Table of Contents
Erich Kahner
Competitive Strategy
Executive Summary
- Record inflation is leading to more people struggling to pay their bills, and grocery stores are the largest line item on the household budget that consumers can take immediate action to change.
- As a result, retailers who are best positioned to save customers money are increasing visits faster and building stronger emotional connections with shoppers during inflationary times.
- To identify which retailers are winning during inflationary times and why, we surveyed ~18,000 grocery shoppers in two waves of research, one in October 2021 and one in June 2022. We gathered perceptions on the 70 largest grocery retailers and modeled their responses against Placer.ai foot traffic and Similarweb web traffic to see which preference drivers had more impact on traffic growth and emotional connection with retailers.
- Some retailers who are well-positioned for the long term, such as regional players Market Basket and Winco, and national discounter Aldi, are also well-positioned for inflation. These retailers claim the top three spots in our inflationary times rankings.
- Several retailers with a highly vulnerable proposition for the long term due to quality weaknesses, such as Dollar General, Grocery Outlet and Save-a-Lot, are also ranked in the top quartile for the strength of their inflationary times customer value proposition, since they are among market leaders in saving customers money.
- Shoppers are, at least temporarily, willing to trade down on quality to make ends meet. For driving retailer results during inflationary times, saving customers money is 5x more important than delivering high quality. For driving long term results, saving customers money is only 1.5x more important than delivering high quality.
- Inflationary times are a big headwind for premium specialty retailers, such as Sprouts, Wegmans, and The Fresh Market, and regional grocers with a quality-first position, such as Publix and Harris Teeter. These retailers are behind the market in year-over-year visit growth during 2022.
- Retailers can save customers money using a variety of levers: base prices, mass promotions and communications, personalized promotions, and loyalty programs, and a great private brand offering. Base price is by far the most effective lever, accounting for about 50% of “retailer saves me money” perception. The rest, when all carefully and expertly executed in concert, will drive the other 50%. This means that retailers who are market leaders in base prices, such as Aldi and Market Basket, are going to have an easier time during inflation.
- Retailers who are not market leaders in base prices but are best-in-class at orchestrating the entire mix of levers fall short of attaining leading results during inflation, but they can get above average results. Kroger, Food Lion, BJ’s Wholesale, Weis Market and Shop Rite are examples of “Lead Conductors” who are not market leaders in price, but are better than the rest at conducting the mix of “Save Me Money” levers.
- Lead Conductors keep base price perception close to base price market leaders, and they edge base price leaders on saving customers money with private brand and mass promotions. They clearly differentiate themselves on making promotions more personalized and relevant, with a loyalty program that saves customers money. Most importantly, they outperform base price market leaders on driving awareness of messaging that supports these price savings efforts.
- Retailers who are not base price leaders, can reduce the gap in price perception to Walmart by six percentage points by following best practice coordination of base prices, mass promotions and messaging, personalized offers and loyalty, and private brand. Over the long-run, this gap reduction in perception is worth an additional three points in 5-year annual compounded annual sales growth. This means that a $5B retailer who follows best practices today realizes ~$160M more in revenue per year, compared to retailers not following best practices.
- There are best practices for each lever of saving customers money, as well as best practices for carefully orchestrating them all together. Many of these rely on the ability to leverage customer data, align organizational stakeholders towards the same goals, and tightly coordinating execution across functions over time. Some details on all these best practices are included in this report, but please visit this site again on October 18, 2022 and visit "The dh Voice" section for more details on winning tactics during inflationary times.
Context
“Extremely stressful.” “Really scary.” “Asinine.” “Frustrating.” “Greed and madness.”
We spoke to 18,000 grocery shoppers during the last year1, while inflation raged at 40-year highs, and shoppers replied with rage to match. Americans are struggling and changing behaviors to cope, and the grocery sector is once again the main stage on which these changes are playing out.
Since November of 2021, inflation has surpassed rates not seen since the time period from 1964 – 1982 referred to as “The Great Inflation,” a time prominent economists called “the greatest failure of American macroeconomic policy in the postwar period.” Despite that for much of 2022 unemployment has remained near the lowest point seen in decades, most Americans (approximately two out of every three) are living paycheck-to-paycheck as they contend with double-digit increases in household bills.
“Price inflation has affected me and my family tremendously. Every time we go to the grocery store now you look at prices and cannot believe how high they went. Not only that, the grocery store that we usually go to in our neighborhood ran out of many things that we usually buy. Before price inflation they've never ran out of these items. So now when we go to the grocery store, we make sure we budget tremendously. We will buy the lowest price possible so we can buy more things.”
