“If You Don’t Know Where You’re Going - Kantar Retail of Customer Management ... “If you don’t know where you’re going, ... way with a view on the relationship between

BreakthroughInsights“If You Don’t Know Where You’re Going …”

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© 2014 – Kantar Retail LLC. All Rights Reserved.

Disclaimer: The analyses and conclusions presented herein represent the opinions of Kantar Retail. The views expressed in this publication do not necessarily reflect the views of the companies covered by this publication. This publication is not endorsed, or otherwise supported, by the management of any of the companies covered herein.

Copyright Notice: No part of this publication may be reproduced in any form or by any means without the express written permission of the copyright owner.

Research Team

Sara Al-Tukhaim Frank Badillo Jessica Campbell Timothy Campbell Apple Chen Alida Destrempe Fiona Feng Karolina Fiedler Ray Gaul Bryan Gildenberg Caroline Gormley Doug Hermanson Rema Iyer Vivian Jiang Simon Johnstone Erin Kennedy Laura Kennedy Vadim Khetsuriani Amy Koo Jim Leonard Michael Lieblich

Stephen Mader Alexandra Mansfield David Marcotte Rachel McGuire Leon Nicholas Mike Paglia Himanshu Pal Tudor Popa John Rand Bryan Roberts Nicole Santosuosso Kate Senzamici Robin Sherk Mary Brett Whitfield Han Yang Oceanne Zhang Anne Zybowski

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Foreword .......................................................................................................................... 4

Where and How? The Two Central Questions Guiding the Future of Customer Management ................................................................................... 7

Changing Fortunes: Kantar Retail’s 2014 Predictions for the Retail Sector ............... 15

Global Outlook Remains Split Among Markets Amid Russia Threats .......................... 23

Shopping Behavior Changes Looming Larger than Spending Changes: U.S. Macro Outlook ........................................................................................................ 27

Using the Concept of “Economic Distress” in February ‘14 Planning .......................... 31

Q4, FY 2013 Results: Amazon Delivers, Yet International Falls Short ......................... 35

Target’s Data Breach Fallout Undermines Strategy to Broaden Guest Base .............. 41

First Takes: Safeway and Albertsons Merger ............................................................... 47

Assessing the Club Trip: What Drives Member Purchasing? ....................................... 51

Drug Shoppers’ Digital Behavior Varies By Retailer, Cohort ........................................ 59

Supeco: Carrefour’s Newest Price Contender in Europe ............................................. 65

Lidl’s UK Checkout Realignment Is Part of a Bigger Brand Strategy ........................... 73

In This Issue

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Foreword“If You Don’t Know Where You’re Going …”A Guide to the First Half of Breakthrough Insights 2014

“If you don’t know where you’re going, any road will take you there,” George Harrison’s now famous paraphrase of the interchange between Alice and the Cheshire Cat in Alice’s Adventures in Wonderland provides a marvelous backdrop to both this edition of Kantar Retail’s Breakthrough Insights and the planning environment in which many of us are formulating or finalizing our 2015 or 3/5-year strategic plans.

Folks like me often hyperbolize how important this specific historic moment is, or how the world has “never been changing more quickly.” As a former history student, I find most of the time that’s untrue—the only constant in history is every generation’s need to feel like it is the most important generation in the history of history! That being said, there are important and fundamental shifts taking place right now, and it alarms me how few companies seem to be prepar-ing well for the actual challenges that will face them in the back half of the 2010s. Most of our clients seem to be gearing up to fight yesterday’s war with an optimized (i.e., cost-reduced) army of talented people—too many of which are aimed at the opportunities of yesterday, with a scant few facing the future.

This edition starts with an (admitted) oversimplification of these challenges into two questions that frame up the other pieces: where are shoppers shop-ping, and how can they be reached? I tackle these two big questions in the opening article—Where and How—and explore what their implications are to suppliers looking to build customer-facing functions that can win from 2015-2020. The big ideas presented in the article—everywhere getting better, asset productivity, the changing nature of analytics, and the more complex world of reaching shoppers as a number of key marketing “lines” blur—are ones we think will be the critical conversations forward-looking companies will be having over the next five years.

From there, we move to the 2014 “predictions” made by our U.S. research team. Covering everything from events that have already come true (the structural and not temporary nature of Target’s challenges in Canada), to the some-what fanciful (my slightly utopian prediction that retailers in 2014 will get smart and opt out of the promotional lunacy that the holiday season has turned into), our team gives you a good idea of not just what we think will happen, but what we think the important topics to focus on are in 2014.

The issue then dives into the 2014 economic envi-ronment—starting globally with two pieces: one featuring Doug Hermanson’s macroeconomic overview highlighting the state of play in a number of key global markets, the other being Ray Gaul and Simon Johnstone’s piece on planning in periods of economic distress in Europe. With China slowing, Brazil struggling, Russia in crisis, and India continuing to strug-gle to realize its economic potential, the 2015-2020 period may be described as the “After-BRIC” era of international growth…and it is our anticipation that suppliers will need to “get better everywhere.” A BRIC strategy was a wonderful way of simplifying international expansion—just focus on a few things and it will all be fine. One of the core themes of our customer planning discussions with clients over the years has been the fragmentation of growth into unfamiliar plac-es—that model will be echoed in global expansion as well. Companies will need to get better at more (and more diverse) growth opportunities.

Frank Badillo’s article brings the focus back to the United States, leading the way with a view on the relationship between economic reality and spending behavior, and how the latter is probably more important than the former for people trying to understand the 2014-2015 environment. The choices

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shoppers are making are changing the way retailers and suppliers need to reach them—a nervous shopper who feels like they have many of the things they need is becoming much more cautious about how they spend.

Cautious shoppers are a big part of the story for our pieces on Target and Safeway. No retailer suffered a more tumultuous 2014 to date than Target. Amy Koo’s piece on the intersection between Target’s data breach and its strategy to reach a broader audience of shoppers highlights both Target’s short- and long-term issues. Structural change in the U.S. marketplace was also pushed forward in the supermarket industry, where John Rand’s perspective on what the Cerberus acquisition of Safeway and its integration into its Albertson’s business might mean for both suppliers and the future of the U.S. retail land-scape more generally. My 2013 prediction was that 2013 would be the busiest year for retail acquisitions in a generation, mostly predicated on the assump-tion that Safeway would be acquired. Sadly, that was just a few months off!

The catalyst for much of the U.S. marketplace change is rooted in two things: the shopper behavior mentioned earlier and the disruptive nature of Amazon. Two of our channel practice leads have put together detailed analysis of shop-per trip behavior that will be critical for retailers trying to understand their business and suppliers trying to help them. Sara Al-Tukhaim and Timothy Campbell dive into trip drivers for the U.S. Warehouse Club industry, and how they are both similar and distinctive among the three major operators, while Jessica Campbell looks at the conundrum of age polarization for the U.S. Drug channel through the drug channel shopper’s digital behavior. As both a health care store for older Americans and a beauty destination for younger ones, the drug channel faces the challenge of having to play a multitude of roles out of the same store. This level of shopper segmentation and understanding will be critical for every retail channel moving forward.

Amazon seems to have a new narrative attached to it every 90 days, so we thought it was interesting to look back on Anne Zybowski and Nicole Santosuosso’s review of its Q4 2013 performance. It’s always useful to under-

stand that Jeff Bezos’ philosophy that “Every Day is Day 1” is actually a great way to take a long-term view of your business. Amazon has absolutely no fear of reinventing itself in many different ways quite quickly, and this dynamism will be incredibly challenging to compete with for any brick-and-mortar operator.

In closing out the issue, the European economic environment provides a great backdrop for two pieces on format innovation and transition in Europe. Format innovation is covered in Tudor Popa’s take on Carrefour’s new Supeco format—a piece rich with information about a retailer reconfiguring hyper-market “space” to give it a different economic model, operating strategy, and brand proposition; and how this reinvention makes that asset more productive. Asset productivity will be the foundation of joint economic business planning between retailers and suppliers from 2015-2020, and it will take real work for both sides to come to the table in those conversations prepared to optimize.

Format transition affords a look at the balancing act between shopper prop-osition and economic return through a different lens—Lidl’s decision to stop selling chocolate and candy at the register. Lidl’s decision to stop selling choc-olate and candy at the register is akin to another blockbuster decision: CVS’s decision to stop selling tobacco in the United States. We see retailers making choices with real economic implications to position themselves very firmly as advocates for consumer health care. The blurring of the line between retail and health care environment is a critical one on the 2015-2020 horizon.

In summary, we dedicate this edition to the future facers discussed earlier, with the hopes that the content within gives you the inspiration and ammu-nition you need to marshal your organizations to follow you! Have a terrific summer (or winter for those of you south of the equator), and I look forward to seeing you right before the winter holidays with our H2 2014 installment! All the best.

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Where and How? The Two Central Questions Guiding the Future of Customer ManagementAt Kantar Retail, we spend most of our energy dedicated to studying the retail, shopper, and macro environment around the world, and more specifically, where that environment is going and how it’s changing. In this article however, we adjust our lens to focus on the future of major FMCG manufacturers, and how these companies will interact with their best customers going forward.

Historically, looking at this would have involved examining the capabilities of a sales team or how different functions can be connected to that team to bring a more cross-functional approach. These things will be important, but there are also some significant changes that will go beyond competen-cies and functions and may get to the heart of how FMCG companies develop, innovate, market, and sell their brands.

We will focus our conclusions on four critical implication areas, loosely divided into two central questions: Where and how will we access shop-pers? The big “where?” involves reviewing capa-bilities by geography and go-to-market platforms; the big “how?” involves analytics and insight, and the change in and integration of consumer and shopper marketing.

�� The first section of this article, “Everywhere Gets Better,” addresses the first critical issue of “where” to reach shoppers and is about capability development. It highlights the unique challenges posed by a world where every market’s capabilities are rapidly evolving.

�� The second section focuses on a theme we somewhat jokingly call “Cover Your Assets,” and examines the impact of asset productivity on the types of economic solutions required by retailers, and the need for suppliers to have a much more holistic view of brand, item, and category productivity.

�� From there, we tackle two critical issues around “how” to reach shoppers. The first is a look at what we call “The New 4Ps” and the importance of prediction, precision, personalization, and proof from an analytics perspective.

�� Finally, we explore the idea of “There Is No Line” and the impact on suppliers of the historic divide between “Above the Line” and “Below the Line” marketing being eroded by the blurring of the divide between retail outlets and media platforms.

The Big “Where?”Capabilities by Geography— “Everywhere Gets Better”Though many of the critical drivers of retail change are truly universal or global, there won’t be a global retail landscape in 2020, and in many key countries there may only be a vaguely national one. India, China, and the United States are all projected to have a stubborn mix of local, national, and virtual players. The key, though, is that unlike any time in history, virtually every market in which an FMCG company competes will be going through significant capability transformation.

From 1990-2010, large parts of the world remained “stalled” (notably most of Africa, and parts of the Middle East and Asia), and large postmodern markets like France and Germany hit something approaching competitive stasis. In the next 5-10 years, “emerging” markets will literally emerge, with virtually every country in the world developing consumption and spending behavior that needs to be addressed and managed differently. Africa will become a market as nuanced and differentiated as Latin America, with its various countries requiring vastly different skills.

By: Bryan Gildenberg

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The rest of the world is being disrupted by the digi-tization and mobilization of purchase behavior—a global “climate change” impacting every market in the world far more evenly than other revolutionary changes like television, the automobile, or other technological innovations. But more importantly, capabilities in many markets will evolve in patterns, and great global companies will need to understand the five stages of market evolution to be successful: exploration, concentration, penetration, maturation, and postmodern.

ExplorationThis is the stage where organized retail is still orienting itself to the needs of the market. Today, non-Bangalore India, Pakistan, and most of Afri-ca fall into this description; parts of India will be beyond this by 2020, as may some major cities in Africa, like Nairobi.

Though historically, exploratory retail has been brick-and-mortar in nature, we anticipate that it will have a much more mobile/digital component to it by 2020. It is not hard to imagine a mobile-based retailer being a top 5 or 10 retailer in Nigeria, Bang-ladesh, or Uganda (all markets have much higher mobile penetration than any other attribute of a “modern” lifestyle) (Figure 1).

ConcentrationThis is the stage where emerging players scale and compete with each other viciously for share of relatively high-disposable-income shoppers (usually in similar trading areas). By 2020, this will include parts of India, non-coastal China, and tier-2 and tier-3 Russian cities in all likelihood; today, most of China is in this phase (Figure 2).

Figure 1: EXPLORATION Stage

Source: Kantar Retail analysis

Figure 2: CONCENTRATION Stage


PenetrationThis stage involves the evolution of formats to access non-core populations: remote, niched, and densely urban. This transition is brutal for retailers, in that they need to learn a whole new host of skills to maintain a variety of footprints in a variety of

geographies. Channel strategy moves from a “nice to have” to a “must have.” Today, Brazil is entering this stage, as is Russia; Turkey is currently in the midst of it; and Mexico is almost through it. By 2020, most of the Middle East/North Africa will be in this phase of development (Figure 3).


Figure 3: PENETRATION Stage

Key skills for suppliers Key skills for the sales “general manager”

Navigating uncertainty, route-to-market mapping, and organizational and skill development

Understanding shopper need states and the basics of organized large-scale logistics

Aggressively upgrading, analyzing, and perfecting traditional trade “trading partners” (i.e., ensuring trading agreements are modern and performance-based and help best-in-class partners evolve their capabilities to drive more effective and efficient distribution)

Understanding the role that modern retail plays in the wholesale/distribution channel


Exploring promotional insights, visual merchandising, and reducing operational errors

Identifying the beginnings of channel differentiation, intense pressure for promotional spend, and the beginning of margin erosion, as organized trade tends to be more margin dilutive

Optimizing traditional trade and building deep partnerships with winning partners is key

Understanding the enabling infrastructure well enough to assess how quickly “non-store retail” can grow in this environment —in some formats, this will be able to scale quite quickly (i.e., China)

Key trade-off to manage: short-term volume versus long-term pricing/equity issues based on retail pricing


Space optimization, modern margin management, category and planogram management/development, and continuous supply chain improvement are critical

Joint business planning turns into something beyond filling out forms your boss told you to fill out, to developing regional marketing/ targeting/clustering and building a supply chain that can handle multiple channels

Own brands start competing for shelf space; category talent is essential to get teams to successfully fight this

Shopper insights become critical as real distinction emerges between how shoppers shop different outlets/channels

By 2020, digital/mobile commerce will be considered a way to reach outlying areas (possibly through retailers or possibly leveraging existing traditional trade infrastructure to do it yourself)

Key trade-off to manage: balancing modern trade growth with traditional trade opportunities/optimization to maintain country profitability

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Maturation This stage involves the rationalization of existing square meters of space into more disciplined operations. The United States has just left this phase, while Poland and Mexico are just entering it (Figure 4).

PostmodernThis is the stage at which competition becomes concentrated and aggressive between massive retailers that are too big to be defeated but too small to conquer each other, and includes format reinvention, relentless demand optimization, and margin maximization (through smart merchan-dising, negotiation, and own-brand development). There is an intense focus on in-store merchandis-ing and experience (and this will eventually mean online experience as well) (Figure 5).

Go-to-Market Platforms— “Cover Your Assets”Irrespective of geography, one of the core themes that comes out across all market types is the need to work with your best customers on more holistic economic solutions. Historically, this has involved moving from simply trying to grow topline sales to driving both sales and profit growth. Going forward, the critical go-to-market issue with major retail outlets will involve questions about profit-able asset productivity: how do shelves, stores, and distribution centers (DCs)/networks generate optimal cash flow?

Productive Shelves—The PhysicalThe degree of variation required in the shelf set and planogram for most retailers in most geog-raphies will increase markedly as they seek to capitalize on better information and harder-to- access growth pockets. This triggers a need for four core capabilities:


Figure 4: MATURATION Stage

Figure 5: POSTMODERN Stage


�� To easily visualize, render, and test shelf set varieties quickly.

�� A shopper-centered view of SKU-level performance. It is critical to understand what happens as assortment changes (what assortment analytic tools are ideally designed for), as well as to have a view on why they are changing (fueled by best-in-class shopper

research) combined with what can shape not just assortment fine-tuning, but assortment strategy.

�� The best predictive analytics you can find on how shelf productivity changes as changes are made in assortment. As these business problems get more challenging, “good enough” may not be good enough, so to speak,


Identifying logistics efficiencies at scale and joint business plan optimization/deepening

Acknowledging that space productivity becomes more cash-flow and less margin centric —the real understanding of how inventory flows impact results not just buying more to get a better deal

Understanding integrated omnichannel category management, which requires robust channel differentiation strategies, including multifunctional team management and balancing conflicting objectives between your own team members

Learning how to work sustainable living into the retailer’s efficiency story

Customer segmentation and picking winners are critical

Supply chain understanding (internal and external) needs to be first rate

Key trade-off to manage: investing in winners that may not be as profitable in the short term and who may challenge your model but who will drive long-term growth in the marketplace

Key skills for suppliers Key skills for the sales “general manager”Loyalty card optimization: high-level clustering and segment analytics

Evaluating retailers as media platforms and brand building experiences

Deep shopper missions/cluster understanding

High-level category analytics skills

Managing the total demand chain to minimize price instability

Knowing that at this point, you’re running massive businesses the size of countries or continents

Team development and succession management, customer-level differentiation and uniqueness

Managing the portfolio of brands in the context of retailers whose lack of support for a brand can severely damage it

Holistic management of the total demand chain

Understanding how to use retail trade as a tool to develop sustainable living platforms without sacrificing the short term

Key trade-off to manage: the needs of the short-term business versus the infrastructure to win in the long term

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on the analytic front. Too high a percentage of total opportunity is going to come from these types of small decisions; they will need to be made with increasing levels of precision.

