presented by: john rand, senior vice president alida destrempe, senior analyst grocery retailing...

Presented by:

John Rand, Senior Vice PresidentAlida Destrempe, Senior Analyst

Grocery Retailing Webinar SeriesJanuary 30, 2014

US Grocery Retailing: Who Grows and Why?

© Copyright 2014 Kantar Retail

Copyright © 2014 Kantar Retail. All Rights Reserved.

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Disclaimers

The analyses and conclusions presented in this seminar represent the opinions of Kantar Retail. The views expressed do not necessarily reflect the views of the management of the retailer(s) under discussion.

This seminar is not endorsed or otherwise supported by the management of any of the companies covered during the course of the workshop or within the following slides.


Today’s Agenda

• The Year Ahead

• Looking in the Mirror: H-E-B & Kroger

3


1 Kroger $89,089 $126,901 $37,812 38.0%2 Walmart* 6,401 18,751 12,350 12.4%3 Publix 28,540 36,534 7,994 8.0%4 Whole Foods 12,566 20,062 7,496 7.5%5 H-E-B 19,064 23,708 4,645 4.7%

$155,660 $225,957 $70,297 70.7%6 Wakefern 12,713 16,325 3,612 3.6%7 Ahold 26,023 29,242 3,219 3.2%8 Wegmans 7,084 9,980 2,896 2.9%9 Winco 5,272 7,220 1,948 2.0%

10 Meijer** 10,346 12,292 1,946 2.0%11 Harris Teeter 4,710 6,106 1,396 1.4%12 Hy Vee 7,247 8,532 1,285 1.3%13 Giant Eagle 6,642 7,918 1,277 1.3%14 Bi-Lo 9,092 10,332 1,240 1.2%15 Delhaize 17,804 18,801 997 1.0%

$262,593 $352,704 $90,111 90.6%16 Supervalu 10,939 11,827 888 0.9%17 Fresh Market 1,530 2,380 850 0.9%18 DeMoulas 2,582 3,169 586 0.6%19 Tops Markets 2,222 2,786 564 0.6%20 DeCA 5,322 5,882 560 0.6%

$285,189 $378,749 $93,559 94.1%*Walmart includes supermarket formats: Neighborhoomd Market, Supermercado de Walmart, Walmart Express, other small 'test' stores

** Meijer includes grocery sales only

Top 20 Total

Rank % Sales Added (US Supermarket Sales)

Sales Added 2013E-2018E

% of Total Sales Added 2013E-2018E

Top 5 Total

Top 15 Total

RetailerSales 2013E

(USD millions)Sales 2018E

(USD millions)

Trend: Growth No Longer Comes from Large, Efficient Players

Source: Kantar Retail analysis; company reports 4

Top 20 Supermarket

Retailers:

account for 94% of sales added from

2013E-2018E


What Has Changed?

• Who dropped off the list? – Safeway, Sprouts, Stater Bros.

– Safeway fell to 73 ranked by sales added between 2013E-2018E

– Sprouts is now listed at 21. Sprouts has yet to make an appearance on Kantar Retail’s top 20, but continues to move “up the list.”

– Stater Bros. dropped to the 24th spot. It was previously in 19th.

• Who is ‘new’ to the Top 20? – Both Top’s Market and Demoulas Market Basket are making their first

appearance on the list.

– Supervalu jumped back onto the Top 20 after falling off pre-divestiture.

• Both Kroger & Walmart have held the #1 and #2 spot in the last few years.


© Copyright 2014 Kantar RetailSource: Kantar Retail analysis 6

Supermarket Diffusion Still Underway

• Grocery channel continues to fragment into retailers that understand they have a targeted shopper and a brand and have made decisions accordingly

the only way you succeed is to stand out in the crowd

you need to know who you are and who you serve


Hybrids Proliferate in Diffused Retailing


Fragmentation & Differentiation Becoming a Trend

• Many efficiency strategies (production, trade spend, customer investment) are grounded in the 20th Century

• Fragmented markets + standardized programs = significant competitive gaps

• If we hope for a more balanced customer environment, this is good

• Simply put, there’s more variation in retailers’ go-to market strategies than in the CPG community

The market is more different than most companies realize

Source: Kantar Retail analysis 8

Do NOT concentrate resources on a few key customers. Simplistic approaches are flawed and do not match marketplace reality.


