Under pressure: Retailers work to stay competitive
The relentless growth of hard-discount retailers and the increasing adoption of online shopping will keep pressure on traditional retailers in the year ahead, according to analysts.
Although the strong economy promises to drive consumer spending, the ongoing expansion of such low-price specialists as Aldi and dollar stores will force food and drug retailers to remain aggressive on price, said Katherine Black, U.S. consumer and retail strategy co-lead at KPMG. At the same time, retailers are being pressured to invest in click-and-collect and delivery solutions to retain customers who are lured by online offerings, she said.
“When you’ve got thin margins already, and you then have to spend on extra infrastructure, and you have to stay in the game on price, if not lead on it, we expect it to create a real financial issue and a lot of margin pressure for retailers,” Black said.
She expects online retailing to continue to expand in food and drug categories in 2019, including perishables. KPMG’s recent 2018 Grocery Retail Consumer Perception Survey found that 48% of U.S. consumers now do some or all of their grocery shopping online, and 59% are planning to do so in the future.
Rising labor costs also are expected to remain a significant source of pressure on retailers’ margins, Black said, as higher minimum wages go into effect throughout the country, and strong employment fosters a competitive environment for workers.
“We see a lot of retailers experimenting with ways to take labor costs out of the store, whether that be cashier-less checkout or using robots for stocking,” Black said. “I think we will see more and more of that in the market — it’s a pressure point, and a lot of retailers are trying to innovate there.”
Economy cuts both ways
While the strong momentum behind the U.S. economy, at this point, means consumers will have more disposable income, it also could drive more spending at restaurants, said Chuck Cerankosky, an analyst with Cleveland-based Northcoast Research.
“We haven’t seen this kind of economy in a long time, and customers are reacting to it in various ways,” he said. “More people are working, and the dual-income household is back everywhere, so that means fewer hours available to cook at home and more sales at restaurants. The industry has to react to that.
Retailers also have to make shopping more convenient, whether it’s by click-and-collect or delivery methods, and they need to be in-stock, because people just don’t have time to shop,” Cerankosky said.
Burt Flickinger, managing director at Strategic Resource Group, predicted GDP growth of about 2.3% to 2.5% in 2019, with price inflation of about 1.5% to 2% and labor cost inflation of about 3%.
CPG companies are experiencing increased costs in several areas, including new tariffs and higher distribution costs, which are being passed on to retailers for the most part, according to KPMG’s Black. She said that whether retailers can continue to pass along these increases to consumers would depend in part on whether the economy remains strong in 2019.
“I think retailers are happy to bring prices up a little bit to help offset some of these added costs, but I’m not sure that’s true across the board, and I’m not sure how sustainable that will be,” she said. “In a traffic-
driving category, they have to stay firm on price on those traffic-driving items.”
The high-labor costs involved in home delivery will continue to drive retailers toward the lower-cost click-and-collect model in the year ahead, Cerankosky said. He also said he expects retailers to continue to experiment to find the right balance between click-and-collect and delivery for each market, while at the same time driving traffic into physical store locations.
He cited Costco as an example of a company that is succeeding in driving both e-commerce and brick-and-mortar sales growth. “It shows you that there is a way to create an experience for the shopper that they enjoy in-store, while at the same time presenting an e-commerce service to them as well,” Cerankosky said.
Retailers both are rolling out click-and-collect services to additional locations and making more products available through this service. Bentonville, Ark.-based Walmart, for example, recently said at its 2018 Analyst Day that it plans to add pharmacy and apparel to the items available for online ordering and store pickup in the future, according to a report from BMO Capital Markets.
For home delivery, some retailers will continue to test in-house solutions, while others will continue to partner with such services as Instacart and Shipt, the delivery service owned by Minneapolis-based Target.
In addition, online will play a larger role in influencing purchases, through the influence of social media or digital recipes, for example, said Sy Fahimi, senor vice president of product strategy at Symphony RetailAI.
“Grocers will also become much more adept at providing consistent and engaging updates for online customers, a la Grubhub or Domino’s, giving them valuable real-time insight into their order status and reducing the friction between in-store control and online convenience,” he said.
Automation and technology
Retailers will continue to experiment with a range of technologies to enhance efficiencies and drive sales in 2019.
Walmart, for example, recently rolled out a test of shelf-scanning robots to more than 50 stores, and also has launched a test of robotic home delivery in partnership with automaker Ford in Florida’s Miami-Dade County.
“We want to make sure we stay on the cutting edge of grocery delivery by exploring what’s new and next,” said Tom Ward, senior vice president of digital operations at Walmart U.S., in a recent blog post.
Similarly, Cincinnati-based Kroger recently began testing delivery using autonomous vehicles through a partnership with robotics company Nuro. The test launched at a single Fry’s Food Store in Scottsdale, Ariz., offering same-day or next-day curbside delivery of groceries ordered online.