�� Holistic math. Shelf productivity needs to be assessed at a sales, margin, turns, and holding power/in-stock level. The questions of optimal private label assortment and variety will only be answered effectively by looking at the total economic implications of these decisions.

Productive “Shelves”—The VirtualSales leaders will increasingly be responsible for parsing what gets sold online versus in-store: How will that decision be made? What are the success criteria for it? What are the tools required to make that decision possible?

�� The Simple. The selling argument for non-blockbuster SKUs will need to be increasingly rooted in economics rather than abstract concepts like “category framer” or “premium” or “clever marketing.” That story will need to answer one very simple question: Why does this product need to be on the shelf?

�� The Complex. Increasingly, your customers will be looking for a perspective on multi-channel assortment architecture (the strategy behind the economics outlined in the penetration phase), asking themselves: Why should certain items be in-store versus online? How should promotions be architected across channels?

�� The Strategic. A critical issue raised by this shelf dynamic relates to the types of

innovation that can comfortably be brought to market. Because most major CPG companies dedicate significant resources to incremental line-extension innovation, the scenario mapped out in the previous bullet raises one fairly obvious question: Where are these line extensions going to be sold? If the economic story behind them isn’t breakthrough or compelling, they will almost certainly be distributed through a multi-channel retailer’s web properties not their shelf properties. At the very least, it requires a new mindset for item development and marketing for these types of items if they are not going to be sold in-store. In all likelihood, what this will require is a radical rethink of the innovation investments and efforts made by CPG companies, which in turn has significant implications for strategy, capital allocation, and even team development. If there are no line extensions left to be made, what’s a 29-year-old assistant brand manager going to do for a living?

Productive Stores—The RelationshipsFor years, the notion that certain suppliers will need better understanding of the relationship between departments in in-store positioning—in terms of adjacencies, layouts, and fixtures—has been discussed but never really brought to life except in a few specific instances. Multi-category suppliers are going to increasingly benefit from understanding total store traffic patterns and category layouts.

Productive Supply Networks Who will build the logistics model that can get

product from DC, to store, to locker, to pickup point, to people’s homes? And, what happens when everyone wants something different?

�� Making Your DCs More Productive. Most companies will be fulfilling single-item orders further up their value chain than they do today. Whether for their own eCommerce customers, for small business/reseller customers, or for major multi-channel customers, this capability will need to be folded into broader distribution capability.

�� Making Your Trucking Network More Productive. Outside of home delivery, much of the growth in the retail ecosystem between now and 2020 will come from stores that are much smaller than your distribution network is used to fulfilling. That will, in all likelihood, require smaller trucks and different delivery patterns to make that work more effectively.

�� Making the Customer’s Safety Stock More Productive. As Amazon.com continues to try to manage a business with the bare minimum of safety stock inventory (often to deleterious effect on its sales), other retailers will be pressured to get better at this (in many ways similar to the pressure Walmart put on less efficient retail under 25 years ago). Replenishment forecasting and modeling will need quantum leap improvements (in particular with better predictive data for simple things like weather and more complex issues like changing consumer trends) in order to keep the primarily brick-and-mortar multi-channel retailers’ inventory competitive with the best pure-play online operators.

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The Big “How?”The Future of Analytics—“The New 4Ps”The future of customer management is rooted in analytic power. Much of that work will be the transfer of leading global practices to the appro-priate markets/stages that require them (e.g., a market like China leaving the concentration stage and moving to the penetration stage will benefit from the category management skills honed in markets beyond this stage).

At the same time, the world of analytics will change as well, requiring new capabilities across the board (while this article doesn’t break down those analytic changes in detail, Kantar Retail will continue to develop a robust perspective on that for clients). To start this dialogue though, framing the four key business questions we think will require transformational analytics to answer is essential.

Precision—Where Should I Target?Increasingly, the answer to this question will require much more sophisticated analytics to understand, as conventional data sets (i.e., loyalty and customer relationship management (CRM)) are crossed with the more widely available world of data (an individual’s “digital/social/mobile” foot-print) to create targeting that will require increas-ing precision. According to numerous sources, when Barack Obama ran for U.S. President in 2008 and 2012, he was able to send out over 10,000 different “targeted” communications based on micro-clusters of voters. The future of shopper marketing (and marketing, period) probably relies on the ability to do more campaigns that look more like that and fewer that are about one simple

message. The relationship between a powerful over-arching brand narrative with micro-targeted resonant messages aimed at precise need states will require creative and analytic types to work together in transformationally different ways than they have before.

Personalization—Who Are They?A related but separate question to precision is the idea of personalization. Increasingly, shoppers are going to want not only targeted messages, but they will also want the “old 4Ps” served up in their own personal way.

�� Product. More and more, products that can be customized will be: flavors, variants, colors…anything that isn’t core to the formulation. Manufacturing plants will need to accommodate this by thinking through the “personalization chain.” Processes will need to be built that can accommodate this cost effectively.

�� Placement. Virtual shopping will increase delivery to a personalized location: home, work, locker, car park, etc. A supply chain that can meet this need will be essential.

�� Promotion & Price. Possibly the greatest test to conventional marketing analytics and frameworks will be driven by the notion of personalized pricing. Personalized promotions based on transactional history are not the future—it is CVS’s stated strategy today. Safeway’s “just 4 U” pricing platform explores the line between that and personalized pricing in the United States. Over time, transactional data will be fused with data from other sources (e.g., media

consumption, demographics, and online behavior) to build pricing tolerances that are both individualized and contextualized. In all likelihood, shelf price for an item will look more like the “sticker price” for a car in the United States, a rough frame of value rather than a specific economic data point. When that point is reached, the calculation of elasticities and equities will need to get more “scenario-based” and curved, rather than formulaic and linear.

Prediction—What Does the Future Hold? As promotion and price become more scenario based, all of our analytics change both their lens and their base. The lens has to become more forward-looking, and the base needs to reflect some of the inherent uncertainty rooted in a more scenario-based future. One of the defining retailers of 2015-2025 will be Amazon.com, and its approach to pricing is fundamentally different from any retailer that has driven the market before it. Put simply, Amazon.com views price as an outcome as much as a strategy, and that outcome is determined by a variety of factors. Reducing variability in this outcome is part of the go-to-mar-ket work we will discuss in the last section of this article, as a “leaky” distribution chain can cause ripples in the C2C marketplace that can shake business planning at your largest customers.

Prediction has always (to some degree) been the point of analytics, though much of the research and insight done have always inherently had a backward-facing view. Winning companies in the

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future will work hard to get this forward-leaning bias built into their insights, and this will require reconfiguring three sets of critical enablers:

�� Skills/Tools. This is interesting because not only will your analytic teams be increasingly thrust into arenas where procedures, techniques, and successes are less well defined (which means your analytic hires will need to look different than they do today: perhaps a 50/50 split between people with conventional and less classic CPG backgrounds for a start), but also your machines will need to work differently. Large data collection, neural network processing, and massive computational power could all be critical differentiators.

�� Processes. If success is modeled best as scenarios, this almost certainly means our decision processes need to be less linear, and more recursive and adaptable. Large commercial enterprises don’t like to rethink decisions but leaders of these companies will become increasingly comfortable with a management style that’s less about “we agreed to the plan, now let’s just relentlessly execute” and more about recursive learning and adaptation along the way.

�� Measures. If the future is scenario based, in all likelihood we’ll be evaluating larger buckets of activity and work to determine success and reward. To paraphrase John Wanamaker, “I know 25% of my initiatives won’t work—I just don’t know which 25% that will be.” This means that initiatives that don’t achieve projections are not necessarily failures and that teams and leaders will probably find that a perfect success record

probably is not compatible with achieving your targets. The world is too complicated to grow faster than the market without failure.

Proof—How Much Do I Make If This Works?The fourth critical area of analytic competency is to some degree the mirror image of the third: I need my recommendations to be more forward-look-ing but at the same time, my backward-looking views need to get more holistic in order to prop-erly determine causation and evaluate success. ROI analysis on all marketing initiatives becomes increasingly complex the more touchpoints we have with the consumer/shopper. In general, there are three themes to ROI analysis that appear to be most significant:

�� Campaign, Not Event Based. Measuring the impact of discrete events in many cases even today can drive curious behavior. For instance, many companies that have strict ROI measures on trade promotion wind up over-relying on price discounting versus other forms of promotion, because there’s generally little you can do that has more direct and immediate impact than a price reduction. Evaluating campaign ROI involves three core attributes:

�- A sense going in of what you’re trying to accomplish;

�- Planned, rather than reactive, techniques; and

�- Patience.

�� Understanding the Difference between Correlation and Causation. As available data in the short term outstrips the ability to rationally process, it is critical to remember

the appropriate use of correlation and causal analysis. Sometimes correlation is fine: if we do two things together, they work better than either independently, for instance. We can sign up for that and be happy. The challenge arises when you start reconfiguring strategy based on an assumed cause. Generally speaking, correlation (i.e., “what happened”) analysis is very good for figuring out what to do, but to understand “why” something happened, we generally need to dig deeper for root causes.

�� Breaking Down Classic Divides Like “Above the Line” and “Below the Line.” Following shopper influence wherever it happens (even if it crosses organizational silos) will be essential.

The Blending of Shopper Marketing, Consumer Marketing, Digital Marketing, and Corporate Responsibility—“There Is No Line”The notion of “Above the Line” and “Below the Line” marketing is as old as modern marketing itself. It has served as a useful distinction between work that was thought to be “equity accretive” versus “trade oriented,” provided a legal architec-ture for the relationship between major suppliers and customers, and been the root of countless thousands of arguments between departments about who gets to pay for what. But as the “Proof” ROI concept becomes more ingrained and as we begin to understand that these “lines” serve as poor guides for how consumers and shoppers relate to brands and making purchases, there are real business reasons for removing this divide. At the same time, the emergence of Amazon.com

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Next Generation Marketing to Shoppers

If the world is a permanent purchase occasion, then there is a need to intertwine “call-to-action”behavior almost everywhere. For example, disrupting routine replenishment purchases to get “new” into auto-matically filled baskets, or tying loyalty data, mobile communication, and in-store presence to create new points of interruption for retailers in a world without natural stopping points (i.e., checkouts).

Next Generation Marketing Planning

Balancing the reward of gross rating point- equivalent impressions with the reward of retail benefit (i.e., merchandising at a moment of truth in the context of margin relief in categories that are extremely price competitive) will be critical. Tomorrow’s sales GMs will be responsible (in the absence of a planning agency’s support) for essen-tially building a field media plan for your brands. We expect there to be an enormous amount of energy in the following areas:�� Continuing to perfect the quest to tie

together media consumption and purchase behavior for better media targeting

�� An understanding of the equity building power of marketing through customers

�� A combination of retailer and supplier assets aimed at high quality customer relationship management (CRM)

Next Generation Budgeting/ Shopping List Management

As retailers inevitably move into financial services/payment provision more and more, does this change their operational economics, and if so, how? The winners in the marketplace will be the ones who can under-stand and move nimbly from shopper influence, to item selection, to replenishment, to purchase as seamlessly as possible. Is it possible that the dominant retailer of the 21st century in emerging markets could be Google? A wireless carrier? Visa? Of course it’s possible.

as both a massive retailer and highly successful media platform presents a practical challenge—if your largest customer is also a media entity, they can (without too much difficulty) understand a supplier’s total spending relationship with them. Today, top-to-top meetings with Amazon.com for suppliers where Amazon.com matters look very different than they have in the past, and this has enormous implications for suppliers, agencies, media buyers, and their competitive retail set.

“Blurred Line #1”: The Boundary between Shopper and Digital MarketingAs more and more shopping is done via mobile phone (both in-store and online), and as more web access is truly mobile (Google estimates that most of the 3 billion people between now and 2020 that become Internet connected will adopt mobile as their primary means of accessing the web), what is the point of having digital marketing removed from shopper marketing? If the world is a “perpetual purchase occasion,” how does that change the way we think about the connection between attitu-dinal marketing and behavioral marketing? Can brand building, brand development, and marketing to shoppers be relevant in isolation from one another?

“Blurred Line #2”: The Deconstruction of “Channel”While this is a term that applies to both media platforms and selling platforms today, the fact that they are the same word won’t be coinci-dental. Either by organic growth (Amazon.com), partnership (Google), or acquisition (Walmart), in all likelihood, your largest retailers will also be among your largest media platforms as well. Some possible scenarios:

�� Could Walmart buy Yahoo?

�� Would Target ever buy a TV network?

�� Will Walmart and Facebook become more and more integrated?

�� Is Alibaba’s investment in shopping malls an experiment or the start of a trend?

“Blurred Line #3”: The End of Corporate Social Responsibility as a “Luxury” and “Brand Transparency”As more shoppers begin to leverage the transpar-ency a digital world provides, they will have unique insights into where products come from and what companies stand for.

�� Next Generation of CSR. Sales leaders will need to manage the “Triple Net” bottom line: reducing costs and waste while enhancing consumer satisfaction. The need to bring marketers and operators together to form a coherent team pulling in the same direction, in many cases, will be rooted in customer-facing behavior.

�� Brand Transparency. Increasingly, consumers will want to see inside the brand’s personality and feel like they know brands better. How can retail be an effective platform to facilitate that?

�� The Deconstruction of Money. As in most of the “next billion” markets, it seems likely that banking will skip a generation and go mobile. How does totally digital payment change the way retail works? How does this change the way we advertise and promote if someone’s wallet is also his or her TV?

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Changing Fortunes Kantar Retail’s 2014 Predictions for the Retail SectorBy: Kantar Retail Analysts

Now that 2013 has come to a close, we wipe the slate clean and look to begin anew in the coming year. In 2014, retailers will look to change their fortunes after producing mostly underwhelming growth during the past year. These goals should get some help from slow but steady traction in the economic recovery. As in recent years, the government will continue to play a prominent role in shaping shoppers’ spending plans.

The net effect will be spotty growth early in 2014 that will give way to stronger demand among both Have and Have-Not households. Along the way, growth will be affected by:

• Food stamp cuts. Cuts to the SNAP food stamp program that went into effect November 1, 2013 will curb consumables spending by as much as USD5 billion and grocery-related category growth by as much as 0.5 percentage points.

• Health care expansion. The health care expansion that begins on January 1, 2014 is projected to add as much as USD15 billion in prescription drug spending—among other effects that now may lag given the troubled rollout. Both the food stamp cuts and health care expansion

are likely to heighten competition among consumables retailers—especially Walmart, dollar stores, and supermarkets—as they work to preserve and gain share among the lower-income shoppers affected by these changes.

• Fed tapering. When and how quickly the Fed decides to taper its bond-buying program will be a key economic hurdle in 2014. Homegoods categories and channels will be most affected. Their growth will moderate but be sustained along with the housing recovery.

• Fiscal uncertainty. Government budget battles will also cast a cloud of uncertainty during periods of 2014—with the next fiscal standoff likely in mid-January.

In the end, growth should be fostered in 2014, especially in the back half of the year, by a continued downward trend in unemployment. This will help Have-Not households absorb cuts to food stamps or shift some of them out of the program altogether. Low inflation in food and fuel in the first half of the year should also help these households keep most of their spending plans, even with less government support. Stronger income

growth and sustained, albeit slower, wealth gains will additionally expand the budgets of Have households that tend to drive more incremental demand, especially for discretionary categories.

With these factors in mind, Kantar Retail has peered into its crystal ball to identify key trends and developments that will impact the U.S. retail sector in the coming year and beyond.

Transformers As we did last year, we have bucketed our ideas into three categories: Transformers, Shapers, and Reflectors. Transformers represent developments that will fundamentally transform the structure of the retail industry, affecting how retailers and suppliers operate today and well into the future. The intention of these predictions is not to be precisely right, but to give the reader “stretch” for a three- to five-year scenario planning exercise. Even if the likelihood of the following events occurring is less than 50%, they are significant enough that there should be thinking in place around what it means if they take place.

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“The Only Way to Win Is Not to Play”: Retailers Learn about Black Friday from War Games Some of you might remember the iconic movie War Games, where a computer that controls America’s nuclear arsenal talks itself out of precipitating global nuclear annihilation by playing itself to a tie in an almost infinite number of tic-tac-toe games. The closing line of that movie (referenced above) feels like a line many retailer boardrooms will be hearing when they pull together their Black Friday 2014 plans.

Kantar Retail’s prediction for 2014’s retail environment is a marked decline (for the first time in living memory) of promotional and marketing intensity focused on Black Friday and the beginning of its march toward irrelevance. There are a few simple reasons for this:

• The name Black Friday came about because it was the day retailers theoretically went “into the black” (i.e., turned a profit for the year). This meaning has become completely lost with retailers seeking to outdo each other with lunatic opening hours and deals.

• Overwhelming the stores with traffic completely defeats the purpose of a loss-leader promotion. It not only encourages cherry picking, but also it’s like opening a store where all you sell is cherries and being disappointed you didn’t sell grapes.

• There is simply no quantitative evidence that suggests that a successful Black Friday builds momentum into the holiday shopping season. This year, most retailers reported alarmingly low store traffic in the weeks between Thanksgiving and the week before Christmas, irrespective of their Black Friday intensity.

• Wall Street is placing way too much emphasis on terrible anecdotal snapshots from Black Friday. Our suggestion for CFOs: manage this narrative by stressing the degree to which you are selectively participating in it.

• The trick with the holiday season (in what by all accounts will be a blockbuster season for Amazon) is asking yourself: How do I create a solution that captures what the Amazon shopper is doing in holiday shopping? Rest assured, what the Amazon shopper is not doing is standing outside in line for hours waiting to turn on their mobile phone to shop.

