U.S. Industry in 2000 Studies in Competitive Performance (1999) / Chapter Skim
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7 Grocery Retailing
7 Grocery Retailing
Pages 155-178
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From page 155... ...
Although the study of innovation for this industry is difficult, we shall nevertheless attempt it. Even though this chapter will perhaps contain less in the way of hard data than many of the other contributions, our goal is to describe a variety iThis research was funded by the Retail Food Industry Center at the University of Minnesota.
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From page 156... ...
In the 1970s, as prices soared and holding goods was preferable to holding cash, the entire distribution network accumulated large inventories. Although this strategy made sense while inflation was high, as inflation fell the expense of owning inventory caused a decrease in efficiency, creating in turn a decline in profitability and industry performance.
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From page 157... ...
supermarket industry at that time (Kurt Salmon Associates, 1993~. Then inflation rose during the 1970s.
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From page 158... ...
A 1996 report of the Food Institute estimated that the supercenter presence in groceries would increase from 2 percent of sales in 1994 to 7.4 percent in 1999 (Food Institute Report, 1996~. Another study, by the Food Marketing Institute, predicted that sales of grocery products by nontraditional food retailers will reach about $70 billion by the year 2000 (Food Marketing Institute, 1997~.
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From page 159... ...
This provided some gains in efficiency for grocery stores. In addition, supermarket POS scanner data were sold to food manufacturers and market research companies (Senauer and Kinsey, 1997~.
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From page 160... ...
Meal solutions are a challenge for the industry because it has more in common with food service than traditional grocery retailing. THE ROLE OF EXTERNAL SOURCES OF INNOVATION The major trade associations and several key consulting firms play an important intermediary role in facilitating innovation by food retailers.
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From page 161... ...
MEASURES OF CHANGE IN INDUSTRY PERFORMANCE Consumer Food Expenditures The performance of the retail food industry is tied to consumers' spending patterns, and a crucial fact is that the share of income spent on food has long been in decline. Real median family income has generally increased since 1970, although during parts of this period it flattened or even fell.
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From page 162... ...
The index Percent of sales 0.8 0.7 1 1.3 1.2 1.1 0.9 0.6 0.5 0.4- 1 1 1 1 1 1 1 1 1 1 1 ~1 ~1 1 1 1 1 1 1 ~00 9~9\0 9~\0 90~\0~9O~ oat ~ ~ ~ 9~19~ ~ ~\9~ 6\9~ ~¢ Al / / / / / / At, ~ / \ \ \/ \ Profit margins \ l l Year FIGURE 2 Profit margins. Source: Food Marketing Institute's Annual Financial Review, various years.
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From page 163... ...
outperformed both the Dow Jones Industrial Average and the S&P 500 (Food Marketing Institute, 1997~. In-Store Measures of Productivity Traditional measures of industry performance include measures such as weekly sales per square foot, weekly sales per labor hour, and sales per transaction.
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From page 164... ...
Source: Food Marketing Institute, FMI Speaks, various issues. 105 100 95 u~ ~ 90 o 85 80 75 ,j, IN/ \ / / / / ~ I/ / V / Sales/labor hour \ 70- 1 1 1 ' 1 1 1 1 1 ' 1 ' 1 ' 1 1 1 1 1 ' 1 ' 1 1 1 1 1 ~ 1 ' 1 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year FIGURE 5 Real median sales per labor hour.
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From page 165... ...
The major goals are to produce and ship products in response to consumer demand, eliminate costs that do not add to value, reduce inventories, spoilage, and paperwork, and simplify transactions between companies. The ECR movement was launched after Wal-Mart and other discount mass merchandisers entered food retailing with supercenters.
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From page 166... ...
Accurate information and high-quality products flow through a paperless system between manufacturing line and check-out counter with minimum degradation or interruption both within and between trading partners. Widespread adoption of ECR could lead to a 41 percent cut in dry grocery inventories and a $30 billion decline in total distribution costs along with an increase in product quality and freshness, the report predicts.
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From page 167... ...
Their major report, Efficient Consumer Response: Enhancing Consumer Value in the Grocery Industry, was published in 1993 by the major trade association, the Food Marketing Institute (Kurt Salmon Associates, 1993~. The fundamental stimulus for the ECR initiative was the intensified competition from nonfood retailers, such as Wal-Mart.
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From page 168... ...
These and other neceesary conditions of innovation adoption are discussed below. Innovation Adoption A characteristic shared by many of the most innovative food retailers that have succeessfully adapted ECR practices is strong leadership at the top level of management that clearly supports innovation.
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From page 169... ...
When enrolling, the consumer provides basic household demographic data. The linkage of POS scanner data to consumer purchases and demographic information opens the door to sophisticated database marketing programs, promotions, and incentives that reflect the individual customer's demographics and purchases.
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From page 170... ...
To make shopping easier, supermarkets are changing their interior designs or floor layouts. A model of a typical traditional grocery store layout is shown in Figure 8.
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From page 171... ...
Supermarkets have discovered that their traditional layout can reduce sales compared to a more user-friendly layout. A study for the FMI classified consumer food shopping trips into three categories stock-up, representing purchase of more than 60 percent of weekly groceries, routine (20-60 percent)
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From page 172... ...
EFFECTS OF INNOVATIONS ON THE CHANGE IN PERFORMANCE It is not easy to draw clear and definitive connections between the various innovations we have described and the performance of the supermarket industry. A research study by The Retail Food Industry Center analyzed the adoption of ECR practices by grocery stores in Minnesota and the impact on performance (Phumpiu and King, 1997~.
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From page 173... ...
However, what this study could not conclude was whether ECR readiness increases productivity or whether better performance simply makes it easier to adopt ECR practices. Category management, a part of ECR that seeks to reduce the number of TABLE 2 ECR Readiness and Store Productivity Measures ECR readiness Productivity measures High Moderate Low Weekly sales per labor hour $124.01 $104.61 $78.07 Weekly sales per square foot of selling area $13.65 $10.70 $6.06 Annual inventory turnover 37 26 16 Source: Phumpiu and King (1997)
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From page 174... ...
The industry's responses to these external changes have come in two broad categories: process innovations and service innovations. ECR is a managerial initiative aimed at improving the use of information to control the supply chain.
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From page 175... ...
The necessary data on a national level are simply not available to definitely assess the impact of service and process innovations in grocery retailing, and in particular ECR practices, on productivity and performance. With this in mind, The Retail Food Industry Center (TRFIC)
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From page 176... ...
. "Reengineering the Grocery Supply Chain, in Changes in Retail Food Delivery: Signals for Producers, Processors and Distributors." Working Paper 9603, The Retail Food Industry Center, University of Minnesota, St.
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From page 177... ...
. "Adoption of ECR Practices in Minnesota Grocery Stores." Working Paper 97-01, The Retail Food Industry Center, University of Minnesota, St.
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