-Family of three, household income of $50k - $100k per year
“The price of food right now is asinine. I know it’s not the retailers' fault and there’s really not much they can do about it; but my grocery bill has basically doubled in the last year and I’m not getting what I used to. The availability of items has also been impacted and the staff is doing their absolute best, but they’re in such a terrible situation between customer demands and what they’re able to keep in stock. I really hope this situation improves very soon. I have had quite enough of COVID and Vladimir Putin messing up my food budget.”
-Family of three, household income of $50k - $100k per year
We heard thousands of these stories, and they reflect some uncomfortable truths grocery retailers will need to contend with for this year and possibly years to come:
- This period of heightened inflation may run at least through Q2 2023, since it is due to structural, global macroeconomic issues such as: the war in Ukraine and its impact on global food and energy supplies, the smoothing out of the supply/demand imbalance created by Covid and the shutdown of parts of the global supply chain, climate change and its continued disruption of previously more predictable and dependable food sources.
- Trouble balancing the household budget isn’t limited to people of below average income. Four out of five households with an annual income less than $50k are living paycheck to paycheck, but so do half of households making $100k a year or more.
- The grocery bill is the largest line item on the household budget where customers can relatively easily cut back on spending; only housing, transportation, insurance, and healthcare are higher overall expenditures. Customers will search for savings in grocery in a variety of ways, from shopping lower priced stores to buying more on promotion, to skipping meals. During the Great Recession of the late 2000s, an additional 5% of American households struggled to put enough food on the table. In today’s numbers, that would translate to an additional 6.5 million hungry households. As a result, retailers whose customer value proposition screams “I save you money” are winning visits, even if their product or experience quality is relatively poor. Now more than ever, customers are looking for ways to save money on groceries, even if they have to trade-off on quality.
Amid this tense backdrop, we set out to answer the critical question: which grocery retailers are best positioned to win during these inflationary times? This report contains answers to that question, and, perhaps most importantly, provides guidance on what retailers can do over the next 18 months to retain and deepen relationships with their struggling customers.
[1] Two waves of data, collected in October of 2021 and May/June of 2022, are featured. 9,970 US respondents were interviewed in 2022, and 7,542 respondents were interviewed in 2021. Dynata was subcontracted to provide the respondent panel and manage data collection, working closely with dunnhumby.
The Inflation RPI Model
To arrive at our results, we conducted two online surveys, one in October 2021 just as inflation was beginning to heat up, and a second survey in May/June of 2022. In total, we surveyed 18,000 grocery shoppers. Each shopper gave their perception of retailer performance on up to three stores where they have bought groceries in the past four weeks. They were asked questions on five preference drivers dimensions: Save Me Money, Save Me Time, Make it Better, Make it Seamless, Make it Dependable (details on how each driver is defined can be found below). We modeled how differences in those perceptions impacted foot traffic and web traffic growth during 2022, as well as emotional connections with shoppers. Our foot traffic was sourced from Placer.ai, an industry leader in location analytics, and our web traffic was sourced from global digital analytics provider, Similarweb. In the end, we collected data on 69 of the largest US retailers across conventional grocery, mass, club, specialty, discounter, drug, and dollar channels. Our emotional connection measure was gathered in the survey mentioned above.
The emotional connection measure is a proxy for how much retailers have demonstrated they are leaning in to help customers during heightened budget pressures. We can expect retailers scoring well on this measure to build up goodwill with shoppers that could carry over to longer-term stickiness.
The results of the model tell us:
- Which preference drivers have the biggest impact in driving retailer inflation era outcomes?
- Which retailers have the strongest customer value proposition for better inflation era outcomes? Or, in other words, which retailers are performing strongest on the preference drivers that matter most during inflationary times?
Inflation RPI Model
Preference Driver Definitions
Save Me Money
- Base prices
- Mass promotions
- Personalized promotions and loyalty
- Private brand and bulk packs
Save Me Time
- Speed to shop the store
- Speed to checkout
- Location
Make It Better
- Product quality
- Better-for-you/natural and organic offering
- Customer service
- Store cleanliness/ambiance
Make It Seamless
- Online shopping
- Shopping app
- Tech that makes shopping experience better
Make It Dependable
- Out of stocks
- Prices are accurate/consistent
It is no surprise that our Inflation RPI model found that Save Me Money was by far the biggest customer preference driver, 5x more important than the next most important, Save Me Time and Make It Better. Make It Seamless and Make It Dependable have virtually no association with retailer outcomes in this model.
