Embrace relevant lessons of the past to forecast and swiftly evolve to meet new demands ahead.
This article originally appeared in the July 2020 edition of NACS Magazine.
As we navigate the current recession (which economists say began in February), it’s instinctive to revisit learnings from the 2008 recession to gauge how this one might impact convenience retailing. But stark differences in the world today versus 12 years ago should be considered when trying to predict future shopping habits of convenience customers post COVID-19 and crafting agile category management plans to flex with consumer demands.
Today, the average price of gasoline hovers under $2 per gallon, while in April 2008 some parts of the U.S. were paying as much as $3.50 per gallon. Mortgage rates dropped this April to their lowest level ever in the history of the Mortgage Bankers Association’s (MBA) 30-year-old weekly survey, compared with a significantly tighter credit market in 2008. Despite the differences in economic fundamentals between the two eras, one thing is for sure—consumer uncertainty, fueled by high unemployment, traditionally translates into a contraction of consumer spending. Though some recession-proof categories such as tobacco and alcohol might be spared, preserving category sales will hinge on merchandising agility to apply relevant lessons from the past while forecasting what trends lie ahead.
PROTECTING CATEGORY PROFITABILITY
A study by the University of Chicago provides some insight into how consumers respond during uncertain economic times. The study, “Food Purchases During the Great Recession,” indicates that unemployment led households to purchase less expensive brands, irrespective of whether they were private label or national brands. Interestingly, it also revealed that unemployment had an insignificant effect on top national brands, suggesting that less-expensive brands stole share from mid-tier brands, while expensive brands were relatively insulated. This may point convenience retailers to some basic assortment lessons for the future. For example, rethink categories with a multi-tiered brand strategy such as “good, better, best”—leaving less space for “better,” while expanding lower priced brands and preserving shelf space for select premium brands.
Price—both everyday and promotional pricing—are important elements in the strategies retailers deploy to retain existing customers and earn the dollars of new ones.
If private label is part of a retailer’s arsenal, now is the time to promote its value and quality as there is high probability it will display sales “stickiness” post-recession. During springtime stay-at-home orders in the U.S., consumers increasingly tried private label brands at supermarkets. Data from AlixPartners show that 65% of U.S. consumers tried new brands during the coronavirus pandemic—79% did so because their usual option was out of stock—and consumers chose more lower-priced private label options over national brands. 7-Eleven, for example, has a strong commitment to private label. Today, the company currently offers more than 1,500 private label items and expects annual sales to reach $1 billion.
By engaging in a more streamlined assortment strategy post-COVID, retailers may see some operational savings related to receiving, stocking and ordering. However, when making assortment changes, retailers must consider any financial impact from lost rebate revenue. Retailers may need to work with their vendor partners to restructure contracts that support this new strategy.
And finally, if consumers do indeed start to “trade down,” it can be risky for retailers since less expensive brands typically offer less penny profit. To combat this risk, retailers should look to overlay these lower cost products with “multiple” style promotions that drive incremental units and penny profit. An example would be to take a $1.19 single-priced item and lead with an everyday promotion “Buy One Get One for $1” to drive a larger basket ring and more margin dollars.
PRICING STRATEGY—STAY THE COURSE
Pricing strategies are critical for retailers who are looking to capture shopper attention, stimulate sales and drive bigger baskets. As the industry works to meet the changing needs of shoppers in a post-COVID-19 world, price will play a critical role in how and where shoppers shop. Having an effective pricing strategy that is consistently executed and optimized is critical for the elongated recovery ahead in retail. Retailers who take the long view of the relationships they enjoy with their customers and the communities they serve will find themselves guided by a strategy that enables them to drive long-term value, versus benefitting from short-term pricing advantages.
These are unprecedented times for our industry, as Lori Stillman, NACS vice president of research, notes. “The impact of COVID-19 on our supply chain and consumer behavior has created a wide array of challenges,” Stillman said. “Some categories have seen sharp decreases in demand, while others are recording unprecedented increases in sales. Staying true to your overall retail pricing strategies is essential as these new behaviors cement or erode and as product availability stabilizes.” Stillman also noted the importance of paying close attention to the opportunities that exist to use cross-promotion as a vehicle to marry trip drivers with the emerging items shoppers are increasingly seeking in convenience retail. “Right now, shoppers are open to looking at new retail solutions to meet their everyday needs. Price—both everyday and promotional pricing—are important elements in the strategies retailers deploy to retain existing customers and earn the dollars of new ones.”
The convenience channel is blessed with selling habit-forming, high-purchase-frequency categories that drive loyal customers to stores multiple times per week. Yet, convenience trips per week have steadily declined from 3.6 in 2014 to 2.3 in 2019, according to NACS CTP (Convenience Tracking Program) data. The industry may see further pressure from a post COVID-19 consumer mindset, where even the most loyal customers look to avoid public places and reduce the number of shopping trips. In a NACS-sponsored national consumer sentiment survey conducted by PSB Insights in mid-May, 69% of Americans surveyed said they would delay normal work and travel. And less than one in four (23%) who commute to work said they would immediately return to their normal routines at convenience stores.
