Reed Marketing Strategy Thoughts

Reed Supermarkets Growth Action Plan

Prepared By: Vishal

This document explores the Industry of

Supermarkets, Industry players and Competition and

outlines the Growth Action Plan for 2011 to be driven

by Meredith Collins, VP of Marketing, Reed.

Reed Supermarkets Growth Action Plan 2011

1 Prepared for Meredith Collins, VP Marketing , By Vishal

2011 Action Plan for Reed’s Growth Background: Meredith Collins, VP of Marketing, Reed, needs a plan for 2011 to execute to

grow its current market share from 14% to 16%. Margins for error are negligible as

competition has intensified in every segment and current economic conditions aren’t looking

good.

Recommendations for Growth: 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.

Increase Sales Target: To increase the current market share to 16%, sales target is set to

775Mn for 2011. It’s an increase of 95Mn. from 2010, on the assumption that total market

size (4.74Bn) remains same.

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.

Maintain current Brand Positioning: Maintain current brand positioning by serving to high

end of customers with good and specialised quality of products (like sea food and organic).

Continue leveraging on better customer experience by providing attentive staff, shorter

check out times, and opening stores for long hours, with clean and better lit lay outs. This will

enable Reed to defend the competition from Delfina, Whole Foods Market and Galaxy and

Top Val.

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 Margin

and SG&A. Offer 2 types of product in each category, one with different brands (total 75% of

that 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 and

prepared food (high margin) in a product category where feasible and continue the organic

pets food for its customer (comprises 20% of existing customer).

Increase Customer Base: Reed will grab at least 1% of market share of Galaxy stores

resulting in additional sales of $47.15Mn (details in justification).

Price: There will be no change in pricing policy for all the products (dollar sp. is scrapped).

Promotion: Leverage the integrated marketing channel of online, print and ad to promote

new addition of more private labels, organic food and prepared food. Promote the message



that healthy food adds to betters quality of life and for this no compromises should be made

esp. in later part of the life (for older affluent population). This will help in tackling the

perception of consumers that prices are high. Promote the excellence in customer service,

clean stores and convenient locations. These promotions will drive the increase in customer

loyalty, awareness, choice and will increase the trips to store.

Maintain Current Locations As far as distribution is concerned don’t add new stores or

acquire any new store this year. Lot of dollar stores have come up at convenient locations to

consumers but it has made only a marginal impact (increase of 0.05%) on their habit of

regularly shopping at supermarkets, so don’t react to it. Additionally there are no plans for

any 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 the

justification of why these recommendations are made for Meredith Collins.

Porters - Industry Analysis

Entry Barriers -

High to Moderate

Matured industry with significant capital investment is required to establish

a retail store chain with minimal returns and negligible room for error

Bargaining Power

of Suppliers -

Moderate to low

Bigger suppliers like Nestle, Pepsi Co, had large number of products and

varieties which required lot of shelf space and quick sales turn over. They

had a moderate bargaining power as they needed these stores to reach to

customer. Smaller niche suppliers had minimal power and hence less

bargaining power.

Bargaining Power

of Buyers - High

Bargaining power of buyers increased by the fact that there are numerous

chains and niche stores competing for the wallet share of the customer.

Customers have more choices and hence giving them high power.

Threat of

Substitutes - High

As bigger players like Walmart & Costco, Discount stores, Limited

selection stores enter; more substitutes are available for consumers on

the lower and middle end of the market. Since switching costs are none or

minimal hence high threat of substitutes.

Industry Comp. –

High

Competition is intense in all the segments of the industry with minimal

returns

Industry Players & Competition Players in this industry make money by applying high volume and low margin strategy. The

onus here is to leverage the economies of scale driven by operational efficiency to reduce

the cost. They buy large number of products across various categories in bulk from different



Reed

Delfina

Galaxy

TopVal

Whole Foods Market

Wal Mart

Costco

Dollar General

Family Dollar

Trader Joe/Aldi

0

1

2

3

4

5

6

7

8

9

10

0 2 4 6 8 10

Qu

ality

In

dex (

Hig

her

Ind

ex i

s b

ett

er)

Price Index (Higher Index Means Low Price)

Reed Delfina Galaxy

TopVal Whole Foods Market WalMart

Costco Dollar General Family Dollar

Trader Joe/AldiSize of Bubble Represents Market Size

Perceptual Map

High Medium Low

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 the

industry 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, some

use discounted pricing or everyday low prices (TopVal).

