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Achieving High Performance in the Retail Grocery Industry
Three of the 23 companies analyzed meet Accenture’s criteria as high-performance retail grocers. All have outstripped their peers in terms of consistently high revenue growth over an extended period. The simplicity and agility of their operating models and decisiveness of their leaders help explain their exceptional performance. So too do their strong and adaptable customer- and market-centric cultures. But what really distinguishes these high performers is an incessant focus on improving their propositions to customers whose demands keep escalating. Superior execution has helped make each company the retailer of choice in its respective market. Each actively shapes and dominates the strategic agenda for its market by constantly enhancing and refreshing its food offer and by undertaking major strategic initiatives to extend its reach to customers.
Defining the High PerformersThe peer group for Accenture’s study of retail grocery high performance comprised 23 publicly traded companies from around the globe. All had revenues greater than US$2 billion, a significant proportion of which were generated from food sales.
We applied Accenture’s High Performance Business methodology to identify those exceptional companies that:
Effectively balance current needs and future opportunities.
Consistently outperform peers in revenue growth, profitability and total returns to shareholders.
Sustain their superiority across time, business cycles, industry disruptions and changes in leadership.
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Traditionally, Accenture gauges high performance by measuring a company’s profitability, growth, longevity, consistency of stock market performance, total returns to shareholders and positioning for the future over three, five, seven and ten years. Because of the extremely short industry cycles in retail grocery, we focused on the three- and five-year periods only.
Three companies emerged from this process as high-performance businesses. All three high-performance companies have distinguished themselves primarily through exceptional revenue growth—on average, nearly double the growth rates of their competitors over a five-year period. Strong revenue growth generates the free cash flow that assures the marketplace that the company has the means to adjust quickly to changes in consumer demand.
The high performers in retail grocery have also delivered significantly better returns over the last five years than their peer set when Total Returns to Shareholders (TRS) is indexed back to 2002. In April 2007, the high performers had a TRS index of 2.3 compared to an index of 1.8 for the average performers.
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Revenue Growth of the High PerformersFar Exceeds Their Peers
15.1%
9.4%
0.7%
High Performers
Average Performers
Underperformers
3-Year Average Revenue GrowthApril 2004-April 2007
S&P, Accenture Analysis
High Performers
Average Performers
14.6%
7.6%
-0.4%Underperformers
5-Year Average Revenue GrowthApril 2002-April 2007
0.500.600.700.800.901.001.101.201.301.401.501.601.701.801.902.002.102.202.30
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Month EndHigh Performers Average Performers Weak Performers All
Total Returns to Shareholders (TRS) Indexed Between April 2002 - April 2007
(April 2002 = 1)
S&P, Accenture Analysis
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The retail grocery industry’s three high performers are also more efficient at managing their current operating assets—particularly their inventory levels. In 2006, their inventory-to-revenue ratios were just �.3 percent compared with 6.� percent for the average performers. This effective cash management enables them to invest profitably in growth.
The high performers’ outstanding growth is especially noteworthy given the overall low economic profitability of the retail grocery industry. Economic profitability in this industry is also quite volatile, rising and falling year by year over a five-year period.
High Performers Efficiently ManageTheir Current Operating Assets
High Performers
Average Performers
4.3%
6.4%
7.9%Underperformers
2006 Inventory-to-Revenue Ratios
S&P, Accenture Analysis
1.4%
0.6%
2.1%1.7%
1.9%
0.0%
0.5%
1.0%
1.5%
2.0%
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Retail Grocery Industry Is Notoriousfor Low Economic Profitability
Industry OverviewTalk to the leaders of almost any mass-market food retailer and they will be quick to confirm that profitable growth is a strategic imperative. But it is also one of their toughest challenges, especially in the mature and saturated markets of the United States and Western Europe where pricing pressures loom large. Although growth opportunities are somewhat stronger in many emerging markets, as a rule growth rates in most food markets are falling well below investor expectations.
