dhVoice
A Roundtable Discussion with dunnhumby Thought Leaders
How should retailers weather inflationary times? To answer this, we've gathered a panel of experts at dunnhumby to break it down for us. We discussed:
1. What should grocery retailers focus on?
2. What are some global best practices to win during inflation?
3. How can grocers wedge competition by adopting Customer data science?
Our Panel
Tracey Lewis Media & Customer Engagement
Jorge Romero Category & Store Solutions
Category and Store Solutions
Jordan O'Brien Customer Strategy and Insights
Vince Tirelli Customer Strategy and Insights
Erich Kahner Customer Strategy and Insights
Natalia Rojas Customer Strategy and Insights
Brice Hardy Category and Store Solutions
Peter Thompson Shopper Insights
Table of Contents
SECTION 1
Executive Summary
For this second edition of the Quarterly Newsletter, dunnhumby experts in Media, Shopper Research, Category Solutions, Pricing, Loyalty, Competitive Strategy, and Consumer Psychology gathered together to discuss practical recommendations, as well as short and long-term tactics that retailers can put in place right now to shield and strengthen their relationship with customers during this period. In short, our experts believe retailers need to:
- Focus your investments. Use customer knowledge to identify which categories and products are more relevant for each lever-- base price, promotions, loyalty, and private brand-- ensuring your investment in each lever is the most impactful to your price-sensitive customers.
- Optimize your actions. Discontinue products and promotions with low ROI, even if that means losing back margin. This will not only make your tactics more customer-centric, but it can also increase operative effectiveness by reducing implementation costs and freeing already strained labor resources.
- Find balance. Based on customer data, decide which products should rely more on base price, promotions or margin. Balance price and promotion efforts to maximize their effect on price perception and strengthen your value proposition for the short and long term.
- Dial up your loyalty program. Reinforce your loyalty program value and communicate its worth at a time when customers appreciate it most. Modify program tactics and mechanics during inflation to maximize customers' immediate savings.
- Safeguard your private brand. Implement basic hygiene practices and assess your private brand architecture to effectively support each brand, building equity and maximizing volumes for each.
Natalia Rojas Customer Strategy and Insights
Hello everyone! We’re all here today to give some practical advice to retailers who want to make inflation top of mind while remaining customer-centric. We’ll discuss the following topics: base price, mass promotions and advertising, personalization and loyalty, and private brand. Let’s begin by discussing how to improve base price.
SECTION 2
Base Price
Invest in lower base prices on the right products
This is where Lead Conductors' advantage in a superior loyalty program, and the customer data that flows from it, becomes a crucial asset for building competitive advantage. Consider Market Basket, with its limited ~80 store scale, four of Market Basket’s top five most cross-shopped competition include the much larger Walmart, Aldi, BJs Wholesale and Ahold-backed Stop & Shop. Like many retailers in its position, Market Basket must ration out its base price investments to the products and categories where customers rely on base price the most. Market Basket’s customers say this is in fresh meat, personal care/hygiene products, and packaged food. Compared to the average U.S. grocery shopper, Market Basket customers are unique in the strength of their reliance on low base prices for meat and personal care/hygiene products, and Market Basket seems to understand this. It is critical that each retailer know not just which departments their own customers rely on base price the most, but also on which products.
Jorge Romero Category & Store Solutions
Retailers should focus on identifying the categories and products that are most important to their most price-sensitive customers, assess their performance on those, and invest accordingly.
Bryce Hardy
Category & Store Solutions
In fact, customer data science has proven that ~20% of assortment can be delisted without negative consequences for customers while also improving sales and profits.
Build Leverage for Negotiating Lower Costs from Suppliers
Retailers who are not Base Price Leaders often lack the scale to get lower unit costs. A path to maximizing scale is customer data-led SKU rationalization. Identifying the minimum number of SKUs to cover a given category's customer need states allows you to identify SKUs to delist, giving remaining SKUs more slots (more volume) on the shelf, potentially leading to lower unit costs. Customers win too, because they do not have to sort through as many products to find one that meets their needs.