Product specialisation and variety is another way of differentiation being employed. Some

retailers are offering specialised products, like Reed specialises in organic and fresh sea

foods 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 in

attracting customers. For customer service, stores like Reed open for long hours, have more

staff 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 check

out. For presentation stores are leveraging cleanliness, bright and better lighting (Aldi, Reed)

and a better layout

of shelves and

stores.

Distribution is a

another lever being

employed, players

are using strategic

location of stores,

some stores like

Reed are located 2-

3 miles from home

and some are

further 5-10 miles

away like Wal-Mart.

Size of stores also

plays a bigger role

in this, as bigger stores leverage more shelf space, hence more products, more variety and

quantity; some have limited space hence less products & variety for distribution. Retailers

like Reed are using integrated marketing and numerous channels like, print, online,

broadcast and some use 1 or 2 channels.

In terms of market positioning perceptual map of price vs quality (shown above) clearly lays

out the market position of Reed in comparison to other industry players.



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 household

size. 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 an

average 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 Foods

Market, 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 been

built over the years. Whole Foods which is competing with Reed on same positioning in

same segment, but it has only 3 stores and has 1.2 % of market share. Reed need not worry

about them at this stage. As far as threat from Galaxy (supervalu) is concerned, they don’t

have good locations and only some stores are marginally profitable. They are in trouble and

it’s a matter of time when they are up for sale. Reed doesn’t need to react to them, in fact

there 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 market

segment. It’s very aggressive and is reacting hard to maintain its presence in competition

with Walmart & Costco, this is not sustainable, and therefore there is no need to react to

their everyday low pricing discount roll out. To further defend against competitors, continue

leveraging on better customer experience by providing attentive staff, shorter check out

times, 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 of

perceptual map) where bigger players like Costco and Walmart hold the place with total

share of 13.46%. Any signalling (using Game Theory)/movement in that segment can drive

the price wars leading to a disaster for Reed as they have bigger pockets and global

capacity to sustain the price war.

On the lower end (extreme right on perceptual map) of market it’s evident from perceptual

Map that dollar stores doesn’t impose any serious threat as they have combined market

share of 1.2% and can reach up to maximum of 3%. They have a different customer

segment and market positioning. Similarly Aldi/Trader Joe has 1.62% of market share today

and can reach up to maximum of 5%. Store like Aldi rely heavily on lean operating model

and efficiency. It leverages private labels (95%) and limited products (14,000 only) compared

to 50,000 in a supermarket) by Reed. Aldi targets niche customers with low and medium end

of price market. In short term it doesn’t pose any threat to Reed, in longer term they can

pose some threat as they have the expertise to compete and can grow aggressively by

introducing private labels for high end of market.

Improve Product Mix: Currently 17% of sale is attributed by private labels in food and

beverage 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 being

used successfully at lower and middle end of price market by Aldi/Joe Traders. It will be

wise for Reed to increase its product mix by increasing their intake of private labels in high

end of products (high price and quality). This will add more choice for consumers along with

branded ones. Negotiate with the bigger suppliers and tell them that they need to

increase/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 goes

well with target customer base. This will help in driving the sales and margin. Organic and

prepared food is high margin as a product category and goes well with the health conscious

and affluent people (less time for cooking). So these products need more attractive shelf

space and intake by Reed and it will help in driving the increase wallet share. Organic pet

food is a good way of retaining (loyalty) affluent segment and increasing the trips to store as

they 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 sustain

these promotions. Addition of more private labels, more prepared food, good customer

service & convenient locations will help in driving the customers to Reed.

Scrap Dollar Special Promotions: Since June 2010, 250 items have been offered on a

dollar 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 of

sales. This has increased the traffic in some stores by 3% but each sale is registering a net

operating loss of 76% on these discounted items and decreasing the overall net profit of

Reed for 2010 to 0.4% only (refer Appendix). This is not sustainable from economic point of

view, if this is run for 12 months Reed will make a loss. Secondly from brand equity point of

view it is destroying the equity built over the years. It is sending mixed signals to target

customer segment as dollar stores are nearby. The 3% increase in traffic at some stores is

driven by bargain hunters, which is opposite to Reeds Positioning.