Primarily brick-and-mortar multi-channel (PBAMM) retailers have for the last five years been engaged in the process of watching automobiles populate America’s roadways and trying to make a bigger, faster, meaner horse. Walmart seemed happy with what it accomplished during Black Friday, but this kind of overwhelming force lends itself better to their operating model more than anyone else’s. “We said Black Friday is the Super Bowl of retail, we ran a play that only Walmart could deliver and our customers loved it,” reported

Bill Simon on November 29, 2013. The trick with the Super Bowl is, if you weren’t a great team all season, you aren’t playing in it. No amount of promoting can get you there if you didn’t have the 325 days or so that precede Black Friday right from a value-proposition perspective.

So, what do we expect instead of Black Friday?

• Unique products. Placing more emphasis on items that can only be bought in one outlet.

• Using personalized understanding to help shoppers create holiday shopping lists throughout the year so that come holiday time, more decisions are locked in. Pinterest or other similar social media outlets seem like a marvelous platform for this. In fact, a preliminary report from IBM suggests that a shopper referred to a retailer site by Pinterest spent approximately USD100 on that visit (nearly double what Facebook was able to generate, though Facebook was apparently markedly better at conversion).

• Using contextualized positioning to guide shoppers into purchases that wouldn’t occur to them in other environments. Retailers that are curators of assortment or that have brand footprints that extend beyond their merchandise to a lifestyle seem ideally positioned to lure shoppers out of item-centric promotional discounting.

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• Understanding “self-gifting” better. It seems reasonable to assume that if a shopper is buying a big screen TV for Christmas, they’re not giving it to their neighbor. We’d expect big-ticket-item retailers to understand this purchase dynamic better and begin to offer value platforms that allow shoppers to treat themselves before the holiday season and avoid the crowds.

• Mobile as the platform. Someone’s going to find a way to geo-target shoppers standing outside their competitor’s stores and offer them USD20 to go home and buy something on their website instead. Assertively promoting the ability to access deals without lines, crowds, endangerment, and insanity seems like a more sensible proposition for any retailer who has a more complex relationship with its shopper than a lab rat has with a food pellet.

In short, we expect holiday shopping to change similarly to how all shopping will change: it will take place on the shopper’s terms, not the retailers’. There is a small subset of shoppers that enjoy leaving their families on Thanksgiving or waking up at 3 AM to capitalize on great deals; we just expect most retail CFOs to start encouraging their merchants and marketers to find better, smarter ways to reach the majority of shoppers that really want to be sold to differently.

The 2014 Buzzword Is “Embedding”This is not a prediction about anything specific, but the management buzzword for 2014 and 2015 will be the concept of embedding the massive changes currently happening in the marketplace more foundationally into the behavior and strategy of large enterprises. We expect the competitive environment from 2015 to 2020 to be dominated by companies that not only know things, but also do things with what they know most consistently; “embedding” is the simplest word that embraces this concept. Should your company have a Director of Embedding to help your teams take change and make sure that change sustainably and effectively impacts the way you work?

Gamification of Loyalty Combining existing loyalty card strategy that provides personalized pricing, with the tactics of gamification, will have profound impact on the way we look at one-to-one engagement with our most loyal shoppers. Gamification of loyalty is the process of rewarding the shopper when they have completed a set of objectives or tasks. In a traditional loyalty program, those objectives were often hidden from view; the shopper knew they received a discount, but had no way to monitor their progress toward the next promotion. Gamification demands those requirements be transparent and open, so shoppers can monitor their progress toward completing those goals.

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There has been a handful of retailer-owned tests of gamification over the last few years, such as Meijer’s mPerks, where shoppers can unlock rewards based on frequency of category purchase. Shoppers can see how often they have purchased a category and can see how many more times they need to repurchase the category to receive the next tier of promotion. In 2014, additional major retailers will move from fringe experiments to fully embedding gamification tactics into their loyalty strategies.

The opportunities for suppliers are immense. We will move to a world where suppliers can fund “achievements” or “badges,” rather than straight promotions. For a supplier with a large cross-category portfolio in the health and beauty category, this could manifest itself in sponsoring a “spa day” achievement that rewards the shopper with a discount across a basket of products—the next evolution of solution bundling.

Shapers These ideas represent developments that will shape how the retail industry operates. They are predictions we would be surprised, but not shocked, if they did not come to fruition and are significant enough that they should be pillars of your planning process.

Home Improvement Retailers Embrace the ShowroomIn 2014, Home Depot and Lowe’s will embrace their stores’ value as showrooms and will

begin to reduce inventory in stores dedicated to big-ticket, space-hogging merchandise like appliances, storage equipment, and power equipment, leaving traffic drivers like hardware and tools in place. Such moves will clear room for display space where the retailers can inspire shoppers with elaborate room displays and project demonstrations. The retailers aren’t likely to turn all of their stores to half-showroom, half-hardware stores, but they will seize the opportunity to do so in major markets and high-income areas.

Home Depot has already acknowledged the benefits of holding inventory for online sales by expanding its appliance selection in just 240 stores so far, and by testing out a more showroom-like experience in its “Superstore” prototype in Vauxhall, NJ. Meanwhile, Lowe’s and its suppliers have found great success from its New Innovations endcaps, which are interactive and engaging displays featuring the best and brightest of manufacturers’ new inventions. Shoppers will be able to test out everything from faucet fixtures to washing machines and home décor.

The retailers will also begin investing in longer-term deeper training of their associates to fully capitalize on their competitive advantage over online retail: in-store advice and how-to instruction. Look for the retailers to seize new technologies such as augmented reality—a technology Home Depot already features in its mobile app—to help shoppers envision their own dream homes, kitchens, bathrooms, and more.

Walmart Leapfrogs Loyalty Cards, Predicts Shoppers NeedsWith a full rollout of Scan & Go—Walmart’s mobile self-checkout app—anticipated in 2014, the retailer will supersede the analytic and targeted marketing capabilities of traditional and mobile-based loyalty programs. Allowing insight into shoppers’ trip planning, Scan & Go lets users enter lists and select digital coupons. Once in-store, the app may track what products shoppers select, switch, and research, as well as their route through the store. Afterward, the app can follow when, where, how often, and how much each user shopped. Undoubtedly, the retailer will have this data at scale: if only 1% of its shoppers use this tool, it will amount to recording roughly 1.4 million trips a week.

As Walmart amasses this unprecedented understanding of store shoppers’ purchase behaviors, Kantar Retail anticipates that its individual targeted capabilities will leapfrog brick-and-mortar retailers. In 2014, Walmart will predict list needs based on past purchase frequencies and suggest Rollback items based on shopping tendencies. Real-time geo-targeting will allow Walmart to appeal to shoppers mid-trip, offering suggestions based on similar users and coupons based on their current basket. This individually targeted marketing will bring sophisticated tracking and targeting techniques commonly found on websites to the physical store, raising the bar for competitors and challenging suppliers to hone their techniques to the customer.

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Target Canada Will Scale BackBy the end of 2014, Target Canada will still be struggling to win over Canadians who remain skeptical of Target’s “Expect More. Pay Less” appeal. While in-stock inventory challenges will be improved for Target stores, trip frequency will still struggle. As a result, Target will roll back its touted 2017 goal of USD6 billion million in Canada to just under USD4 million.

Urban/CityTarget 2.0 ArrivesBuilding on its strong private brand portfolio as well as earlier private brand over-facing tests, Target will pilot a smaller limited-assortment box (~40K sq. ft.) in urban neighborhoods that carries private brand food, non-edible grocery, HBA, and a selection of apparel merchandise, including C9 by Champion. Key vendor partners will provide a small rotating selection of merchandise to create a treasure hunt experience. A pharmacy and store pickup area, for online orders, will also encourage regular traffic into the box.

Grocers Will Grow and Gain Market ShareKroger, Whole Foods, Publix, Meijer, HEB—a whole pantheon of good retailers, large and small, with strong brands and a clear definition of their value to the shopper—will continue to grow and gain incremental share. Combined with the expansion of Walmart’s Neighborhood Market, less prepared and less well-defined supermarket retailers will struggle. As a result, the wave of swaps, sell-offs, mergers, acquisitions, and divestitures we saw in 2013 will continue.

Key battleground areas to watch:

• The Charlotte market area. As Publix invades, Harris Teeter combines with Kroger, and Walmart continues aggressive price marketing, it may not be a good year for Food Lion.

• The Dallas/Fort Worth market area. As WinCo arrives, HEB moves closer to the core market area, and established large players stay strong, Safeway will continue to struggle.

• The Chicago market area. This market will be the rugby scrum of grocery retailing for 2014 as Dominick’s is dismantled, Mariano’s continues to penetrate, and Jewel continues trying to regain momentum. Someone is likely to make a big move here.

Reflectors Reflectors are predictions that are reasonably conservative—in many cases, they are extrapo-lations of changes taking place today. We chose them because we feel they are reflective of broader trends that are useful to account for as you build your 2014 and 2015 plans. Dollar Stores Will Become Health and Wellness Destinations for Price-Sensitive ShoppersAs low-income shoppers are forced to buy health insurance under the Affordable Care Act, they will also be compelled to actively manage their everyday health in order to avoid costly trips to the doctor’s office and medical bills. Doing so will require greater reliance on over-the-counter

items to manage chronic health conditions. Dollar stores that can remain competitively priced while effectively communicating that it’s less expensive to be healthy will quickly establish a leadership position in these categories and create significant pressure on competitors.

Clubs Reach an Inflection PointAs the club shopper base continues to age out of the box, clubs will have no choice but to shift focus to the next generation of members, Gen Y. The need to retain the largest represented cohort of their member base (Boomers) while attracting a sustainable, longer-term base of Gen Yers, however, creates a fundamental conflict in the message and mix. This will result in greater demand from Costco, Sam’s Club, and BJ’s Wholesale for the use of prospective and current member insights to drive meaningful differentiation and growth moving forward. Expect a much greater emphasis on analysis and a corresponding demand for support.

Meanwhile, the threat of Amazon will disproportionately impact club shopping. Club members continue to skew higher in cross-shopping Amazon and participating in memberships like Prime, Mom, and Subscribe & Save than typical U.S. shoppers. Because traditional club products (e.g., those with stock-up, bulk, shelf-stable traits) are more aligned to online purchasing, expect that the clubs will attribute more importance to offers and experiences that Amazon (and online retailers in general) can’t currently contend with. This will drive the need for

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a more curated, omni-channel assortment than ever, as well as more exclusive, new, and local items to reflect greater member relevance and unique value. While this challenge is not new, the potential for rapid growth in overlap between their online and in-club offers and services could be a game changer.

In this context, the expansion of services will also be key to elevating the club value proposition. Areas like health care, health and wellness, technology, travel, small business support, and financial management are ripe for greater club involvement given the nature of their evolving member bases. Members, especially Gen Y who are more inclined to take these efforts into their own hands, will appreciate the convenience and value of these types of online and in-person services. As the clubs elevate the role of services in their overall value proposition, opportunities will emerge for suppliers across categories to better fit with the broader solutions the clubs offer, particularly those targeting specific generation cohorts and life stages like club moms, college students, and those members seeking more transparent and practical health and wellness solutions.

Further, with a model that continues to prove successful amid growing competition in the United States, expect that the clubs (namely Costco and Sam’s Club) will seek to capitalize on a more global brand. Costco has already set several wheels in motion that will pave the way for expansion into continental Europe in early 2014, as

well as the potential introduction of dot-com in markets where it currently doesn’t operate a transactional site. Costco’s ramp up in Mexico will also require a response from Sam’s Club, which will need to more thoughtfully defend what has largely been its market of markets. This will place more pressure than ever on suppliers to get their global logistics in order, to ensure greater connectivity between their more market-specific club constituents, and to better leverage the crossover between imported and exported products to appeal to the clubs’ treasure hunt environment.

Drug Retailers Focus on Communicating Value to Stay CompetitiveIn 2014, expect CVS, Walgreens, and Rite Aid to emphasize value through loyalty and services. As millions of shoppers enter the health care system, drug channel retailers will need to accurately communicate value to the newly insured Have Nots or risk losing them to another channel. All three players will focus on this in a few different ways.

• By offering rewards to compete at a basket level instead of individual item level. Rewards, promotions, and coupons all help lower the total basket, improve price perception, and make comparing prices more difficult.

• Through personalization. Creating a more unique experience and tailoring promotions or assortment will build a relationship with shoppers and encourage them to return.

• By adding value beyond price. Drug retailers’ overall health care expertise will give them an opportunity to create value through health services, education, and one-on-one guidance.

On a retailer level, CVS will continue honing its personalization efforts and incorporating health conditions and education across the total store. Walgreens will focus on educating shoppers on how to optimize Balance Rewards and honing its rewards and promotions. Rite Aid will use wellness+ to target specific groups, such as moms and senior shoppers.

Ethnic Foods Expand into New CategoriesWhen someone says “ethnic foods,” the most common reaction is to think of Hispanic marketing opportunities. But the extraordinary wave of new immigration that has reached the United States in the last 20 years also includes large numbers of people from Asia, Eastern European, and Africa; literally, people from almost everywhere.

Food and product trends are always a surprise to mainstream companies unless they make large efforts to look beyond the obvious. Not long ago, few knew what edamame was, breakfast burritos were a local oddity, and no one had any idea what a success story Greek yogurt was about to become.

In 2014, an item or cuisine that seems exotic or niche today will “suddenly” gain traction. Like a small band working in small venues that “suddenly” becomes an overnight success, that item or cuisine is out there right now. Winning suppliers find these things. Winning retailers find these things. Have you been looking?

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For Grocers: Eat Well, Be Well, Act Well With large, well-publicized efforts to remove trans fats from American product lines and 14 million people entering the health care system, there is increased awareness of healthy eating; however, shoppers will need guidance, and supermarkets are well positioned to step into this gap to leverage health and wellness across the entire store. Some directions supermarkets can capitalize on include the following:

• Eat Well. Offering guidance and expertise to help shoppers make healthy food purchases. Shelf-tag messages, in-store staff, cooking seminars and demos, etc., will be increasingly utilized, and some retailers will begin to proactively discontinue product lines or items, or demand changes to formulations to meet new standards.

• Be Well. Managing shoppers’ dietary or health needs by acting as a wellness resource and/or provider. Pharmacy services will be leveraged more and become more accessible. Clinic investments will accelerate, and more

merchandising and assortment changes will be made to meet specific dietary needs. Expect better signage and more integrated wellness-oriented marketing as well.

• Act Well. Helping shoppers stay fit through programs that tie food in with fitness. Retailers will either engage in partnerships or launch contest/marketing programs tied specifically to fitness.

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As the Russia-Ukraine conflict creates new disruptions and China struggles to restimulate growth, the global outlook for retailers and suppli-ers increasingly requires approaches to minimize the impact of weaker demand growth in emerg-ing markets and capitalize on improved demand growth in developed markets that is expected to persist despite the new disruptions.

The outlook for developing markets has a greater potential for deteriorating in the coming months due to price pressures and market disruptions, including the Russia-Ukraine conflict. Putting a cap on price pressures will be essential for Mexico, Brazil, India, and Russia. Most policies to do this likely will produce slower or relatively moderate economic growth in the short term. China is trying to stave off such an outcome as its efforts to rein in consumer and property prices takes its toll on economic growth. Russia’s incursion into Ukraine will have a negative effect that will vary by country as sanctions or the prospect of sanctions scares off business investment at home and abroad.

Europe should continue to show uneven signs of recovery that persist despite threats from the Russia-Ukraine conflict. The United States is likely to produce respectable growth this year as govern-ment-related uncertainty that plagued growth last year mostly subsides. This boosts the outlook for Canada, which will need exports of goods and services to the United States to offset moderation in housing and other sectors. Japan will be the

Global Outlook Remains Split Among Markets Amid Russia ThreatsBy: Doug Hermanson

exception from most other developed markets, as higher tax rates depress retail sales growth in the coming months.

These are among the factors affecting the macroeconomic conditions across countries as summarized in Figure 1.

In broad terms, here’s what this outlook means for its varying impact across the retail landscape:

�� Be on guard against implications from the Russia-Ukraine conflict. A quick resolution to this conflict is unlikely. Broad-based sanctions that move the conflict toward resolution will be difficult to achieve due to the varying economic ties to Russia, especially among European Union members. As a result, the implications by country will be varied and likely to unfold over a span of months. One possibility is that Russia’s oil and gas markets will be vulnerable

By measures of:

Overall Consumer/Retail Spending

Market Disruptions#

Consumer Confidence

Employment/Income#

Business/Residential Investment

Prices

? = POSITIVE

Policy: Fiscal, Monetary, Exchange Rate

? = MIXED ? = NEGATIVE

Key MarketsDevelopedMarkets

Emerging Markets

Euro Zone Japan

United States

Figure 1: Selected Indicators by Key Markets

GDP, Investment and Consumer Spending are quarterly through second quarter of 2013; Remaining indicators are monthly through June, July, or August 2013. # Market disruptions are typically events that are temporary in nature and cannot be controlled by households, firms, or government; Employment/Income metrics may be based on a different mix of indicators by country as well as Kantar Retail analysis; Policy factors focus on the expected impact on retail sales of government policies related to government spending, money supply and interest rates, and their related/expected effect on the exchange rate of the domestic currency.

Source: Government sources, Kantar Retail analysis

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to disruptions that push fuel prices higher or make them more volatile in certain countries, if not globally. In most Western European markets, sanctions could have an effect on certain retailers and manufacturers. Exports of luxury goods and automobiles from Germany, France, and Italy to Russia are at risk. The United Kingdom could feel effects from a pullback in residential investment and tourist spending from wealthy Russians living in London. The direct effect on most consumables categories and European retailers is not likely to be severe, but in the long term they are threatened indirectly by any pullback in business confidence and investment that puts pressure on job gains.

