Increasing Loyalty at the Grocery Store

These days, businesses need to hold onto every customer they can get their hands on. Cutbacks in discretionary spending are keeping consumers out of whole categories of stores and malls. Lucky for grocery stores, people still need to eat.

There’s lots of press about how grocery retailers are improving the quality of their store brands. Whether it’s Rancher’s Reserve, Eating Right, Organics, or even Safeway Select, the packaging and products are clearly moving up market. But I would argue those brands are still not loyalty drivers. I don’t go to Safeway to get them, though I do buy them when I’m at the store,a and they do help build perceptions of quality and variety. (In contrast, Costco does actually have store brands that we make a special trip to pick up – like their Sparkling Ice Talking Rain drinks).

In our town, there are three choices of grocery stores. There’s the local, independent market whose owners are deeply involved in the town. We have a cramped Whole Foods with inadequate parking but the best butcher shop. And there is a Safeway across the street from the high school, where most kids eat at least one meal a day (and no adults want to be when the high schoolers take over the place). There are more choices farther away, but these are the store we shop at day in, day out.

I’ve preferred Safeway for years, because of the free and ample parking, the deals, and its broad assortment which makes it a one-stop-shop. Safeway is also the only store of the three with a loyalty program. And today, I experienced the real value of my loyalty to Safeway for the first time. In the past, Safeway has included coupons for Safeway Gas Stations among the receipts the cashier hands customers at checkout. Since there are no Safeway gas stations near us, I had no use for the coupons (I can’t keep track of paper coupons, anyway).

However, Safeway recently launched PowerPump Rewards – a cobranded program with BP, which owns ARCO as well as BP stations across the country. For every $100 I spend at Safeway, I receive $1.50 toward a fill up at an ARCO or BP station. Sounds small. But without even trying, I earned a $10.50 debit card last month that I used today to buy gas. So, now, in addition to saving money on most of what I buy at Safeway, I also save money on gas. And while I occasionally go to ARCO to fill up, with PowerPump Rewards I make a point of it. Apparently, I'm not alone. Convenience Store News reported today that according to Safeway Chief Marketing Officer, Diane Dietz, "The customer response to PowerPump has been tremendous."

For me, the customer, it’s double savings. For Safeway and ARCO, they’ve given me a more powerful reason to be/stay loyal. That’s a win-win-win for them.

Tools for Keeping Customers Close

Imagine a company that does lots of customer surveys, has a customer segmentation scheme, target customers, and a loyalty program, tracks its brand attributes, and occasionally does in-person research to get feedback on new product ideas. Despite all this data, the company has little insight into how customers view its offerings, what it has permission to extend into, what messages are getting through to customers and which are completely lost on or irrelevant to them. Sound familiar?

Now more than ever, companies need to figure out what makes their customers tick, what role their brand plays in their customers’ lives, and how to become indispensable.

Last week, we had online conversations with four groups of a retail client’s best customers. None of the participants (customers or clients) had ever participated in this type of online research. Sure, we structured the conversation and had specific questions we wanted customers to answer. But mostly, we wanted to hear what they had to say about their attitudes toward the category, purchase drivers, and brand awareness and preference drivers.

We got what we needed to deliver specific recommendations about the issues in question. More importantly, customers had their first-ever opportunity to tell the company where and how its products are relevant to their lives, and where they’re falling short. This type of two-way, open-ended conversation is invaluable input for product designers, sales teams, marketers, and others across the organization. And it is too rare.

It’s clear that the recession is reshaping consumers’ behavior at multiple levels. This makes it all the more important for companies to talk to them more personally and more often, stay close to their needs, and make them feel valued. Web 2.0 tools make it easy and economical for brands to do this. Earlier this month, Bruce Temkin wrote about this on his blog, Customer Experience Matters.

Recent research by Internet Engine suggests that traditional retailers might not be keeping up with changes in consumer behavior “because they are relying on a brand-push marketing strategy while online retailers using search marketing present a consumer-pull strategy.” Etailers have been quick to embrace the tools that allow them a greater sense of customer intimacy – could be because they don’t get to see them or hear their voices, could be because they are less constrained by old-school CIOs and legacy systems.

Most bricks and mortar retailers are far from the bleeding edge of tools and social media. That said, they have the greatest opportunity to engage their customers in an enveloping experience. These days, connecting with customers includes having, following, and digesting unstructured Web 2.0 conversations. Winners are doing it. Losers continue to hide their head in the sand.

Recession Redirects Retail Innovation

The economy has been tough for lots of retailers. Personal bankruptcies are running high, and consumers have been reluctant to open their wallets regardless of the great deals being offered to tempt them.