Price: There is no need for change in pricing policy for all products as COGS and Expenses

are 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 Special

Promotions.

Recommendations on Distribution & Promotion don’t need further explanation as they are

justified while making the recommendation.

Conclusion: These points above provide the justification for recommendations. Reed must

stay the course on what it has done successfully over the years. This current cycle of

downturn and increasing competition must be used to focus on target segment & defend the

territory and grow on what Reed does well. Reaction like weekly Dollar Special without a

thorough analysis and plan can be detrimental to business. Soon there will be more

opportunities as some players will burn themselves by employing unsustainable practices.

So Reed must stay the course with sharp focus.



Appendix

Wallet Share of Reed and Average US Customer

Income in $USD %

Median income of Customers 52,000

Annual Income of Reeds Customer (% Higher than median) 58,240 12.0%

Annual Spend By Each Customer in US 5,200

Wallet Share of Reed Customer

8.93%

Wallet Share of Avg Customer

10.0%

On average each customer make 2.1 trips/week to a supermarket

Annual spend by each customer is $5,2000

Therefore each customer spends $47.62 on each trip. [47.62 = 5,200/(2.1*52)]

Reeds Average Sales Value is $31.42/transaction.

Other supermarket Average Sales Value is $27.7/transaction (12%lower)

Sales & Market Share of Industry Player

Estimated Annual

Sales Per Store

(millions)(a)

Estimated 2010 Total Sales (millions)

Estimated Columbus

Market Share 2005

Estimated Columbus

Market Share 2010

Reed 26.4 660 15.3% 14.00%

Delfina 25.1 451.8 10.7% 9.58%

Galaxy (Supervalu) 22.6 474.6 11.8% 10.07%

TopVal 20.1 482.4 10.5% 10.23%

Other Supermarkets 24.5 784 17.0% 16.63%

Whole Foods market

19.1 57.3 0.4% 1.22%

WalMart 42.5 212.5 3.8% 4.51%

Target 30.2 120.8 1.9% 2.56%

Costco 100.4 301.2 6.3% 6.39%

Sam's Club 66.1 132.2 2.8% 2.80%

Dollar General 1.6 28.8 0.5% 0.61%

Dollar Tree 1.9 19 0.2% 0.40%

Family Dollar 1.7 37.4 0.7% 0.79%

Trader Joe's/Aldi 25.5 76.5 1.0% 1.62%

Other (drugs, convenience, etc.)

- 876 17.2% 18.58%

Total 408 4714.5 100% 100%



Impact of Dollar Special on Reed’s Net Operating Profit

Dollar special sales are 4% of total weekly sales.

COGS for Dollar Special Sales is same as Normal sales as price was reduced from $2.7

to $1.5

Dollar Special ran for 7 months (28 weeks) starting in June 2010

Normal Price Sale

in USD

Dollar Special Sale in USD

Weekly 4% Dollar Sales

in USD Millions

Dollar Sales in USD Million for 7 Months (28 weeks)

Sales 2.7 1.5 0.51 14.28

COGS 2.09 2.09 0.7 19.9

Gross Profit

0.61 -0.59 -0.20 -5.62

Gross Margin

22.7% -39.3% -39.3% -39.3%

Total Expenses

0.56 0.56 0.19 5.33

Net Profit 0.05 -1.15 -0.39 -10.95

Net Profit Margin

2.1% -76.7% -76.7% -76.7%

Total loss

10.95

Impact of 7 months of Dollar Sale on overall Bottom Line

Dollar Special Sales in $USD

Million

Normal Sales in in $USD Million

Combined Sales (Dollar & Normal)

Total Sales 14.28 645.72 660

Gross Margin -5.61 146.58 140.96

Expenses 5.33 133.02 138.34

Net Operating Profit

-10.95 13.56 2.6

NPM -76.7% 2.1% 0.4%



Mind Map

Glossary

Mn - Millions

Bn - Billions

GM - Gross Margin

NPM - Net Profit Margin

Business

Reed Marketing Strategy Thoughts