Natural/Organic

Natural/Organic ValueValue

PremiumPremium ClubsClubs

‘13E-’18E CAGR =

9.2%

‘13E-’18E CAGR =

5.4%

‘13E-’18E CAGR =

7.5%

‘13E-’18E CAGR =

6.3%

One Thing is ClearRetailers with a clear brand outgrow the market

#1 #2

#3#4


How to Make Sense of it All? Advanced, stable, pre-transitional


Advanced

Stable

Pre- Transitional

• Retailers that are not at immediate risk, but have gaps in either or both execution and strategy.

• Competent retailers that are relevant, but have a less clear and coherent shopper base.

• Steady outlook for growth in line with the channel.• Example: Ahold, Giant Eagle

• Retailers that are troubled and are expected to have difficulty sustaining growth in 2014. (minimal to low growth or decline)

• Inconsistent execution of strategies and/ or lack ability to leverage shopper understanding.

• Example: Safeway, Delhaize US

• Expected to lead financial growth within the industry.• Retailers that have a clear brand message and strong

understanding of its shoppers.• Thought leaders with strong and consistent execution of

strategies.• Example: Kroger, H-E-B


2014 Grocery Channel Trends:Rise of New Markets

11


The Windy City: Chicago Loss of Safeway creates new opportunities

Source: Kantar Retail analysis; Chain Store Guide Market Share (2012) 12


Texas: Where the Big Keep Getting Bigger• Dallas is probably the next major market for H-E-B.

• Aldi opened stores aggressively in 2013.

• Kroger outlined that Dallas will be a “fill-in” market for 2014.

• Growing footprint of Neighborhood Market

• Entrance of WinCo

• A home to specialty retailers


Opened

distribution center

Hello! WinCoCore market for

Neighborhood Market

Growth from the

“unfamiliar”

H-E-B

experimenting?


Mid-Atlantic/Southeast MarketThe regional grocer fight

HeraldOnline.com 14

6,000 items

• Publix continues to move North

• Delhaize making changes to Food Lion

• Harris Teeter will be part of Kroger

• Continued pressure from Walmart


Competition Heating Up!

• Most chain retailers have achieved competitive scale• Critical skill for most retailers will be to grow store sales, built

by:– Making stores more effective and putting emphasis on remodels and revamps

– Maintain & drive traffic through loyalty, marketing, and relevancy

• Competitive pricing depends on competitive efficiency• Retailers need help in understanding where and why their

shoppers go to another retailer



2014 Grocery Channel Trends:Health & Wellness

16


Focusing on “Eating Well & Being Well”

Source: Kantar Retail analysis; store visits 17

The message attached to services is more important and will play a larger role in overall store brand, marketing, and merchandising.

FoodFoodFitFit

PharmacyPharmacy


A Guide to Eating Right

Shelf tags to Shopper insights

Leveraging its core purpose: food

Source: Kantar Retail analysis; store visits & materials, retailer websites 18


A Resource to Managing NeedsLeveraging the pharmacy business

Source: Kantar Retail analysis; store visits & retailer websites 19

• Shoppers can discover the convenience of having a grocer prepare their ‘scripts while they shop for groceries—and retailers can gain a lot of traffic and basket

• Suppliers that play in the HBA and Rx spaces should take notice

• How can your items play off of the pharmacy/OTC/HBC departments?


Completing the Health PackageHandling the diet plus the exercise

Source: Kantar Retail analysis; company websites; HealthyAlbany.org, TimesUnion.com

20

What we have seen……


Health & Wellness Conclusion

H&W trends may allow supermarket retailers to become a provider, a resource, a guide, but most importantly...

An Editor



2014 Grocery Channel Trends:Digital Development

& Price Pressure

22


Digital DevelopmentEnhancements and changes to current digital strategies

Source: Kantar Retail analysis; company materials 23

• Will present new and more marketing opportunities• Leveraged to create engagement and capture the shopper • Websites will become an integral part of pre-trip planning (recipes, solutions, find savings,

organizing the trip, etc.)• Expect more retailers will launch online shopping initiatives.

new marketingnew marketing

more engagementmore engagement

more onlinemore online


Continued Price Pressure

• Digital may push retailers to personalized pricing.

