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London produce show and conference:
Former Wal-Mart exec speaks on consumer value perception, future of UK RetailingThe tumultuous situation in UK retailing has been redefining market opportunities. Amongst the many experts in the UK on British retailing speaking at the upcoming London Produce Show and Conference, it is sometimes beneficial to speak to an outsider to the market who can both speak more freely and see things from a different perspective.
So the Perishable Pundit, sponsors of the upcoming produce show in London, asked Bruce Peterson of Wal-Mart fame if he would come and share his market analysis. Bruce was kind enough to participate in a Q&A interview to provide a sneak preview of what he would have to say in London:
Q: Bruce you have an interesting background. You built Wal-Martís produce program from almost nothing to the largest on earth. You then worked on the grower-shipper side of the business as President/CEO of Naturipe. And your consulting business has given you exposure to a wide range of companies and markets. And you are free to speak openly. Your candid, thought-provoking insights are sure to stir up attendees at the upcoming London Produce Show & Conference. Channelling your transformative role at Wal-Mart Stores, and your presence there during the acquisition of ASDA, what key issues will you broach as UK retail competition heats up?
To hit all the issues requires a State of the Union address in regard to where UK retailing is going right now. The whole deep discounter phenomenon is a very, very real trend and difficult challenge in the UK. Retailers in the UK havenít had to experience that before. UKís ďBig Four SupermarketsĒ ó Tesco, Sainsburyís, Morrisons and Asdaó have had their way in the UK. Even Wal-Mart is feeling the heat from Aldi.
Q: Financial reports show the Big Four being squeezed at both ends. Deep discounters, Aldi and Lidl, continue to grab market share, as Waitrose and speciality segments increasingly nip away from the top, unhinging their retail market stronghold and shaking up long-standing norms. Arenít there some parallels to when Wal-Mart Supercenters penetrated the U.S. market, pummelling conventional retailers?
The consumer value proposition is what itís all about. That could be the title of my presentation. What entices a person to come to your store? In the UK, so much has been around location and also a private label offering. If youíre a fan of Tesco product you go there; if itís Marks & Spencer product, you go there.
Asda was the first retailer in the UK that started talking about price. That was one of the things so attractive to Wal-Mart, which operates on the value proposition of price, and a driving impetus for Wal-Mart and Asda getting together. The whole proliferation of discounters in both the States and in the UK presents a huge problem. If your value proposition is centred on price and a consumer can go to another store and get the product cheaper, how do you deal with that?
Q: What strategies do you suggest?
Itís really funny because in the UK, retailers are experiencing the same kinds of challenges that traditional U.S. supermarkets, such as Kroger, Safeway and Albertsons, faced when Wal-Mart became a significant player in the marketplace. They have to do things to battle that price pressure.
The difference is that in the UK, in terms of the size of the country, location is still a meaningful factor. Retailers have location solidified that way. Itís a great defence. People arenít inclined to drive 50 miles to get to the store. In the U.S., consumers showed a willingness to travel quite a distance to shop at a Wal-Mart Supercenter for a good deal.
Q: How much does that consumer mentality cross retail channels? For instance, do you think that higher-end chains may have miscalculated the value proposition of price in consumer purchases? How does product quality and other attributes, such as variety and service, stack up in the value equation with these deep discounters?
One thing we found out at Wal-Mart, as Aldi continued to grow in the U.S., just because someone has a lot of money doesnít mean they wonít shop for bargains. Youíd be surprised how many Mercedes are parked outside of Wal-Mart.
We donít have Lidl in the US, at least not yet. My experience with Lidl has been observing the chain in Germany. I can tell you that Aldi, particularly in produce, has done a much better job with the quality of product it carries.
One thing to note about a Tesco, Sainsburyís, Morrisons or Marks & Spencer is that variety is broader. In other words, these discounters have great prices, but a limited SKU count. That said, one of the critical strategies for survival: You have to be able to manage assortment very, very intelligently.
