1. Private Label Introductions: Many grocers are expanding their private label varieties as a lower-cost alternative to branded merchandise. Retailers are testing these product introductions to quantify their overall profit impact, net of cannibalization and halo effects. Click here to read about the growing trend of private label products across the grocery industry.
2. Remodels: Today’s retailers are testing their remodel programs to understand which components drive the greatest return on investment. Grocers can then use this information to optimize their remodel programs by only rolling out profitable components to locations which will benefit most. Click here to read more about testing remodel programs.
3. Promotions: Customers have come to expect some kind of promotion or discount on their food purchases. Grocers are becoming smart about their promotions strategy by testing which offers lead to the least margin loss and highest overall sales. Many are even using loyalty cards to personalize their promotions. Click here to read about how a major grocer enhanced its customer loyalty program, generating millions in value.
4. Media impact: Many grocers are testing reductions in their print circulars by moving some print advertisements online. While some retailers have found that print circulars are still profitable in some markets, they have also found ways to profitably reduce their spending by shifting circular spend online in markets where it will be most profitable.
5. End-Cap Optimization: Grocers are constantly testing end-cap product placement. Placing products on end-caps can drive significant sales, but in order to determine which products drive the largest overall profits, when considering follow-on and attached sales, executives must execute controlled tests.
6. Aisle Resets: Aisle resets can drive incremental foot traffic and increased sales, but often includes upfront costs and the risk of cannibalizing other categories.  Click here to read about why executives should test aisle resets, like Coca-Cola’s BAR (Beverage Aisle Reinvention), before rolling the program out across their chain.

• Managing shrink
• Accounting for seasonality
• Optimizing ordering procedures

Click here to read the article.

Coca-Cola is currently testing the BAR in their Shopper Experience Innovation Center.  Though this kind of beta-testing is important, in order to truly understand the profitability of the BAR program, Coca-Cola and its retail partners would benefit from conducting in-market tests in a small subset of representative stores before rolling the BAR out across their store network.  Specifically, executives at Coca-Cola and retailers need to understand the disruption impact, break-even point, and cannibalization and halo effects of this program.

Disruption Impact

When grocery stores implement a significant change, there is likely to be some disruption to sales while the construction takes place.  Consumers accustomed to purchasing SKUs in certain areas of the store may have difficulty locating their target items during construction.  Further, there may be an impact on return visits, as a store may be perceived by consumers to be “incomplete” or “under renovation.”  Understanding the precise construction disruption is necessary to fully determine program economics, and will be a key element in understanding the sales impact of implementing the BAR system across stores.

Break-Even Point

The Beverage Aisle Reinvention program will carry with it the up-front cost of installation, in addition to the added energy costs for the lighting in both the end caps and the middle shelf areas.  It is unclear whether or not incremental traffic will account for the total fixed and variable costs of the BAR system.  Further, the effect on incremental transactions will vary by store and by market.

Cannibalization/Halo Effects

As with most category-based programs, non-promoted categories are likely to be affected.  There may be some consumers who usually shop primarily around the perimeter of the store purchasing milk, bread, and other staples, that are now drawn to purchase Coca-Cola brand products because of the enticing display.  There may be another subset of consumers, however, who now purchase sparkling beverages but forgo other purchases, like non-carbonated drinks. Understanding the direction and magnitude of these cannibalization/halo effects can be nearly impossible to assess on a store-by-store basis without scientifically testing the change in a few stores first.

The Beverage Aisle Reinvention is the latest advance to come out of Coca-Cola’s innovation lab, and it has the potential to dramatically shift consumer behavior around sparkling beverages and center-store shopping.  By conducting scientific tests to understand the overall impact of this program and tailoring rollout accordingly by market/location, Coca-Cola and its retail partners can make confident decisions and maximize the ROI of this innovation.

• How do we best allocate floor space to our different offerings? What is the cannibalization impact to items for which floor space was reduced?
• Which marketing strategies for the new store concept will generate the greatest ROI?
• In which locations will this store concept be most profitable? In which locations will the cost associated with constructing the new store concept not justify a potential lift in sales?
• For locations where this is not a profitable strategy, what other innovative lines can we add?
• How should we price these offerings? How should our pricing strategy vary based on location to nearest c-store and nearest fishing supply competitor?

Though an interesting concept, it will be difficult for Brookshire Brothers to understand the cause-and-effect relationship between this new category introduction and profits. To determine the true incremental impact of the program, Brookshire will need to test this concept in a representative subset of their network. Only through in-market testing with well-matched test and control stores can retailers truly understand which concepts work and how to optimize their programs to maximize ROI. Stay tuned to see if more non-traditional concepts will pop up in the c-store space.