What does it mean to have a bigger association with retailer outcomes?
Simply put, an association means as one number goes up, so does another. Retailers with competitive advantages in Save Me Money outperform the market in visit growth and emotional connection during inflationary times, while retailers with a competitive disadvantage underperform the market.
For example, a retailer such as Aldi, who has one of the best perception scores for Save Me Money, had near industry leading year-over-year foot traffic growth, YTD for 2022, of +11.0% and web traffic growth of +8.5%. Wegmans, on the other hand, declined in foot traffic by -6.4% and web traffic by -29.0%. For reference, the total U.S. grocery market saw foot traffic decline -0.2% and web traffic decline -11.2%.
The association between Save Me Money and retailer outcomes is clear. On the other hand, Make It Dependable, has little-to-no association with inflationary era results; in fact, the association is slightly negative (but non-significant). In other words, retailers who have a competitive disadvantage in Make It Dependable are just as likely to have strong outcomes as retailers with a clear competitive advantage. That is why a retailer such as Grocery Outlet, who is near the bottom of the market on Make It Dependable, can achieve foot traffic growth equal to Aldi during inflationary times (+10.3%) and above-average web traffic growth rates (-1.4% versus the industry average of -11.2%).
Translation: in today’s environment, customers are willing to shop retailers with poor out of stock rates if those retailers can save them money.
Make It Seamless is similar to Make It Dependable. During inflationary times, retailers with a poor offering in eCommerce can have results as strong as retailers with big competitive advantage in digital capabilities. The fact that the total U.S. grocery market saw a -11.2% decline in web traffic during the same time it saw foot traffic decline only -0.2% reflects grocery shoppers shifting priorities toward money-saving solutions and away from the convenience-at-a-cost that eCommerce often provides. Amazon, typically ranked 1st in the strength of its long term value proposition in our annual RPI study, has seen web traffic decline -6.5% this year, slower than the average brick and mortar grocery retailer. While a competitive advantage in eCommerce provides wind in the sails for the long term, during inflationary times that wind dies.
Make It Better and Save Me Time are the other pillars to show a positive association with retailer outcomes during inflationary times, but their impact is dwarfed by the impact of Save Me Money. Translation: customers are much more likely to trade-off on benefits of better product quality and time savings to save money, during inflationary times. Of note, Save Me Time edges Make It Better for 2nd place. Club retailers such as Costco, Sam’s Club, BJs Wholesale, market outliers in saving customers time, are also underperforming the market in year-over-year visit growth in 2022. According to Placer.ai, the club channel declined -1.9% in the first half of 2022 compared to the first half of 2021, slower than any other channel. This is notable because the club channel tends to be well-positioned for success over the long term; inflationary times have taken some of the wind out of the club channels sales.
Examining the differences between what drives retailer outcomes over the long term versus a period of inflation underscores just how much customers are shifting their priorities to meet the strain inflation puts on their household budgets. Our annual long-term Grocery RPI report takes a similar modeling approach to answering the question “who’s winning and why.” However, it does so with a more long term perspective, including retailer outcomes, such as 5-year sales compounded annual growth rate and total market share. Over the long run, Save Me Money is still the most important driver of retailer outcomes; however, it is only 1.5x more important than the second strongest driver of long term success, Make It Better. During inflationary times, Save Me Money is 5x more important than Make It Better.
What is At Stake?
Retailers who excel at saving customers money have customer value propositions that are best positioned to win during inflation. Our Inflation RPI score is a measure of this inflation-ready customer value proposition. When we rank each of the 69 retailers in our study on the strength of their inflation-ready value proposition and compare results by ranking quartile, the story is clear.
Market Basket – a 90-store, traditional grocery chain in New England – leads all retailers in our Inflation RPI rankings, ahead of household discounters Aldi, Dollar General and Walmart. They do so by also ranking 1st in the U.S. in the all-important Save Me Money pillar. Within the Save Me Money pillar, there are many levers a retailer can pull, from base prices, to promotions, to private brand; Market Basket is the only retailer who is top five in both base price perception and mass promotions perceptions (see later sections on Save Me Money pillars and best practices for more details), which more than offsets its lower performance in Save Me Time. On the opposite end of the quality-price spectrum is premium retailer Publix, who is ranked in the 4th Quartile of our Inflation RPI. Publix is a market leader in Save Me Time, Make it Better and Make it Dependable. Despite a value proposition that customers value on a long term horizon, the depth of its vulnerability on Save Me Money is a big liability during inflation and is the driver of its fourth Quartile ranking.