Another alternative negotiating chip to scale includes a strong private brand. The prospect that a retailer will enter a category with its own brand, which has strong equity with customers, can require a supplier to stay competitive on the costs to retailers.
Move away from back margin practices
Back margin practices can unwittingly create costly inefficiencies and higher prices. For example, slotting fees can lead to SKU proliferation of products that do not appeal to customers, sometimes because of price or sometimes because of unnecessary variety, making it more difficult for customers to hunt for the products they want.
Create rules to align with pricing strategy
Create rules to align with pricing strategy: Consistent and stable prices are important to a shopper’s overall perceived value. When a retailer is optimizing product pricing, a rules-based pricing engine will ensure that logic at the shelf remains stable for customers. Pricing rules such as Price move limits, own-product, and competitor differentials can help to keep the retailer on strategy while satisfying a customer’s needs.
Carlos Vargas
Category & Store Solutions
We routinely find that retailers are over SKU'd in products that appeal to less price-sensitive shoppers and under SKU'd in products that appeal to more price-sensitive shoppers. Retailers need to keep in mind that variety is also a relevant lever of price perception.
SECTION 3
Mass Promotions and Advertising
Invest in deeper promotions on the right products
As with base price investment decisions, certain products are more relevant to promote than others. Identify which products are more responsive to price changes by analyzing price elasticity of demand and importance of those products to price sensitive customers. Kroger-owned Fry's Foods, a ~125 store chain based in Arizona, likely knows that its shoppers are most inclined to seek promotions in fresh produce and meat.
Fry's shoppers are also unique from the average U.S. grocery shopper in its relative lack of reliance on mass promotions for packaged food. For the average grocery shopper, packaged food is the most common category in which shoppers look for deals, but for Fry's customers, packaged food ranks ninth on the list. As with decisions regarding surgical base price investment, it's important to know for which categories and products mass promotions are more important to your particular shopper.
Erich Kahner Customer Strategy and Insights
In this environment, retailers should avoid promotions that lead to higher total basket costs, such as multi-buys, in favor of fewer, simpler promotions, like percentage discounts or flat cents-discounts.
Invest in only the best performing promotions
The 70-30 rule applies here. Typically, when we analyze promotion performance, we find that ~30% of promotions provide little-to-no real sales uplift. Why do retailers continue these promotions? The common causes are: a blend of no or poor promotion analytics, or a reliance on ad fees from suppliers, which leads to an overabundance of promotions that aren't customer first. We have found that too many irrelevant promotions can erode price perception over time, making identifying and discontinuing poor-performing promotions more important during inflationary times.
Move away from back margin practices
It can be difficult for retailers to move away from ad fees, since they provide a jolt to the bottom line. However, we have seen in some retailer partners that eliminating 30% of ineffective promotions, using customer data science, leads to a bottom-line savings of ~$150K per week per 100 stores, in costs associated with executing those promotions in store (e.g. store labor on shelf tags, printing costs, etc.).
Appropriately balance base price and promotion investment
So far, we have talked about base price and promotion best practices independently of each other. However, the most important best practice is to carefully orchestrate base price and promotion investment by identifying which products need to be everyday-low-price, which need to have respectable base prices but still need aggressive promotions, and which you can price higher and promote occasionally (or not at all) to boost overall margins. The Lead Conductors orchestrate this delicate balance best.
Bryce Hardy
Category & Store Solutions
Promotions create excitement, but it is base prices that builds trust and loyalty with your customers.
Erich Kahner Customer Strategy and Insights
This 500 bps shift in perception can be enough to move a retailer from an Understudy to a Lead Conductor, which we know is worth more visits in the short term and better sales growth over the long run. Link Inflation RPI
Retailers who are not base price market leaders are typically not relying enough on everyday-low-prices to compete, believing instead that they must put most of their eggs in the promotion basket to differentiate and drive excitement. However, we have seen that an ~8% reduction in percent of sales of product sold on promotions can lead to an overall price perception improvement of ~500 bps, if the money saved by reducing promotions is reinvested into better base prices on the most important everyday-low-price (EDLP) items.