Teens and young adults have been two of the few bright spots that have gotten a lot of press, and so have retailers that cater to them. While the rest of us have been preoccupied with what happens to the Dow on a daily (or more frequent?) basis, millennials had no stock portfolios to speak of, so the market turmoil has not affected their sense of financial security.

However, it looks like the Millennial retailing innovation engine may be losing some of its steam. According to a March 13 story in the WSJ, several retailers have decided recently to drop their millennial-focused new concepts. Pacific Sunwear, Quiksilver, American Eagle and Aeropostale all announced plans to take charges to earnings and close chains aimed at this demographic.

A closer look at these concepts suggests these closures may actually be a rejection of the strategy of slicing the Millennial market into ever finer niches. The Long Tail got a lot of press when it came out in 2006, and led retailers and others to attempt to sell less of more to increasing numbers of niche markets. Seems Millennials don't respond well to slicing and dicing.

Hot Topic and The Buckle are examples of Millennial-focused retailers that are thriving. Unlike the retailers mentioned above, these two have not been chasing new niches. Instead, they have stayed the course and continue to aim at a broad segment of the teen and twenty-something markets.

Winning retailers know innovation is key to continued relevance. Rather than go for line or concept extensions, they’re focusing on merchandise innovation within their existing footprint and formula. Forbes reported last week on an RBC Capital Markets analyst’s comments that "As we walk the malls and listen to companies report sales and earnings, it's clear that where there is exciting merchandise, there is outperformance on a relative basis."

In addition to merchandise innovation, the other area of innovation that is driving retail success with Millennials these days is the in-store customer experience. S&P reported recently that “an engaged sales force and layaway program that allows youths to buy designer denim” are a big part of Buckle’s success.

So, it’s back to basics when it comes to retail innovation. More than ever, with prices down everywhere, it’s about the product and the customer experience. Retailers whose merchants have budgets to experiment with new products and sources and who have the ability to hire and upskill their sales associates will win.

Going Beyond Value

Late last year, I wrote about value becoming tablestakes. The upshot was that consumers were about to be bombarded with promotions screaming value, putting retailers in most categories at a disadvantage relative to Walmart.

Some value retailers have been caught flat-footed, like Sears, whose Q4 2008 profits were down 55% from their 2007 levels and whose comps dropped 8% for the year. As Fortune reported late last month, “analysts are predicting profits will fall even further in 2009, and one even suggests Sears may disappear altogether.”

Meanwhile, Family Dollar has been busy adjusting its assortment and promotions strategy to better fit the times. CEO Howard Levine told attendees at a February Deutsche Bank Small and Mid Cap Conference that the 6,600-plus unit neighborhood discount chain is “working to increase relevancy to the customer by reinforcing more promotionally priced offerings and expanding the assortment of key consumables, such as food.”

What exactly have they been doing? The company added sales generating SKUs of food, health and beauty aids, and laundry and cleaners – all items that people buy regularly and frequently, so they come into the store more often. In addition, the company directly confronted the downturn in the home category by launching a Home Remodel event featuring inexpensive home décor ideas. And it took a page from Merchandise Optimization 101, promoting average ticket-increasing merchandise in in-store circulars and end-aisle displays. In another smart merchandising move, the company is using seasonal buys to freshen the selection.

The strategy appears to be working. According to a Dow Jones Newswire from March 5, Family Dollar’s second quarter comps store sales were up over 6%, and the company raised its earnings guidance ten cents to $0.61 a share. And the stock is up 60% vs. year ago levels.

From all appearances, Family Dollar seems to be getting back to retailing basics in ways that consumers, as well as shareholders, clearly approve of.

Reframing the Conversation

Every brand has a context – a frame of reference within which it operates. Often, the frame of reference is the category or industry. It may seem fixed – for years, Coke = soft drink, Visa = credit card. However, the frame of reference is actually a dynamic dimension of brand management and a core component of positioning.

Today, you could argue Coke is trying to be seen as a refreshment, and Visa, a payment solution. The frame of reference helps define a brand’s competitive set, and telegraphs something about where the brand is headed. I recently came across two brands I think have done a nice job redefining their frame of reference, for themselves and their industry.

Wag Hotels: If you have a dog or cat and ever travel without it, you’ve faced the need to have it cared for while you’re gone. The industry formerly known as “pet boarding” or “kennel” has gotten a makeover. It could be known as “pet hotels & spas” now, and Wag Hotels, is its poster child. Wag is the first five-star experience for pets and their owners. Cageless care, a la carte services including nighttime strolls and peanut butter kongs, and training are among this new category’s distinctive features.