�� Plan cautiously for sustained, albeit uneven, growth in European markets. Despite the threat from Russia-related disruptions, the negative effects should not be enough to overcome positive momentum most evident in countries such as the United Kingdom, Spain, and, to a lesser extent, Italy. At the same time, expect the gap between Have and Have Nots across European countries to persist and widen. In France, the outlook depends on whether government spending cuts deepen or stay the course, which has led to steeper-than-desired deficits. A shift toward less government spending would put more pressure on Have Nots. As the uneven European recovery continues, Have households will be the first to increase

spending plans as they benefit from a bounce back in investments. Have households in the United Kingdom are receiving an additional lift from surging home values pushed up by additional government support for home buying enacted in the past year. Additionally, job growth in this segment has likely been more resilient during the downturn, providing more immediate spending power as consumer confidence returns. Have Nots are likely to remain more cautious with their spending plans, perhaps for several years. Jobs and savings that have been severely depressed by the prolonged downturn will likely take years to recover. Suppliers and retailers will need to differentiate products and marketing efforts to address the two-track course of the Haves and Have Nots. Products and retailers that are unable to appeal to one or both of these distinct segments may fail to benefit from the initial recovery in most European markets or the potentially increased value focus in others, such as France.

�� Prepare for persisting uncertainty in emerging markets that should give way to stronger growth in the long term. Russia itself and other emerging markets should be most negatively affected by the disruptions caused by the Ukraine crisis as investors flee to U.S. dollar or euro-based assets and investments. In addition, the short-term growth outlook of emerging markets will continue to be hurt by the steps the Federal Reserve is taking to unwind its huge cash injection into the U.S. economy—and into the

global economy indirectly—over the past five years. The Fed’s “tapering” has led to a selloff in many emerging market currencies. The weaker currencies are fanning inflation in India, Brazil, Russia, Mexico, and emerging markets generally by raising prices of imported goods. The currency and price impact also dampens demand from consumers and slows economic growth. Brazil also faces a toll on demand from increased sales taxes on beverages at least until the end of 2014, which is among the negative factors that will likely offset any potential stimulus from the upcoming World Cup. Inflation pressures combined with bulging government debt in India and Brazil has limited the ability of these countries to respond by lowering interest rates or sharply increasing federal spending to boost economic growth. China largely has been an exception to these exchange rate effects due to its tight control of money flows in and out of the country. The currency effects likely will require raising interest rates in the case of Russia and Mexico and keeping rates at high levels in Brazil and India. This should lead to subsiding inflation and a strengthening currency in the long term that attracts investors and again makes these markets key growth engines for retailers and suppliers (attracted to relatively younger populations and emerging middle-class populations in most of these markets). In the short term,

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though, these policies will keep growth moderate or may even dampen growth further.

�� Curb expectations of a short-term rebound in China’s growth. China’s road to rebalancing its economy is becoming bumpier. Factory growth has slowed and perhaps retracted in recent months. Consumer confidence is flagging, which is an ominous sign for near-term retail sales growth. The government has already responded in recent weeks by announcing government-funded investment projects and letting interest rates move lower. This likely ensures that retail sales growth in the short term will continue to outpace most major markets, but pale in comparison to the sky-high growth of recent years. Take note, though, that the government policy risks a hard fall down the road. Increased government stimulus may cause inflation to flare and easier credit conditions may encourage more speculative investment in housing. The government will be hard pressed to stimulate the economy just enough, but not too much.

�� Expect sustained U.S. growth to bolster Mexico and Canada. Improved weather and job gains in the United States will shift U.S. retail spending into higher gear in the coming months. This will contribute to a pickup in U.S. demand for Mexican and Canadian exports that should be enough to keep these

economies growing despite disruptions that threaten to derail growth. Canada’s housing market seems to have made a soft landing, but is still vulnerable if job growth slows sharply. The situation for Mexico is more pressing. Rising food inflation is among the factors that have pushed Mexican consumer confidence down to its lowest levels in several years. If inflation pressures can be contained, then consumer demand should recover due to sustained U.S. demand for Mexican goods that will bolster jobs and incomes.

�� Plan cautiously in Japan. Expect retail sales growth to slow in the short term due to a higher national sales tax that took effect on April 1. This is part of a multi-pronged approach to simultaneously rid Japan of growth-killing deflation and keep in check Japan’s ballooning government debt. In the past year, the Bank of Japan has been implementing a plan to double the money supply by 2015 and dole out a USD107 billion fiscal-stimulus package. The initial effects were positive for retail sales growth last year as consumer confidence picked up. But the higher sales tax will have a measurable impact in the coming months. While a slowdown in retail sales growth is tolerable, and likely expected, the biggest fear is a prolonged pullback in demand that might cause consumer prices to fall once again and cause government revenues to sink. Thus, the success of these government policies, and the

prospects for retail and supplier investment in Japan, may be most evident over the longer term, rather than the coming months.

�� Expect exchange rate fluctuations to play an increased role in the global price picture. The weak-to-moderate demand outlook for China and other emerging markets will keep global commodity price pressures mostly dormant. Still, the inflation outlook will remain much weaker for developed markets than emerging markets due to a swing in the value of currencies. The euro area, the United Kingdom, Canada, and the United States will continue to see muted price pressures due to the increased value of their currencies. Deflation may be a risk in Spain and other euro-zone countries, but this is unlikely to be severe enough or persist long enough to become a threat to the economic recovery. Brazil, Mexico, India, and Russia will continue to battle price pressures due to a falling currency value. China’s shift toward more economic stimulus and less appreciation of the yuan may spark more inflation in the coming months.

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Shoppers’ reaction to early-year macro conditions dominated by bad weather, higher heating costs, SNAP cutbacks, and the health care reform rollout looms large heading into the second quarter of 2014. That response will ultimately have the greatest effect in terms of changing shopping behavior—more so than any pullback in levels or growth of spending.

A key reason why shopping is more important than spending is because the spending toll from any one of the early-year disruptions is small relative to overall spending on goods and services. The toll on overall spending growth is measured in tenths of a percentage point and can be easily obscured (or offset) by other conditions—macro and competitive.

The spending toll, however, is magnified or mini-mized for any given retailer or supplier depending on how households respond to the disruptions via their shopping behavior. Among other things, we are seeing:

�� Discretionary goods and services most at risk. The money-saving tactics shoppers initially resort to tend to preserve food and drug spending and instead limit spending on discretionary goods and services. Eating out less is among the first tactics employed, which then benefits and minimizes the

Shopping Behavior Changes Looming Larger Than Spending Changes: U.S. Macro OutlookBy: Frank Badillo

negative impact on grocery spending. Beyond reining in spending on services, apparel, and homegoods are the retail channels most negatively affected.

�� Coupons, private label, and value channels gain favor. The pressures moving households toward value-focused behavior also mean an ongoing inclination to use coupons, buy private label, and shop at value-focused channels and retailers such as dollar stores and Walmart—with Have-Not households disproportionately leveraging these approaches to shopping.

�� Consumable goods sheltered, favored. While households shelter food spending from the most severe money-saving tactics, that spending has simultaneously received a boost of late from the bad weather because it has encouraged households to spend more in anticipation of weather-related needs. This has especially benefited supermarkets, and other consumable goods channels to a lesser extent.

�� Consumables retailers and brands not immune. While the net spending effects can be relatively straightforward at a macro level, determining what the underlying shifts in shopping behavior mean for any given retailer or brand is much more difficult.

A strong position among the growing online and small-box value retailers will help minimize the potential negative impact on consumable goods brands, but a timely competitive response to changes in shopper behavior also will help.

The macroeconomic conditions shaping this outlook are summarized in Figure 1.

Figure 1: Summary Scorecard of Macro Conditions

* The latest weekly scorecard is available in a news brief posted on the Macroeconomic Insights webpage at: http://www.kantarretailiq.com/Topic/NewsList.aspx?Topic=368280 Source: U.S. Department of Commerce, U.S. Department of Labor, Conference Board, Federal Reserve Board, Kantar Retail analysis

March 2013*

Overall Consumer/Retail Indicators

Market Disruptions

Confidence & Spending Intentions

Employment, Income, Wealth & Credit

Business & Residential Investment

Prices

Exchange Rate, Monetary & Fiscal Policy

? = IMPROVING ? = MIXED ? = WORSENING

United States Overall ImpactIndicators by group

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Here’s what this outlook means in broad terms of its varying impact across the retail landscape:

�� Expect spending intentions to bounce back. In retrospect, it may be no surprise that spending intentions among both Have and Have-Not households reached their last high point in October amid the resolution of the government shutdown. In the following months, spending intentions slid—albeit slightly, but especially more among Have households—as concerns about the health care rollout rose and harsh winter weather rolled in. For Have-Not households, SNAP cuts also factored in. These should prove to be temporary effects that fade as time passes. And in fact, signs of improvement in spending intentions occurred in February, but entirely among Have Nots with Have household spending intentions holding steady. A continued pickup should be driven by underlying macro conditions that otherwise remain positive. Jobs, income, inflation, interest rates, and the housing market should all remain on a track that sustains economic recovery. While job measures appear mixed, most meaningful are jobless claims, which as a leading indicator suggest that the jobs recovery remains on track.

�� Expect the SNAP impact to remain blurred, blunted. Our initial estimate was that the expected $5 billion cut in benefits would reduce the growth pace in the consumables channels by as much as one-half of a percentage point. This impact has so far not been clearly evident in the sales growth

for consumables channels as reported by the government through January. These results for consumables channels have held steady in the aggregate and actually picked up into January, partly as households spent to prepare for bad weather—especially at supermarkets. Retailers such as Walmart and Family Dollar have reported weak results for their latest quarter that may reflect a SNAP impact, but that impact is difficult to separate from competitive and price pressures on growth. Among the factors blurring and blunting the SNAP impact are: (1) actual benefit cuts that are slightly lower than expected; (2) the response in shopping behavior that shifts part of the impact of the cuts to non-food spending; and, (3) enrollment counts that have begun to edge lower. SNAP data just now available for the first months of the cuts (November) show that average monthly benefits fell by about $8 per person and $17 per household, which is a few dollars below expectations and translate into an annualized cut of about $4.5 billion. Meanwhile, ShopperScape® survey results from January tell us that one in every five SNAP recipients say they have not changed their retail spending behavior because of reduced SNAP benefits. And those that have changed behavior employ a variety of shopping and spending tactics to blunt the impact. The leading tactics are: not buying as many non-essential food items (43%); using more coupons (36%); and cutting back on non-food household essentials (33%).

�� Expect a health care reform impact that is varied by segment and modest in the aggregate. The clear impact of health care reform on household discretionary spending will remain difficult for a while to separate from other disruptions affecting households, such as weather effects and SNAP cutbacks. However, the early signs from retail sales results and our ShopperScape® survey are consistent with our initial expectations that the impact will be modest at an aggregate level while varied among specific consumer groups. Have households are more likely to be anticipating spending more on health care and premiums in 2014: 47% vs. 37% of Have-Not shoppers. This may explain why spending intentions slipped as 2014 approached more so for Have than Have-Not households. But not all believe these higher health care costs will cause them to change their spending and shopping behavior. This effectively means that about one-third or fewer of households entered the year expecting to change their spending and shopping behavior in response to health care costs. The wildcard is that nearly one-quarter of households were not sure if they would be spending more on health care. So the impact of health care reform likely will evolve over time—especially after the next signup deadline passes on March 31.

�� Expect price pressures to remain isolated and modest overall—for now. Higher winter heating costs represent the biggest threat to households from rising price pressures, which we expect will expand across more

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categories as the year progresses. At the moment, however, the inflation threat remains isolated and should not create a big drag on spending across all households—not with the key consumer price inflation measures running at a tepid rate between 1.0% and 1.5% through January even with higher heating costs. The inflation threat is focused in the Northeast states and among households that use heating oil, which is where the biggest price spike has been. The uptick in natural gas prices has been less dramatic. In either case, these fuel price pressures have the greatest negative impact on Have-Not households, who primarily hold back on spending in discretionary categories in response. Consumable goods categories should be affected far less significantly.

�� Respond to the range of conditions by state and local market. The early-year macro conditions will either aggravate or be blunted by the varied conditions across states and cities. The prospects look best in states that have previously lagged, but that are recently showing a pickup in jobs growth: Arizona, Arkansas, Delaware, Florida, Hawaii, Indiana, Nevada, North Carolina, South Carolina, Tennessee, and Wisconsin. Be careful in markets that have led the jobs recovery, but that have slowed more recently: Alaska, Iowa, Montana, Nebraska, Virginia, Washington D.C., and West Virginia.

And within states, be aware of the metro markets that are growing faster or slower than the rest of the state. The big markets outpacing their state include San Jose, CA; Indianapolis, IN; Louisville, KY; Charlotte and Raleigh, NC; Columbus, OH; Pittsburgh, PA; Nashville, TN; Seattle, WA. The big markets lagging their states include Riverside and Sacramento, CA; Bergen-Hudson-Passaic, NJ; Westchester, NY; Cincinnati and Cleveland, OH; Nashville, TN; Milwaukee, WI; Richmond and Virginia Beach-Norfolk, VA.

�� Look for next quarters to pick up across channels. Kantar Retail’s channel forecasts by quarter show how the first-quarter weather effects have weighed most on the discretionary goods-focused channels—i.e., apparel and homegoods specialists as well as online retailers. While

they are forecast to bounce back in the following quarters, growth at consumables-focused channels also is expected to step higher as macroeconomic conditions beyond weather improve. This includes drug stores and supermarkets, as well as big and small-box mass retailers.

�� Look for 2014 pickup in consumables categories. Kantar Retail’s category forecasts suggest that a modest in-store pickup in sales growth in 2014 will be led by consumables goods categories. Prescription drugs will see the biggest pickup because of the impact of the Affordable Care Act, but food, health, and beauty care categories also will see improvement from last year’s weak growth pace. Growth will be driven first by unit volume gains and then price gains as the year progresses.

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Using the Concept of “Economic Distress” in February ’14 PlanningEconomic distress—a situation where consumers, firms, or governments have the sense that they lack funds—is a defining theme in European retail analysis in 2014. Kantar Retail looks at three different, yet similar, forms of economic distress:

1. Income Distress. Income distress is the easiest concept to measure and understand. Income distress occurs when there is either no new revenue flowing into accounts or when the amount of income flowing in is growing more slowly than desired/needed.

2. Expense Distress. Expense distress is more complicated because it comes in two forms: acute and chronic. Acute distress is an emergency that requires financial spending, like a car breaking down or damage from a natural disaster. Chronic distress is when expenses rise faster than income over a long period, such as what happens with property bubbles or energy costs.

3. Expectations Distress. Expectations distress is the least tangible concept of the three forms of distress. Expectations distress occurs when there is an expectation that something good will happen but then it does not materialize. Expectations distress can have long-term effects on consumer behavior in that it has the most profound impact on the psychological nature of those affected.

Three European countries are expected dominate the headlines:

�� Switzerland—voters have just rejected “open” movement of people from the EU

�� Bosnia & Herzegovina—youth protests across the country have raised the possibility of a “Balkan Spring”

�� Scotland (UK)—politicians are debating the pros/cons of a “yes vote” for Scottish independence

We can then combine these three with the three countries that previously dominated headlines:

�� Turkey—a political corruption scandal has opened the doors to currency devaluation and the potential for a return to civic protest similar to the summer of 2013

�� Ukraine—a stalemate between the president and reformers has created a political and economic crisis

�� Russia—the Olympics has thrown Russia into the spotlight at a time when the economy is slowing and the ruble is facing external pressure

Using the three concepts of economic distress to help characterize these countries will illus-trate ways you can plan more effectively for retail success in 2014.

By: Ray Gaul, Simon Johnstone

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Mapping Distress in 2014The easiest way to map economic distress is by taking a view of the past and combining it with a view of the future. In this illustration, we will use GDP and look at the last five years combined with expectations for 2014. You can take the same approach with your customers by taking your own “sell in” data by key account (Figure 1).

Using this data, 5-year performance compared to 1-year outlook, we can map the countries (Figure 2). Using this mapping, we end up with four groups of countries (Figure 3).

Figure 2: GDP Forecast vs. 5-Year Performance

Source: Kantar Retail research, analysis

Figure 1: GDP Data

Source: Kantar Retail research, analysis

Real GDP,Euros bn.

GDP Annual Growth %

2008 2013Index

2013:2008 2014EUnited Kingdom € 2,698 € 2,672 99.0 2.4%Russia € 1,958 € 2,065 105.5 2.3%Ukraine € 190 € 178 93.7 1.3%Turkey € 610 € 732 120.0 3.8%Switzerland € 642 € 679 105.8 2.2%Bosnia and Herzegovina € 20 € 20 100.0 2.0%

United Kingdom Russia

Ukraine

Turkey

Switzerland

Bosnia and Herzegovina

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

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90.0 95.0 100.0 105.0 110.0 115.0 120.0 125.0

2014

Rea

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Economic Growth vs. 2008(Real GDP in EUR using Fx as of 31-12-2013)

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Figure 3: Four Groups of Countries


Figure 4: Aldi’s Focus on Expense Distress, New Cross London, UK

Source: Kantar Retail store visit

What becomes interesting is when comparing two countries in the same situation, such as Russia and Switzerland. In the case of Russia, consum-ers are primarily concerned with “expectations distress”—a situation where the future may not deliver adequate results. In the case of Switzer-land, consumers are primarily concerned with “expense distress”—a situation where the cost of living rises faster than desirable (due to open immigration policies and a generous social support system).

Using this analysis helps to explain why Aldi UK has grown 30% in the past 12 months. It focuses on consumers feeling of expense distress in a market where expense distress is the dominant theme (Figure 4).