To remain profitable in spite of rising costs, executives have considered many decision-making strategies. These decisions are often based on customer surveys, correlation studies, or simply “gut feeling”. Unfortunately, these approaches often lead to inaccurate answers. The only accurate method of minimizing the risk of major decisions is real-world testing.

Rising commodity costs will affect all grocery stores. Consequently, grocers have the opportunity to differentiate themselves from competition by leveraging their Big Data to drive testing and inform smarter decision making. Grocery executives can use a test and learn process to determine the true cause-and-effect impact of any upcoming initiative. Specifically, executives should consider testing price changes, promotions of high margin and large basket products, and removing high-cost SKUs.

Price Changes

One method to combat high costs is to raise prices. However, given the challenging economic climate, an inventory-wide price increase could potentially devastate customer visits. There is likely an opportunity to increase prices for some SKUs and in some markets, however. The best technique for figuring out the optimal pricing strategy is to conduct a multi-cell, in-market scientific test. For example, to offset rising protein costs, a grocery store could run a test such as this:

• Cell A: Increase protein prices by 5%
• Cell B: Increase protein prices by 10%
• Cell C: No change (Control Group)

In this example, a store may learn that increasing protein price by 10% (Cell B) drives customers away from proteins at a high rate, negatively impacting profits. However, protein purchasers may not be extremely price sensitive and by raising protein prices by only 5% (Cell A), grocers might drive profits without driving too many customers away. Additionally, the store may find out that increasing the price of proteins is a poor strategy in all locations, as it may cause loyal customers to reduce frequency of store visits. This test-and-learn approach to analysis has created millions in incremental value for grocery stores in the past.

Targeted Promotions

Another strategy for increasing profits is to promote higher margin SKUs which are attached to large baskets. For example, if feed costs are driving up poultry prices relative to fish prices, a grocery store may consider doing a large seafood promotion.

However, rolling out promotions without first testing their effect carries major risk. By launching promotions in some stores prior to chain-wide rollout, executives can answer two questions. First: What is the impact of the promotion on total store margin? Second: How can we determine the effect of the promotion on demand for each SKU by location in order to better inform purchase decisions?

In addition to providing accurate answers about the total network impact of the promotion, test and learn analysis also allows executives to understand how the impact varies from store to store. Often, grocers will find that a limited-time offer works well in some stores or markets, but not in others.

In the above example, it is possible that in some locations, like those in lower income markets, more consumers will switch from purchasing poultry to purchasing fish. By clearly identifying this trading behavior, grocery executives can understand the total economic impact of the promotion, net of halo and cannibalization effects. They can then target different promotions to different markets to maximize profits.

SKU Rationalization

A third approach executives should consider for increasing gross margin is to remove high-cost SKUs from store inventory. However, to reduce risk associated with SKU rationalization, executives should always make data-driven decisions. Specifically, grocers should only remove high-cost/low-margin items that are associated with small baskets. For example, if a $2 yogurt is usually linked to large baskets, removing that yogurt from the shelves could potentially result in a loss of the whole basket in the future.

Executives can gain additional insights by approaching mix analysis with a more sophisticated approach. For example, if a block of cheese attaches to small transactions but is purchased in six percent of baskets, it would seem unwise to simply eliminate it from all stores. To accurately predict the impact of the removal, it must be tested with real customer data. Specifically, executives would need to understand whether consumers shift to other items or if removing the cheese actually leads to fewer customer visits and a resultant profit decline.

One fact is certain: the drought will impact the grocery business. The good news for executives is that all grocery stores are facing the same challenges, presenting a prime opportunity to rise above the competition. Testing business decisions now is the only way to ensure that you continue to harvest profits in the future.

(Adapted from APT’s recent article in QSR Magazine)

Online grocery delivery has been around since Ahold’s Peapod home delivery service began in 1996, but it has yet to gain significant market share (in 2011 Peapod accounted for only 1.3% of Ahold’s sales).   Although online grocery shopping is designed to maximize efficiency for consumers, many still prefer the in-store shopping experience.

Differentiation through Service

An interesting alternative to home delivery comes in what Tesco is calling “Click and Collect.”  Customers select the items they want from an online store, then conveniently pick up their order at the store’s drive-through, where a staff member loads the groceries directly into the car.  Tesco is on the forefront of drive-through grocery pickup as it tries to regain market share in the U.K.; it plans to have 150 stores offering “Click and Collect” by year’s end.  Recently, U.S. grocers Stop & Shop and Giant Eagle began testing this service as well.