JimmyJane: At a lunch meeting this week, I was reminded of a brand that has been at work changing its frame of reference, moving from one that has questionable connotations to one that is more, um, respectable. While boomer prudes (including me?) may blush, millennial women among others apparently have no qualms talking about their Jimmyjanes. The company sees itself as a “lifestyle brand that joins the ephemera of sexiness with the substance of design.” The frame of reference? The old category, “Sex Toys,” seems have given way to “Bedroom Aids.” Nice upgrade.

Based on its recent ads, I’m betting that KY Jelly is also in the “Bedroom Aids” category. Much better than “Personal Lubricants,” the frame of reference for an earlier generation that ironically preferred clinical, impersonal language for this very personal set of products.

With President Obama reframing the healthcare debate from a moral requirement to an economic one, reframing is alive and well, and all around us!

Discounters Winning Our Wallets – Will Hearts & Minds Follow?

These days, consumers are more reluctant than ever to part with their hard-earned cash, and virtually every store is offering deals and discounts to entice them to spend. As USA Today reported last week, the stores with the sharpest pencils and price points are clearly winning the battle to draw in new customers. Walmart, TJX and Dollar General beat analyst expectations and are reporting decent performance while the competition misses badly. But who are they attracting, and are they building customer loyalty that will prove enduring?

The data suggest upscale consumers are shopping these discounters big time, and while they may be enjoying the savings, they’re not loving the experience. That’s the interpretation of the latest retail data from the American Customer Satisfaction Index. The just-reported 2008 rankings for Department and Discount Stores show Nordstrom and Kohl’s tied for first place in customer satisfaction (at 80). Dollar General declined more than any other Department or Discount Store (to 75). While Walmart’s score increased last year, consumers still rated it the worst of the lot. (70). Among Specialty Stores, Barnes & Noble and Costco came out on top (at 83). TJX scored third from the bottom (73), with only Circuit City (72) and Home Depot (70) scoring worse.

What’s a discounter to do? Hire more sale associates or improve training in customer service? Clean the stores more often or improve store lighting? No! They should trust what people are doing more than what they are saying. Consumers vote with their pocketbooks every day, and the discounters are winning.

There must be a way for Walmart to use its commitment to packaging and energy efficiency to help upscale consumers appreciate the store experience more. Shopping at Ross and Marshalls stores is all about the thrill of finding amazing deals on brand name merchandise. And at Dollar General, it’s all about what a buck will buy. In a classic judo move, discounters might creatively turn a no-frills store experience into a badge of shopper frugality. Aldi and Costco both do this well. What could Dollar General, TJX and Walmart do?

Most pundits are projecting that the new behaviors being formed in this economy will have staying power. So, upscale consumers may learn to hold their noses while shopping the discounters. Just maybe, a few innovative discounters will find ways to make them happy to come back again and again.

Wanted: Effective Promotions

These days, consumers are more reluctant than ever to part with their hard-earned cash, and virtually every store is offering deals and discounts to get them to spend. We’ve been working with a few retailers to better understand how and what to promote in order to sell more units per transaction at full price (or at least, at less of a discount).

Viewing promotions through a basket-analysis based lens reveals how in touch retailers are with their customers. Take the email I received today from Target, and their most recent store circular. The subject line of the email reads: “Live large: Spend $125, SAVE 15%, plus FREE SHIPPING on select furniture.” The copy is tone deaf to the times. No one is “living large,” and conspicuous consumption is out. Who is Target talking to? How are they responding? Not well, I suspect.

Clicking through to the weekly ad raises more questions about Target's promotions effectiveness. The front and back covers are squandered. The covers should be all drivers proven to add items to the shopping cart. Page 1 is all about towels, sheets and pillows on sale. Are towels a driver for Target? Do pillows sell sheets? If so, then featuring sheets is a waste of real estate, and discounting them is a no-no. The back has a random assortment of food SKUs – not a big statement about Target’s commitment to the food category, which I keep reading about.

The insides of the weekly ad insert don’t seem to be working as hard as they could, either. They should feature drivers and not discount draftees on these pages, too. Pages 2-3 and 4-5 are furniture and related accessories. The office furniture spread attempts to sell “get organized” but the merchandise doesn’t really support that theme. The rest of the circular features random items and touts the great prices being offered on high-ticket items that are value-priced.

Page 17 is the closest thing to a category statement where Target is attempting to own “Clean.” It features 16 well-priced items merchandised together under the banner “Affordable, Clean Fun”. I’m guessing these actually are drivers in all seasons – people come into the store to buy them year round. Good move to promote them with a story behind them. Too bad they’re buried inside the circular.

All in all, the email and circular are a miss. And one Target probably can’t afford right now.

Who do you think is doing promotions well?