Retailers will need to develop and implement creative programs to rebuild high-frequency foot traffic. One solution could be to institute a beverage subscription program where customers purchase a monthly subscription for a flat price and enjoy unlimited cups of drip coffee and/or fountain drinks. In March 2020, Panera rolled out to its nearly 2,200 locations a coffee subscription program for $8.99 a month. In its test markets, Panera “saw a 200% increase in the frequency of visits and a 70% increase in consumers buying food with the coffee,” USA Today reported.
By engaging in a more streamlined assortment strategy post-COVID, retailers may see some operational savings related to receiving, stocking and ordering.
Replicating the Panera approach could be just what the convenience industry needs to coax loyal customers back into a routine. Tying the subscription program to the enrollment in a loyalty program can provide yet another layer of benefits. Subscription programs allow retailers to uncover deeper insights into their customers’ purchasing behavior, giving them needed data to provide consumers with meaningful rewards and start building a long-lasting relationship to their brand.
ADJUST FOR CHANGES IN DEMAND
Sales volatility will be the new constant. As retailers experience sharp sales spikes in essentials, declines in non-essentials and natural brand shifting, they will need to make the necessary adjustments to their ordering processes to avoid out of stocks. Accommodations might be as basic as developing a report of “SKUs that have grown greater than XX% in the past 30 days” and communicating to both stores and suppliers to increase supply and adjust ordering par levels.
Likewise, manual intervention with any computer-assisted ordering technology may be necessary as these systems often do not react immediately to rapid spikes in demand. Significant volume shifts could require updating space allocation and planogram facings. Finding temporary “space-expanding” solutions, such as re-purposing flexible endcaps, utilizing mobile merchandising units and allocating bulk space for high cube items like toilet paper, budget beers and case water, can make it easier to shift between pandemic needs and normal space planning activities in anticipation of possible COVID-19 waves.
7-Eleven’s use of mobile merchandising is a good example of an agile merchandising approach which enables stores to quickly capitalize on seasonal and popular merchandise without having to reset inline gondolas. During the pandemic, these merchandisers were dedicated to COVID-19-specific merchandise such as washable face masks, bandanas and various sizes of sanitizer. The mobility of these merchandisers also allowed them to be placed in high traffic, impulse areas of the store.
SAFETY DRIVES FOODSERVICE
Safety and sanitation will continue to be top of consumers’ minds, along with a new aversion to high-contact surfaces. A likely outcome could bring significant change to how self-service food is merchandised. Bulk bakery cases might soon be replaced with wicker floor baskets filled high with wrapped donuts and muffins. And hot cases, once filled with bulk burritos and corn dogs, may soon take on a new appearance as products are dressed in insulated window bags. At the onset of COVID-19, Jeff Foley, manager of business improvement at CEFCO in Temple, Texas, explained how CEFCO transitioned from merchandising hot snacking items (burritos, egg rolls, etc.) from a bulk display to packaging each item in CEFCO Kitchen branded bags. “We believe this change was exactly what customers wanted and helped preserve much of our snacking business during peak COVID-19. We also streamlined our assortment and focused more on the top sellers. These changes improved operational execution, and our margin in this category has improved 18 full percentage points,” Foley said.
Accordingly, changes to foodservice merchandising may come with both operational and sales benefits:
- Wrapped products would be tagged with individual UPCs, allowing better visibility into SKU level sales and therefore more accurate production planning.
- Wrapping food items typically extends shelf life, which in turn can help reduce waste.
- Mobile merchandising units such as floor and counter baskets allow bakery products to reside in multiple “impulse” locations throughout the store. This display flexibility capitalizes on the right category adjacencies and potentially increased sales.
A CHECKLIST FOR THE RECORD…
As category teams react to the effects of COVID-19, it is critical to keep copious notes. Adjustments to space allocation, assortment, promotional and pricing strategies, and ordering systems need to be permanently recorded in an organizational archive. This pandemic “checklist” will be essential for retailers to quickly react to similar events in the future.
The key theme for this time period is simple—be agile amid changing times. Category teams must act swiftly to meet the shifting dynamics of the business. This includes capitalizing on a changing product mix, pricing sensitivities, ordering disruption and new delivery mechanisms for foodservice.
Don’t assume 2020 will be a copy and paste from 2008. Economic fundamentals between the two eras are significantly different, but the general outcome will most likely be the same—a value-seeking customer. Though this time, the value seeker places equal importance on a safe and sanitary shopping environment from a trusted brand.
Senior Principal Consultant
Liza brings innovative leadership to Impact 21, inspiring teams to think differently and push the boundaries of traditional industry norms. She taps into her expertise in small format merchandising, marketing, branding, and business strategy to help companies realize their business objectives.