September 2017

Introduction

Customer centric is one of the hottest business buzz-phrases of this decade with good reason. Increasing access to user journeys from the moment that they engage with your product – whether physical or online – and heightened expectations from customers have required large companies to obsess over how to best serve their customer.

In a sector like the Australian supermarket industry, the abundance of user data has provided the big players with an unprecedented opportunity to understand their customers. In the grocery sector in Australia, customer centricity is a core growth strategy for both local companies trying to retain their stronghold on the market, as well as large international incumbents aiming to cut a slice of the pie for themselves. This article will dive deeply into this concept: why Australian retailers and suppliers are focusing on the customer in their business decisions i.e. a customer centric business model.

Secondly the article shall explain how Australian retailers and suppliers are trying to become customer centric by leveraging data to better handle category management as well as through social media and customer support.

The key message of the article is that the Australian grocery industry has become more competitive for retailers and manufacturers (brands) and the only way to be competitive in this market is to adopt a consumer centric business model.

Retailers and supermarkets – Why be customer centric?

Large International New Entrants

While traditionally dominated by three main players (Wesfarmers, Woolworths group and Metcash), Australian grocery (supermarket) retailers are facing increased competition. Firstly, new international retailers have entered or plan to enter the market:

2001 Aldi opened their ﬁrst store. Now have 470 stores in Australia

2009 CostCo opened their ﬁrst warehouse. Now have 9 warehouses

2017 Amazon announced they will open their ﬁrst warehouse in Australia (Victoria) and plan to launch in Australia in 2018.

2017 Kauﬂand website states ‘Kauﬂand is coming to Australia.’

Aldi in particular has successfully adopted a customer centric business model in Australia and this approach has supported Aldi been named supermarket of the Year in 2016 by Roy Morgan research, and 4 times since the awards were established in 2011. This approach has also driven Aldis’ market share as highlighted in the chart below:

ALDI MARKET SHARE, FY01 – FY20E (%) – SOURCE: MORGAN STANLEY

E-Commerce

Another major change affecting the Australian grocery retailers is e-commerce. Australian consumers can now order many goods direct from overseas through sites like eBay and Amazon. Australian consumers can also order grocery items and fresh food from local e-commerce operations such as Aussie Farmers Direct, Groceryshop, Groceryrun and Kogan. In addition to these online stores some manufacturers are also dealing direct with consumers via e-commerce. An example of a manufacturer dealing direct with consumers is Nestle selling their Nespresso range of coffee machines and coffee capsules direct to consumers.

This increase in competition is one of the main reasons large Australian retailers are putting customer centricity at the top of the agenda. Brittain Ladd, former global logistics senior manager at Amazon, explained the situation as;

‘If Australian’s are unhappy with Amazon and they prefer to shop at other retailers, Amazon will fail. Based on my experience, I believe consumers will be very happy with the service provided by Amazon.’

Fortunately, for Australian grocery giants, their enormous stores of user data stand them in good stead to go head to head with overseas players. The question remains, can they harness and handle that data effectively?

Manufacturers – Why be customer centric?

The larger, blue chip, tier 1 grocery manufacturers e.g. Nestle, Procter & Gamble and Unilever, focus on branded products. The sales and share of private label (store brands) have grown in the Australian market consistently for many years now, due in part to Aldi entering the market. The growth of private label sales in Australia is forcing many branded manufacturers to be customer centric to maintain sales and share in the current environment i.e. if their brands do not give customers what they want they will buy private label brands instead.

Nielsens’ The state of Private Label around the world in November 2014 estimated private label value share in Australia had grown from 14.0% in 2010 to 21.3% in 2013/14. Brooke Tonkin from IBISworld noted in January 2016 that around 30% of all food and grocery sales in Australia are private label and:

‘this compares with over 53% in Europe and 35% in the United States, indicating that there is room for expansion in Australia’.

Canstar Blue research released in January 2016 also noted that 65% of shoppers now prefer private label. Canstar Blue’s Megan Doyle explained the situation as:

‘You need to be convinced that a big name brand is superior in quality to spend the extra money. With private label products improving, the difference in quality seems to be narrowing and consumers are simply following the cheaper prices.’

‘The supermarket focus on private labels means cheaper groceries for consumers, but it could also mean that only the most popular brand names will survive on supermarket shelves in the long-run. Some brand names are facing a fight to survive.’