Use your customer data to identify how products should be classified – EDLP, better base prices paired with compelling promotions, or less competitive prices for margin padding. For example, bananas might be an EDLP item you want to match Walmart on, while wine can have a high regular price but frequent promotions, and you can let the floral department sit at high regular prices without frequent promotion. Why might bananas be an EDLP for you? The short answer is because your customer data tells you so. If you were to ask a customer why one product might need to be an EDLP while one might need to be hi-lo, he or she might say: "I need low, everyday prices on products I use and buy often in fairly predictable amounts, like bananas. Promotions on these products won't change our consumption since no one in my house will eat two bananas a day. Because I buy these and use these so often, I'm aware of the prices at the stores I shop and like knowing I'm saving a little money every week getting the best prices. On the other hand, I don't mind that wine is at a higher regular price because I only buy it on promotion, since it is something I don't use regularly but will buy as a treat for myself. Even if I know I won't use it right away, I can store a few bottles for down the road and they won't spoil like bananas do."
SECTION 4
Personalized Promotions and Loyalty
Consider the Shopper Journey
Retailers who leverage the data they have on customers to predict the right offers for those customers and proactively offering them in the right channels will win. However, best-in-class retailers are likely going beyond that. They incorporate an understanding of where a customer is in their personal shopping journey and optimize the experience accordingly. For instance, if a shopper is in their planning phase, a retailer might be offering a budgetary or meal planning tool connected to reward options. At the buying phase, they give customers control over their earnings, allowing them to apply their reward when they want or even gift their rewards or points to others. After or between planning and shopping phases, rewards program members are recognized and given access to expedited or elevated customer service, for returns or to resolve billing issues. Leading retailers start to embed these trending solutions across their customer buying cycle using the Loyalty Program to maximize the voice of the brand in every step.
Tracey Lewis
Media & Customer Engagement
Rewarding loyal customers with personalized offers can mitigate migration to retailers with better price indexes. Seventy-five percent of customers expect discounts or offers from their loyalty program, and they will value these benefits more than ever when budgets are stretched.
dunnhumby Shopper Journey Best Practice
Short-term Shifts in Loyalty Program Tactics and Mechanics
I. Deploy aggressive discounts on the most relevant KVI items for your best customers. Since these are things that most customers are buying somewhere (bread, milk, etc.), discounts on these items can drive visits that would otherwise go to a competitor.
II. Rely less on Points offers and stick with tangible savings. Points are great when people have extra money to spend, but savings shine when disposable income is minimal. Give people money now, not later.
III. Now is not the time to try to condense your program. Reinvesting program profit into better offers ensures you're maximizing the loyalty savings for customers.
IV. Minimize stretch spends. While offers need to be profitable, customers simply aren't likely to add a lot of unnecessary items to their basket right now. Lean on reward type offers during peak inflation.
V. Consolidate your value. Instead of multiple campaigns that go out over the course of a week, send a single message that shows all the ways customers might save. Illustrating the total potential savings to a customer allows for trust, transparency, and actualized value.
Jordan O'Brien
Customer Strategy and Insigths
Some retailers, like Tesco in the UK, have removed mass promotions and introduced Clubcard promotions only, with great success. Ensuring that promotions become relevant only for the most loyal customers has not only increased their penetration of the loyalty card across all formats, but value perception of getting an immediate discount off promotion presents a strong offer of value to their customer.
SECTION 5
Private Brand
Invest in your private brand offering in the right places
H-E-B's customers are unique from the average grocery shopper in their reliance on private brand for health care product savings. For H-E-B shoppers, it's at the top of the category list, while it's sixth on the list for the average US shopper. Dairy, packaged food, common household products, frozen food are more common destinations for private brand shoppers. It's critical that each retailer understand where private brand will be most effective for their shopper base.
