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Reporting in from the Food Marketing Institute Midwinter Executive Conference…
BOCA RATON, Fla. -- There was very little good news for mainstream, traditional supermarket retailers in the McKinsey & Co. report, “Understanding The Value Based Consumer,” unveiled Tuesday morning at the Food Marketing Institute (FMI) annual Midwinter Executive Conference here. The message, conveyed by the McKinsey spokesmen with the clinical composure reserved by doctors for delivering prognoses to fatally ill patients, suggested that:

  • Consumer attitudes toward value retailers and the relative roles of price and quality have changed forever. There will be no return to the halcyon days of yore.

  • Even as value-oriented food retailers are making enormous inroads in the marketplace, they actually are moving beyond a simple price message to differentiate themselves.

And while the speakers -- Kevin Sneader, a principal at McKinsey, and Stacey Rauch, a director of the company -- maintained that competing with value-based retailers is not a lost cause, clearly it is a major undertaking that only some will survive.

Based on the McKinsey research and presentation, here are some of the “cold realities” of the current competitive climate:

    • Value retailers in food have accumulated 21 percent of grocery sales, and grew roughly 12 percent a year between 1992 and 2001.

    • The grocery categories that are proving to be central battlegrounds for value retailers -- and therefore, their more mainstream competition -- include cereal, candy, snacks, pasta and bakery.

    • “Once a category has gone to value,” said Sneader, “it is very hard to bring it back.”

    • Value retailers are building their reputations not just on price, but on breadth of assortment, increasingly vital private label programs, a better in-store experience, friendly service and even, believe it or not, convenience…which often is defined differently than in traditional c-store terms.

    • In a survey of the Dallas market, which McKinsey believes today reflects the reality that most other markets will have to deal with in the future, the company found that 22 percent of consumers use value retailers to fill-in, 28 percent use them to stock up, and a whopping 50 percent use them for their “routine” shopping trips. “Value grocers have effectively penetrated the routine grocery shopping trip,” said Rauch, noting that 55 percent of Americans visit a Wal-Mart at least once a week. That makes picking up groceries while at Wal-Mart very convenient.

    • The McKinsey study suggests that value retailers are penetrating every demographic category -- price-sensitive and not so, rich and poor, young and old.

    • Sixty four percent of those who do not shop at a value retailers said that the reason was that they were too far away…hardly reassuring news as new supercenters and other value concepts go up almost every day.

    • Based on the McKinsey focus groups, traditional supermarkets and value retailers have reached parity in a number of areas: highest quality fresh food, frequent sales, national brands, and good store brands. The research suggests that in some ways, “the traditional grocery store has become a commodity in the mind of the consumer,” not any sort of differentiated experience.

    • Three chains -- Walgreen, Bed Bath & Beyond, and Tesco -- were cited as examples of retailers that have confronted the value proposition and changed their marketing and merchandising approaches accordingly.

According to the study, what food retailers need to do is very simple:

1. Decide what they are going to be famous for.
2. Achieve a leaner cost structure.
3. Get credit from the consumer for value delivered.
4. Out-execute the competition through simplification.
5. Grow through new categories and new formats.

Or maybe not so simple.

“You have no choice,” Sneader said. “This is a value-driven world. You’ve got to step up, and it is a enormous challenge."

More news and commentary from the FMI conference:

  • US Secretary of Commerce Donald Evans told the audience that the Bush administration holds to the tenet that “businesses are at the strategic core of any civil society” and that “capitalism provides the system through which people can pursue their dreams.”

    That said, Evans said that passage and implementation of the administration’s economic stimulus plan is critical if the nation’s economy is to improve. The focus, quite simply, is “cutting taxes and controlling spending,” he said, with deficit reduction taking a back seat.

    From where we were sitting, Evans’ remarks were well received until he said that the recovery “began 15 months ago” and that the nation is in "the second year of recovery.” While the retailers we spoke with agreed that economic statistics are not as bad as the media necessarily makes them sound, and that the problem may be more with Wall Street than the national economy, several mentioned that they’d believe there was a recovery going on “when people stop losing their jobs.”

    Making his point, Evans said, “the fundamentals (of the economy) are still very strong and there is every reason to be optimistic about the future.” He said it was impossible to predict when the stock market might recover. “I’m not sure,” he said, “but it’s just wise to bet on America.”

  • Former Senator George Mitchell (D-Maine), who has served on panels trying to bring peace to both Northern Ireland and the Middle East, gave the Clarence Francis Leadership Lecture, offering a bleak but ultimately optimistic view of the escalating violence in the Middle East. “I believe that there is no such thing as a conflict that cannot be ended,” he said, noting that it would require US leadership, movement by both the Israelis and Palestinians, and probably the simple realization on the part of both nations that they are sick of the violence.

  • There also was a terrific presentation by Ann Rhoades, a director at JetBlue Airways, about the subject of employee hiring. It would be a mistake to just say they do it differently there, since they only:

    • Adhere to the notion that “a successful company can only be built one satisfied customer at a time” and that this can only happen when a company has “happy motivated employees.”

    • JetBlue believes in breaking all the rules for its customers and always “getting to yes” in dealing with them.

    • JetBlue involves its people in the recruiting and hiring process. Pilots hire pilots, mechanics hire mechanics, and flight attendants hire flight attendants. The company also breaks the mold when it comes to various positions. JetBlue’s top flight attendant is a 63-year-old fireman who “gets” the JetBlue culture implicitly.

    • The company only hires people who mirror its values, and is ruthless about getting rid of those who do not.

    Rhoades noted that it is an adherence to simple, basic principles that has JetBlue making money at a time when major airlines are declaring bankruptcy and facing severe economic problems.

  • Three major awards were presented by FMI at the conference:

    • Boyd George, chairman of Alex Lee Inc. received the Glen P. Woodard award for his involvement in public affairs.

    • Dr. Thomas Haggai, chairman of IGA, received the Sidney R. Rabb Award.

    • And the Albers Award went to Timothy Smucker, of JM Smucker Co.

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