Private label ranges that are sourced/manufactured in Australia are normally managed by the retailer. After the retailer decides the range, product specification and other item details the suppliers are normally selected by a tender process. In this situation, it is normally the responsibility of the retailer to understand the customer and to successfully manage the brand. In some instances the retailer may partner with a third party buyer e.g. in 2017 Woolworths announced a partnership with European Marketing Distribution (EMD) to source some private label products from European suppliers via EMD.

So the main driving force for retailers and manufacturers to adopt a customer centric business model is increased competition from other retailers and brands (including private label).

How are retailers and manufacturers customer centric?

Category Management

Category management is a term the grocery industry started to use in the early 1990s. Still today there is much debate about what category management is, the best process to use, the benefits etc. This article will discuss in general how category management is done in Australia to give a greater understanding of how the grocery industry is putting customer centricity at the top of the agenda.

Brian Harris suggests a 3 step definition of category management as:

Philosophy with aim to manage categories as Strategic Business Units

Process for retailers and suppliers to jointly develop strategic category plans

Organisational concept to integrate buying and merchandising decisions

The process that Australian retailers use for category management does vary by retailer and category. For example Aldi uses a tender process for each product, including internal product testing, before awarding a supplier the supply contract for a period, normally 2 years. Coles, Metcash (supply IGA stores) and Woolworths normally have category reviews for each category every 6 months. The dates and steps for the category reviews are normally documented in CDS – category development schedule.

For some categories, such as fresh produce, formal category reviews and category plans are not necessarily agreed upon by the retailer and supplier as supply volume and prices can change weekly with variations in weather / supply. These categories normally have an ‘understanding’ of what is planned rather than a formal category plan with clearly defined KPIs and dates. Seasonal ranges, such as Christmas, are normally 1 review a year with only a single order (job lot) placed.

Irrespective of what process retailers and suppliers use for creating and implementing their category plans the plan is consumer centric. The objective of maximising sales for both the retailer and supplier is achieved via consumer insights and these insights drive category decisions such as what to range, what price points (standard and promotional), planogram (POG) etc.

Consumer Insights

As outlined above the exact process of how retailers and suppliers create and implement category plans does vary but the key to a successful category plan is consumer insights i.e. a consumer centric plan. There are a number of different data sources for consumer insights but the widely used sources are:

Scan data and Panel data. Scan data or EPOS is the data that is collected in-store when items are sold or ‘scanned’ at the checkout. This data provides a great deal of numeric data such as units sold, price sold at, time of day sold etc. Panel data adds more depth to the data as consumers join the panel and normally will take their shopping home and then scan their purchases. Panel data will then include other data such as the age of the consumer, number of people in the household, income levels etc. In Australia, this data is normally provided by agencies such as IRI and Nielsen.

Due to the increasing sales and importance of private label Australian retailers are putting more emphasis on private label product creation and testing now with panel data:

October 2015 Aldi launched its ‘Testers Club’
2016 Woolworths started developing ‘The Bunch’ and in 2017 it went live

These examples of product testing / panel data are an example of how retailers are gathering the data to become customer centric with their private label ranges. Rather than just copying a top selling branded product they are now developing specific ranges based around customer feedback.

“we want them to cook, experiment and test them with their family and friends, then decide what they think of them and share their honest rating and reviews on the Bunch,” said Gemma Howells, Senior Own Brand portfolio manager at Woolworths.

Coles has internal testings called WUBIT (Would You Buy it).

Loyalty card data. This data is collected via consumers opting to use loyalty cards and/or credit cards when they purchase products. This data is not collected by all retailers but is normally available from major supermarket chains that offer a full- service supermarket in a developed market. In Australia, Coles uses the Fly Buys program and Woolworths has its Woolworths Rewards program.

Social media. The grocery industry is starting to collect data from social media platforms. For example, if Australian consumers are researching topics such as ‘ketogenic diet’ then retailers can review their ranges to ensure they are meeting the ever-changing demands of consumers.

Ad hoc research. Ad hoc research covers a wide variety of qualitative and quantitative research options and is normally completed by branded manufacturers for their brands / categories and retailers for their private label ranges. This research typically ‘answers questions’ that the other data sources do not and is widely used in NPD (new product development) to test new concepts and products.