Group Country

1. Fast Growth Ahead, Rapid Expansion over past 5 years Turkey

2. Fast Growth Ahead, Expanded Gradually over last 5 years Russia, Switzerland

3. Fast growth ahead, mild contraction in past 5 years United Kingdom (Scotland), Bosnia & Herzegovina

4. Weak growth ahead, contraction in past 5 years Ukraine

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Amazon ended 2013 with a strong holiday season—yet one that fell short of growth expec-tations on the international side of the business. For its fourth quarter ended December 31, 2013, revenue grew 20% to USD25.6 billion, as Amazon surpassed over 237 million worldwide active customer accounts. Full-year 2013 net sales increased 22% to USD74.5 billion, compared with USD61.1 billion in 2012. As shoppers become increasingly connected across devices, mobile continues to be a tailwind for the business, remov-ing purchase friction and providing easier access for shoppers that is one-click, or tap, away.

Amazon’s home market results outpaced slower growth in international markets. 2013 internation-al net sales grew merely 14% to USD29.9 billion, while North America sales grew significantly faster at 28% growth to USD44.5 billion. Apart from product sales, strong growth in “other” revenue reinforces Amazon’s business model as more than just a retailer. This revenue, which includes credit cards, third-party sales, Amazon Web Services (AWS), and Amazon Media Group, was a significant contributor to overall growth and now represents 18% of sales (Figure 1).

Sales Highlights by Segment, Fiscal Year 2013North America Sales Highlights North America net sales grew 28% in the 2013 fiscal year to USD44.5 billion. Growth was driven

Q4, FY 2013 Results Amazon Delivers, Yet International Falls Short

by the electronics and general merchandise (EGM) category, which grew 29% to USD29.9 billion. The media category grew 18% to USD10.8 billion. While both categories continue to grow at double-digit rates, EGM continues to outpace and take a larger

part of overall sales with a 67% share of net sales, steady from last year. Media decreased share of net by sales by approximately 200 basis points (bp) from 2012. The “other” category (sales from non-retail activities such as AWS,

Quarter Ending Year Ending12/31/2013 12/31/2012 % change 12/31/2013 12/31/2012 % change

Net Sales (USD millions)North America

Media $3,513 $2,903 21% $10,809 $9,189 18%

Electronics/GM $10,648 $8,503 25% $29,985 $23,273 29%

*Other $1,170 $769 52% $3,723 $2,351 58%

Total Net Sales $15,331 $12,175 26% $44,517 $34,813 28%

International

Media $3,714 $3,611 3% $10,907 $10,753 1%

Electronics/GM $6,478 $5,431 19% $18,817 $15,355 23%

*Other $64 $51 25% $211 $172 23%

Total Net Sales $10,256 $9,093 13% $29,935 $26,280 14%

ConsolidatedMedia $7,227 $6,514 11% $21,716 $19,942 9%

Electronics/GM $17,126 $13,934 23% $48,802 $38,628 26%

*Other $1,234 $820 50% $3,934 $2,523 56%

Total Net Sales $25,587 $21,268 20% $74,452 $61,093 22%

Profitability (USD millions)North America

Segment Operating Income $725 $608 19% $1,886 $1,592 18%

International

Segment Operating Income $151 $70 116% $107 $76 41%

Consolidated

Segment Operating Income $876 $678 29% $1,993 $1,668 19%

Figure 1: Amazon Q4, FY 2013 Segment and Consolidated Performance

*Other includes sales from credit cards, third-party, Amazon Web Services (AWS), and Amazon Media Group. Source: Company reports

By: Anne Zybowski, Nicole Santosuosso

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advertising services, and co-branded credit card agreements) grew 58% to USD3.7 billion. Other revenue represented 8% of total net sales, an increase by approximately 100 bp from 2012.

International Sales HighlightsInternational net sales for the fiscal year 2013 grew 14% to USD29.9 billion, or 19% growth excluding foreign exchange impact. EGM sales were up 23% to USD18.8 billion, while Media grew only 1% to USD10.9 billion; excluding foreign exchange impacts category growth was 27% and 7%, respectively. EGM represents a larger portion of International segment sales as well, increas-ing approximately 500 bp since 2012. The “other” category (sales from non-retail activities such as advertising services, and co-branded credit card agreements) grew 23% to USD211 million and contributed less than 1% share of net sales, about steady from 2012. Sales: Product vs. Services Keep in mind that Amazon is not just a retailer, but also a technology company that provides many other services including AWS and Amazon Media Group. Net service sales grew 45% to USD13.5 billion and increased share of net sales by approx-imately 300 bp from 2012. Product sales grew 18% to USD60.9 billion. Amazon’s marketplace continues to be a key driver of the overall busi-ness in terms of both assortment and profitability, with more than 2 million worldwide active seller accounts that represent 39% of paid units.

Financial Highlights: Profitability, Fiscal Year 2013 Amazon’s overall profitability for 2013 was rela-tively neutral with reported net income of USD274

million, but a significant reversal of its net loss of USD39 million last year (Figure 2). Operating profit has remained flat at 1% of sales margin, or USD745 million. Consolidated segment operating income (CSOI) grew 20% to USD1.99 billion.

�� North America operating income grew 19% year-over-year to USD1.9 billion, a 4.2% margin on segment sales, which is a slight decline from 4.6% in 2012.

�� International operating income grew 41% year-over-year to USD107 million, a 0.4% margin on segment sales, which is relatively flat versus the prior year.

To support topline growth, operating expenses jumped from 23.6% of sales to 26.2% of sales in 2013. Key drivers of these expenses:

�� Fulfillment expenses grew 33.7% as Amazon opened seven net new fulfillment centers, expanding capacity across all markets to support first- and third-party (FBA) volume.

�� Net shipping expenses (shipping revenue less outbound shipping costs) grew 23% to USD3.5 billion, in line with revenue growth and as a percentage of sales remained flat at 4.7% of sales.

�� Technology and content, followed by marketing, were the other two areas where expense growth outstripped sales growth at 44% and 30%, respectively. Technology and content development continue to be a driver of both Amazon’s retail business as well as AWS growth in “other” revenue.

FISCAL YEAR ENDING

(USD millions) 2013% of Total

Sales 2012% of Total

Sales Change change bpsNet Sales 74,452 61,093 22%Cost of sales 54,181 45,971 18%Gross Profit 20,271 27.2% 15,122 24.8% 34% 247

Operating Expenses 19,526 26.2% 14,446 23.6% 35% 258

Fulfillment 8,585 11.5% 6,419 10.5% 34% 102

Technology and Content 6,565 8.8% 4,564 7.5% 44% 135

Marketing 3,133 4.2% 2,408 3.9% 30% 27

General and Administrative 1,129 1.5% 896 1.5% 26% 5

Other Operating Expenses 114 0.2% 159 0.3% (28%) (11)

Operating Profit 745 1.0% 676 1.1% 10% (11)Net Income (loss) 274 0.4% (39) -0.1% (803%) 47

Net Shipping Expenses 3,499 4.7% 2,855 4.7% 23% 3 Shipping revenue 3,137 4.2% 2,279 3.7% 38% 48 Outbound shipping costs 6,636 8.9% 5,134 8.4% 29% 51

Figure 2: Amazon FY 2013 Financial Data as Percentage of Total Sales

Source: Company reports

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Examining the balance sheet, cash and marketable securities grew USD1 billion year-over-year to USD12.45 billion, driven by a stronger increase in cash from operating activities. Inven-tory grew 23% to USD7.41 billion and payable days decreased to 74 from 76 in 2012. Inventory turns were 8.9, down from 9.3 turns in 2012 as Amazon expanded selection, improved in-stock levels, and introduced new product categories.

Looking ForwardAs a nearly USD75 billion retailer, Kantar Retail expects topline growth rates to remain strong, but continue to moderate as Amazon hits scale. We forecast that Amazon will deliver a 16% CAGR over the next five years in North America as sales grow from over USD50 billion in 2014 to over 90 billion by 2018; International’s CAGR is estimated to be 21% over the next five years to reach over USD75 billion by 2018.

For 2014, Amazon predicts between 13% and 24% growth in first quarter sales with relatively flat operating income. 2014 guidance anticipates first quarter CSOI to be between USD150 million and USD550 million, compared with USD441 million in the first quarter of 2013.

2014 initiatives will continue to extend Amazon’s value proposition, while driving conversion into new categories and services.

�� Digital: Digital services continue to be a value-add for Prime members, as new content continues to be added to the U.S. Kindle Owners’ Lending Library and Prime Instant Video service. Internationally, Amazon has just launched Prime Instant Video in the UK and Germany as it continues to leverage the “value-add” enhancements associated with its Prime model.

�� Amazon Fresh: Although still in its infancy, Amazon Fresh has seen positive results in the

LA and San Francisco Bay area. The company is pleased with performance thus far, citing “good adoption” and “good conversion from the Prime trials” and will continue to invest in this service, expanding to additional markets in 2014. Continued emphasis will be placed on fulfillment and same day delivery.

�� Prime: Amazon is considering increasing the cost of Prime by USD20-40 in the United States. The company notes dramatic increase in membership and selection (from 1 million eligible items at launch in 2005 to over 19 million today) combined with increased shipping costs as the cause. Annual membership has remained at USD79 since the program’s launch in 2005, while significantly investing in value-add content services. Specifically asked during the Q&A with investors, Amazon stated that investments in content and Prime Instant Video are not the reason for considering price increases.

Kantar Retail Point of ViewWhile Amazon delivered a solid fourth quarter and fiscal year 2013, the retailer’s growing pains as it has tripled its scale in the past four years—from USD25 billion in 2009 to USD75 billion in 2013—are quite evident in its recent results. To understand the true story requires digging deeper below the head-lines fixated on “irrational share prices” and “slowing growth” to understand the real transitions by segment.

Topline vs. Bottom Line Balancing Act Topline. You’ve heard us say this many times over the past year, so we’ll keep it brief as it bears repeating. As Amazon becomes a major scale player, its growth rates each year will continue to decline—it’s basic math. Its growth rates are just declining from the high 30s down to low 20s and into the high

teens. From a dollars-of-growth-added perspective, Amazon is not slowing at all; in fact, over the next five years Amazon will add approximately USD9 billion in sales per year in the United States alone, making it the #1 growth retailer ahead of Walmart.

International Impact. The biggest pressure on Amazon’s profitability comes from its International division, which is very much in growth mode. Growth in 2013 was a bit disappointing at “only 19%” (excluding foreign exchange (FX) rates), driven by a slowdown in media to 7%, as internationally it is in the early stages of the transition from physical to digital. EGM growth (excluding FX rates) was a respectable 27%, albeit a decline from the 40% growth of prior year.

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Mixed into the international performance are a number of new market entries, which require significant start up investments particularly in DC capacity. India was an entirely new market in 2013, and Amazon expanded its category foot-print in Canada, Italy, and Spain. The combination of infrastructure, capacity, and media investments in these countries is critical to ramping up and scaling the market to drive revenue over time. It is the International division’s profita-bility that has been the biggest drag on the company’s overall profits. Bottom Line. Even back in Amazon’s U.S. home market, tension around profitability continues to mount as it expands into “new categories” such as consumables, which have negative item-level profitability. While Amazon pushes to continue innovating the supply chain to improve overall profitability, there certainly has been increased focus and pressure on suppliers to help drive profitability—from contra-COGS to packaging innovation and SIOC to save touches and cost through the system. This profitability push is being felt beyond Amazon’s direct relationship with suppliers. There has been little publicity around changes to fees for its marketplace sellers that account for 39% of units that Amazon sells.

�� On February 4, merchants that use Amazon’s webstore-only platform saw monthly fees increase from USD39.99 to USD79; some merchants who also use Selling on Amazon and previously didn’t pay monthly fees are now subject to the full monthly charge.

�� For participants in Fulfillment by Amazon (FBA), pick and pack, weight handling, and monthly storage fees all increased effective February 18. In addition, Amazon intends to introduce an apparel fee in May 2014.

Prime Changes Ahead?While overall revenue tripled in the past four years, Amazon has attracted more new customers—and deepened its overall spend with its loyal Prime customers; meanwhile, the annual cost of Prime has remained flat at USD79 per year and eligible products has increased from 1 million in 2005 to over 19

million items today. The “all-you-can-ship” mentality among members has been a strong contributor to Amazon’s overall growth by eliminating purchase barriers as “Prime members are ordering more items across more categories than ever before, on a per customer basis,” but has also impacted its outbound shipping costs significantly. Given this increase in membership and usage, Amazon announced inten-tions to potentially raise the annual fee by USD20-40. This type of change in membership fees would clearly have implications on renewal rates, impacting both the topline and bottom line. Kantar Retail’s recent read on Amazon Prime from the December ShopperScape® survey gives us unique insight into the prevalence of Prime and impact on behavior (Figure 3). �� Penetration: has nearly doubled in three years to 19% of all primary

household shoppers by December 2013. This means that one in five primary household shoppers are members of Prime, with incidence levels at one in four among Gen Y and Gen X shoppers.

�� Likelihood to renew: 61% of members said they were likely to renew with another 30% that were unsure; renewal rates increased significantly among those that engaged in content like Prime Instant video and jumped to 82% among members of three or more years (Costco-like renewal rates).

�� Amazon-1st mentality: 49% of Prime members tended to check Amazon first before shopping anywhere else, with nearly one-third agreeing that they were shopping retail stores less often, and buying a wider assortment of categories and brands on Amazon. Nearly 1 in 10 shoppers had stopped shopping some retail stores, reaffirming loyalty to Amazon.

These topline insights reveal the significant impact that Prime membership has on overall shopping behavior, and reinforces that membership has its benefits for shoppers and Amazon. If or when the price of membership

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2 0 1 4 F I R S T H A L F

Figure 3: Penetration of Amazon Prime Membership among All U.S. Primary Household Shoppers

Source: Kantar Retail ShopperScape®, December 2011-2013

increases, it will clearly have an impact on renewal rates and reset the membership base. The key for Amazon will be finding the right threshold to keep loyal at a lower cost to shipping expenses, while potentially accelerating the loss of unprofitable members.

At Kantar Retail, we will be closely watching the evolution of Prime member-ship rates. What’s interesting is the specific comment Amazon made that the decision to increase Prime membership fees was tied solely to increases

Figure 4: Amazon UK 2014 Prime Promotion

Source: Company website

in shipping volume and costs, not due to significant investments in content for the “value-add” components of Prime. Particularly when Amazon is now finally bringing Instant Video to Europe in the UK and Germany, that coincides with a price increase in both programs. Figure 4 shows the UK promotion that prompts users to “lock in your membership at GBP49” (the current cost of Amazon Prime in the UK) compared to a “regular price” of GBP79; the same dynamic applied in Germany at EUR29 versus EUR49.

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Target’s Data Breach Fallout Undermines Strategy to Broaden Guest BaseBy: Amy Koo, Rachel McGuire

Target’s large payment card and guest database breach dramatically affected the retailer’s fourth quarter comparable store sales (comps), which declined 2.5%, despite what was originally a “strong start to the holiday season,” according to the retailer’s December 18th press release. After learning of the breach, Target leadership immediately pivoted its strategy to manage the fallout by locking down its data infrastructure and working to regain the trust of its guests. While Target was not the only retailer hit by a recent data breach, its incident was the second-largest retailer breach in history, seldom leaving the news for weeks and keeping the issue top of mind for shoppers. Kantar Retail examines the effect of the data breach on guests’ attitudes and behaviors in the weeks following the disclosure, and offers implications for suppliers helping Target navigate the tricky after-effects, as well as retailers looking to their own data management.

Target’s Shopper Penetration Plummets in January, Exacerbating an Existing DeclineThe overall trend in Target’s past four-week shopper penetration has been on a slightly down-ward trajectory for the past several years, but Target’s confirmation in mid-December of a major breach of its guests’ payment information may prove to be a critical moment in exacerbating that decline. In the wake of that news, Target failed to reach a December “bump” in penetra-tion of the same magnitude as it has enjoyed in

recent years, indicating that shoppers pulled away from Target in the vastly important shopping days between the data breach and Christmas. As of mid-February, the Target breach has still not completely fallen out of the news cycle, and Target’s shopper penetration in January 2014 is reflective of the extent to which the issue contin-ues to plague the retailer: 33% of U.S. households reported shopping at Target or SuperTarget during January 2014, the lowest penetration number for Target in the past three years, and a 22% decrease in penetration versus January 2013 (Figure 1). While guests’ reactions to the incident appear to have contributed to January’s sharp decline, the

latest drop fits into a larger pattern of consistent declines over the last couple of years. The shift away from shopping at Target in January varied among key segments of guests (Figure 2). Target saw the biggest year-to-year dips in pene-tration among some of its most core guests— Gen X, who are more likely than any other cohort to shop Target—and its more peripheral guests—lower-income guests, whose penetration at Target declined by a full 30% from January 2013 to January 2014. While these lower-income guests tend to be outside of Target’s traditional core base, the shift away from Target among lower-income

Figure 1: Past Four-Week Shopping Incidence at Target/SuperTarget

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t i n

Pas

t 4 W

eeks

% Change vs. Year Ago Shopped Target/SuperTarget in Past 4 Weeks

Source: Kantar Retail ShopperScape®, January 2011–January 2014

42


shoppers hints that the retailer’s “Pay Less” appeals have not made great strides in engendering a sense of loyalty among these shoppers. On a positive note for Target, Gen Y guests have shown greater willingness to stick with Target during this challenging stretch, indicating a stronger sense of loyalty among the youngest guests.

