Taking Stock with Pimm Fox

How do Energy Management Systems Work?

Second to labor, energy consumption is typically one of the biggest variable costs for many retailers. Expenses in this category include electricity consumed by lighting, HVAC systems and store fans, refrigerators and coolers, water heating, POS device operation, powering computer equipment, etc. In addition to monitoring and reducing energy usage across equipment types in the store, EMS also provide for a gradual, automated starting-up and stopping of energy usage at the beginning and end of a stores operating hours. These systems also control energy usage to avoid spikes in demand that are costly for both a retailer and the broader energy grid. Recently, some retailers have found ways to supplement store revenues by installing EMS devices that store energy and sell unused portions back to power grid operators during times of peak demand.

While EMS costs have come down dramatically over the last decade, they are far from free. Many retailers struggle to accurately quantify the reductions in power usage attributable to EMS installations and with high up front installation costs, understand the ROI of such investments.

How to improve the ROI of EMS deployments

Any business considering EMS must answer three key questions in order to determine how to move forward with the EMS installations:

1. How profitable is the EMS program?
2. Do energy savings vary over time?
3. How should stores be prioritized and targeted to undergo EMS installations?

To accomplish the above, retailers should use limited-risk trials: install EMS in a small subset of their networks and carefully track EMS performance over time. Measures such as kWh usage and total energy cost should be tracked to understand changes over time.  Performance tracking must be done on a test (stores with EMS) vs. control (stores without EMS) basis to carefully account for seasonality, changes in the sales patterns and store operating hours. Using balance of chain control group, while popular, usually is insufficient, and may be misleading as power consumption varies significantly by store.

Instead, test stores should be matched to individually-tailored groups of peer control stores, controlling for fine differences between store types, weather patterns, and fuel types across a network.

Segmentation analysis can then identify store location types that experience larger incremental savings following EMS installations. Data often shows that stores with specific characteristics – related to location, climate, size and utility usage history – are better positioned to benefit from EMS installations. Targeting EMS deployment on a store-by-store or market-by-market basis may save several million dollars for the average retailer.

Learn more

Read a case study on how convenience retailers and grocers evaluate the effectiveness of Energy Management Systems and maximize ROI by smartly targeting the deployment.

The Paradox

Many retailers are bringing back pallets, end caps and checkout lane displays to entice shoppers to spend more. It is a surprising turn of events for several reasons. The chief reason is that many of the same companies were touting their “clean look” and “uncluttered feel” strategies as recently as twelve months ago. This is especially surprising because many of these same retailers surely tried their “clean” and “uncluttered” looks before rolling them out nationwide. Many even ran in-market tests to ascertain their strategies. Why then did the results of those tests not translate to national rollouts?

On Accuracy

Tests need to be designed properly to provide accurate results and inform go-forward decisions. Any test needs to have the right number of stores or markets to provide meaningful recommendations. If a test is too small, then it will be challenging to confidently measure the impact. 5-store or 2-market tests are not tests at all in the sense that they cannot be relied upon to guide rollout decisions. These are more like operational trials that can inform the operational viability of the idea, but not provide enough statistical significance to bank company’s future on.

Secondly, test stores and markets need to be selected to be representative of the network as a whole across key dimensions. If the test is biased in some way (e.g. we only test the “clean look” concept in downtown Dallas), the results won’t hold when we extend the idea across the network.

Lastly, measuring the impact of any test requires rigor and analytic sophistication.

• Proper control groups have to be used to account for seasonality and economic fluctuations. It is not enough to show that performance has improved on a pre vs. post basis (or this year vs. last year). Only using a well-designed control group can tell us what the true, incremental impact of a program actually is.
• Understanding the true impact of a test requires additional measurements beyond the specific product and metric tested. For example, when testing the new store format it is not enough to look at sales and customer satisfaction. One must examine impact on unit sales, average basket size, customer count, gross profit, etc. Furthermore, one needs to understand how these changes happen at the department or category level, not only at the total store level, and segment results by customer types.
• Finally, any test measurement must properly identify and suppress outlier observations. Results that are not representative of the rollout should not be used in making the rollout “go” vs. “no go” decisions.