So Australian retailers and manufacturers are customer centric by utilising various data sources to better understand their consumers and then using these consumer insights to create a category plan that meets or hopefully exceeds consumer demands/expectations. Due to the increasing level of competition in the marketplace if a retailer or manufacturer does not deliver what the customer demands, then the customer can shop at another retailer or buy another brand/ private label product.

International recruits

Until the early 2000s it was normal for Australian retailers (Coles, Woolworths) to promote people from within the business to key senior management positions. Woolworths in particular was proud of how they developed their talent internally and the career opportunities available. During the 2000s, partly due to Aldi entering the market, Australian retailers realised they needed to recruit key senior management staff with experience at international retailers to ensure their businesses would remain competitive and customer centric.

Coles and Woolworths have recruited a large number of key senior management staff with international experience. Some examples are:

2008 Ian McLeod joined Coles as Managing Director. Ian had 20+ years experience with Asda in theUK (which was bought by Walmart)
2008 John Durkan joined Coles as Merchandise Director and is now Managing John had 17 years experience with Safeway in the UK
2011 Tjeerd Jegen joined Woolworths supermarkets as Managing Director. Tjeerd had worked with international supermarkets including Ahold, Makro and Tesco in Europe and
2017 Claire Peters joined Woolworths supermarkets as Managing Claire had 20+ years experience working with Tesco in Europe and Asia

So Australian retailers have transitioned to a customer centric business model by recruiting key senior management staff that have worked in international retailers that already have experience with this business model/culture. These people have been able to transform how staff think (decision making process) and how businesses act (put customer first) and implement a customer centric approach throughout the organisation.

Corporate KPIs

A more recent development highlighting how retailers are customer centric is including corporate consumer satisfaction KPIs in their financial reports/results. Previously basic internal indicators such as sales and market share were used to review performance but not formally reported to shareholders. The fact that Australian consumers switched to new entrants (Aldi, Costco) has highlighted that customers were not happy/satisfied with the retailers and were prepared to trial and now spend the majority of their grocery spend at other retailers.

An example of customer centric corporate KPIs is Woolworths VoC (Voice of Customer). The objective of collating this data is to ensure customer satisfaction so that customers do not switch to another retailer. Included in Woolworths Third Quarter sales results 13 weeks to 2 April 2017 overall customer satisfaction was 77%.

“All states now live on our new Customer-led rostering tool to better match team hours to customer shopping times,” was a key point of the report.

This initiative is one of many that Woolworths are implementing after receiving negative feedback from customers about their shopping experience and is another example of how retailers are being customer centric. Coles had a similar initiative with the I’m Free campaign for Easter 2017 when they had an additional 23,570 checkouts open in the lead up to Easter Sunday.

As outlined in Wesfarmers 2017 Strategy Briefing Day, June 2017, the first point made by John Durkan, Coles managing Director, was Coles’ aim is “delivering a better customer offer remains the focus”. To review actual performance against this goal, Coles has a survey where customers can provide feedback. For the 12 weeks ending May 2017 the number of customers dissatisfied were:

Areas of customer dissatisfaction at Coles.

Summary

For Australian retailers, it is a huge priority to transition to a business model that puts customers at the top of the agenda.

Australian retailers are aiming to become customer centric by actively researching their customers opinions/suggestions about the overall shopping experience and then responding to this feedback with the goal of creating long term brand loyalty. This is particularly prevalent now, when the traditional Australian duopoly is facing significant competition from new competitors.

Considering the fact that Aldi has won the Roy Morgan Research Supermarket of the Year award 4 times since the award was created in 2011 and the impending arrival of us-behemoth Amazon, local supermarkets in this country are facing a huge challenge.

The way retailers and manufacturers adopt a customer centric business model is by utilising numerous data sources to research and understand their customers opinions. In the case of negative feedback, they will be able to change the way they do business by minimising the negatives and maximising the positives in an effort to create customer satisfaction and brand loyalty.

While summarised in the last paragraph in two sentences, the challenges of becoming truly customer centric are enormous and require some of the brightest minds in the country to successfully overcome.

The information provided in this blog post was general in nature. If you require more information I offer a free initial consultation by completing a contact us form.

Thank you,

Tim Bowen

How Australian retailers are using customer centric strategies to win