Best Guests Are Still Carefully Visiting, But Less-Engaged Guests More Likely to Leave TargetNews of the data breach was widely disseminated through both media and Target’s own communica-tion channels, and as of the third week of January 2014, 92% of all shoppers and 97% of Target’s monthly guests were aware of the breach. Although nearly all shoppers were aware of the breach, the behavioral reaction since that time has been somewhat different among the average shopper versus Target’s core monthly guests, and highlights Target’s continued vulnerability among shoppers outside its core shopper base (Figure 3). Across all shoppers who are aware of the data breach, 10% indicated that they would likely shop Target less in the future and 5% stated that they are removing Target from their store consideration set entirely. Discounts were insuffi-cient in luring them back to the store, as only 3% shopped at Target the weekend following news of the breach, even with a hefty 10% discount off their entire purchase (Figure 4). In contrast to all shoppers, monthly guests showed a significantly higher willingness to stick with Target, despite encountering more inconveniences in managing

Figure 2: Percent Shopped Target/SuperTarget During Past Four Weeks, by Key Segment

Read as: the percentage of Gen Y shoppers who shopped at Target/SuperTarget in January 2014 (43%) was 15% less (100-85) than the percentage of Gen Y shoppers who shopped at Target/SuperTarget in January 2013 (51%). Source: Kantar Retail ShopperScape®, January 2013 and January 2014

43%

51% 53%

38%

25% 27%

44%

56% 57%

33%

43%38%

28%

21%19%

35%

44% 46%

All Shoppers Gen Y Gen X Boomers Seniors HH Income<$35k

HH Income$35k-$84.9k

HH Income$85k+

Moms

Jan-13 Jan-14

78 7084767285 807879Index:

Jan'14 vs. Jan'13

Figure 3: How Shoppers Have Been Affected by Target Data Breach (among all shoppers aware of data breach)

Boxes indicate significant difference between all shoppers and monthly Target/SuperTarget shoppers (95% confidence level) Source: Kantar Retail ShopperScape®, January 2014

26%

11%

10%

9%

5%

5%

3%

2%

1%

53%

46%

12%

4%

13%

2%

10%

9%

2%

2%

35%

Have monitored my credit/debitaccount more closely

More likely to pay with cash going forwardforward wherever I shop

Less likely to shop Target going forward

Still shop at Target, but only pay with cash

Have stopped shopping at Target

Had to change my debit card PIN number

Shopped at Target to get the extra discounts offeredin response to the security breach

Had my debit/credit card used fraudulently

Had my debit card spending and cash withdrawallimits lowered by the bank that issued the card(s)

None of these

All Shoppers Monthly Target/SuperTarget Shoppers

43


Figure 4: CEO Gregg Steinhafel Apologizes for the Data Breach, Extends 10% Off In-Store Shopping

Source: ABullseyeView.com

“We’re in this together, and in that spirit, we are extending a 10% discount ... to guests who shop in U.S. stores on Dec. 21 and 22.”


44


their payment card accounts. Only 4% of monthly Target guests said they would visit Target less frequently in the future, and only 2% stated they would stop shopping Target entirely. Furthermore, extra discounts were an effective lever in attracting 9% of these core guests back into the store after the breach occurred, suggest-ing that Target was able to rely on the loyalty of its “best guests” to help weather this storm, suffering only a 2.5% drop in comps, despite a 5.5% fall in transactions for the quarter.

Though core Target guests appear to be largely sticking with the retailer during this tough time (at least for now), the response has not be equal across all cohorts of regular Target guests (Figure 5). Monthly Target guests who fall into the Baby Boomer cohort are more likely to now be paying with cash at Target, suggesting that the retailer may face a tougher road among these guests in the months ahead in coaxing them to adopt, or continue to use, REDcard Rewards credit or debit cards. The youngest Target guests are more likely to indicate that they experienced fraudulent charges as a result of the breach; it does not appear to have affected their attitude toward Target greatly. Finally, although few regular Target guests indicated they had stopped shopping at Target, Target’s Gen X guests were significantly more likely to indicate having done so. This is very much in line with the significant decline in Target’s penetration among Gen X guests in general.

Figure 5: How Target Shoppers Have Been Affected by Target Data Breach, by Demographic Segment (among all shoppers aware of data breach)

Segments in boxes significantly more likely to be affected in named way vs. all monthly Target/SuperTarget shoppers (90% confidence level) Source: Kantar Retail ShopperScape®, January 2014

46%

13%

12%

10%

9%

4%

2%

2%

2%

Have monitored my credit/debit account more closely

Still shop at Target, but only pay with cash

More likely to pay with cash going forward wherever I shop

Had to change my debit card PIN number

Shopped at Target to get the extra discounts offered in response to the security breach

Less likely to shop Target going forward

Had my debit/credit card used fraudulently

Had my debit card spending and cash withdrawal limits lowered by thebank that issued the card(s)

Have stopped shopping at Target

Boomers

Gen Y

Gen X

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2 0 1 4 F I R S T H A L F 2 0 1 4 F I R S T H A L F2 0 1 4 F I R S T H A L F 2 0 1 4 F I R S T H A L F

Target’s recent data breach touched upon a sensitive fault line within American life today, likely ensuring the explosive level of interest in the news. Regardless of the actual problems experienced by shoppers, Target may be receiving an outsized share of rage, as shoppers focus on a target they can finally punish for lapses in data security and privacy. Over the last few years, Americans have suffered myriad indignities of modern life—the targeting of online advertising through Facebook or learning that their mobile call records are being logged by the NSA. No doubt, some of their sublimated frustration came out in the weeks following the breach, resulting in shoppers’ aversion to visiting Target. The retailer is at a critical inflection point, as it strategizes how to win back the confidence of shoppers at large. While the breach caused an immediate blow to sales, and will affect traffic for some time to come, it also exposed the larger longstanding issue of Target’s fragile relationship with its less-engaged guests. While monthly guests demonstrated their commitment to Target since the data breach, the same is not true for the less-engaged. Despite significant efforts in the last year to woo back shoppers who were skeptical of Target’s value proposition, these shoppers remained resistant to the retailer’s courtship. Furthermore, large discounts in December were not sufficient in regaining their patronage or trust in late December—even among lower-income households.

Target and Its Supplier ImplicationsTarget’s leadership has determined that the company’s future success relies on building trust with guests through the full disclosure of the incident. The long-term implications of that choice will depend on the results of the ongoing investigations, and is outside Target’s control.

In the meantime, Target and its suppliers should scrutinize the reasons for guests’ loyalty, or attrition, among the various guest segments. It has never been more important for Target and its suppliers to keep best guests pleased with Target’s assortment and experience—particularly Gen Y, mothers, high- income households—as they navigate the bumpy next few months ahead. At the same time, Target must take a hard look at the current strategies aimed at less-engaged guests—particularly Gen X and lower-income households. The predominantly price-focused “Pay Less” initiatives will need to be transformed into an “Expect More. Pay Less” value proposition that resonates and gener-ates long-term loyalty.

Implications for All RetailersTarget’s data breach should be taken as a firm warning for other retailers to reassess their data security risks. The fallout from this breach has caused widespread financial damage, and ultimately Target will pay the final price in both financial and reputational cost. As shoppers consolidate their retailer set, trust will become an even more critical differentiator as they winnow out retailers that they cannot trust with their money or time. And while the seriousness of the payment card and contact information exposure cannot be underrated, retailers that play in the health care space also are cautioned to assess the security of their systems. It may be costly to reissue credit cards and bank account numbers, but the exposure of personal health care information is irreparable.

Kantar Retail Point of View

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47


First Takes: Safeway and Albertsons MergerBy: John Rand

Once again, Cerberus and its investment partners are dramatically stirring the supermarket indus-try pot, as a definitive agreement was announced to merge Safeway and Albertsons into a single company by the end of the year. There is a long process to go through to complete this deal and an even longer one afterward before we will be able to tell with certainty what the real impact of this merger will really be.

As analysts, we can thank Cerberus and Albert-sons for regularly creating massive amounts of uncertainty for us to sift through and try to under-stand. We appreciate the work, but in all fairness, I have my reservations about this one, as I did when the first link of this chain of events was forged years ago with the combination of Supervalu and Albertsons.

The Official Announcement in BriefThe headline from Cerberus is that Safeway shareholders get USD40 per share. Of course, USD7.60 of that is from selling pieces of Safeway itself, essentially monetizing some of the non-core assets. These include liquidating Safeway’s investments in the Blackhawk gift card business, selling its minority interest in Casa Ley in Mexi-co, and selling its Property Development Centers (although it wouldn’t surprise me if this last unit was bought by a Cerberus partner with expertise in real estate).

That will leave approximately 2,400 stores in 34 states, 27 distribution centers, and 20 manufac-turing plants that will form the core of the new company. The combined volumes of these two groups of stores last year totaled approximately USD56 billion.

Robert Edwards, current President and CEO of Safeway, will hold these same titles in the new entity. Current Albertsons CEO Bob Miller has been named the Executive Chairman. Edwards had been primarily a financial officer for most of his career before succeeding Steve Burd at Safeway’s top job. On the other hand, Miller’s background is much more operational and merchant focused, having been a long time leader and self-described “grocery man” at the original Albertsons before it was scattered and then glued back together after the Supervalu episode.

What We Expect NextThe deal is not expected to close before Q4 2014, which is not too much time for the work that clearly will have to be done. The most immediate question, of course, is what locations will have to be divested for this merger to be approved. Over-laps abound, as can be seen in the accompanying map of locations by state (Figure 1).

It seems inevitable that the FTC will have concerns about concentrations in California, in the Pacific

Northwest, and possibly in Arizona, although it will certainly be argued that there are plenty of competitors in the markets. Texas may be a discussion area as well. Although the combination will not create anything approaching dominant share overall, specific towns and market areas will be scrutinized, and if necessary, decisions about which stores to keep and which to divest will be made on a case-by-case basis.

It also seems likely that further divestitures will follow the closing of the deal, as Cerberus is unlikely to wait long before reducing its cash investment and selling off assets, as Safeway was already doing on its own. So we expect to feel the reverberations of this deal well into 2015, before a more stable picture of it emerges.

How Well Will It Work?One has to wonder how the very different cultures of these two companies will merge and function. The two leaders exemplify their respective organi-zations: Edwards, the financial man who, like Burd before him and like much of the board at Safeway, is primarily stockholder oriented and financial-ly driven. Safeway has always put profits before growth, margins before traffic, central control before local decisions, and stockholders before shoppers. Miller, on the other hand, is a more traditional retailer, with an orientation to stores and execution, a preference to simplify at store

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NH (28)VT (19)MA (78)

RI (8)CT

NJ (48)DE (4) (12)MD (65) (5)

D.C. (13)

Figure 1: Overlap of Operations

Note: Safeway supermarket store count noted in red, ABS & NAI supermarket store count in black Source: Kantar Retail analysis, Safeway Merger Agreement Conference Call

ABS & NAI Supermarkets: 2410 Safeway: 135 Supermarkets

49


level but not necessarily unify at headquarters, and a focus on shoppers and store traffic that Safeway has simply lacked.

Safeway and Albertsons, in their original forms, competed for many years. There will certainly be deep differences of outlook, internal metrics will need to be revised and aligned, and the total will be two very different retail brands that will co-exist uneasily across banners and markets for a long time to come.

What to Watch ForPerhaps the best advice, as trite as it may be, is to watch the money. The Supervalu deal failed, ultimately, because Supervalu was saddled with too much debt and was unable to invest or operate effectively with the cash flow left after debt service.

How much money will Cerberus pull out of this combination, and how it structures the costs of

acquisition, will be the first key to the outcome. Will it be treated as a long-term investment, or will Cerberus want to cash out as much and as soon as possible? If cash and cost reduction dominate the thinking, we will see reduced staff at many levels, consolidation of divisions, and possibly a long period of additional divestment and restructuring. Certainly some streamlining will take place, and may even be positive. But when Albertsons was re-established last year, important elements such as its loyalty card system were discarded, and decisions remain somewhat confusingly dispersed and promised investments in price at the shelf never became compelling enough to drive signifi-cant share growth.

Although the merger will create a very large customer, with store counts that approach those of Kroger (not counting any eventual divestments) many challenges will remain. At a rough level,

Kroger stores’ average per store volume is nearly USD34 million per year, based on last year’s performance, while the combined Safeway/Albertsons entity would average just under USD23 million. This substantial level of difference in effectiveness will be reflected throughout the enterprise in a lack of comparative efficiency and profitability. Kroger’s position as the number one supermarket company is not in any immediate danger.

It will be some time before we can say with certainty that this new combination is a key element of channel growth or merely a transitory phase for a number of proud banners that have been through supremely difficult times.

We will all be watching closely—including many competing grocers, who will probably be keenly interested in which stores will become available as the new Safeway/Albertsons entity emerges.

50


50

51


Despite the challenges of selling through clubs, success there comes with high volume rewards and access to one of the most affluent, well- educated, and loyal shopper bases in retail. But once members are signed, what drives their trips and purchases? Trip and purchase drivers for each club are varied and there remain strong opportunities for conversion.

Note: The shopper data in this article are from Kantar Retail’s August 2013 ShopperScape® survey of 929 Sam’s Club shoppers, 780 Costco shoppers, and 256 BJ’s shoppers.

Unique Products, Routine Behaviors, and Food Largely Drive TripsItems and pack sizes unique to club are the primary drivers of club trips (Figure 1). This is followed by the integration of a club into over-all shopping routine, supported no doubt by the sunk cost of membership that bolsters loyalty and incentivizes return trips. Each club has unique trip drivers as well.

�� Sam’s Club shoppers are more notably driven to the retailer for club pack purchases.

�� Sale or coupon items are more significant drivers for Costco and BJ’s shoppers.

Assessing the Club Trip: What Drives Member Purchasing?By: Sara Al-Tukhaim, Timothy Campbell

�� Special occasions or events are more likely to spur Sam’s Club and BJ’s shopping trips.

�� Services play a stronger role in driving trips for Costco, followed by Sam’s Club, shoppers.

Once in the box, the vast majority of club shop-ping is driven by edible grocery, as is most of members’ actual club purchasing (Figure 2). BJ’s shoppers skew slightly higher toward shopping

and purchasing non-edible grocery, potentially due to its expanded assortment and variety, as well the more regular “supermarket-like” trips the retailer captures. For similar reasons, although shoppers are more likely to shop for HBC products on trips to Costco than they are on trips to BJ’s (no doubt a function of Costco’s treasure hunt), shoppers are more likely to purchase HBC products at BJ’s.

29%

21%

13%

8%

7%

6%

4%

3%

2%

1%

0%

0%

34%

24%

3%

9%

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To buy particular types of products or pack sizes I canonly get at the club

No specific reason, this was my regular, routine trip tothe club

To buy specific items advertised on sale/featured incoupon book

To browse the club to see what's new

To buy gas, did not go into the club

To buy gas and then I ended up shopping

To buy supplies for a special occasion or event

To use an in-club service such as the pharmacy, opticalcenter, or auto center

To sample items in the club

To make purchases for a business or organization

To participate in a health screening

To participate in a club event (e.g., open house, booksigning, etc.)

Costco

Sam's Club

BJ's Wholesale Club

Figure 1: Primary Reason for Last Trip to Club Retailer

Source: Kantar Retail ShopperScape®, August 2013

52


Across the board, there remain strong opportu-nities to drive shopping and purchasing across the box while also improving overall conversion, particularly by building on the edible grocery trip to improve penetration in HBC and non-edible grocery.

Categories Play Different Roles in Driving Trips to Each Club While edible grocery tops the list of broad depart-ments shopped at all three club retailers, the specific departments shopped varies somewhat across BJ’s, Costco, and Sam’s Club (Figure 3). �� The top department shopped at each club

falls under the heading of perishable grocery: meat/seafood at Costco, fresh produce at Sam’s Club, and frozen foods at BJ’s. The percent of trips to BJ’s that pass through frozen foods is notably higher versus Costco and Sam’s Club, aligning with the retailer’s more “supermarket-like” value proposition.

�� Overall, BJ’s shoppers tend to shop across the box more than their Costco and Sam’s Club counterparts, in line with its more “supermarket-like” approach to the club model as well as a potential influx of new members given its aggressive efforts to drive trials and support growth.

�� On the other hand, during trips to Sam’s Club, shoppers tend to shop less of the box, pointing to opportunities to improve cross-box shopping by aligning less frequented categories with those that are more popular and vice versa.

�� Meanwhile, Costco shoppers stand out by shopping the meat, seafood, fresh produce, OTC, and alcohol categories notably more than Sam’s Club and BJ’s shoppers.

Even more telling, the following conversion rates reveal which club categories are most effectively compelling shoppers to purchase (Figure 4). Among the standouts:

�� Meat/Seafood: BJ’s exhibits the strongest conversion of meat/seafood, even though more Costco shoppers actually shop this category—this is in line with BJ’s efforts to drive awareness of its meat/seafood mix as well as better engage members with its butchers.

�� Fresh: Costco enjoys the highest conversion rate in fresh, suggesting its offer (with its growing emphasis on organic and natural) is more appealing than that of its club counterparts.

�� Frozen: While BJ’s may have the highest penetration for frozen foods, Sam’s Club’s conversion is much higher—the retailer has had its eye on the frozen category for some time now as a growing trip and membership driver.

�� Personal Care and Baby: BJ’s is exhibiting a particularly higher conversion rate in personal care and baby products than Costco or Sam’s Club. This aligns with its overall expansion of SKUs, ongoing focus on moms, and attention to these categories in particular, including the rollout of Generation Earth, one of BJ’s newer private labels.

Figure 2: Departments Shopped and Purchased on Most Recent Club Trip


83%

42% 39%

82%

42%35%

83%

46%37%

Edible grocery Non-edible grocery HBC products

Which departments did you shop onyour most recent trip to retailer?

CostcoSam's ClubBJ's Wholesale Club

78%

34% 27%

76%

34%24%

77%

38% 30%

Edible grocery Non-ediblegrocery

HBC products

From which departments did youactually make a purchase?