• Maintaining price leadership will drive retailers to offer more stable prices, especially in a world where shoppers have gained ongoing price transparency.

• Conventional retailers “in the middle” (not premium, nor value) will continue to feel squeezed and have a harder time with growth.

Clarity of value to shoppers will be a must

Source: Kantar Retail analysis; company materials 24

© Copyright 2014 Kantar RetailSource: Kantar Retail analysis

Digital Impact: 100%Even if you don’t sell much online (today), the impact extends well beyond eCommerce

25


A Committed Change in Strategy Could be BeneficialThe era of the dominant promotion is ending


Hybrid pricing strategies trending toward EDLP are foundational in a world where shoppers have gained

ongoing price transparency

Variety of retailer pricing models emerging:

•Intensified EDLP

•Limited assortment- Margin (Dollar, Convenience)

- Velocity (Club, Limited Assort. Grocery)

•Dominant depth- Category specialists

•“Match and Switch”

•“KVI & Draft”Identify key value items to be at/near price leader on

Price Model 2013E 2016E 2018E 2013E-2018E

CAGR

Hybrid 217,981$ 250,278$ 275,093$ 4.8%

High-Low 124,850$ 130,947$ 135,658$ 1.7%

EDP 53,497$ 70,857$ 82,508$ 9.1%

Total 396,328$ 452,082$ 493,259$ 4.5%

US Supermarket Price Model


Looking in the Mirror:Kroger vs. H-E-B

27


Continued Financial SuccessStrong outlook and growth


1 Kroger $89,089 $126,901 $37,812 38.0%2 Walmart* 6,401 18,751 12,350 12.4%3 Publix 28,540 36,534 7,994 8.0%4 Whole Foods 12,566 20,062 7,496 7.5%5 H-E-B 19,064 23,708 4,645 4.7%

$155,660 $225,957 $70,297 70.7%6 Wakefern 12,713 16,325 3,612 3.6%7 Ahold 26,023 29,242 3,219 3.2%8 Wegmans 7,084 9,980 2,896 2.9%9 Winco 5,272 7,220 1,948 2.0%

10 Meijer** 10,346 12,292 1,946 2.0%11 Harris Teeter 4,710 6,106 1,396 1.4%12 Hy Vee 7,247 8,532 1,285 1.3%13 Giant Eagle 6,642 7,918 1,277 1.3%14 Bi-Lo 9,092 10,332 1,240 1.2%15 Delhaize 17,804 18,801 997 1.0%

$262,593 $352,704 $90,111 90.6%16 Supervalu 10,939 11,827 888 0.9%17 Fresh Market 1,530 2,380 850 0.9%18 DeMoulas 2,582 3,169 586 0.6%19 Tops Markets 2,222 2,786 564 0.6%20 DeCA 5,322 5,882 560 0.6%

$285,189 $378,749 $93,559 94.1%

Sales Added 2013E-2018E

% of Total Sales Added 2013E-2018E

RetailerSales 2013E

(USD millions)Sales 2018E

(USD millions)

Supermarket Sales (includes sales from only supermarket formats)

1st

5th


EBITDA (service the debt)

New stores, new formats, loyalty program, great prices,

SHE stores, Urban Fresh, supply chain, etc., etc., etc.

Shareholder value (stock price,

dividends, etc)

Shopper satisfaction/loyalty

Well run, attractive stores with good

prices

Basket/wallet share growth

Source: Kantar Retail analysis

Marginal sales gains, protracted traffic loss

Divestiture of banners

What Are the Drivers of Performance?Goes Deeper Than Supply Chain, Strategy, etc.

29

Purpose Process Outcome

Well run, attractive stores with regional elements

and good prices

Strong sales, maintained traffic, increase loyalty


The Importance of the Corporate CultureHelps define a company’s success

Source: Kantar Retail analysis; kroger.com

Rodney McMullen• CEO since January 2014•President/COO since 2009•EVP – Strategy, Planning & Finance since 2000•GVP and CFO in 1995•Multiple planning & finance rolls since 1989•Joined the company in 1978 as a part-time stock clerk

30

Charles Butt•CEO since 1971•Third generation grocer•Started as a bag boy at age 8. H-E-B was founded by his grandmother in 1905.