In the pharmacy area, technological advances include the ongoing expansion of such telemedicine solutions as Teladoc, which CVS Health began rolling out in 2018 at its MinuteClinics. The video conferencing system allows patients to consult with medical practitioners, via the CVS mobile app, about a range of minor illnesses, injuries and conditions.
Larry Merlo, president and CEO of CVS Health, said the offerings will roll out state by state. As a complementary strategy to the clinics, Teladoc offers an opportunity for the chain “to expand our reach, as well as expand our scope of practice,” said Merlo, citing after-hours care as an example.
Similarly, Boise, Idaho-based Albertsons in late 2018 opened two artificial intelligence- and augmented-reality powered teleclinics through a partnership with Akos Med Clinic at two Safeway locations in Arizona, with plans to bring it to 50 stores this year.
Mergers and acquisitions
Such acquisitions as Kroger’s investment in Ocado — which is bringing the company a fully automated fulfillment center — and CVS Health’s purchase of Aetna illustrate the diversity of acquisition opportunities in the marketplace, analysts said.
However, margin pressures could impact retailers’ ability to execute mergers and acquisitions in 2019, according to KPMG’s Black. In the current competitive environment, retailers need to carefully weigh the potential synergies of potential acquisitions, she said.
“I think we are seeing a lot more in terms of partnerships in the retail space — lower-risk investments in firms without full ownership — rather than pure M&A,” Black said. “The risky thing for retailers is that they acquire a company that is fundamentally different, and that’s a tricky kind of acquisition because to get the full value out of it, you need to figure out how to integrate it to a degree into the core business without destroying what was special about the target to begin with.”
Symphony RetailAI’s Fahimi said channel blurring will continue in 2019 as retailers evolve their in-store experiences. “Independent channels, formats and brands will all blur to become more
experience-based,” he said. “For example, we will see more grocery stores that also have restaurants and banks inside, which is how retailers will be able to compete with Amazon. It’s up to retailers to provide a friendly and engaging shopping environment.”
Experimentation with channel partnerships and format changes is well underway, with Kroger and Walgreens working together on a new format that includes Kroger products inside Walgreens stores, for example, and Walgreens partnering with subscription beauty brand Birchbox to augment its own beauty aisles. “We’re expanding our initiatives and partnerships, and there are a lot more to come,” said Stefano Pessina, vice chairman and CEO at Walgreens Boots Alliance.
Retailers also will continue to shutter underperforming stores in 2019, according to Northcoast Research’s Cerankosky. “I would expect to see ongoing, steady consolidation in the industry, with marginal stores disappearing,” he said. “They are very hard to sell, and what Supervalu — now UNFI — is going through with its retail stores is a good example.”
Health and wellness
Positioning that emphasizes health and wellness will remain a winning strategy for food and drug retailers in 2019 and beyond, analysts said. Retailers will continue to emphasize in-store health solutions by adding clinics, dietitians and other health-oriented services.
“Expect clinics and dietitians, and other special services, to impact sales in those stores at a double-digit pace in same-store comparison sales,” said Flickinger of Strategic Resource Group’.
John Clevenger, senior vice president of Acosta’s Strategic Advisors consulting arm, said opportunities remain for retailers to expand their offerings of health services. “Both food and drug channels have invested heavily in in-store pharmacies, and grocers in particular have expanded their ‘better for you’ food items, so the appropriate product offerings have been established,” he said. “What remains are services: diagnostics, seminars, in-store help centers, etc., that can be established in partnership with local health providers or nonprofit groups.”
Flickinger cited Rochester, N.Y.-based Wegmans Food Markets as an example of a retailer that is benefitting from the addition of an expanded assortment of organic food products. “Those categories can grow at at least 7%, and typically 10% to 12% at year two,” he said.
Cerankosky cited Sprouts Farmers Market, based in Phoenix, as an example of a retailer that has been growing at a rapid pace in part by virtue of the “health halo” it has created through better-for-you product assortments.
Amazon Fresh and Whole Foods Market will continue to pressure food retailers in 2019, analysts said, although it’s not clear that Amazon’s 2018 acquisition of Whole Foods has had much incremental impact on traditional food and drug retailers. “I think Whole Foods remains the same competitor it has been,” Cerankosky said.
He said that Whole Foods’ core strengths in high-quality perishables and prepared foods remain strong drivers of store traffic and are resistant to e-commerce. The chain’s expertise in prepared foods also helps it maintain an advantage in driving store trips.
Meeting local consumer demands
KPMG’s Black said successful retailers in the year ahead will take steps to ensure that they are pursuing the right strategies for their individual markets. “Every customer base is very unique, [there are] vast differences in how consumers are adopting online shopping and adopting different types of products and retail formats,” she said. “The strategy has to be tailored to the specific customer base for it to be effective, which is kind of common sense, but it is often ignored common sense.”
And while advanced technologies using data analytics have the potential to assist retailers in tailoring their offerings to meet the demands of their unique consumers, Black cautioned that such solutions represent “yet another cost and another change, among all these other costs and changes.”
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