Aldi is very private label-oriented. It offers a great price on private label, but is not known as a brand house. Thatís another interesting point, because in the UK private label is dominant.
Q: Wasnít branding strategy at Wal-Mart pivotal in its phenomenal growth, and one of your signature achievements during your tenure there?
In the States, Wal-Mart developed a strong national brand strategy. I still feel strongly about that and think itís a big error that Wal-Mart is departing from that. In the UK, this is already starting a bit. We will see a little more brand emphasis going forward. If consumers are shopping laundry detergent from all these private label retailer names, they clearly will all have different prices but also different quality standards. If you have Tide, Tide is Tide, and you win the battle in pricing in the mind of the customer.
Strategies I used in my early days at Wal-Mart targeted national branding. I chose to carry Chiquita exclusively. It clearly made my value proposition strong. In the US Chiquita is one of the top consumer brands period, because of the marketing for 50-years plus that Chiquita put into it and in bananas they are especially strong. Remember that the other big banana brands really started with other products. In the consumersí collective mind we assessed that there was a direct connection between carrying Chiquita bananas and being perceived as having quality bananas. Remember, at that time Wal-Mart had zero brand equity in fresh produce, carrying Chiquita not only made people think well of our bananas but it helped build up a trust that all Wal-Mart produce was high quality. It also made it easy for consumers to see we provided the best value in town because the branded product was directly comparable between a supermarket and Wal-Mart.
Q: Isnít a national brand strategy more limiting in the produce industry?
I believe there are only four national brands in produce ó Chiquita, Dole, Del Monte, and Sunkist ó in the U.S., perhaps five if you count Ocean Spray although with their limited season, that is more a packaged goods brand. There are strong regional brands ó Andy Boy is iconic in New York; Driscollís has a dedicated following in different parts of the U.S.
You have to think about branding as a pricing strategy. Itís fine to compete on private label, but if you try it with a deep discounter you lose on that because their operating costs are so low and can work on such slim margins. In contrast, if you have a brand pricing strategy, you can gain a competitive edge.
Q: Doesnít Aldiís limited SKU assortment also aid in pricing efficiencies?
The deep discounter stores are so small they donít have the room for the assortment.
The warehouse club also operates on a narrowly defined SKU offering, but is a totally different economic model. The original strategy worked on almost zero margins but made money on memberships. In terms of geography and zoning, there is little room in the UK for that kind of model.
In the UK and in a lot of Europe, in general, there tends to be more vertical stores, two- to three-level stores to deal with that issue. Itís hard to build large footprints where there is a high concentration of stores. Itís very, very expensive. Besides the warehouse Club model is built around selling larger quantities. That works in the US, with large garages, extra refrigerators and freezers, but in the UK the number of people with room to store extra product is limited. Warehouse concepts tend to be more business to business oriented.
Q: Arenít there many divergent variables to consider when comparing U.S. retailing to that in the UK?
When people point to how innovative retailing is in the UK, itís important to consider itís a totally different social economic model. All the people are concentrated in relatively small areas. They donít shop in the same way. They donít have big refrigerators, they donít have big homes. Everything was designed to manage that lifestyle.
You have to take these other variables into account. There hasnít been a single retailer from the UK thatís been able to come into the U.S. and make significant inroads. What is the reasoning? Itís because they are totally different markets, which isnít to say there are certain elements you want to emulate.
The biggest difference between the UK and the U.S. is the distance product travels from its source to the warehouse and the warehouse to the stores. When I was at Wal-Mart, the average distance a supplierís product would travel was significant. We might ship product 4,000 miles across the country.
In the UK, the average distance between manufacturer and whatís called the depot is 100 miles, and from the depot to the store is 50 miles. In the UK, they donít have warehouses; they have distribution centres. The difference is logistics and the amount of time the product is sitting. Theyíre able to minimize the time product is in the supply chain. Bringing in product from elsewhere is a seasonal thing like anything else, but think of Spain, France, and the UK all next to each other. The key, though, is that the product may come from South Africa or New Zealand but once it is in the UK, the distances are short and thus relatively easy to manage.
