Take Belt-Tightening Up A Notch

The global economic downturn has had a traumatic impact on every North American business sector, including one that some commentators naively considered recession-proof: grocery retailing. Indeed, as the slump continues, many grocers – who were already feeling the pressures of a hotly contested marketplace – may find themselves struggling simply to maintain past sales levels, let alone grow.

The retailers who survive this unprecedented slump will be those who react quickly to the changing behaviors of cash-strapped consumers. What will give them a decisive edge over competitors is something they may be under-utilizing at the moment; their loyalty programs and other sources of customer information. With the expertise to recognize what customer data is telling them – and the will to put those insights into action – they have a unique weapon for prevailing despite tough times.

As a starting point, retailers should be paying closer attention than ever to shifting consumer priorities. A valuable source of intelligence is a recent fact-finding initiative undertaken by the customer-centricity strategists at Precima and their market research colleagues at ICOM (operator of a consumer response database). Two in-depth consumer surveys yield highly significant findings for grocers who can appreciate the implications – and are ready to act on them.

First, while North American consumers have responded to the slowdown by generally tightening their belts, they’re being selective about where exactly they spend less. For instance, people aren’t dining out as often, but that means they’re spending more on eating at home – and often looking for alternatives to preparing meals from scratch. Grocers who can respond with the right blend of convenience, value and taste definitely stand to profit.

Consumers also say they’ve changed how and when they stock up on groceries. They’re watching the sales more closely and making fewer trips to the store. And as gas prices have declined rapidly from their mid-2008 peak, people have been putting the savings toward their food bills.

At the same time, most frugal consumers say they’re in no hurry to give up their preferred brands for more value-oriented substitutes. Instead they look for overall cost reductions while leaving room in the budget for old favorites – which means more profits at the checkout for grocers who can identify those sure sellers.

Finally, many consumers they say they plan to stick to their new frugal ways even when better days return. People are not simply watching their pennies until the worst has passed; they’re making broader changes in their shopping habits for the long term.

This nuanced response to tough economic times clearly presents a challenge for retailers. The solution is to develop equally nuanced promotional strategies, pinpointing precisely when and where to target promotional offers.

Using the data-driven insights of customer-focused analytics, it’s possible to zero in quickly on the buying patterns and lifestyle traits of today’s belt-tightening consumers. From there retailers can determine what products and brands your customers value most – and by extension, which of those customers will deliver the most value to their businesses.

In other words, by embracing the strategies of customer-centric retailing, they can develop more effective responses to the current lean times, hang on to the customers who bring them the highest returns, and build a better foundation for competing successfully in what we all presume will be a better future.

Dining Out is Out
The online surveys conducted by Precima and ICOM polled several thousand households in the United States and Canada. Questions focused on how respondents’ grocery shopping behavior had changed during a 12-month period in which the faltering economy grew more and more prominent in the public consciousness.

Many of the survey findings were immediately illuminating for grocery retailers. For starters, a remarkable 78% of consumers said they would be cooking at home more often rather than eating at restaurants or ordering take-out meals. What’s more, more than 80% of those respondents said they intended to continue their new dining habits even when the economy improved.

The implications for grocers are clear. While tough economic times may bring an overall drop in spending, consumers who’ve decided to avoid restaurant meals will head to the grocery store in search of attractive dine-at-home alternatives. Even better, consumers say they’re resolved to change their habits for good; so whatever retailers do to address today’s needs will continue to bear fruit in the future.

The Answers are in the Data
How can retailers reap the most benefit from consumers’ changed priorities? This is where sophisticated analytics have a crucial role to play. By overlaying transactional data with other customer information (typically from a loyalty program, along with publicly available demographic sources), analytics experts can determine not only what shoppers buy, but what kind of lifestyles they have, what other products they might purchase that reflect those lifestyles, and how their priorities will likely evolve over time.

Faced with a shift toward more home dining, grocers can build on those insights to identify your most cost-conscious customers and the meal items for which they’d find special offers most meaningful. Grocers can also pinpoint shoppers who are especially interested in, say, health-conscious alternatives to eating out, or whose time-crunched lifestyles make it vital to get something quick and convenient onto the table.

By applying analytical precision to customer data, marketers avoid making drastic, across-the-board cuts to entice the widest swathe of belt-tightening consumers. Instead they can deploy surgical pricing and promotional tactics to target exactly those items that are valued most – by their most valued shoppers.

