Matt Hamory and Marco Di Marino are both partners and managing directors at consulting firm AlixPartners. Hamory is the co-lead of the firm’s global grocery practice.
A chief merchant stares at her computer. She’s used every trick of the trade she ever learned, but sales continue to fall. She can see where it’s happening — but not why.
She’s not the only one. Many traditional grocers are encountering an unsettling reality: Customers aren’t responding to tried-and-true tactics the way they once did. The levers that could always be relied on to drive volume are no longer delivering.
Fundamentally, there are two reasons. First, traditional grocers have fallen out of the consideration set for certain categories and items. Second, consumers can get the categories and items they do want from traditional grocers à la carte.
Two of the pillars of the traditional grocery business model — achieving a sustainable margin based on full baskets, and increasing basket size through incremental and impulse purchases — have gotten shaky as consumers eschew full shops and buy online more.
To support a modern version of the business, grocers need a category management approach with an entirely different financial underpinning.
If grocers keep doing what they’ve been doing, they should expect volumes to keep declining. What’s happening right now isn’t a phase. It’s the new normal.
The end of the full shop
The full shop has been replaced by multiple, mission-driven trips — motivated by unique products, market-leading prices, and convenience — that produce smaller baskets. When the full shop still existed, budgeting at the desk level made sense because every category had the chance to compete for its fair share, and growth was always the right goal.
Because how consumers shop has fundamentally changed, grocers need to alter how they measure financial performance and set their budgets.
When budgets are set at the desk level, it triggers a behavior from the merchant that is only optimal if consumers buy the full basket at the store — which they no longer do. An alternative could be creating budgets at the mission or customer level based on how many dollars the grocer wants to capture from a certain type of trip or a certain customer profile.
It’s not an insignificant shift, but change is coming either way. The old approach to category management keeps traditional grocers engaged in battles that don’t exist anymore. The new approach frees grocers to supercharge their strengths and build loyalty around them.
Here are the practical pivots that will be required:
Make traffic the strategic focus. Grocers should move from viewing volume and rate as the critical metrics to prioritizing traffic. As the industry landscape continues to change, grocers will need to become more focused on profitably selling fewer SKUs. Part of making this change will require the establishment or elevation of a few powerful destination departments, which over time will allow grocers to stabilize or grow traffic rather than continually having to “buy” it with bargain-basement promotions. This strategy will result in an initial decline in topline numbers, but without a transformation, most traditional grocers will remain susceptible to further sales decline.
Set growth goals based on relevance to priority missions or customer profiles. Grocers need to let go of the expectation that every category should hit a baseline level of growth. In some categories, they will benefit by selling less but doing so more profitably. Chief merchants need to cultivate a new vision for their teams and lead a transition from focusing on individual category performance to prioritizing share growth in specific missions or customer profiles that are strategically important.
Fund the big bets. “Fair share funding” needs to be a thing of the past. To drive traffic, grocers need signature elements — certain items, categories, departments or services for which they’re famous — and those need outsize investment. When shoppers make a store part of their rotation because it has certain items they can’t get anywhere else, other products will find their way into the basket. But growth for those ancillary items isn’t the goal; the strength of the main attractions is what makes the whole operation viable.
The bottom line
It should go without saying that unwinding processes that have been ingrained for decades — and spinning up new ones — doesn’t happen quickly or easily. It’s complicated. It takes intention and follow-through to get everyone on board. It requires significant due diligence to understand the financial implications of a different business model.
The alternative, however, is continuing with an outdated model that is not sustainable.
Declining sales volumes aren’t a death knell for traditional grocers — unless they do nothing. Transforming category management can kickstart the recovery.