Market Basket also benefits from having the most defensible competitive position for inflationary times, due to low cross shop with competitors who have strong inflation customer value propositions. Three of Market Basket’s top five competitors rank in the bottom two quartiles of the Inflation RPI, and only 43% of its customers cross-shop Walmart, lower than the 55% for the average Walmart competitor. Additionally, dollar chains and Aldi are scarcer in New England; only 8% of Market Basket customers cross-shop Dollar General, versus 20% for the average Dollar General competitor.
On the other hand, discounters such as Save-A-Lot, Lidl, Family Dollar, and Dollar General are vulnerable due to much higher cross-shop with each other and other inflation-ready retailers such as Walmart. For example, 81% of Dollar General shoppers cross-shop Walmart, and 38% cross-shop Family Dollar. Retailers must assess their customer perceptions relative to their most cross-shopped competition, not merely benchmark to their own internal performance, to understand what their strengths and weaknesses are for inflationary times and the long term. For Market Basket, inflationary times should be good for market share.
A full list of 2nd - 4th Quartile retailers is not released publicly. If you are interested in learning who these are or are interested in customized deep dives into each dimension of a specific retailer’s performance, please contact dunnhumby.
The majority of retailers in the 4th Quartile are a mix of specialty, conventional, and regional stores. These retailers have a competitive advantage and reputation for high quality perishables and prepared foods. This can be a strong position for the long term, provided these retailers are also minimizing competitive disadvantage in prices.
A look at how positioning of retailers is different for the long term versus inflationary times reveals just how much a context shift in the market presents a reversal of fortune for certain retailers. The dramatic differences in rankings between inflation and standard RPI results uncovers a critical contextual shift for customers. For example, Wegmans, Sprouts, Fresh Market, Fresh Thyme, Big Y Foods and Publix lag the market in Save Me Money perceptions, and are consequently lesser positioned for inflationary times. However, they are able to parlay their differentiated Make It Better positioning into superior long term growth and emotional connections. Failure to meet customers where they are during inflation may not only lead to loss of market share in the near term, but also could create cracks in the strong long term emotional connection that they have built with their shoppers.
How can they effectively meet customers where they are?
The customer has the answer.
Before we get to it, let’s first better understand what Save Me Money really means to them.
Through an analysis of the Inflation RPI data, as well as from our experience conducting Price Perception Strategy projects for clients over the years, we know that ~50% of Save Me Money perception is driven by base prices, while the remaining half is driven by a collection of complementary levers working in concert: mass promotions, personalized promotions, private brand, bulk pack sizes, advertising and messaging, experience, and product cues. The last of those complementary levers – experience/product cues – carries the potential to be a drag on price perception. For example, premium touches to signage, flooring or lighting and a heavy presence in organic products can be perceived to be, in the words of one customer, “a green light to charge higher prices.” So, especially during inflationary times, retailers need to be conscious of this and limit or downplay these cues.
All other complementary levers, when carefully orchestrated together and with the right base prices on the right items, can lead to market-leading price perception.
A base price focus may be even more prudent than usual during inflationary times. Between 2021 and 2022, satisfaction with grocery retailer base prices declined 500 basis points, more so than promotion, personalization, or private brand satisfaction, while quality perception held steady indicating shoppers are placing greater scrutiny on base prices than ever.
As a general rule, the stronger your base price position, the less you have to lean on those other levers. The weaker your base price position, the more you have to lean on those other levers. However, that last statement comes with a caveat. If your base price perception is too far behind the competition, no matter how hard you lean on the complementary levers, overall Save Me Money perception will continue to languish.
Typically, retailers who lean harder on base price and less on those other levers tend to outperform; for example, base price market leaders such as Aldi, Lidl, and Market Basket, tend to have the most 2022 momentum and the best 5 YR Sales CAGR.
The second most effective approach to inflationary times momentum is carefully coordinating leadership on other Save Me Money levers while genuinely committing to minimizing base price perception gaps. Retailers such as Giant Foods, BJs Wholesale, Kroger and Weis are Lead Conductors of this complex orchestra of levers. While this approach is clearly less effective than the Base Price Leader approach during inflationary times, there is good news for these and all retailers who can’t win on base price: the 5 YR Sales CAGR for retailers who are best-in-class at orchestrating all Save Me Money levers is comparable to base price leaders.