No Two Segments Are Alike
The Precima-ICOM survey found significant variation in frugal shopping behaviors when consumers were segmented by age, gender and income level. Younger consumers, for instance, were inclined to cut back on beer, wine and spirits, as well as beauty care products and dessert items. Older shoppers were more likely to forgo frozen dinners and other convenience foods, along with deli products and non-alcoholic beverages.

These general findings provide helpful signposts for retailers. They’re akin to trade-area analyses identifying which macro consumer demographic segments are predisposed to buy certain items or respond to certain promotions. While such insights can be helpful to spot overall trends, the real challenge is determining how specific individuals are likely to shop. An analytics expert can drill deeper into each segment, identifying from past behaviors which shoppers are more inclined to value, say, a price promotion on shampoo, or who will be more influenced by an incentive to visit the deli counter.

To take another finding from the Precima-ICOM survey, nearly two-thirds of respondents said the recession had changed their grocery shopping habits, particularly when it came to stocking up or “pantry loading.” Within this group, 41% said they could no longer afford to stock up at all and only bought what they needed from week to week.

On the other hand, 54% said they actually stocked up more than in the past, but only when items they valued were on sale. So the task of customer-centric retailers is to figure out exactly who belongs to either of these groups – and craft the most relevant offers for each audience.

Brand Loyalty Trumps Frugality
By understanding how their best customers respond to pricing and promotions on their favorite brands, marketers avoid needlessly discounting items that they’ll continue buying even when they’re watching their pennies. For example, the Precima-ICOM research showed that only 32% of consumers had switched from a preferred brand to a more value-oriented substitute. So for most, giving up favorite products was not high on the list of money-saving strategies. Indeed, even among those who’d switched to less costly brands, only about half said they would continue doing so when the economy improved.

Here again, general trends research points the way for more customer-focused retail strategies. A shrewd retailer can use data-driven insights to determine which customers will respond to promotions of value-oriented brands and who will be more responsive to other offers. Especially in a weak economy, this kind of marketing precision is invaluable. Retailers can better determine what products to promote at what price point, and even where to position them in the store. They can also make more informed decisions on new product opportunities in light of customers’ brand allegiances.

The key is to probe past the aggregate numbers and identify exactly what consumers want, how that affects their shopping patterns and what types of offers can be crafted to match their needs profitably.

Gas-Powered Grocery Carts
When it comes to gauging the impact of fluctuating oil prices, the Precima-ICOM research again offers direction for grocers. In mid-2008, as gas prices shot up past $4 a gallon, 78% of respondents said they would be driving less often to the store. However, that didn’t mean they’d be putting less in their baskets; they might even buy more as they sought alternatives to dining out. So the next step was a more rigorous analysis to determine how frequently customers were making that shopping trip and what kinds of incentives they’d find most meaningful when they did.

By late 2008, as gas prices retreated below $2 a gallon, 48% of survey respondents now said they would take what they’d saved at the pumps and put it toward their grocery bills – ahead of their savings accounts, holiday gift shopping and unpaid credit card balances. The percentage was even higher among those who’d been hit hardest by the downturn, while it was lower for retirees and high earners. Once again, the task for retailers armed with a clear customer strategy was to identify who would be most influenced by promotions that played up this unforeseen benefit of falling oil prices.

Taking it Up a Notch
Whatever trajectory this recession follows, North American consumers have adopted a value-conscious balancing act they feel is here to stay. For retailers trying to get in sync, it pays to monitor early-warning research like the Precima-ICOM surveys. But that’s just a preamble for the real work that lies ahead – that is already under way for many forward-looking retailers – and that will extend far past the current economic malaise.

A successful response to the new frugality must be part of a broader evolution toward true customer-centric retailing, in which data-driven insights shape everything from coupon offers to product assortment to the physical layout of stores. It’s not enough to execute competitive pricing and promotions aimed at getting through a rough patch. What’s required is a customer strategy that supports the steady expansion of relationship-building capabilities while setting the stage for truly differentiating retail experiences.

So when consumers start tightening their belts, customer-centric grocers will be ready immediately to take it up a notch – and to keep on matching further waistline adjustments through whatever economic cycles lie ahead.

Brian Ross is general manager of Precima, a retail analytics firm. He can be reached at bross@precima.com