As the Stanley Roth Sr. Professor of Retailing at Harvard Business School, Rajiv Lal has been researching the supermarket industry for nearly two decades, examining pricing strategies and looking at how supermarkets such as Shaw’s and Safeway use private label brands and frequent shopper programs. The professor sees major changes afoot.
“Supermarkets used to be at the center of gravity for the middle class,” says Lal. With increasing competition from other types of retailers for the food dollar, a shrinking middle class, and shifting cooking habits, Lal confirms what shoppers may already have discovered. Today’s consumers are buying fewer ingredients for from-scratch cooking and more prepared foods for assembling dinner at home.
Q. What challenges do supermarkets face for finding and retaining customers?
A. The competition is fairly intense. Every day somebody or other decides to carry food, including pharmacies, Target, or what have you. If anybody wants to have an increase in foot traffic, the first thing they think about is food. Of course, the quick service restaurants have done a phenomenal job. Look at Chipotle. It can be hard to make a meal for the price of a quick serve restaurant. There’s also been a shift to purchasing dry grocery and paper products from the Walmarts, Costcos, and Amazons of the world.
Q. How have economic changes affected the supermarket business?
A. The middle class has been hollowing. People have been moving to the two extremes, whether it be the lower income or higher income. A shrinking middle class affects the viability of the supermarket. And then of course there’s intense price pressure on the supermarkets themselves. Behavior is changing quite dramatically in terms of what people want from a supermarket.
Q. What do they want?
A. People used to think of supermarkets as a place to buy ingredients to cook a meal. It’s not clear how many people know how to cook today. They want to put a meal on the table, but it’s not that they want to cook a meal to do that. So they want a very convenient, easy way to put together a healthy meal for their family, which is very different than buying ingredients at the store then coming home and investing time to cook.
Q. How do you see this change in behavior reflected in stores?
A. If you look at the front of the store, you see a lot more fresh produce, baked goods, delis, and things like that. You see a lot more emphasis on those products that also happen to be high volume. Generally the bakery and fresh food sections are high-traffic areas. The average margin for grocery stores is 25 percent. Dry groceries might be 15 to 20 percent. So bakery, prepared foods, and delis might be 30 to 40 percent. At the same time, the center aisles are where the problem lies. You don’t see people taking a cart and going through all the aisles.
Q. What are stores doing to retain customers?
A. At the end of the day, the best loyalty is because of what you have in your store. People don’t go to the store because of a loyalty card program if they don’t like the store. The service, the experience, the products are certainly critical to building loyalty. At the same time, loyalty programs have been used in an effective way to retain customers because the more information you have, the better job you can do in terms of making offers to them more personalized and customized.
Q. How important are house brands?
A. Private labels are a big source of loyalty if they are well priced, good quality, and available only at the store. We wrote this paper a long time ago showing how private labels make a significant difference in terms of loyalty towards a store. There’s significant evidence to suggest that continues to be the case. Most retailers have at least two or three different levels of private label products: one for the price sensitive, one at a level that is comparative to the national brands and then there are some retailers that try to come up with certain products or product lines that are perceived as superior to the national brands. If you can deliver that kind of quality at a lower price, consumers will be very loyal to that store.
Q. Do consumers shop for value or quality?
A. When people see the quality difference between brands as very small, they are more motivated by value. As manufacturing and other factors have improved, people are looking for value and are paying a premium for quality.