1.05%Japan1.45%Netherlands
1.74%Sweden1.74%France1.86%Germany1.91%Chile
2.30%Hong Kong2.51%USA
2.71%UK2.73%Canada
3.14%South Korea3.39%Argentina3.42%Thailand3.59%Taiwan
3.98%Brazil5.02%Australia
5.96%India6.20%Indonesia
6.46%Russia6.47%Mexico
8.89%China
Growth Rates in Mature Markets Are Low
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Datamonitor,Accenture Analysis
Emerging Markets vs. Mature MarketsFood Market CAGR Growth 2000-2006
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That’s not to say that all market segments are static. In developed markets, health-conscious and environmentally sensitive consumers are powering booming demand for organic food and exerting strong pressure for changes in product labeling, product sourcing and innovation in product offerings. The quest for convenience that is driving change in other industries is at work in the retail grocery industry as well. Witness the surge in the growth of convenience food stores, particularly in the United Kingdom. All food retailers, however, are caught in a cost crunch: inflation in fuel prices, wages and rent on the one hand and on the other hand, consumer resistance to price increases.
The name of the game is to maintain tight control over costs while driving higher revenues from sales—not an easy task in a market where increasingly discerning consumers tend to shop “schizophrenically,” using different stores for different shopping missions or shopping for different products in the same store. Success requires the sort of clarity of purpose that has not come naturally to retail grocers.
1.9%
0.5%
7.0%
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3.2%
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5.0%
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-0.8%
Food Market Size
ConvenienceStores
Discounters
Organic Foodand Drink
Premium Foodand Drink
GermanyUKUSA
Euromonitor International,Datamonitor, Accenture Analysis
Demand for Organics Is Driving Growth
Sub-sector and Overall Food MarketCAGR Growth 2000-2006
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The Building Blocks of High Performance in the Retail Grocery IndustryAccenture has learned that only three grocers worldwide consistently exhibit such strategic thinking—and have achieved high performance and created long-term shareholder value as a result. They owe their superior revenue growth to mastery of market focus and position, distinctive capabilities and performance anatomy—the three building blocks that Accenture’s extensive cross-industry research shows underpin high performance regardless of industry. Our industry-specific research has identified the shared characteristics of the high performers in the retail grocery industry across the three building blocks. In the section that follows, we will examine those characteristics as they relate to each building block.
Acute MarketSensing Skills
Using deep customerinsight, skills andcapabilities to analyzeall marketplace aspects
ContinuousInnovation in theCore Offering
Ongoing, incrementalchanges at the storelevel to better meetcustomers’ needs
Consistent Agendaof Growth Initiatives
Dedicated teams thatidentify and delivermarket-leadinggrowth initiativesacross the business
A Simple, Effectiveand Agile OperatingModel
Using simple operatingmodels; consistentlymeasuring andbenchmarking results,adjusting as needed
Highly Cohesive Customer- and Performance-Focused Organization Led by Decisive, RespectedLeaders Who Embrace Change
Create customer-centered organizations with aligned business functions;encourage risk-taking and develop skills
Strategic Market Domination
Superior understanding of market dynamics and consumers, enabling first-moveradvantage and market/niche leadership
Market Focusand Position
DistinctiveCapabilities
PerformanceAnatomy
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Market Focus and Position
Strategic thinking is critical to this building block, which in retail grocery means demonstrating an understanding of what will lead to market domination.
Food is a local business where players with strong regional structures can respond quite quickly to local trends. Leading retail grocers understand the dynamics of their home markets better than their competitors do. Tesco PLC, for example, is widely credited with having read the 1990-91 recession in the United Kingdom better than its peers did. When German discount stores such as Aldi entered the UK market to take advantage of the slump and the higher margins available there, Tesco retaliated by introducing its "Value" brands of economically priced products. The company’s "Finest" range, meanwhile, is aimed at shoppers who are prepared to pay more for high quality—evidence of the inclusivity of Tesco’s approach to its customers.