Costco

Sam's Club

BJ's Wholesale Club

53


Figure 3: Products Shopped on Most Recent Trip to Club Retailer

Note: Retailer logos indicate product more likely to be shopped at that club retailer than either of the other two club retailers; not a test of statistical significance Source: Kantar Retail ShopperScape®, August 2013

0%10%20%30%40%50%60%70%80%90%

Costco Sam's Club BJ's Wholesale Club

Figure 4: Conversion Rate* for Consumables on Last Trip to Club Retailer

*Conversion rate=% purchased ÷ % shopped Source: Kantar Retail ShopperScape®, August 2013

0%

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Costco Sam's Club BJ's Wholesale Club

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BJ’s captures more trips more often due to the “supermarket-like” nature of its assortment and message and this is clearly reflected in its shop-pers’ higher rates of cross-category purchasing. Meanwhile, Costco and Sam’s Club purchases may reflect more of their larger family and business member purchasing in key departments such as fresh and frozen. Overall, both of these retailers possess clear opportunities to better drive basket across the box.

and furniture are among those departments with the most notable conversion gaps. Sam’s Club also suffers from similar conversion gaps as Costco, though they are wider or narrower depending on category (Figure 6). Books/DVDs/video games, meat/seafood, fresh produce, appar-el, bread/bakery, personal care products, and electronics are among those departments with the most notable conversion gaps.

Figure 5: Products Shopped and Purchased on Last Trip to Costco

35%

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Meat/seafood

Fresh produce

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Bread/bakery

Boxed or canned food items

Snack foods/candy/gum

HH cleaning/paper products

OTC/vitamins/supplements

Non-alcoholic beverages

Milk

Personal care products

Deli items

Beer, wine, and/or liquor

Apparel

Pet food and supplies

Books/DVDs/video games

Electronics

Office supplies

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Auto center

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Purchased product Shopped but did not purchase


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Fresh produce

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Milk



Deli items



Apparel



Office supplies

Electronics

Baby supplies

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Jewelry

Auto center

Mobile services


Figure 6: Products Shopped and Purchased on Last Trip to Sam’s Club


Club Trips Are Ripe with Opportunities to Better ConvertIn comparing Costco’s departments shopped versus those actually purchased from, the retail-er’s treasure hunt is clearly at play (Figure 5). As with Sam’s Club and BJ’s, Costco shoppers are shopping and browsing departments across the box but only “biting” certain categories along their race track. Apparel, books/DVDs/video games, bread/bakery, meat/seafood, frozen, fresh produce, personal care products, deli, electronics,

55


Similarly, conversion gaps in BJ’s shopping versus purchasing are most apparent in bread/bakery, frozen foods, fresh produce, books/DVDs/video games, non-alcoholic beverages, and electronics (Figure 7). While there are similarities and differences in club conversion rates, the challenge for all three retail-ers and their suppliers is how to narrow these gaps knowing that shoppers are shopping many departments, but clubs are only closing the sale

in significantly fewer departments. One way to help address this is to better understand the influence of various club promotions on purchase.

The Influence of Club Promotions on Purchase Varies by Retailer The clubs offer a portfolio of promotional platforms for vendors looking to influence awareness and drive purchasing in their categories. However, the effectiveness of these efforts varies widely by retailer (Figure 8).

Figure 8: Club Purchase Drivers (% of members who say factor “frequently/occasionally” prompts them to purchase item at club)


72%

61%

48%

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Saw item in club coupon book

Sampled item at the club

Item part of instant savings promotion at club

Item featured in front aisle when first walk in the club

Friend/family member recommended item

Had never seen item anywhere else before

Item was promoted in club email newsletter

Read about item in club magazine

Item was featured on club Web site

Saw item in a roadshow

Received text offer/alert from club about item

Item was featured in club member's blog

Heard about item on club's Facebook page/Twitter feed

Costco

Sam's Club

BJ's Wholesale Club

�� Costco and BJ’s purchases are most influenced by their coupon books.

�� Half of BJ’s shoppers frequently or occasionally purchase items they read about in the retailer’s Member Journal, compared to far fewer Sam’s Club and Costco shoppers who are influenced by those retailers’ magazines.

37%

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Milk


Deli items




Apparel

Office supplies

Electronics


Baby supplies

Jewelry

Furniture

Mobile services

Auto center



Figure 7: Products Shopped and Purchased on Last Trip to BJ’s Wholesale Club


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�� BJ’s shoppers also are more likely to point to various promotional efforts as having an influence on their purchase, reflective of the retailer’s more “try anything and everything” outreach. While this may be having an impact, the question remains as to whether it is sustainable.

�� Samples are the strongest drivers of purchase at Sam’s Club, with more than half (53%) of its shoppers indicating they frequently or occasionally purchase items they sampled in the club.

�� Costco shoppers’ purchases are notably more influenced than either BJ’s and Sam’s Club shoppers by fence or cart rail placement, samples, unique SKUs, and road shows.

To a lesser but nevertheless significant extent, the clubs’ digital efforts including Facebook, text alerts, and blogs also are positively driving club purchases.

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2 0 1 4 F I R S T H A L F 2 0 1 4 F I R S T H A L F2 0 1 4 F I R S T H A L F 2 0 1 4 F I R S T H A L F


Costco, Sam’s Club, and BJ’s shoppers’ shared and unique trip and purchase drivers point to three core opportunities for the clubs and their suppliers to better maximize basket across the box.

1. Understand where you fit in each club’s trip. While there are several shared trip-driving categories across the channel, there are also notable variations for each club. Improve success by better aligning with each club’s top drivers through more integrated, solution-based offers.

�- Better align club offers to shoppers’ core trip routines. Direct efforts toward supporting club shoppers’ desires for unique club products/packs and better integration into their food-driven shopping routines.

�- Focus on those drivers that are unique to each club. Realize club packs matter more to Sam’s Club shoppers, sale items drive more Costco and BJ’s trips, and special occasions spur more Sam’s Club and BJ’s trips.

�- Give members more reasons to return. Identify promotional opportunities to better integrate and maximize the role of services and events in driving club shopping trips and overall membership value.

2. Focus on narrowing conversion gaps. While club shoppers are shopping across much of the box, that shopping activity is not uniformly converting to purchases. The impetus is on suppliers to make their products’ (and ultimately the club’s) value propositions stickier. Generate awareness, appeal, and retention through customized, exciting, and too-good-to resist offers.

�- Support Costco’s need to better convert in core categories. Apparel, books/DVDs/video games, bread/bakery, meat/seafood, frozen, fresh produce, personal care products, deli, electronics, and furniture departments stand out with particularly wide conversion gaps.

�- Support Sam’s Club’s need to better convert in core categories. With some similarities to Costco, books/DVDs/video games, meat/seafood, fresh produce, apparel, bread/bakery, personal care products, and electronics are among those departments with notable conversion gaps.

�- Support BJ’s need to better convert in core categories. Conversion gaps at BJ’s are most apparent in departments like bread/bakery, frozen foods, fresh produce, books/DVDs/video games, non-alcoholic beverages, and electronics.

3. Weigh the ROI of different promotional vehicles. The effectiveness of promotional efforts varies widely by club. While it is important to consider each platform in the context of the club story you are trying to build (e.g., awareness, education, savings), not all promotional vehicles are equal in their impact on purchasing.

�- Influence purchasing through coupons. While participating in coupons and instant savings are an investment, they do have a strong impact on purchase. Costco and BJ’s purchases are most influenced by their Multi-Vendor and Big Brand Mailers, respectively; as Sam’s Club’s Instant Savings Book gains awareness, it will likely have a similar impact.

�- Drive purchase at BJ’s through its Member Journal. Disproportionally higher than their Costco and Sam’s Club counterparts, half of BJ’s shoppers purchase items they read about in the retailer’s Member Journal.

�- Focus on samples at Sam’s Club. Samples are Sam’s Club’s strongest drivers of purchase, influencing purchases for more than half (53%) of its shoppers.

�- Stand out at Costco through its fence. Costco shoppers’ purchases are notably more influenced than both BJ’s and Sam’s Club shoppers by the retailer’s fence or cart rail, samples, unique SKUs, and road shows.

�- Consider the growing influence of digital. To a lesser but nevertheless significant extent, club digital efforts leveraging Facebook, text alerts, and blogs also are positively driving club purchases.

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Over the past year, all three major drug retailers have begun to focus more on digital and multi-channel strategies than ever before. CVS, Walgreens, and Rite Aid have all increased their investment in this space, improving their offer and hiring for groups that aim to create a seamless brand experience between the physi-cal store and digital properties. However, though online sales are growing for these retailers, they still represent less than 1% of total retail sales. This is due to the fact that drug retailers are not

Figure 1: % of Shoppers Who Shop Retailer’s Website (among past 4-week shoppers of retailers)

Source: Kantar Retail ShopperScape®, January 2009–February 2014

Figure 2: % of Retailer’s Shoppers Who Have Retailer App (among shoppers who have shopped retailer in the past 6 months)


Drug Shoppers’ Digital Behavior Varies By Retailer, CohortBy: Jessica Campbell

using their mobile and online presence solely to sell products; they’re using it to connect with shoppers and drive engagement.

Website & Mobile App PenetrationKantar Retail’s ShopperScape® data shows that, at the total shopper level, online shopping inci-dence at the big three drug retailers is rather low. However, when looking at this data in terms of an online shopping ratio (the percentage of drug retailers’ past four-week shoppers who shopped

those retailers online), penetration is a bit higher (Figure 1). Since 2009, Walgreens has typically had the highest percentage of its own shoppers using the website, with CVS typically a close second—though in February 2014 Rite Aid edged out CVS by less than 1 ppt. There also is a seasonal impact on website shopping, with peaks around the holidays, and dips during the warmer months.

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CVS.com Walgreens.com Rite Aid.com

12%

All shoppers of retailer

24%26%

17%

27%

21%

15%14%

11%9%

12%10%

8%

0%

5%

10%

15%

20%

25%

30%

Walgreens CVS/pharmacy Rite Aid

Gen Y Gen X Boomers Seniors

19%16%

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Mobile apps have proven to be the more successful platform in attracting shoppers than drug retailers’ websites. In terms of mobile, Walgreens has the highest overall capture rate (i.e., the percentage of Walgreens shoppers who have the Walgreens app), with slightly less than 2 in 10 shoppers having downloaded the app (Figure 2). The capture rate by cohort differentiates Walgreens from CVS. Not too surprisingly, the percentage of shoppers who have a retailer’s app is higher among Gen X and Gen Y shoppers for all retailers. However, CVS actually captures a higher percentage of its own Gen Y shoppers (26%) than Walgreens—which captures more of its Gen X shoppers than CVS (27% and 21%, respectively)—despite the fact that both retailers have very similar shopper demographics.

CVS Shopper Digital Behavior: Deal SeekingWith so little sales being generated online, the natural question is “what are shoppers doing on the CVS website and mobile app?” The top activ-ities are tied to deal-seeking behavior (Figure 3). Viewing the circular, checking ExtraCare rewards, and searching for coupons are among the top five activities for both web and app usage. Most CVS shoppers report using the website to browse the weekly ad (22%), while the most-used feature on the mobile app is searching for coupons (17%). When it comes to actual shopping, CVS shoppers are more likely to use the website versus the mobile app (15% and 10%, respectively). The rate of shoppers checking ExtraCare rewards is almost the same across online and mobile, displaying the broad adoption of the retailer’s loyalty program. Overall, this digital behavior is representative of the traditional drug shopper that is highly deal seeking, plans trips, and shops on circular.

Figure 4: Use of CVS Website During the Past Six Months (among shoppers who have shopped CVS in the past 6 months)


Shopped CVS in the Past 6 MonthsAll CVS

Shoppers Gen Y Gen X Boomers SeniorsSample size 1381 214 456 520 192

Browsed the weekly ad 22% 15% 20% 25% 24%Checked my ExtraCare rewards 17% 19% 14% 19% 13%Shopped for products 15% 15% 12% 17% 16%Searched for coupons 14% 11% 14% 16% 11%Ordered a prescription refill 12% 17% 12% 11% 9%Made a shopping list 6% 10% 5% 7% 2%Ordered photo prints to pick up in a store 5% 10% 5% 4% 2%Searched for a store location 5% 9% 5% 4% 1%Checked for drug interactions 3% 6% 4% 2% 3%Searched for a MinuteClinic location 3% 4% 3% 1% 1%Used pill identifier 2% 4% 4% 0% 0%Ordered photo prints to be shipped to my home 2% 4% 3% 1% 1%None of these 55% 49% 56% 55% 57%

Figure 3: Use of CVS Website, Mobile App During the Past Six Months

(among shoppers who shopped CVS in the past 6 months)


There are some key differences among generational cohorts when it comes to use of CVS.com (Figure 4):

�� Gen Y shoppers are significantly more likely than the average CVS shopper to use the website for transactional things such as ordering a prescription refill or making a

shopping list. They’re also significantly less likely to look at the circular online.

�� Boomers, on the other hand, are more concerned with managing their trip to the physical store and continuing the channel tradition of deal seeking. One-quarter of Boomer CVS shoppers report using the

Rank CVS.com CVS Mobile App1 Browsed the weekly ad

(22%)Searched for coupons

(17%)2 Checked my ExtraCare rewards

(17%)Checked my ExtraCare rewards

(16%)3 Shopped for products

(15%)Browsed the weekly ad

(15%)4 Searched for coupons

(14%)Shopped for products

(10%)5 Ordered a prescription refill

(12%)Made a shopping list

(9%)

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Figure 5: Use of Walgreens Website, Mobile App During the Past Six Months

(among shoppers who shopped Walgreens in the past 6 months)

website to browse the circular, and slightly fewer than 2 in 10 use the site to check ExtraCare rewards.

�� Both Boomers and Seniors are less likely than all CVS shoppers to use the more health-oriented features like refill prescriptions, or the pill identifier.

Walgreens Shopper Digital Behavior: Rx Refill Drives App UsageThe top three behaviors of Walgreens shoppers are similar to those of CVS shoppers, but beyond that there are some differences (Figure 5). Walgreens shoppers are also most likely to browse the ad and shop for products online, but they are much less likely to use the site to manage their Balance

Rank Walgreens.com Walgreens Mobile App1 Browsed the weekly ad

(21%)Ordered a prescription

refill(18%)

2 Shopped for products(14%)

Checked BalanceRewards points

(18%)3 Checked Balance

Rewards points(12%)

Browsed the weekly ad(15%)

4 Ordered a prescription refill(11%)

Search for coupons(11%)

5 Searched for coupons(10%)

Searched for a store location

(8%)

Rewards points. In fact, the top two actions taken on the mobile app are refilling prescriptions and managing the loyalty program. Walgreens’ scan to refill feature is utilized much more than on the CVS app, which has a similar feature. The fact that Walgreens shoppers are more likely to manage their Balance Rewards account on the app versus the website, and also are more likely to use the app for this purpose than CVS shoppers, is reflective of the fact that Walgreens increasingly approaches its digital initiatives with a “mobile first” mentality.

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As with CVS, there are differences in web usage among generations of Walgreens shoppers (Figure 6):

�� Unlike CVS shoppers, Boomers are less engaged with the Walgreens website. They’re significantly less likely to do things such as refill a prescription, search for stores, order photo prints, or set pill reminders.

�� Boomers are significantly more likely to browse the weekly ad than all shoppers, which, like CVS shoppers, is indicative of traditional drug channel deal seeking. These shoppers were conditioned to shop on the circular and are now shifting this behavior online.

�� Gen X Walgreens shoppers display higher incidence of leveraging website features than do Gen X CVS shoppers. This cohort is significantly more likely than the average Walgreens shopper to manage their Balance Rewards accounts online. Gen Y shoppers, on the other hand, are the most likely of all cohorts to search for coupons online and search for clinic locations.

Figure 6: Use of Walgreens Website During the Past Six Months (among shoppers who have shopped Walgreens in the past 6 months)


Shopped WAG in the Past 6 MonthsAll WAG

Shoppers Gen Y Gen X Boomers SeniorsSample size 1355 196 413 517 229

Browsed the weekly ad 21% 18% 20% 24% 19%Shopped for products 14% 18% 16% 13% 13%Checked my Balance Rewards points 12% 12% 14% 12% 7%Ordered a prescription refill 11% 13% 13% 9% 10%Searched for coupons 10% 14% 10% 10% 6%Ordered photo prints to pick up in a store 9% 13% 12% 8% 4%Searched for a store location 6% 8% 8% 4% 2%Ordered photo prints to be shipped to my home 5% 8% 8% 2% 1%Made a shopping list 4% 7% 5% 2% 2%Managed Steps with Walgreens account 3% 5% 2% 1% 1%Searched for a Healthcare Clinic (Take Care Clinic) location 3% 6% 4% 2% 0%Transferred prescription to Walgreens from another retailer 3% 6% 4% 1% 2%Set a pill reminder 2% 4% 4% 1% 0%Arranged to get prints from Instagram 2% 3% 4% 1% 1%None of these 54% 52% 55% 67% 67%

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Kantar Retail Point of ViewDespite having low eCommerce sales, all three big drug retailers are investing in online and mobile to reach shoppers across mediums. In fact, Walgreens has even stated publicly that it doesn’t see “omnichannel” as a way to sell product; the retailer sees it as a way to build relationships with and be avail-able for shoppers whenever and however they need. In the drug channel specifically, digital offers a way for shoppers to manage their health, get expert advice, and learn about conditions or treatments. It also speaks to the promo-tional nature of the channel, with many of the actions taken by shoppers being deal seeking. For suppliers, takeaways include:

�� Remember that online doesn’t just mean eCommerce. Drug retailers are trying to engage their shoppers online, so partner with them to offer tips, education, or expertise around your products. Also try to work with complimentary brands to offer total solutions to fulfill a specific need, and tie into health & wellness strategies wherever possible. With Walgreens, take a stance on whether your product belongs on the “happy” or “healthy” side of its positioning.

