Expert Opinion: How Regional Grocers Can Win Against the Odds

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Expert Opinion: How Regional Grocers Can Win Against the Odds

By Stephen Caine, Wes Janson and Karl Zimmermann - 02/19/2020
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Regional grocers have a target on their back. Their biggest rivals are getting bigger, unlocking extra savings that they are reinvesting in their businesses. Competition from hard discounters and Amazon is intensifying. Costs are rising. But in spite of these and other threats, the best-run regional players can still secure a prosperous future—as Bain & Company’s latest Advocacy in Retail study illustrates.

With research firm ROIRocket, we surveyed more than 14,000 grocery shoppers in the U.S., examining how likely they were to recommend grocers to a friend or colleague. More than three dozen grocers were assessed in this way, including national and regional supermarket chains, warehouse clubs, discounters and dollar stores. Against the odds, regional players took the top four positions in the ranking. 

Texas-headquartered H-E-B emerged with the most committed cheerleaders. Its Net Promoter Score, a customer advocacy measure, was a stratospheric 69, 11 points ahead of the second-place grocer. H-E-B’s devoted following in the Southwest reflects how it leans into everything local, from tortilla chips shaped like the Lone Star State to a “Quest for Texas Best” competition showcasing regional food and drink makers. “I love H-E-B with a passion,” one customer told us, praising its local roots and the quality of its items. “The regional product lines are unique,” another observed.

The regional discounter WinCo came in second with a Net Promoter Score of 58, thanks to a very different approach. WinCo delights its customers with ultra-low prices enabled by a company-wide culture of thrift. For instance, to save on labor costs, it doesn’t employ baggers.

Distinctive private-label products and prepared foods helped third-place Wegmans secure a Net Promoter Score of 54. Fellow regional player Publix also did well; its fourth-place Net Promoter Score of 52 reflected what shoppers described as “extraordinary” and “exceptional” customer service.

One thing uniting H-E-B, WinCo, Wegmans and Publix is that they excel in at least one retail dimension, such as assortment, price or service. That’s likely to be vital over the next decade. Our analysis suggests that nurturing a crisply differentiated value proposition is one of three key strategic actions that can help regional grocers thrive, even as margins in general come under pressure.

That might sound obvious, but it’s surprising how many regional grocers are uniformly average. They could get by with this in the past because of their strong local relative market share (RMS), a measure of their size advantage over immediate competitors. Being No. 1 or No. 2 locally offers significant cost advantages that tend to lift profit margins.

However, regional grocers can no longer rely on that local RMS boost alone. Now, their biggest competitors are leveraging absolute scale to fund both price reductions for customers and the vast investments needed to master online grocery and innovation. Lacking the resources to excel on all fronts, regional chains must make the necessary trade-offs to stand out in at least one or two ways.

The second key strategic action ties in with this changing notion of scale. Regional grocers need to minimize their size disadvantage by outhustling bigger players and creating virtual scale (through partnership deals, for instance). The nimblest leadership teams are already doing this.

Take the outhustling part. Some regional grocers are becoming adept at moving from concept to pilot to rollout at a speed that eludes national or international players. Meanwhile, virtual scale can be key to building a powerful presence in online grocery. Most regional grocers can’t afford to do that on their own, or don’t have the in-house expertise required. It can make more sense to find specialist partners to help, but without going so far as to outsource digital strategy to others.

Bold and rigorous cost management is the third strategic action that regional grocers need to prioritize. While scale retailers may be leading the way on unlocking cost savings, the most forward-thinking regional players are redoubling their own efforts to find the fuel for investment. Being medium-sized doesn’t mean they can’t achieve eye-catching results.

Consider one regional grocer that saved more than 3% on cost of goods sold through a data-led rethink of supplier negotiations. The same grocer scored further wins across its cost base. It reduced labor costs by introducing robotic floor cleaners and other automation, for example. It also freed up additional funds for investment by moving some deli and bakery tasks out of stores, as well as by adopting an advanced analytics–driven workforce management model.

Looking at the strongest regional grocers, including those that scored well in our Advocacy in Retail study, we see other common characteristics, such as reasonably competitive prices and a rising market share. But these three key strategic actions—nurturing crisp differentiation, minimizing scale disadvantage and managing costs boldly—are at the very heart of what’s needed to survive the transition to a more digital and concentrated industry. Some regional players are already well placed to make that shift, and there’s still time for others to follow suit.

Stephen Caine is a Bain & Company partner based in Chicago. Wes Janson is a partner based in Dallas. Karl Zimmermann is a partner based in Boston. All are members of Bain’s Retail practice.

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