Tesco’s mission, indeed, is to become the United Kingdom’s leading mass-market retailer, boosting market share
by winning the “lifetime loyalty” of its customers. The company pitches itself as the consumer’s champion, expressed in its long-established slogan “Every little helps.” Helpfulness and value for money also characterize its positioning—a stance that is amplified by Tesco’s selling of innovative non-food services such as personal finance and telecommunications. Tesco’s growth initiatives are designed to improve the overall customer shopping experience. They are always closely linked to its volume-led business model and their success is measured by increased customer traffic and steadily increasing sales. Since 60 percent of all UK households are said to shop at Tesco every month—20 percent more than at the company’s nearest rival—the strategy is plainly bearing fruit.
Whole Foods Market, Inc., meanwhile, has focused on catering to the burgeoning US demand for organic and “natural” produce, positioning itself as the food retailer of choice for increasingly health- and quality-
conscious American consumers. The company’s motto—“Whole Foods, Whole People, Whole Planet”™—emphasizes its commitment to more than just food retailing. Whole Foods actively supports organic farming as the “best method for promoting sustainable agriculture and protecting the environment and farm workers.” It also supports local food banks and contributes at least five percent of total net profits to not-for-profit organizations.
Australia-based Woolworths Limited has been able to leapfrog its rivals by setting the agenda in terms of fresh food at low prices. The company has succeeded in positioning itself in consumers’ eyes as the “fresh food people”—a more effective and more consistently applied stance than its competitors have been able to muster. Success in its core food business gave Woolies (as the stores are known affectionately by customers and employees) the financial platform to take the lead in the gas station and liquor store businesses as well.
Distinctive CapabilitiesFour distinctive and interdependent capabilities enable high performance in the retail grocery industry:
Acute market sensing skills
Continuous innovation in the core offering
A consistent agenda of growth initiatives
A simple, effective and agile operating model
Acute Market Sensing SkillsAcute market sensing skills underpin the superior market understanding of high-performance retail grocers. Accenture’s research shows that consumers in all retail industries seek offerings that meet their needs in four dimensions: 1) individualism and personalization; 2) responsibility and accountability; 3) convenience and simplification; and �) aspirational and experiential. Acute market sensing skills enable the retail grocery leaders to respond successfully to these four drivers.
Their market sensing skills are supported by rich analyses of customer sales and product data that allow the tracking of key consumer trends within the overall market, and which accommodate the influence of media, pressure groups, legislators and technology. More attuned than their peers to reading market signs, high-performance retail grocers enjoy insights into both consumers and competitors—insights that give them both first-mover advantage and the ability to respond rapidly to threats and challenges with a steady stream of small-scale product and offer innovations .
Superior market sensing played an important role in making Woolworths the biggest food retailer in Australia. Woolworths was the first to recognize the trend toward fresh produce among Australia's food shoppers, its "best for fresh" image has given it first-mover advantage. For over a decade, it has
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consistently reinforced its image as "the fresh food people" and has benefited from the rising consumer demand for good quality produce at fair prices.
Leading grocers develop their market sensing skills in different ways. Tesco takes a highly centralized approach. The Tesco Clubcard, launched in 199�, lets the company track the choices and spending patterns of 13 million customers who gain “points” (representing money off future purchases) every time they use the card and to whom Tesco sends individually tailored product offerings every three months in the form of additional vouchers. Tesco supplements this insight with purchased research data, customer advice centers and large amounts of survey work at both store and product levels. Unlike other loyalty programs that have not been so well managed, Tesco’s Clubcard has actually enabled the company to hold it margins despite significant price wars.
