Surviving And Thriving On The U.S. Digital Grocery Shelf

Surviving And Thriving On The U.S. Digital Grocery Shelf

The Digital Grocery Shelf Grocery represents one quarter of U.S. retail sales; however, with the recent entry of Amazon and major mass merchandise players such as Walmart into online grocery, the industry as we know it will never be the same. All signs point to a critical inflection point in this market, including the success of disruptive new business models such as Instacart and asset-light delivery models like UberRush that enable home delivery and support the acceleration of online grocery. The industry is also seeing double-digit growth in the prepared foods category, reflecting more single households, which is a key facilitator to increased online grocery sales. Source: RetailNet Group, 2014.

The Digital Shelf: Threat or Opportunity? The increase in mobile shopping, along with increased price transparency, is also disrupting traditional grocery selling models. The Google Shopper Marketing Council reports that 89% of U.S. smart phone owners already use their phone in-store to compare grocery prices, locate products, and get nutritional information. The questions facing today s grocers and consumer packaged goods (CPG) manufacturers are: What to do online, when and how? These questions pose a serious quandary to an industry that represents the last bastion of traditional brick-and-mortar retailing. Until recently, the industry was qualified by: Anemic online sales and regionalized pricing; Store traffic still largely driven by paper-based flyers; Assortments optimized for single pack sizes and sub $5 individual purchases; Customer propensity to want to touch and feel the merchandise, especially perishables; A mass market approach five generations shopping side-by-side with limited segmentation and personalization beyond store location. In addition, there s the added challenge of already low margins traditional grocers typically have had operating margins below 2%.

Thriving on the Digital Shelf While the digital grocery shelf may be daunting, it is not uncharted territory. Groceries have been online in the U.K. for years, largely the result of an early price war among the major U.K. grocers. The good news for U.S. grocers is that Amazon has had limited success in the U.K. market, which means there is plenty of information for retailers to learn to get a head start in the U.S. Here are some best practices to help grocers and CPG manufacturers navigate online grocery growth in the U.S. market: 1. Survey the online grocery landscape As a first step, grocers should find out who is selling which products, where and at what price point. Armed with competitive pricing and assortment information, grocers can identify incremental margin and sales opportunities online and in-store. Additionally, CPG manufacturers can better determine the relative effectiveness of different grocery channels including assortment coverage, availability, pricing and brand compliance. CPG manufacturers can also address threats to their brand and channel effectiveness by identifying and addressing marketplace threats. *360pi retail snapshot of breakfast & snack brands for a major CPG manufacturer - June 19th, 2014.

2. Pick your online categories Not all categories are equal, especially online. Understand which categories are leading in online penetration today, these include breakfast foods, snacks, coffee and pet food. One effective way to gauge online category success as well as future potential is to leverage online keyword searches as a proxy for online consumer demand. This also helps determine SKU elasticity online vs. in-store. Grocers need to optimize their store and online assortments to reflect trip drivers vs. margin enhancers. For CPG companies with products in key online categories, there s an opportunity to grow market share through larger pack sizes and broader product penetration.

3. Package and price for online This is typically where Amazon wins they understand and use larger pack sizes at higher prices to facilitate online sales and mitigate the cost of shipping. A typical grocer starts with exactly the opposite model single packs at low individual price points and an aversion to home delivery. Aside from a missed opportunity to grow consumption online, CPG manufacturers are vulnerable to having their products, especially those intended for the club channel, repackaged for online sale with adverse price, distribution and brand implications. CPG manufacturers and grocers must rethink packaging and pricing for online success. *360pi online snapshot of pack sizing and pricing for a major CPG manufacturer s breakfast & snack brands - June 19th, 2014.

4. Price-per-unit vs. price-per-volume? Whether you re a retailer, manufacturer or even a shopper, understand the game being played. Price-per-unit (i.e. price per cereal bar) is typically how retailers navigate for online channel success. Price-per-volume (i.e. price per ounce) helps CPG companies understand optimal online pack sizing and pricing. *360pi price-per-unit snapshot of Kellogg s cereal bars - May 20th, 2014.

