With several major retailers recently reporting quarterly results recently, including Walmart, Kroger and Costco, we look at the five key themes shaping their performances.
1. Deflation making its impact on growth rates
Growth rates across the grocery retail market have slowed significantly over the last year. While the factors behind this are often complex and relative to each individual operator, across the industry, deflation has had a major impact. Kroger, which has delivered positive identical store sales growth each quarter over the last 13 years, saw its incredible streak come to an end. For the retailers, deflation has predominantly been felt in fresh produce and meat categories, but an intensifying competitive environment, and major price investment programs have dampened growth rates in several core categories.
2. Shifting price and promotional investments into EDLP
Increasing price transparency, a major price investment program from Walmart and the continued growth of Aldi (along with the imminent entry of Lidl) are leading many retailers to shift their pricing strategies. The most notable has been Costco, which has started to focus more on Every Day Low Price (EDLP) pricing, noting that promotional activity across some categories and products is becoming less effective in driving shopper purchases. Whole Foods Market and CVS Health have also highlighted a shift away from a mass promotional effort to a more data-led, category and product specific approach. Both these retailers will be leveraging customer data to activate this, with Whole Foods Market announcing a new partnership with dunnhumby.
3. Remodels are a key engine of growth
Retailers are showing very little appetite for new space growth, although opportunities continue to exist in the right locations. This includes a shift to more urban formats and regionally-focused operators taking their offers into new areas. However, many retailers are shifting their investment dollars into remodels. Walmart will remodel 500 stores this year, while Target is planning to introduce a new in-store experience across 600 locations over the next three years. CVS Health will build on the roll-out of its enhanced beauty offer beyond the current 400 stores to over 3,000 over the longer-term. In addition to improving the overall shopping experience, through delivering a more contemporary and relevant environment, many retailers are also looking to reallocate in-store space to support their digital programs.
4. Ecommerce roll-out gaining momentum
This is being driven by the robust growth rates which retailers are achieving with grocery ecommerce. Retailers have continued to invest in the channel. Walmart and Kroger have extended their grocery pickup initiatives to over 600 locations each, while an increasing number of retailers have partnered with third-party companies to roll-out online delivery. This includes Costco, which is working with Instacart in 132 of its clubs across 26 cities, and with Google Express in 15 clubs across five cities. CVS Health has extended its partnership with Curbside to 4,000 stores. This is likely to be an area of continued heavy investment over the next few years which could impact other programs and/or operating margins.
5. Building supply chain advantage
The intensifying trading environment, along with the growth of ecommerce has brought supply chain development back into focus for several retailers. At Walmart, the store has been at the centre of its supply chain improvements, introducing top-stocking processes and providing store associates with real-time inventory information. These initiatives have had a major impact on reducing out-of-stocks and inventory levels, which are down 7.2% year-on-year. At Target, the supply chain is being redesigned to make it more responsive. It is building new capabilities to enable it to move single items in addition to case-packs as it moves from a linear supply model to a “smart network.” Whole Foods Market, as part of its turnaround plan, is also testing automatic replenishment, the first phase of a plan which it hopes will drive similar inventory improvements.
What you should watch for in the next few months
While the outlook for the current quarter is similar, cycling last year’s lower inflation rates in the second half, should ease some of the pressures towards the end of the year. Operators should also start to benefit from their remodel programs and the continued roll-out of ecommerce. While this will cannibalise some store sales, most retailers typically achieve an incremental benefit through their multi-channel initiatives. Key things to watch as we head into the next few months include Lidl’s preparations for a summer launch, the impact of turnaround programs at Target and Whole Foods Market and whether Walmart will continue to sustain its improved level of performance. Consumer sentiment and propensity to spend will also be key, particularly as taxation, welfare and spending programs start to take shape under the new US administration.
Stewart Samuel, Program Director, IGD Canada
Based in Canada, Stewart heads up all of IGD's research and coverage in North America. He is also responsible for shaping IGD's research program across the region. Contact Stewart at [email protected] for further insight on the market and its leading retailers.