Whole Foods, by contrast, takes a decentralized approach, facilitated by direct staff interaction with customers, participation in local communities and as much reliance as possible on local producers. Moreover, because its stores are local, each one can use customer feedback to make it even more responsive at the local level—a key differentiator. Employees are recruited for their passion for food and can give customers direct, detailed and personal attention. Each store customizes its own product mix; whenever the US grocer acquires new stores, it retains the local management to keep local relationships intact. By providing customers with in-store information on food safety and sustainability, recipes, cooking tips and serving suggestions, Whole Foods elicits the sort of direct customer feedback that nourishes its understanding of the market.
Continuous Innovation in the Core OfferingContinuous innovation in the core offering is critical to high performance in this industry—as long as it isn’t at the expense of product quality, range and availability at the right price. Leading companies make exceptionally effective use of customer and store feedback to enable continuous assessment of purchasing behavior and trends. As a result, they can make fast decisions on a small scale, pushing through the sorts of store-level incremental changes that respond most effectively to customer needs. The upshot: high customer loyalty, continuous same-store sales increases and high sales productivity.
Tesco is outstanding in this regard, thanks to the streams of data generated by its Clubcard. Indeed, customer insight underpins the UK grocer’s key marketing strategies, daily trading activities and store service initiatives. When Christmas shoppers traded up to wines that Tesco didn’t stock, for instance, the company increased the price point range to capture this spending. In its quarterly mailings, Tesco also includes vouchers to stimulate purchases in departments new to the individual consumer. The vouchers “buy” products at no additional cost to the shopper—but Tesco benefits from an additional volume of sales and from getting its customers to try new products in departments where they may continue to shop in future. What’s more, Tesco’s suppliers can use Clubcard data to ensure that they have the right product ranges in store and to identify new product opportunities.
In Australia, Woolworths is committed to “low prices you can count on, every day”—and can deliver on that promise thanks to savings generated by improvements in its core sourcing, trading and supply chain processes. Woolworths’ increasing use of promotion strategies and its private-label strategy, which encompasses economy items as
well as fresh, organic and natural produce—categories where consumer brand response is strongest—enable the constant, incremental improvement that distinguishes high-performance grocers.
Consistent Agenda of Growth InitiativesA consistent agenda of growth initiatives is probably the distinctive capability that is the supreme hallmark of high-performance retail grocers. Dedicated teams focus on developing market-leading growth initiatives across all aspects of the business, from new products and services through new formats and channels to new geographies. Top retailers ensure that their initiatives are implemented by taking a disciplined approach to growth and portfolio management that weeds out less promising projects, prioritizes the best of them and uses a balanced scorecard to monitor efficiency.
There are three main routes to non-core growth for retail grocers: adding products and services, adding formats and channels, and entering new geographies. No single route guarantees success—it all depends on individual starting points, opportunities and ambition. Moreover, there is no substitute, whatever the route to growth, for superior execution.
Whole Foods stands out for its continuing focus on the core offering: the US grocer still has plenty of room to grow through store openings across the United States. Whole Foods is also entering new markets, as evidenced by its recent debut in the United Kingdom. Meanwhile, Tesco, and to a lesser extent Woolworths, have embarked on major international expansions.
Woolworths’ multi-pronged growth strategy includes expanding its existing chains, making bolt-on acquisitions, boosting its presence in New Zealand and establishing a consumer electronics joint retail venture—
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not counting its push into the liquor store business. For its part, Tesco has clearly articulated no fewer than four separate growth platforms—non-food products such as clothing, services that include insurance, entertainment and telecommunications, and global expansion, as well as its core UK food offering. The UK retailer is now active in 13 European and Asian markets and plans to enter the US market in late 2007.
A Simple, Highly Effective and Agile Operating ModelWithout a simple, highly effective yet agile operating model, such ambitions would be next to impossible. Leading retail grocers optimize their business process design to achieve low costs to serve and high asset utilization. They make continuous incremental changes to their operating processes and periodically update their operating models. By using clearly defined and easily understood operating methods across the entire organization—and measuring and benchmarking the results—they also ensure operational excellence.
