Recommendations for Growth:
1. Stop the dollar special for each week: 1st step is to stop the dollar special promotion immediately. This is not consistent with the brand equity and positioning built over the years. It’s resulting in net operating loss of 76% on each discounted item and overall decreased the net operating profit for 2010 to 0.4% only (details in justification). Moreover, this promotional activity is polluting the message for regular consumers, considering that some of the dollar stores are located nearby. 2. Increase Sales Target: To increase the current market share to 16%, sales target is set to775Mn for 2011. It’s an increase of 95Mn. from 2010, on the assumption that total marketsize (4.74Bn) remains same. 3. Focus and Maintain current Target Segment and Increase the Wallet Share: Continue focusing on the current target segment of affluent and older customers with smaller household size. Their wallet share is 8.93% only as compared to average supermarket customer’s wallet share of 10.0% (details in justification). Wallet share of Reed customers will be increased by at least 1% which will result in additional revenue of 79Mn/year. 4. Maintain current Brand Positioning: Maintain current brand positioning by serving to highend of customers with good and specialised quality of products (like sea food and organic).Continue leveraging on better customer experience by providing attentive staff, shortercheck out times, and opening stores for long hours, with clean and better lit lay outs.
This will able to defend the competition from Delfina, Whole Foods Market and Galaxy and Top Val. 5. Improve Product Mix: Improve the product mix by introducing more private labels. Increase the private labels to 25% of total products on offer while maintaining the same Gross Marginand SG&A. Offer 2 types of product in each category, one with different brands (total 75% ofthat category) as a premium product and second with private label with lower prices as compared to branded ones. This increase in private labels will send a signal to stores like Aldi to not to enter their territory of high end market with private labels. Roll out the bundled products containing food and beverages. Increase the organic andprepared food (high margin) in a product category where feasible and continue the organicpets food for its customer (comprises 20% of existing customer). 6. Increase Customer Base: Reed will grab at least 1% of market share of Galaxy storesresulting in additional sales of $47.15Mn (details in justification).
7. Price: There will be no change in pricing policy for all the products (dollar sp. is scrapped). 8. Promotion: Leverage the integrated marketing channel of online, print and ad to promotenew addition of more private labels, organic food and prepared food. Promote the message healthy food adds to betters quality of life and for this no compromises should be madeesp. in later part of the life (for older affluent population). This will help in tackling theperception of consumers that prices are high. Promote the excellence in customer service,clean stores and convenient locations. These promotions will drive the increase in customerloyalty, awareness, choice and will increase the trips to store. 9. Maintain Current Locations: As far as distribution is concerned don’t add new stores oracquire any new store this year. Lot of dollar stores have come up at convenient locations toconsumers but it has made only a marginal impact (increase of 0.05%) on their habit ofregularly shopping at supermarkets, so don’t react to it. Additionally there are no plans forany capital expenditure for next 2 years as market conditions are quite tough.
Why These Recommendations
To understand how these recommendations were made, let’s first explore the current Industry situation, followed by Industry player and competition analysis and finally thejustification of why these recommendations are made for Meredith Collins.
Porters – Industry Analysis
Industry Players & Competition Players in this industry make money by applying high volume and low margin strategy. Theonus here is to leverage the economies of scale driven by operational efficiency to reducethe cost. They buy large number of products across various categories in bulk from different suppliers and sell them at lower prices as compared to a smaller store which have limited shell space, product range and category. Net Operating Margins are quite thin, 1.5% – 2.5%,room for error or slag is nearly negligible in operations. There are 5 types of player in theindustry competing in 3 segments, from high end to low end of market. They are differentiating with each other on the following parameters: Pricing as a strategy (shown below in perceptual map) is used by retailers to differentiate. Some are positioning their price low (Dollar stores) and some at premium like Reed, someuse discounted pricing or everyday low prices (TopVal). Product specialisation and variety is another way of differentiation being employed.
Someretailers are offering specialised products, like Reed specialises in organic and fresh seafoods and some differentiate on packaging. Some retailers are selling various products in a category by different manufactures and some retailers like Aldi sell only 1 product exclusively (private label) in a category. Quality is another way of differentiating the product, higher the quality, higher the price. Reed and Whole Foods are leading the pack when it comes to quality. Customer Experience driven by customer service and presentation plays a bigger role inattracting customers. For customer service, stores like Reed open for long hours, have morestaff on check outs to reduce the servicing time, have runners for shuttling the baggage.Some stores (like Dollar stores) have less/minimal staff (reduced cost) for help and checkout. For presentation stores are leveraging cleanliness, bright and better lighting (Aldi, Reed)and a better layout of shelves and stores Perceptual Map:
Justification for Recommendations
Focus on current Customer Segment and Increase Wallet Share: Reed’s current customer segment is composed of affluent and older customers with, smaller householdsize. Their annual income is 12% higher ($58,200) then state’s median household income of$52,000. On Average Annual spend by customers in US is $5,200. Hence on average wallet share of Reed’s customer is 8.93% (refer Appendix) as compared to 10% wallet share of anaverage customer. Additionally, on average customer in US spends $47.62/trip to a supermarket and currently Reeds Average Sales Value is $31.42/transaction. This must be leveraged to increase the average sales value and wallet share. Having said that, it seems that current downturn has impacted the spending habits of Reeds customer segment.