�� Promotions and loyalty are still priorities. Old habits die hard, and shoppers are conditioned to seek out deals from drug retailers. Take advantage of digital offers like Walgreens’ mobile and online coupons or CVS’s personalized circular, MyWeekly Ad. Create value for the shopper, whether that’s with dollar savings or value-adds that go beyond just price.

�� Cohorts are leveraging online and mobile differently. How you engage shoppers will not only differ from retailer to retailer, but from shopper to shopper. Get more granular with your planning and have strategies to connect with Gen Y, Gen X, Boomers, and even Seniors. How can you engage older shoppers and encourage them to leverage digital?

�� Bring innovative ideas to retailers. Walgreens, CVS, and Rite Aid are looking to improve their digital strategies and are open to trying new ideas. Leverage expertise you have in this area to help them elevate their offer and partner with them to connect with shoppers. Position yourself as a trusted advisor, both in the digital space for retailers and in your category for shoppers.

As eCommerce sales grow, CVS, Walgreens, and Rite Aid will expect suppliers to offer any in-store product online. However, the real goal is to aid the shop-per, build that relationship, and have that added value drive in store sales. Online sales may not be going anywhere, but instead of distinguishing between selling product online versus in-store, retailers are positioning themselves to capture shoppers versus other retailers; wherever that sale happens.

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Supeco’s growth has taken many by surprise, including its parent company, Carrefour. Although there is no official long-term expansion plan for the format, Carrefour is expected to reward this success by opening additional stores in Europe. For suppliers working with Carrefour, this means that you not only need to understand how to merchandise this new format, but it also means you need to be ready to discuss your strategies in your next top-to-top with the retailer. Kantar Retail takes you through the Supeco story in order to prepare you for this upcoming discussion.

A Little Bit of History. Repeated.Supeco is Carrefour’s Spanish “hypercash” format. It belongs to a generation of hybrid store formats that have been intensively developed over the past 10 years. The hypercash model has a strong presence in Latin America with Atac-adao (Carrefour), Todo Dia (Walmart), MaxxiAt-acadao (Walmart), Changomas (Walmart), and Assai (Casino). Walmart also runs this format in Africa (Cambridge Foods) and in India (Best Price Cash & Carry). This format will grow in emerg-ing markets and will continue to expand in retail neighborhoods where there is little or no modern trade. Hypercash’s discount price model is a logical next step from traditional trade outlets, particularly so for lower-income markets.

Supeco: Carrefour’s Newest Price Contender in EuropeBy: Tudor Popa

Supeco is based on the Atacadao “discount-hyper-market” network that emerged in Brazil during the 1980s. Carrefour acquired the Atacadao network in 2007, following two decades in which the network grew to 34 units and 21,400 square meters of sell-ing area (6,700 square meters average). Carrefour then converted part of its old Brazil hypermarket set to the format, which reached 90 units by 2012. In the meantime, the retailer exported the format to Colombia (renamed Carrefour Maxi in 2011), Argentina, Morocco, and Italy (named Gross Iper).

What Is Supeco and Why Is it Here? In Europe, and especially Western Europe, where the hypermarket format has witnessed tough times over the last five years, Supeco’s hybrid model enters as a tested, viable alternative to revive underperforming hypermarkets (The Ata-cadao model was used in Brazil by Carrefour to reenergize some of its underperforming and/or smaller hypermarkets that were converted to the hypercash model). At the same time, it provides a low-cost market-entry model to tackle discount-ers and small cash and carry operators. Along with Carrefour taking the opportunity to establish a stronger base and generate profitable growth, the move also constitutes a counterattack to the planned entry of Costco in Spain.

Supeco has arrived in Europe after a period where the retail landscape and shopper attitudes have altered significantly, where middle and low incomes are converging, and where catering to the real needs of shoppers is make-or-break for a retailer. In this tough economic Europe—an land-scape with cash strapped shoppers and small businesses, the format is standing up to the opportunity (Figure 1).

And Supeco is not the only one who sees pros-pects; U.S.-based Costco has announced its plans to enter the market in 2014 as it “sees hope” in Spain (Figures 2,3). Costco’s Spain entry is a second step in Europe, after a firm first step was set in the UK where it already operates around 25 stores. Supeco’s current Spanish presence comprises four loca-tions: Chiclana (1,600 square meters), Los Palacios (2,000 square meters), San José de la Rinconada (1,500 square meters) and Madrid Parla (2,700 square meters). Costco is currently setting the founding stone of their 13,000-square-meter store in Sevilia, and the retailer is also planning a 2014-2015 opening in Madrid.

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Figure 2: Consumer Confidence and Retail Sales Are Recovering

Source: Instituto de Crèdito Oficial, Eurostat

Figure 3: Supeco, Costco See Opportunity in Spain and Beyond

Source: Kantar Retail research

Figure 1: Supeco.es Homepage Features the Format’s Bold Message: “If you think you are buying cheaper you don’t know us, we break prices.”

Source: supeco.es

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Figure 4: Supeco’s Low Cost Philosophy

Advertised In-Store

Source: www.fanahorro.com, www.desdemiatalaya.com

Figure 5: Checkout Dividers Featuring the Message: “If you thought you bought cheap that’s because

you never met us.”


Supeco’s Key TraitsBrandSupeco brings a focused, simple price message: “the more you shop, the cheaper.” It employs an aggressive price proposition strategy supported throughout the store by messages like, “We can offer you low prices because we save on: power, marketing, stor-age space, transport and loyalty programmes” (Figures 4, 5). During the recent Spanish openings, the retailer boldly displayed similar shopping trolleys from competitors Dia and Mercadona highlighting an overall savings of 10% to its advantage. The in-store shopping experience is not a key focus area for Supeco, similar to its advertising and marketing. The format relies on the attractiveness of its offer to bring shoppers back, and this message is consistent both inside and outside the store.

Operations Supeco exploits simplicity to the max; its design is simple both inside and out. With limited staff, wide aisles, extended open-ing hours, and minimum merchandising, it emphasises efficiency (Figures 6, 7). For suppliers, the format’s merchandising provides multiple packaging options for the same product and lower distribution costs helped by pallet merchandising, which also eases any disruption to the browsing shopper.

Figure 6: Supeco’s Simple Store Design


Figure 7: Wide Aisles Allow for Easy of Navigability and Restocking


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Figure 9: Axe Deodorant Price Cut (Before: EUR1.00; Now: EUR0.92)


Finance The format targets high RONA (Return on Net Assets), employing a low start-up and operating cost, and aims to rapidly generate profits though it’s accelerated turns. A Supeco store costs a little more than EUR0.5 million to set up, excluding the plot of land, some-times even less than a discount store, and boasts an average selling area of 1,600 square meters. The format utilizes a limited staff of around 60 people and aims to maintain low operating costs though the simplicity of the store layout and fittings.

Pros and ConsAs there is no such thing as a balance between product, price, promotion, and position, the Supeco format has its advantages and disadvantages. The pros derive from the format’s cost-efficiency-driven operating model:

�� It relies on the simple proposition of guaranteed low prices on bulk purchases. Promotions and price cuts are ongoing events (Figures 8, 9).

�� The store can adapt to multiple pack sizes of the same product and can be utilized to test shopper preferences.

�� The cost-effective merchandising facilitates savings in logistic costs as most of the assortment is displayed directly on pallets, on the central aisle, or on the towering four-level shelves.

Figure 8: Aisle Endcaps Feature Promotional Displays


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Figure 10: Carrefour Private Label Takes a Fair Share of the Store Assortment


Figure 11: Endcaps Featuring Frozen Goods


�� Operating hours between 0900 and 2200 everyday, including holidays, makes it a destination of choice for corner shops that wish to replenish stocks as well as for late-night shoppers.

�� It has low set-up costs (EUR0.6 million for a new store) and remodeling costs, as well as operational costs, along with the small staff required to operate the store (50 to 60 people, as compared to 150 to 200 for a classic hypermarket).

The cons come from Supeco’s low price strategy, supported by its low-cost philosophy:

�� The format poses a risk for price erosion in brands adopting its regressive pricing model. The pricing model cumulated with promotions can create confusion for shoppers trying to make the best choice.

�� The limited marketing and display space will also make it difficult for suppliers to differentiate in-store (Figure 10).

�� The store’s basic design and dim lighting is scarce in eye-catching design elements, making it less appealing than discount stores, projecting a warehouse feeling (Figure 11).

�� The format’s limited selling area (1,500 to 2,500 square meters) provides little room to play with, moreover the assortment of 2,500 SKUs results in around 1.5 SKUs/square meter, which is very narrow. Given the proportion of bulk merchandising the formats need to accommodate, there is a constraint in terms of width and breadth for each category.


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What to Expect from Supeco in 2014 and Beyond?The format will benefit from Carrefour’s established position and improv-ing brand image across geographies (Carrefour has continued to develop its network systematically for the past couple of years through its supermarket and convenience networks, mostly through franchises). While Supeco brings an attractive price proposition, it also brings the risk of creating confusion with shoppers (Figure 12). But so far, the entry into Western Europe has proven beneficial and we should soon hear about plans to expand to other geographies.

RomaniaRomania is already in Carrefour’s expansion scope for Supeco’s footprint. The market has leapfrogged in recent years, having witnessed an exponen-tial development of supermarket and discounter networks as well as hyper-markets that continue to adapt and still find space in the retail landscape. Carrefour’s improving brand awareness in Romania will be only one of the key internal strengths that will support the assimilation of the new format. An additional opportunity comes from the wide acceptance of the discount formats. Lidl has proven to be a great success with local consumers, but then again, Lidl invested massively in marketing while Supeco defers from doing so. Supeco will bring an additional blow to an already weakened Metro, but will face tough competition from Transgourmet’s Selgros, which recently invested massively in refurbishing stores and getting more personal with customers. Moreover, heavy investments in marketing from Lidl and exponential develop-ment of other discount networks like Penny and Profi have given them a head start over Carrefour.

ItalyItaly could well be one of Supeco’s next destinations, for the same logic as Spain’s entry. Despite overall challenging economic conditions, the market still offers opportunity for growth. Local grocers such as Coop Italia and Conad, though challenging for Carrefour, stand proof of the market’s potential. Coop reported 12.6% sales growth in sales for 2012, Conad reported 7.3% sales growth in 2012 and 5.4% in 2013. Carrefour already operates three cash and


carry formats in the market: Docks, Docks Market, and Gross Iper, totaling some 20 stores. Its experience in Italy goes beyond this channel though, as the retailer’s total 1,300 multi-format store base places it in the top five retailers in the market.

PolandPoland is unlikely to be considered an opportunity for expansion as the highly competitive and over-saturated retail landscape is a strong barrier for entry. Carrefour is already undergoing a massive franchise expansion programme in the market where its store base has been growing at around 100 new stores per year for the past three years.

GOOD PRICE PERCEPTION

HIG

HLY

PRO

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EDLP

POOR PRICE PERCEPTION

Figure 12: Supeco Offers a Unique Proposition in Europe


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2 0 1 4 F I R S T H A L F 2 0 1 4 F I R S T H A L F2 0 1 4 F I R S T H A L F

BelgiumBelgium is also unlikely to be on Supeco’s European itinerary, as Colruyt’s discount hypermarkets are dominating an already highly competitive retail landscape. Current Sunday trading regulations would also be a big impediment for Supeco, as it relies on attracting shoppers any day of the week.

Supplier ImplicationsSuppliers that already have a proposition with Carrefour should consider preparing to engage their consumers through this hybrid format. Consider the following questions in advance of meetings with the retailer:

�� Listing Strategy. When Supeco first opens stores in your market, will you be ready to supply it? How well prepared is your product portfolio to cater to the specificities of this format? How can you engage Carrefour in finding the opportunities to support the development of its format while maximizing your sales? What can you learn from your Spanish counterparts and apply in your market?

�� Marketing. Given the format’s limited options given to merchandisers, how will your products help emphasise Supeco’s value proposition, and how will you differentiate in the eyes of the shopper from your competitors in-store? Will you have the right marketing mix to capitalize on Supeco’s proposition?

�� Pricing. Will you have the appropriate pricing margin strategy ready to be deployed in-store? Will it be flexible enough to adapt to tough negotiations given the limited shelf and floor space as well as the progressive pricing model proposed by the format?

Kantar Retail will continue tracking the developments of Supeco; despite its currently small scale, this format has the potential to disrupt its competitors’ strategies throughout Europe. Similarly, we will keep you up-to-date on other hybrid channels that are crushing the limits of conventional retailing and liven-ing up today’s European and Global retail landscape.

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Lidl’s UK Checkout Realignment Is Part of a Bigger Brand Strategy

Figure 1: Revamped Meat Section (Lidl UK)

Source: Kantar Retail store visit

By: Simon Johnstone

Lidl is in the middle of a balancing act: it’s trying to achieve a growing like-for-like (LFL) focus in Europe in conjunction with improving its brand image. As the retailer looks to sell more in-store, the checkout will naturally be a key area of focus, as it’s a place where Lidl can make money from suppliers as well as leverage the impulse opportu-nity. However, with plans to remove all chocolates and sweets from its checkout aisles in the United Kingdom in response to a growing obesity problem, Lidl has shown that brand image, where necessary, will ultimately trump a LFL focus. Lidl’s brand image has shifted from being simply about high quality at low prices to a more robust image of being a destination for healthy, fresh, high quality products that are locally sourced. Whilst the improvements in fresh produce, bread (via in-store bakeries) and meat have been noticeable over the last five years (Figure 1), the checkout has remained somewhat untouched. Lidl understands that to fully reinforce its brand image, the checkout must also be realigned. Lidl’s first significant move at the checkout was through the launch of a green till initiative (groen-takasse) in the Netherlands, which saw it place vegetable snacks at tills to promote healthy living. Last year, it went one step further, introducing its Healthy Till concept in the UK. Lidl’s Healthy Tills replace “treat” items such as chocolate with more nutritional products such fresh fruit. The German

discounter went on a PR offensive throughout the year claiming, “Since the trial began, turnover of the Healthy Tills has been 100% higher than that of the standard tills.” This led to it doubling the number of healthy tills to 1,200. Lidl’s discounter model allows it to react quicker to local shifts than traditional retailers. Lidl has acted first, and Kantar Retail expects other formats to also realign their checkouts in the UK (to some extent). It is no coincidence that Lidl’s latest announcement comes a few days after predic-tions about the number of obese and overweight people in the UK may have been dramatically underestimated. However, Lidl’s store layout, with confectionary located at the very front of the store, means the confectionary category may not be hit too hard, in comparison to traditional supermarkets (Figure 2).

Figure 2: Store Layout (Lidl, UK)

Source: Company materials

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Figure 4: Checkout Pallets (Hofer, Austria; Lidl, Switzerland)

Figure 3: FSDUs (Lidl Belgium)

Source: Kantar Retail store visits

Source: Kantar Retail store visits

This latest development brings up a number of important supplier considerations:

�� Lidl has shown that where necessary, improving brand image is a higher priority than growing LFL sales. Suppliers should look to identify where Lidl falls in this respect in their respective markets. For example, in Germany, this phenomenon is redundant as the retailer’s brand image is extremely good, and LFL growth and profitability remains its core focus. This results in increased activity around streamlining its product ranges.

�� If, like in the UK, the checkout undergoes a drastic change, there are still opportunities to consider. Confectionary suppliers have been driving innovation around free standing display units (FSDUs) in discounters over the last few years. Whilst the checkout may be off limits in the UK for the foreseeable future, continued development around FSDUs will allow suppliers to be in other important parts of the store (Figure 3).

�� Indeed, if your product doesn’t fall into the “unhealthy bucket,” there is a chance to push innovation around the checkout. The right palletised display will engage with shoppers at a prime location in-store. However, remember: the efficient model of discounters doesn’t allow for all checkouts to be open all the time (Figure 4).

Over time, Lidl will have to find a perfect balance between LFL growth and its brand image, meaning many markets may be in a state of flux. Suppliers can get ahead of this trend if they understand where Lidl’s priorities lie in their relevant market.


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2 0 1 4 F I R S T H A L F

Market Insights, Americas501 Boylston Street, Suite 6101 Boston, MA 02116 USA +1.617.588.4100

Market Insights, EMEA24-28 Bloomsbury Way London, England WC1A 2PXY UK United Kingdom +44.207.031.0272

Asia HeadquartersThe Center, 25th Floor 989 Changle Road Shanghai 200031 China

+86.212.405.0132

Brazil HeadquartersRua Olimpiadas 205 13o andar Vila Olimpia - Sao Paulo SP - 04551 - 000 Brasil

+55 3066 64 54

Leadership Team

Steve Pattinson

Chief Executive Officer—Americas

Phil Smiley

Chief Executive Officer—EMEA and ASPAC

John Barry

Chief Executive Officer—Market Insights

Supriya Chaudhury

Chief Marketing Officer

Bryan Gildenberg

Chief Knowledge Officer

Mark Mikitka, Global Chief Sales Officer

[email protected]

About Kantar Retail Kantar Retail (www.kantarretail.com) is the world’s leading shopper and retail insights and consulting business and is part of the Kantar group of WPP. The company works with leading branded manufacturers and retailers to help them transform the purchase behaviour of consumers, shoppers and retailers through the use of retail insights, consulting, analytics and organi-zational development services. Kantar Retail tracks and forecasts over 1000 retailers globally, has purchase data on over 200m shoppers and among its market-leading reports are the annual PoweRanking survey (USA and China), and Industry Shopper Study Across Retailers. Kantar Retail works with over 400 clients and has 20 offices in 15 markets around the globe.

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