5. Embrace zone-based pricing Grocery and regional pricing are natural allies. With online penetration and an in-store assortment optimized for immediate gratification, there s even more zone upside potential. Online zones need to reflect the local supply chain reality and can be blurred from a customer perspective with free or subsidized shipping. For CPG companies, online represents an opportunity to create regional products and brands to reflect different geographic digital penetration and shopping preferences.

6. Manage share of digital shelf Grocers should avoid over-concentration on one or two online channels. CPG manufacturers should be especially wary of the Amazons, which include Amazon.com, AmazonFresh, AmazonPantry and Amazon Marketplace. For retailers star struck with models like Instacart, recognize that this is also a form of channel disintermediation and loss of customer interface and perceived value. Amazon.com and AmazonFresh account for approximately half of this CPG manufacturer s online distribution in selected brand/category. *Sample Data, for illustrative purposes only Kellogg s and Nestle growing their share of the digital shelf for this category, at the expense of General Mills and PepsiCo. The age of the U.S. digital grocery shelf has arrived equal parts opportunity and threat for retailers and CPG manufacturers alike. The key is to be prepared and a have a strategy for success. Looking for more information on the online grocery industry? Contact 360pi at info@360pi.com.

Honey Nut Cheerios Analysis Online grocery shopping has reached the US market, with staples such as breakfast cereals, snacks, and coffee among the first items to go online - and topping Amazon.com s list of most shopped grocery items. This presents a double threat to traditional grocers - there s the direct impact of lost sales for these items; then, there s the more troublesome concern that this diversion of trip driver store traffic puts a larger basket of in-store grocery purchases at risk. 360pi decided to investigate where the best deals are for grocery shoppers - online or in-store - recognizing that differential package and pack sizing often obscure the answer to this question. So, on the eve of back-to-school, we took a look inside three different pack sizes of Honey Nut Cheerios. In the Honey Nut Cheerios analysis on the following page, we can see that the average store promotional price consistently offered a better deal to shoppers across pack sizes than Amazon.com and this delta was even greater if the shopper incurred additional shipping charges online. As well, store-based grocers and CPG manufacturers are some what at odds with respect to pack sizing and this is highlighted by an inverse relationship between Price-Per-Unit (PPU) and Price-Per-Volume (PPV), which is seen in the Honey Nut Cheerios analysis on the next page. CPGs are motivated to offer larger pack sizes which generate higher PPVs. While this format works for online grocers, large multi-packs work to the detriment of store based grocers in terms of unit pricing and the opportunity cost of available shelf space.

Price-per-Volume Analysis Honey Nut Cheerios Price-per-Unit Analysis 165 Grocers 85 carry single packs 25 carry 2-packs 110 carry 4-packs Largest analyzed pack size (12.25oz, 4-pack) delivers the highest return to General Mills in terms of PPV, both online and in-store. Amazon.com particularly attractive channel in terms of PPV. Ironically, the highest PPU pack size (21.6oz, 2-pack) is the least popular with retailers. Singles are the second-most popular size with grocery stores. They also represent the largest PPU gap between offline and online. 4-pack is carried by two-thirds of sampled retailers, yet represents lowest PPU. Possible indication of manufacturer trade promotion to incent larger packs. * Note : PPV (price-per-volume) and PPU (price-per-unit) are inversely related; the highest PPU (21.6oz, 2-pack) is the lowest PPV. Retailers generally seek to optimize PPU, while CPG manufacturers look to optimize PPV. ** Source : Average 2014 offline promotional price for 3 different pack sizes of Honey Nut Cheerios for 165 US grocers nationwide vs. online price for same on Amazon.com as at Aug 11, 2014. Amazon price excludes Marketplace sellers. 360RP14_Digital_Grocery_Shelf_1410a