Woolworths’ “Project Refresh” is a multi-year change program designed to improve its operating model. Launched in August 1999, the project has refocused the ways in which Woolworths does business by looking at best practices across the group and at other retailers worldwide. The emphasis is on finding ways to reduce line-item costs and improve supply chain efficiency while eliminating waste and duplication. Supply chain achievements to date include a smaller, more efficient group of regional distribution centers, significant improvements in transport management, common integrated systems and process improvements right across the network.
The key to such operational improvements is simplicity of approach. Three principles drive Tesco's operating model—better (for customers), simpler (for staff)
and cheaper (for Tesco). Among the initiatives that have made life easier for its staff are shelf-ready packaging and freezers with drop-down fronts for faster refilling. Customers also benefit from ease-of-use innovations like self-serve “Grab and Go” counters, which have resulted in payroll savings of �0 percent and boosted sales by 19 percent. Tesco has a step-change program that regularly renews and even reinvents the operating model on a three- to four-year cycle for each country in which it operates. And the company has created a common set of operating processes and IT systems—“Tesco in a Box"—that it is rolling out worldwide.
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Performance AnatomyThis building block is a mix of the cultural, leadership and workforce factors that sustain both distinctive capabilities and market focus and position. In retail grocery, it describes a strong, highly cohesive, customer-focused organization that is very much oriented toward the right outcomes. This unique organization mindset, when combined with strong and decisive leadership, is a key differentiator in an industry where everyone tends to be paying the same for labor, land, transport and other fixed assets.
High-performance retail grocers have a shared understanding of what is to be achieved. Each business function is aligned through shared goals and objectives. In addition, within each business function, managers adhere to performance measurement processes and Key Performance Indicators (KPIs) that lead them toward their individual group
The FutureThe high performers in retail grocery are forces to be reckoned with. They set market trends, foresee changes in consumer demand and quickly innovate in their core business to meet emerging needs. By constantly pursuing new growth opportunities, achieving superior execution with clear and simple operating models and by nurturing cultures that embrace change, these high-performance businesses are strongly positioned for the road ahead. They must, however, constantly refine those distinguishing characteristics to keep pace with the market. The race is on…with plenty of potential for new winners to emerge along the way.
threat, they have developed systematic approaches to deal with it. They manage change as a journey. They encourage risk-taking and they value employees who seek to optimize business processes through change.
These businesses also build capable and inspiring management teams with the retail skills to drive the business forward. They create environments that challenge and stretch their people to think outside of their day-to-day responsibilities, to always step back and look at the big picture without being afraid to make improvements. As well as focusing its staff on continuous small improvements, Tesco, for instance, regularly takes senior managers out of day-to-day operations and gives them full support to spend four to six weeks investigating an issue or problem. The managers’ subsequent recommendations are regularly accepted and implemented.
and collective goals. There is no room for interpretation about what is to be achieved by the business function or by the company at large.
Whole Foods has a team-based structure that shares practices and works to solve problems at all levels of the organization. The company’s integrated approach to performance management sets clear goals for all teams and rewards them for high performance. This culture fosters intense competition between teams, stores and regions—an operational feature that the company encourages by linking bonuses, rewards and promotions directly to team or store performance. A gain-sharing program ties team bonuses to sales per labor hour. Every department gets a performance target and a monthly labor budget. If the team meets its target without spending its entire budget, the surplus is split among team members.
Leading companies see change as a normal part of business. Viewing change more as opportunity than
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About Accenture
Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With approximately 170,000 people in �9 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.
To find out more about how to achieve high performance in the retail grocery industry, please contact:
Jeffrey R. Smith Managing Director, Retail +1 312 693 1�66 [email protected]
Janet L. Hoffman North America +1 �1� �73 �1�7 [email protected]
Richard Wildman Europe + �� (0) 20 78�� �7�1 [email protected]
Andrew Clarke Asia Pacific +61 3 9838 712� [email protected]
Vasco Simoes Latin America +�� 11 �188 3�77 [email protected]