Q: Could you talk about British procurement systems and relationships between retailers and grower/shippers?
What happens in the UKÖ itís often the case that the producer sells virtually all its product to a single retailer. Thatís not necessarily a bad thing but youíre kind of at the mercy of that retailer. If you have a portfolio of retailers, foodservice providers and wholesalers, your portfolio is easier to balance. Iím a big believer in diversification.
Q: It brings back memories of produce suppliers in the U.S. being concerned about having all their eggs in Wal-Martís basketÖ
Thatís right. At Wal-Mart, we had a policy that we could only have 25 percent of a supplierís business. If we exceeded that, we had to get sign off from the CEO of the company. We didnít want any supplier so dependent on us.
At Wal-Mart, we wanted diversification. Itís a different strategy than retailers in the UK. A Tesco isnít thinking that way. Asda isnít thinking that way. None of the UK retailers are. They have more control over their suppliers that way. Itís not necessarily good or bad, itís just different and must be looked at in the context of the UK market versus the U.S. market.
Q: What happens to traditional British procurement structures as retailers look to buy direct?
Iíve found going direct very interesting for a lot of reasons. In its very basic form, intuitively I cut out the middle man, and I can save money. But the middle man often does a lot of different things that donít necessarily show up in the FOB cost of goods. I actually believe it would make a great economic case study. Of course, that all depends on your supplier relationships, but is it really cheaper to go directly to a grower and not a grower/shipper marketer? There are a ton of variables in determining that.
I know for a fact what our grower/shippers did at Wal-Mart was much more than just giving us product.
Q: In Wal-Martís case, werenít you also having your suppliers manage your inventory? This required sharing of information, which other retailers were hesitant to doÖ
We called it vendor co-managed inventory replenishment. It was a great model. UK retailers do things differently. A lot of retailers in the UK have a single company that does all the procurement. I never understood why that was a good thing, although Asda was resolute in maintaining that system, as were other UK retailers. The funny thing is, thatís about to change.
Asda had a single-source procurement model, and now theyíre going to a more diversified model ó like what I was doing at Wal-Mart back in 1993. I want to make clear that these different strategies need to be considered, not as right or wrong, but within the confines of each market. In the UK, retailers developed strategies based on the circumstances at that time and were very successful.
Look at Asda. Itís a great company. It gained market share years ago and did some wonderful things. But those things are not necessarily applicable to the U.S. market. The most poignant example of that is when Tesco came over here to the U.S. and failed with Fresh & Easy. They were so good at data-mining, but were unable to read the U.S. market.
At Wal-Mart, we had national brands, but also a very articulated tiered private label offering, just like Tesco and many other retailers. Hereís the philosophical shift between brands and private label: When you do private label and control your own products, you can tell the supplier whatever you want them to do. If you go to Nestle or Proctor & Gamble as a partner, you lose that control.
Q: So, in becoming less autonomous, the retailer/supplier partnerships must be elevated? But youíll never hear a retailer or supplier say otherwiseÖ
You have to look at the transactional component as a collaborative effort with your suppliers. Everybody says, ďwe have great relationships with our suppliers,Ē but no, it canít just be idle talk. You work toward a mutual definition. Itís not just, ďIím going to get this product cheap.Ē These are very high strategy issues. What I find interesting about the UK is they think they have it all figured out. You can really become a victim of your own success.
One of Sam Waltonís biggest fears was the success of the company; that people would get too complacent and think they had it mastered. When I was at Wal-Mart, we spent two seconds talking about what we did right and about five hours talking about what we did wrong. Youíve got to have this relentless passion for change and never accept the status quo, and the minute you think youíve got it figured out, thatís when somebodyís going to come in and do a better job than you.