It is not enough “to test” and “to measure,” but you actually have to have the expertise and the tools to be able to do this accurately. If you don’t, you should be working with APT to take your testing capability to a different level. Stop relying on your gut-feel. Instead embrace the power of data-driven decision-making.

Learn more

Learn how APT’s Test & Learn^TM helps grocery and c-store retailers make decisions on capital allocation strategy with great confidence.

Shoppers in many markets around the U.S. take advantage of them, but are discounts on gasoline an effective way to build supermarket shopper loyalty and drive traffic into stores?

Kroger certainly believes so. In announcing his chain’s strong first quarter earnings for 2011, Kroger chairman and CEO David Dillon commented that “the combination of having gas near our supermarkets is a very strong convenience… [customers] like the tie-in with our store sales.”

In various forms, fuel rewards have become a widely used tactic used by supermarket chains (and some other retailers) to keep shoppers coming back. Typically applied in conjunction with a frequent shopper card program, the per-gallon discounts kick in after a certain level of spending is reached in a calendar month.

The typical reward adds up to roughly $1.80 on an 18-gallon fill-up – attractive, but barely a half a gallon of fuel at current prices. When gasoline price anxiety is running high, however, the discounts seem to have some impact on shopper choices.

Some retailers, including Walmart, place gas stations in front of their retail stores, attempting to lure price-sensitive consumers in which discounted gas and then drive them to make additional purchases in the store.

Advocates of supermarket fuel rewards programs argue that incentives provide shoppers with a reason for loyal behavior – that is to confine their grocery purchases to one chain in order to qualify for the largest possible discount. But the actual dollar amounts involved for most participating households may not be so large. Is a fuel discount of between two and five dollars once a month meaningful to shoppers? More importantly, is it meaningful to the right shoppers?

Testing new strategies is vital to determining how to best align fuel related programs to drive both loyalty and visits.

Kroger tested new permutations of its fuel price incentive programs last fall in Indiana in an effort to win a greater share of shopping trips. Instead of a flat 10-cent per gallon discount for shoppers who spend $100 or more in a calendar month, the program was extended to allow shoppers to stack multiple 10-cent discounts by reaching higher spending milestones. The heaviest grocery shoppers – those who spend $1,000 or more in a month – would earn a $1 per gallon discount on up to 35 gallons fill-up.

Success of this test, along with other pilot program in five markets, has driven Kroger’s expansion of the program across more than 26 states.

Kroger is not alone in offering fuel rewards at company-owned filling stations. Costco has long offered discounted fuel prices as a benefit of membership along with a year-end rebate of a few cents per gallon for customers who pay with its private label American Express card. Rival Sam’s Club offers a nickel discount to its members. Meijer offers discounts to users of its credit card.

With oil prices fluctuating significantly at levels far above their historic averages, sophisticated grocers have an opportunity to increase the effectiveness of their fuel programs using testing. We’ll update you on innovative programs as we hear about them.

Washington D.C. – Is grocery moving online? BusinessWeek reported earlier that Walmart is said to be experimenting with online grocery delivery. At the same time, many supermarket chains are expanding their grocery curbside pickup services. SuperMarket News is reporting that Harris Teeter is slashing its shop-online-pickup-groceries-curbside-at-the-store fee from $4.95 to $1.95. At $1.95, the fee likely only covers the cost of processing the online payment for Harris Teeter. At the same time other grocers are actively testing the curbside pickup options at their stores as well. Why do it?

Benefits and costs

According to the annual report, a typical Harris Teeter store averages about $400K in sales and $119K in gross profit every week, as Harris Teeter earns a pretty typical for grocery industry 30% gross margin rate. Assuming an average shopper basket of $35, in an average week a store draws in about 11.3K customers, each bringing in about $10.50 in gross margin (again, using the 30% margin rate). But online orders that are picked up at the store are likely much larger than $35 per basket. Often seen as a convenient alternative to stocking up at warehouse retailers (Costco, Sam’s Club), and cheaper than grocery home delivery, these baskets are likely 3 to 5 larger than average. In other words, the curbside pickup customers average closer to anywhere from $105 in sales & $31.50 in margin (3x larger than average) to $175 in sales & $52.50 in gross margin (5x larger than average).