Any other approach that doesn’t result in a best-in-class position on base price or a best-in-class position on orchestrating the entire mix of levers will deliver comparatively poorer results.
Many retailers try to be Lead Conductors, but they likely have ended up in one of the following pitfalls: They haven’t leveraged enough data science to point them to the right products to invest in or competitors to benchmark against, or they haven’t coordinated execution across organizational functions well enough. Another common pitfall is taking half measures in investment, or scaling back on investment too soon. These aspiring Lead Conductors, which we are referring to as Understudies in this report, are giving up both near term and long term growth, and their price perception gaps to their most cross-shopped competitor, Walmart, are six points higher than Lead Conductors.
It shouldn’t come as a surprise, then, that all Lead Conductors are also in the 2nd Quartile in the Inflation RPI Ranking, while all Understudies are in the 3rd or 4th Quartile. The full list of Lead Conductors is below. The specific levers they pulled and best practice for orchestrating levers will be discussed further in the next section.
As we mentioned previously, Lead Conductors get credit from customers for being good enough on base prices while excelling at a mix of other Save Me Money levers.
What does “good enough on base prices” look like? What is the benchmark to strive for if you’re not going to be a market leader on base prices? Lead Conductors and Understudies give up 20 points in customer perception on base price perception to market leaders. They get about half of their customers to agree base prices are already low, without discounts. On the other hand, Base Price Laggards are giving up too much ground on base price perception (~35 points). It is important for retailers to understand where they fall on this benchmark, given its association with financial success and emotional connection with shoppers.
While Lead Conductors also possess an edge in mass promotions, Base Price Leaders are not far behind. A takeaway from these data points in mass promotions is that Base Price Leaders do in fact rely on mass promotions to drive price perception and are not solely relying on everyday low prices (EDLP), so differentiating on mass promotions will be a challenge for Lead Conductors and Understudies.
Where Lead Conductors demonstrate the biggest advantage over both Base Price Leaders and Understudies are in relevant promotions and loyalty. Being best-in-class in personalization is critical if you’re not a market leader in base price.
Importantly, Lead Conductors reinforce their efforts to save customers money by talking about it and having high advertising and communications awareness. It is important for retailers to support price and promotions execution with sustained marketing. We have observed one retailer who supported significant price investment for six to 12 months, then scaled back on marketing support, believing the hard work was done. Customer perception gains immediately began to slip. The lesson here is that, if you are not a Base Price Leader, you need to continually tell the story of your efforts to save customers money.
Finally, Lead Conductors’ private brand rivals Base Price Leaders in their ability to save customers money.
Best-in-Class for Save Me Money Levers
Click into the sections below to view Best-in-Class on each Save Me Money Lever. Visit The dunnhumby Quarterly again on October 18th to see even more details on best practice tactics for winning during inflationary times.
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.
Retailers in this study
Retailers included in the RPI that are interested in receiving their individual banner profiles can speak with their dunnhumby account executive, or contact dunnhumby at: https://www.dunnhumby.com/contact/.
Banner
ACME Markets
AJ's Fine Foods
Albertsons
ALDI
Amazon
Amazon Fresh
Bashas'
Big Y
BJ's Wholesale
Brookshires
Commisary
Costco Wholesale
CVS Pharmacy
Dollar General
Family Dollar
Family Fare
Fareway
Food 4 Less / Foods Co
Food City
Food Lion
Fred Meyer
Fresh Thyme
Fry's Food Stores
Giant Eagle
Giant Foods
The GIANT Company
Grocery Outlet
Hannaford
Harris Teeter
H-E-B
Hy-Vee
Ingles
Jewel-Osco
King Soopers
Kroger
Lidl
Lowes Foods
Marc's
Market 32
Market Basket
Meijer
Price Chopper
Price Rite
Publix
Ralphs
Rite Aid
Safeway
Sam's Club
Save A Lot
Save Mart
Schnucks
Shaw's / Star Market
ShopRite
Smart & Final
Smith's
Sprouts Farmers Market
Stater Bros.Markets
Stop & Shop
Target
The Fresh Market
Tops
Trader Joe's
Vons
Walgreens
Walmart
Walmart Neighborhood Market
Wegmans
Weis
WinCo
Winn-Dixie