Q: If youíre giving constructive advice to people in the UK retail market, are there a few bullet points you could highlight?
What you have to be able to do is articulate your consumer value proposition and execute better than anyone else. You cannot be all things to all people.
The Marks & Spencer brand is like Craftsman tools and Kenmore in Sears; you can only get those brands there. Contrast that to Aldiís real simple proposition ó Ďwe have the best price in town.í
The main bullet point is you donít want to be in the middle. Thatís the worst place. If you look at retailing historically, thatís where companies started to fail. Iím basically speaking about three disciplines, and you have to be dominant in at least one of these. You can be operationally excellent, product excellent or service excellent.
Operationally, McDonaldís reigns, while itís not necessarily the best hamburger place.
Aldiís expense structure is so low it is the best price in town. Wal-Mart was an example of that at one time. For product excellence, you could point to Nike, Apple, Peter Luger Steakhouse in Brooklyn, or Marks & Spencer because products are so innovative or such high quality. For service, itís the Ritz Carlton or Nordstromís. The Ritz is not the cheapest hotel, but its value proposition is clear. Whole Foods has both product excellence and service excellence. HEB would be another example.
At Wal-Mart, we didnít want to be known as a grocery store. For consumables, Tide, toilet paper, all those staple things, we had the best price in town. Thatís what would bring people into the store, and then we offered produce and other items they would buy when there.
In the UK, what brings people in the store? Number One is location. Ask what brings your customers into your store. Do you know your customer? Have the products in stock when they want them? And at a good price? Retailing is simple. People make it complicated.
What I admired so much about Reggie Griffin [former Vice President Produce and Floral at Kroger] is that he didnít want to be Wal-Mart. He wanted to be Kroger. On a national basis, Kroger held their own, because they were true to who they were. Everyone wanted to chase Wal-Mart. He understood their value proposition.
Q: What do you make of Wal-Martís announcement that it intends to drive organic food prices down by selling Wild Oats brand organic products at more affordable prices?
I believe competing on organics is not a smart strategy, but that is a topic for another day. Whole Foods is expensive on a lot of things, but thatís not the point. The most important thing is your merchandise assortment. You have to be smart on that.
Iíve been a proponent for a long time that the mass market as a merchandising strategy is dead. People have so many choices of how to get goods and services today; you have to dominate a segment; get the right assortment, pricing strategy, and know your consumer.
In the early days of the supercenter, retailers would say, Ďweíve got 650 different SKUs, and Wal-Mart only has 290. The problem is, it doesnít matter the number; what matters more is what SKUs. The other critical component is managing your stock. You have to be in stock on the products consumers demand.
Q: Going back to our distribution discussion earlier, wouldnít UK retailers have an edge there in keeping product in stock with their shorter supply chain?
UK retailers are perfectly willing to run out of product, willing to accept out-of-stock because they get deliveries every day. Itís kind of OK, but if youíre always out of stock at 7:00 pm, you may be frustrating customers that do their shopping in the evening. But then if youíre over-inventoried with too much product, it goes bad and your customer certainly wonít appreciate that. Keeping inventory tight allows you to save money on one side, but you have to look at the supply chain holistically and geared to the end user.
Q: Whatís your advice for attendees on the supplier side?
It really depends on the individual grower/shipper and their current circumstances. There is no silver bullet. You have to think about managing the elements of risk. If youíre heavily dependent, diversify your portfolio. It doesnít happen overnight. You have to set goal posts, and rid yourself of white elephants and the sacred-cow syndrome.
To register for the London Produce Show to be held at Grosvenor House, June 4-6, 2014, please visit www.londonproduceshow.co.uk and click on the Registration button at the top of the home page. For more details on exhibition space or sponsorship please send an email to the contact below.
For more information:
London Produce Show
Twitter: @LondonProduceSh #celebratingfresh
Publication date: 5/9/2014
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