What Role Does Culture Have in Performance?

• What is “culture”?

–It’s the manifestation of the retailer’s purpose in people’s actions/behaviors

–The retailer’s internal “brand”

–Roots in company’s history/ownership

• Culture and performance are inextricably linked



Ownership has a Huge Impact on Retail MetricsNot What is Tracked, But What is Important

– How a company is owned is important to any industry

– But in retail, there are some key factors that come into play to be considered

Sweat Equity – Low Threshold of Entry

Pervasive Customer Interaction

High Cash Flow to Profit Ratio

High Capital Investment – Fixed and Fluid

Intense Competition

What do you think will be the major factors influencing H-E-B’s & Kroger’s growth over the next 12-24 months?

What do you think will be the major factors influencing H-E-B’s & Kroger’s growth over the next 12-24 months?



Differentiated Format Development

33

Sq

uar

e fo

ota

ge

…and more

Targeting:•Cater to different trips

•Each offer different baskets•Aimed at certain shopper demographics

Source: Kantar Retail analysis; store visits, retailer websites, HoustonChronicle


Both Growing Store Footprint Expansion plans in the making


Dallas

Expand in “fill-in” markets:

Year-to-date = $1.8 billion in

capital investments

Dallas

“H-E-B has been considering stores in DFW for roughly 15

years and it continues evaluating the market.”

?-Leslie Sweet

Director of Public Affairs, HEB

Growth to Growth to fight fight

competitioncompetition

Growth to Growth to fight fight

competitioncompetition


Overall Success Driven by Profitable StoresSales per average square foot


sa

les

/ a

vg

. s

q.

ft.

Forecast


At Store LevelGreater sophistication as means to capture trips


Educational signage

Interactive elementsEntertainment through live demonstrations,

taste testing

Highlighting merchandise


Work Hard to Convey Value% at Presence who think the brand costs more than they are prepared to pay

Source: Kantar Retail analysis; BrandZ and store visits 37


Offset Margins One Way or Another…KVI’s vs. Price Comping


Actions

Premium loyal customer appeal,

Basket driver, Trip driver, Item affinity, Item uniqueness,

Shopper price elasticity

Known Value Item:Get the price “right” with these

SKUs

Non-KVI:Take margin and profit with

these SKUs

Inputs

Analysis Criteria

Match Comparable-Price Comping

Unique Economics-Real Estate

Increase Non-Comparable

-Captive Branding


Pricing Strategy ExecutionPrice investments maintain sales momentum

Source: Kantar Retail analysis; 39

Not just a campaign, H-E-B price comps

against out of market players as a strategic

initiative also

Not just a campaign, H-E-B price comps

against out of market players as a strategic

initiative also

Multiple saving opportunities

Multiple saving opportunities

ETC….

Comps EVERYONE

KVIKVI

Draft Draft


Understands RegionalStaying relevant in local markets

Source: Kantar Retail analysis; store visits and retailer websites 40


Similar Challenges

• Online/digital efforts.

• Increase of competition.

• “Comping” the prior year performance will become more difficult the more successful you are.

• Increasing demand for brand clarity in a diffused market.

With every “up” there is a “down”



Summing Up H-E-B & Kroger

• H-E-B & Kroger have several characteristics which set both apart from the rest of the channel

– Both have considerable scale, but H-E-B is still very much a regional retailer, whereas Kroger “reacts regionally.”

– Both are showing impressive growth despite the recession and competition from leaders like Walmart and outside of grocery channel

– No fear of Wall St.:• H-E-B is a family owned retailer which frees it from Wall St. pressure, but

can make it challenging to work with• Though public, Kroger has cares more for shopper value than shareholder

value

– Both demonstrated competency at leveraging multiple capabilities at the same time, which can increase complexity

– Both have sophisticated marketing capabilities and a clearly defined brands



Contact:

John RandSenior Vice [email protected]

T:+1 617 912 2860M:+1 508 667 3321www.kantarretail.com

Alida DestrempeSenior [email protected]

T:+1 614 355 4030www.kantarretail.com

presented by: john rand, senior vice president alida destrempe, senior analyst grocery retailing...

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