Competition and Brand Positioning:
Reeds main competitor is Delfina, Whole FoodsMarket, Galaxy and TopVal. These players together comprise 45.10% of total market and Reed is leading overall. Since they are in same segment of market (except Top Val), its vital Reed maintain its current brand equity and position (defending the territory) which has beenbuilt over the years. Whole Foods which is competing with Reed on same positioning insame segment, but it has only 3 stores and has 1.2 % of market share. Reed need not worryabout them at this stage. As far as threat from Galaxy (supervalu) is concerned, they don’thave good locations and only some stores are marginally profitable. They are in trouble andit’s a matter of time when they are up for sale. Reed doesn’t need to react to them, in factthere is a potential for Reed to get some customers from Galaxy.On competition from TopVal it is positioned as low price player in the middle marketsegment. It’s very aggressive and is reacting hard to maintain its presence in competitionwith Walmart & Costco, this is not sustainable, and therefore there is no need to react totheir everyday low pricing discount roll out. To further defend against competitors, continueleveraging on better customer experience by providing attentive staff, shorter check outtimes, and opening stores for long hours with clean and better lit layouts.
It’s neither attractive and nor possible for Reed to move to middle end of market (in middle ofperceptual map) where bigger players like Costco and Walmart hold the place with totalshare of 13.46%. Any signalling (using Game Theory)/movement in that segment can drivethe price wars leading to a disaster for Reed as they have bigger pockets and globalcapacity to sustain the price war.On the lower end (extreme right on perceptual map) of market it’s evident from perceptualMap that dollar stores doesn’t impose any serious threat as they have combined marketshare of 1.2% and can reach up to maximum of 3%. They have a different customersegment and market positioning. Similarly Aldi/Trader Joe has 1.62% of market share todayand can reach up to maximum of 5%. Store like Aldi rely heavily on lean operating modeland efficiency. It leverages private labels (95%) and limited products (14,000 only) comparedto 50,000 in a supermarket) by Reed. Aldi targets niche customers with low and medium endof price market. In short term it doesn’t pose any threat to Reed, in longer term they canpose some threat as they have the expertise to compete and can grow aggressively byintroducing private labels for high end of market.
Improve Product Mix:
Currently 17% of sale is attributed by private labels in food andbeverage and has grown since 2005. Private labels aren’t perceived a low quality product anymore because of aggressive campaigning over the years in industry. These are beingused successfully at lower and middle end of price market by Aldi/Joe Traders. It will bewise for Reed to increase its product mix by increasing their intake of private labels in highend of products (high price and quality). This will add more choice for consumers along withbranded ones. Negotiate with the bigger suppliers and tell them that they need toincrease/add private label offerings as consumer doesn’t perceive them low value anymore.If they don’t come to the party then look for new suppliers in private label category.Bundling of food and beverages must be done as they complement each other and goeswell with target customer base. This will help in driving the sales and margin. Organic andprepared food is high margin as a product category and goes well with the health consciousand affluent people (less time for cooking). So these products need more attractive shelfspace and intake by Reed and it will help in driving the increase wallet share. Organic petfood is a good way of retaining (loyalty) affluent segment and increasing the trips to store asthey take their pets when they go out for shopping. Increase Customer Base:
Reed need to target to grab at least 1% of market share($47.15MN) of Galaxy. These stores are poorly located & are in trouble as they can’t sustainthese promotions. Addition of more private labels, more prepared food, good customerservice & convenient locations will help in driving the customers to Reed.
Scrap Dollar Special Promotions:
Since June 2010, 250 items have been offered on adollar special on weekly basis where prices have been reduced by 44% (refer Appendix).This sale constitutes 4% (12.69 Mn.) of total sales in a week, which is 0.51 Mn/week ofsales. This has increased the traffic in some stores by 3% but each sale is registering a netoperating loss of 76% on these discounted items and decreasing the overall net profit ofReed for 2010 to 0.4% only (refer Appendix). This is not sustainable from economic point ofview, if this is run for 12 months Reed will make a loss. Secondly from brand equity point ofview it is destroying the equity built over the years. It is sending mixed signals to targetcustomer segment as dollar stores are nearby. The 3% increase in traffic at some stores isdriven by bargain hunters, which is opposite to Reeds Positioning.
There is no need for change in pricing policy for all products as COGS and Expensesare built in using economies of scale. It’s already a very low margin business (NPM of 1.5%to 2.5%); further reduction of price (only and having same GM and S&A) will impact the economic model and the bottom line of Reed. This is also evident from the Dollar SpecialPromotions
These points above provide the justification for recommendations. Reed muststay the course on what it has done successfully over the years. This current cycle ofdownturn and increasing competition must be used to focus on target segment & defend theterritory and grow on what Reed does well. Reaction like weekly Dollar Special without athorough analysis and plan can be detrimental to business. Soon there will be moreopportunities as some players will burn themselves by employing unsustainable practices.So Reed must stay the course with sharp focus.