Vince Tirelli Customer Strategy and Insights
Shoppers will reach for a strong private brand in some categories, but not others. Knowing the categories where private brand is an effective lever for driving price perception and visits during inflationary times will lead to the strongest ROI.
Short-term actions for inflationary times
Of course, building a winning private brand organization is not a short-term proposition (more on that in a moment). So, in the near-term, you can support the portfolio you have today through some basic hygiene practices.
Additionally, dunnhumby repeatedly finds that staff engagement with your private brand portfolio is highly associated with better private brand results. Galvanizing staff to advocate for the brand in the store and taking actions to nurture their own love of the private brand offering will have immediate long-term benefits.
Build a better private brand organization for the long term
Diagnose the brand position of each brand in your portfolio and assess where your private brand organization is in its phases of evolution. We have found that organizations that are solidly in the Innovate Phase – where they have a full complement of brands in the Mainstream, Value, Premium and Icing Tiers – have the best results. A common trap that retailers fall into is, here again, assortment proliferation. They often have too many medium to small-sized brands, with overlapping brand positions and insufficient marketing support. This makes it hard for each brand to build distinct, strong equity in customers' minds and act as a clear and easy-to-find signal of value.
Natalia Rojas
Customer Strategy and Insights
Make it easier for the customer to find your private brand in the store and on the website, through placement and signage; shield your private brand, especially when national brand equivalents go on sale; make sure you are adhering to pricing guardrails (e.g. value brands the lowest priced in the category, mainstream brands 20%-30% below national brand equivalent, etc.).
Phases of Evolution for the Best Practice Brand Portfolio
Mainstream brands are commonly priced 20% to 30% below the biggest name brand in a category, matching the name brand in Quality. Best practice adherents have one mainstream brand to be the workhorse across the entire store, rather than two or more different large mainstream brands to cover fresh, center store food and center store non-food (see H-E-B's brand architecture below for an example of best practice).
Premium tier brands are positioned above mainstream in price and offer higher quality or more unique variety, and Value tier brands are positioned as the lowest priced option in a category and stick to just the most sold varieties. Again, as in the mainstream tier, best practice organizations only have one large brand in these tiers, rather than a few large ones to cover different groups of departments. Minimizing the number of workhorse brands in each tier increases the presence of each brand in the store, making it easier for customers to find value, while at the same time maximizing volumes for each brand, and minimizing the cost to source.
Finally, icing brands are each narrow in scope, covering just a few, unique sub-categories (e.g. soft home goods such as towels and linens) or serving an overarching consumer trend (e.g. organics). These brands should only be created when an organization is mature enough to provide marketing, insights, and innovation support to many private brands. Put another way, bake the cake first (Mainstream, Premium, Value tiers), and then you can add the Icing. H-E-B provides an example of a best-in-class private brand architecture.
H-E-B - Closest Adherent to the Best Practice Architecture
Measure “real” growth
Lastly, when reviewing overall business performance, retailers should dissect the effect of inflation.
Peter Thompson Shopper Insights
During this period of sustained high inflation, it's important for retailers to monitor market share and unit sales growth in addition to sales $ growth. It's tempting to observe year-over-year gains in sales $ as a success, but for many retailers, the current $ gains are mostly or entirely driven by inflation. Retailers need to pay careful attention to "real" growth from market share gains or rising unit sales, which should be better indicators of long-term, sustainable success.
SECTION 6
Closing Words
Inflation is breaking records and your customers are hurting. Funnel as many resources as you can into saving them money and showing them that you’re in it together. Follow best practice and benchmark your results against the best to keep your organization honest. You will reap better results during inflationary times and strengthen your emotional connection with shoppers, which will lead to better results even long after this inflationary period becomes just another chapter in the history books.