In addition to the potential for increased customer loyalty, in-store pickup may be a cost-saver for grocery chains compared to home-delivery, since delivery trucks and operators are not necessary.

Considerations for Executives

The largest potential pitfall that grocers face by offering this new service is the lost opportunity for cross-sell and impulse buys.  According to a recent study by The Integer Group and M/A/R/C Research, 90% of grocery shoppers purchase at least one item not on their shopping lists.  Aware of this tendency, grocers place high-demand items like milk at the back of the store, and customers have to pass hundreds of SKUs to purchase it.  Most customers are familiar with the experience of entering the grocery store to purchase just milk and eggs and leaving the store having also bought bacon, bread, and two boxes of cereal which were on sale.

When those same customers can easily click to order milk online, however, they are no longer exposed to the plethora of in-store grocery options.  And if customers are no longer being tempted by thousands of edible SKUs, impulse buy opportunities will likely be lost.  For this reason, grocers instituting a “Click and Collect” program need to minimize the cannibalization of existing customers who are more profitable when they do their shopping in-store.  The true benefits of a “Click and Collect” program lie in the opportunity to gain new customers who would otherwise not have shopped in those grocery stores at all.

Further questions grocery executives must consider are:

• Will there be sufficient incremental sales from this program to offset the necessary increase in store labor costs?
• What will be the impact of this program on customer loyalty?
• How do we micro-target our marketing strategy for this program in order to bring in new customers instead of merely shifting our existing customers from in-store shopping to drive-through pickup?

Importance of Testing

In this low-margin industry, grocers must do everything they can to differentiate themselves from rivals.  Drive-through grocery pickup could be a major driver of both revenue and customer satisfaction, and stores cannot afford to miss out on either.  It is therefore imperative that grocery chains test whether grocery home delivery service or a “Click and Collect” program drives incremental profits.  With considerable operational costs and the potential for cannibalization of impulse purchases, testing initiatives like “Click and Collect” first in a small subset of stores would de-risk broad rollout of these programs.

In most cases, by featuring a product on an in-store display, the manufacturer and retailer are going to drive sales of that product. However, often overlooked in judging the effectiveness of a display are the two secondary impacts:

• Consumers are drawn toward nearby products (halo effect) or
• Consumers are less likely to purchase similar products (cannibalization)

Acknowledging these impacts – and measuring them – is crucial to successful merchandising.Take two examples of displays commonly seen around grocery and convenience stores:

Action: A display for a weight-loss drink is placed near other healthy-living products

Primary Results: Display drives incremental sales of promoted weight-loss drink

Potential Secondary Result A: Nearby portfolio products also experience a sales lift (halo effect)

Potential Secondary Result B: Sales of nearby portfolio products decrease, but increased sales of the higher-margin drinks make the program profitable

Potential Secondary Result C:Sales of higher-margin portfolio products decrease, making the program unprofitable (before even considering the cost of the display)

Action: A large branded beverage display is prominently placed near the front of a store, advertising two-liter bottles of soda

Primary Result: Display drives incremental sales of two-liter bottle

 Potential Secondary Result A: Sales of other products from same manufacturer also increase

Potential Secondary Result B: Sales of other products from manufacturer decrease, but not enough to offset the lift in 2-liter products

Potential Secondary Result C: Sales of higher-margin 6 and 12-packs decline, leading to a total-program profit loss
In both of the above examples, there are numerous possible responses — the key for manufacturers is figuring out how to rollout programs that lead to results A and B and not C.

Recently, top manufacturers have begun to employ test vs. control analysis to measure these impacts, gaining key insights into their consumer’s purchasing decisions. By doing so, manufacturers are generating innovative new ways to maximize the halo effect and reduce cannibalization of other products in their portfolios. The newest wave of displays utilizing these lessons are hitting the market now and generating millions in incremental revenue for manufacturers and their retail partners.

Are you aware of the true incremental impact of your POS displays? Do you know how placing these displays in different areas of the store affects your sales? Read about how one company used Test & Learn to measure their display program and drive more than $1 million in incremental profits.

But as numerous studies (and probably personal experience) has demonstrated, consumer behavior is not only unpredictable, decisions are often illogical. One familiar example of the irrational consumer is the idea that having a lot of choices actually results in less sales because the consumer gets overwhelmed (this is one of the many reasons for Trader Joes enormous success). Daniel Ariely’s book, Predictably Irrational is, as the title suggests, full of examples like this. Based on these irrational truths, it is clear that the only real way to confirm or disprove your intuition is to try out your ideas in the real world before rolling out to your whole distribution channel.