It probably takes anywhere from 25 (for $105 baskets) to 40 minutes (for $175 baskets) for in-store personnel to assemble the ordered items, bag them and deliver them curbside for customer pickup. Ignoring for a minute other expenses such as installation of the required technology to process online orders for curbside pickup, handling of payments for customers who are pulling into the parking lot to pick up their groceries, to name just a few, 25-40 minutes of clerk time translates into $5-$8 in labor costs (assuming a $12/hour average for a clerk position).

So, to review, the online-ordered baskets average $31.50 to $52.50 in gross margin, and it costs Harris Teeter $5-$8 to pick them. So, net benefit is anywhere from $26.50 to $44.50, right? Not exactly!

Incremental value

The key question is how much incremental spend does curbside pickup generate for Harris Teeter. Incrementality here can be thought of as consisting of two drivers:

1. Does curbside pickup drive increased basket size? In other words, is Harris Teeter getting shoppers to spend more money because it offers the curbside pickup service, net of any demand-pulled-forward effects?
2. Does curbside pickup drive additional trips? Said another way, is Harris Teeter getting shoppers to consolidate their trips and come to Harris Teeter only instead of splitting their share of wallet across multiple supermarkets?

This is where it gets really tricky:

• If all curbside sales are incremental, the benefit clearly outweighs the costs. This extreme assumes that all curbside sales wouldn’t have happened at all if Harris Teeter didn’t offer the curbside pickup service.
• On the other hand, if none of the curbside sales are incremental, then Harris Teeter is paying for someone else to pick your groceries for you. Customer satisfaction improvement notwithstanding, this would be a very expensive way to provide convenience.

Which is the right answer? How much is truly incremental? Does Harris Teeter actually drive over 15% lift in baskets that are being picked up curbside to break even on the curbside pickup service?

Test vs. control measurement

This may sound like a simple analytical task. However, measuring small changes in sales at a store is much more complex than counting the number of curbside pickup orders. The complication is rooted in the nature of store sales. Daily sales vary by over 100% in any given week. The only way to know for sure is to test the service in some locations but not others, and then measure the incremental change from before to after vs. a carefully matched control group. Only by carefully matching test stores to representative groups of control peer stores can one reduce noise from daily operations, and measure the attributable impact of the curbside pickup initiative.

Results should then be segmented to understand:

• Is curbside pickup more effective at growing basket size or creating incremental transactions?
• Is it driving lift in some departments and product categories more than others?
• Is curbside more effective with some customers than others?
• Should it be deployed only to some stores (or markets) but not others?

With a wide array of investment opportunities, grocers need a consistent and accurate measurement system that can be used across capital programs, to ensure that capital is allocated to initiatives with the highest return on investment. Sophisticated analytics along with a scalable, repeatable process for accurately measuring the impact of any in-store initiative are key for making the right decisions, curbside pickup service being but one example.

Learn more

APT’s Test & Learn process brings highly specialized techniques to bear on the problem of reducing noise and finding the true attributable impact – the “signal” – of the activity under examination. Learn more by reading our white paper on maximizing returns for grocery investments.

And, there is a constant refrain, uttered in the calm between campaigns: there has to be a better way to evaluate ad spend.

Fortunately, controlled experimentation (a.k.a “Test & Learn) is slowly, but surely, replacing traditional methods for measuring the effectiveness of ad spend (from Media Mix Analysis to the time-tested “gut-check” method of measurement). This evolution in measuring and improving advertising spend has been pushed in no small part by a number of emerging media channels, ranging from search advertising to mobile display ads on smartphones. These new channels more easily allow marketers to measure the impact of ad dollars spent and also opening eyes to the opportunity to measure traditional media (from TV to flyers) in a more robust way.

Our friends over at Google recently crafted a short video demonstrating how companies are using Test & Learn to measure the impact of online ads on brick and mortar sales to which we’ve linked, below.