Reed in other markets. The stakes were high, both for Reed and her career, and she was determined to find the right path. HARVARD BUSINESS SCHOOL BRIEFCASES 9

10 Exhibit 1 Estimated Columbus Market Competitor Size, Growth, and Market Share, (as of 4/10/2010) Estimated Columbus Market Share 2010 Retailer Positioning Estimated Total Sales Change % Estimated 2010 Total Sales (millions) Estimated Annual Sales per Store (millions) a Change in Stores Number of Columbus Stores in 2010 Reed % high Delfina % high Galaxy (Supervalu) % medium (specials) TopVal % low (EDLP) Other Supermarkets % varies Whole Foods market % high WalMart % low (EDLP) Target % low (EDLP) Costco % warehouse Sam's Club % warehouse Dollar General % dollar Dollar Tree % dollar Family Dollar % dollar Trader Joe's/Aldi % limited selection Other (drugs, convenience, etc.) % Total % Source: Company estimates a Estimated dollar store sales include grocery and general merchandise; Walmart, Target, and warehouse stores exclude general merchandise

11 Reed Supermarkets: A New Wave of Competitors 4296 Exhibit 2 Estimated Comparative Operating Statements for Three Chains (% of gross sales) Reed a Dollar Stores c Aldi Gross Margin b Expenses: Payroll, taxes, benefits n.a Property rental n.a Utilities n.a Advertising n.a Supplies n.a Depreciation n.a Maintenance n.a All other n.a Total expenses b Operating profit b Source: Company records and estimates a Includes insurance, taxes, licenses, equipment rentals, and other services b Estimated Aldi does not release this information c Composite of Dollar Tree, Family Dollar, and Dollar General Exhibit 3 Consumer Perceptions of Supermarket Chains in the Columbus Market, Price Index Quality Index Reed Delfina Galaxy TopVal Whole Foods Market WalMart Costco Trader Joe Aldi na na 8.5 na na 6 Dollar General na na Family Dollar na na Source: Company records data based on first six months of 2010 Note: Indices were developed on the basis of an annual survey of 400 principal food purchasers in the Columbus market. Respondents were asked to name the best, second best, third best, worst, second worst, and third worst retailers on price, quality, and value. On the basis of each respondent's answers, points were assigned to each supermarket from 1 (worst) to 10 (best). Figures in the chart represent mean index scores across all respondents. HARVARD BUSINESS SCHOOL BRIEFCASES 11

12 4296 Reed Supermarkets: A New Wave of Competitors Exhibit 4 Comparison of Everyday Prices for the Same Shopping Basket, January 2011 Indexed Prices Whole Foods Market Reed (base) Delfina 99.5 Galaxy 97.3 TopVal 96.8 Trader Joe s 92.3 Aldi 89.1 WalMart 96.0 Costco 95.6 Note: Comparison may be inexact for Trader Joe s and Aldi since 90%+ of their items are private label Exhibit 5 Reed survey of 250 Columbus non-customers, November 2010: Percent of respondents citing reasons for not shopping at Reed Most important reason Next most important reason Better prices at other outlets Selection of products/brands Store isn't conveniently located to work Store isn't conveniently located to home 7 15 Employees aren't friendly/helpful 3 8 Isn't clean enough or unpleasant to shop in 3 5 Doesn't do things I like (e.g., community events, recycling, charitable donations) 2 5 Other 4 7 Source: Reed survey of shoppers living within 2.5 miles of a Reed store but who do not shop there Exhibit 6 Reed survey of 400 Columbus area customers, March 2010: Percent of customers citing factor as important to them % Citing factor Better prices 75 Better discounts and coupons 62 Double coupons 47 Promotions and coupons that are mailed to my home 44 Promotions and coupons that are ed to me 34 More natural/healthy foods 27 More local foods that are grown/produced near where I live 26 Source: Reed survey of current customers 12 BRIEFCASES HARVARD BUSINESS SCHOOL