How do the regional US grocers continue to dominate their markets? Amazon, Walmart, Costco, Whole Foods, Trader Joes, Aldi and Target use a national grocery strategy. How do the “HEB / Publix / Wegmans / Byerlys” chains continue to thrive? How do they build such deep connections to their markets that they are nearly impossible to unseat? Is it the ads on the centerfield wall at the local Triple-A ballfield? Then supporting local marathons and cancer benefits? As well as hiring seniors as shoppers to pick online orders and high schoolers to corral shopping carts in the parking lot?
National chains focus on economies of scale. Their quarterly reports say “driving efficiencies from a repeatable process to meet customer needs.”
Regional chains go out of their way to build store-specific plans. They focus on the specific needs of a neighborhood. Done right, the store reflects its local shoppers in everything from its décor to its product selection and promotions – even its store hours. That kind of differentiation is difficult to replicate for national logistics and merchandising systems. Which is why regional grocers can succeed where the national chains struggle.
Which national grocer stands out?
There is really only one national retailer who has succeeded with a similar micro-focus on single stores: Whole Foods. Its eleven regions have the autonomy and support from the Global Headquarters to make the right decisions at the store level. Whole Foods operates more like a regional chain than a national retailer. In fact, the organization is much closer to a SuperValu wholesale model. The headquarters provides guidance and support for decisions that are made within markets. It is a model that Amazon will have to handle with respect. Otherwise, the chain’s value will be swept away if management decision-making is collapsed to Austin TX.
David Lusk, former Chief Merchant at HEB’s Central Market, is well aware of that since HEB operates in Whole Foods’ back yard. The two central-Texas competitors are an excellent example of how customers benefit when stiff competition exists in the grocery channel.
Where are the regional grocer’s profit pools?
If you are wondering what generates the profit to fuel the kind of store customization that make regional grocery chains a success, the first answer can be found in its Supply Chain.
The Regional Supply Chain
A regional supply chain can be optimized for the territory. The word “territory” sounds small in the USA. But if you remember that Germany is roughly ½ the size of Texas, you can see that optimizing for the right size geography and population can be more then enough to support a healthy grocer.
With Distribution Centers a short-distance away (relative to national chains) and a local network of suppliers regional chains have short lead times. As all forecasters know, shorter lead times for purchase orders leads to more accurate forecasts and orders that more closely match sales rates. Because of a national chain’s size, they must provide their forecasts months in advance on promotional and even replenishment orders. The extended time means that their forecasts have higher variability risk and they cannot be as nimble as regional chains. The shortened supply chain of a regional player means they can wring days of supply out of their system. When each day of supply represents tens or hundreds of millions of dollars in inventory, each day counts.
Private Labels & Local Brands
The second major profit generator is a strong private label (or owned-brands) program. National players will focus on national brands (like Heinz ketchup or Campbells soup.) Competition puts tremendous price pressure on those brands. Everyone will be priced right on those brands – which means that there will be very slim margins. A retailer who can shift the focus to local, organic or private label brands can find breathing room and profit.
To make matters worse, many of the largest CPG companies and brands compete in declining categories like canned soup, canned vegetables, packaged meats and frozen meals. Those categories have declining margins as a result of competitive price pressure for the national brands. As the categories overall sales have declined, large CPG brands lowered their own margins to try to gain market share. Many miss that the declining sales for national brands is due to consumer preferences for alternative organic, local or private label brands.
With their back up against the wall, Consumer Packaged Goods companies can fight back with
- Innovation that recognizes the regional differences and
- Joint business planning to compete in local markets.
In other words: build relationships and sharing data with the regional (not national) grocers.
Unfortunately, CPG’s are dazzled by the purchase order sizes from Target, Walmart and PetSmart. They continue to focus their best and brightest team members on building programs for national retailers with B and C programs for regional grocers. Exclusive offers are purposefully created with minimum order quantities so high that only the biggest retailers can take advantage of the offers. And with every passing quarter, CPG’s lose market share to local brands and owned brands built in the regional grocery channel.
Which national CPG’s stand out?
There are a few DSD players like Frito-Lay and Coca-Cola that continue to have a deep well of store-level knowledge. Their detailed understanding of store inventories and sales make them a stand out from the CPG company that has its own store service teams or local brokers. Similarly, local beer distributors with national brands have the insights to understand and pivot when local tastes demand custom assortments.
But for the behemoths: Nestle, Procter & Gamble, Unilever, Tyson, Kraft Heinz, Danone and the rest, unlearning how to behave like an enormous multinational to truly partner with regional US grocers is nearly impossible. Which is where the profit pool begins: for regional chains and their local, organic and private brand suppliers.
Learn more about leveraging the Timeless principle of strategy to build your retail business in Chapter 1 of Retail: The Second-Oldest Profession.