Retail 101: Part seven with Mike Mauti

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Packer: Hi again Mike, today we set aside some time to talk about promotion at retail. It's a fascinating topic and since I know you have many years of experience in the retail trade, I'm anxious to hear what you've got to say about it. So, let’s get right into it. First things first, what are a retailer’s objectives when they promote? I assume increasing sales tops the list but are there any underlying objectives?

Mike Mauti: Thanks a lot Tom for this important ongoing conversation about the mechanics of retail, or as I like to call it Retail 101. That's a great first question regarding promotion. It is easy to just say the objective of promotion is to increase sales. But as your question alludes, there are larger underlying purposes. Because of the importance of these underlying purposes that promotion tends to be a major part of a merchant’s business activity. In a retail organization, promotions are the most visible part of their offer, so naturally retailers use lots of resources trying to put their best foot forward. In essence, they are showcasing their wares through their promotions.

When you think about promotion on a high level, there are two objectives that a retailer attempts to satisfy through promotions. The first objective can be satisfied through strong execution of a weekly flyer. With the weekly flyer a retailer is trying to entice their competitor’s customers to shop in their stores. It is no secret that even your best customers shop different stores from time to time. And a lot of times, whichever store has the hottest flyer is where some of those customers will spend a portion of their grocery dollars. The flyer aims to capture as much of that transient grocery spend as possible. If you can have the hottest flyer on the street, multiple weeks in a row, you can start to change consumer behavior and get a lot of those feet along with the dollars that go with them into your store on a more consistent basis. Because of this, it can be said that the weekly flyer is the primary tool to communicate with your competitor’s customers.

The second objective for promotion, which is often satisfied inside the store with the use of in-store features, sometimes referred to as Manager’s Specials, aims to alter the basket of existing customers. Since these promotions occur inside the four walls of the store, there is no opportunity to communicate to customers who don't normally shop there. Rather, the communication is received only by customers who are inside the store. The goal with these types of promotions can either be to grow the total basket or to select one product over a different competing product. The first goal is self-explanatory, but the reasons for the second goal of enticing customers to select one product over another is not so obvious. Perhaps the preferred product is a store brand that the retailer is pushing. Or it could be a new product that strengthens a strategic supplier partnership. Or it could simply be that the promoted product is more profitable than the top selling product in the category whose sale they are aiming to replace.

Packer: In the first objective you're talking about drawing your competitor’s customers, is there an established percentage on how much a typical customer shops in one store? Conversely how much do they spread their business around to others? And how can that knowledge be valuable for retailers?

MM: That's the million-dollar question. ‘How much of your primary shopper’s wallet are you getting?’ Most studies I’ve seen suggest that your best customers are only giving you approximately 60% of their grocery spend.  That suggests there is a considerable amount of cross shopping going on, even with your best customers. As a retailer, knowing this information highlights the ‘size of the prize’ for enticing your current customers to complete more of their shopping within your store.

Packer: When we consider all that has happened with COVID how do you think promotional objectives have changed, if at all? Are retailers still doing the same things for the same reasons? Or have they changed how they promote?

MM: At the beginning of COVID, we saw a pullback on the frequency and breadth of ads. Some companies even stopped printing ads altogether and instead distributed electronic copies only, while other companies elected to print smaller ads. Perhaps that was a sign that retailers were expecting less cross shopping since during the height of the pandemic people wanted to get into their primary store and out quickly. The dramatic decrease in frequency of shop proved that these expectations were well founded. In this environment, attempting to entice your competitor’s customers into your store would have been a more difficult. Instead, a lot of that investment would have gone into the store. I am sure you saw investments in safety retrofits at your local store. It is likely that some of the promotional investment went to these safety measures, but also into more manager’s specials, or in-store features. Retailers were looking to entice existing customers to grow their basket. It is no secret that we did see significant growth in consumer baskets during the pandemic. This was in large part because people were shopping less frequently and eating more of their meals at home. Since the opportunities existed inside the store, promotional activity changed accordingly and spoke more consistently to customers already there, both through in-store features and through enhanced protocols to ensure the safety of their shoppers.

Packer: Speaking of the circular or the weekly flyer, aside from the pandemic related changes, I imagine there have been other changes over the years as technology has changed. I do see many flyers online now as you mentioned, what is your sense on the changing tactics to get that information to the consumer and how important is the printed flyer in this digital age?

MM: Given that the printed flyer is quite expensive to print and distribute and the fact that, despite the pullback, most retailers still use one as a primary communication tool, I would say It remains important. Remember, it is still one of the best ways to communicate to your competitor’s customers. And since these potential customers can only be reached with communications external to your store, the printed flyer continues to be relevant, even in this digital age. But like most things in the produce industry, technology has touched weekly flyer execution. While the printed flyer remains relevant, digital flyers have been able to expand the reach and permanence of the communication tool.

In recent years, technology has also changed the makeup of the weekly flyer. In years past, prior to the widespread use of big data analytics, flyer products were selected based on what was historically planned, seasonality and to some degree; gut feel. The result of selecting products in this fashion was a slate of items that sold well when on ad, which sounds good on the surface, but did not necessarily get a sufficient sales lift over what would have been generated without advertising. Then along came analytics. New techniques used to gauge the effectiveness of advertised items are now used to determine how products behave when placed on promotion. Products that have a large sales lift when advertised at a discount are referred to as elastic, while those with a small sales lift are inelastic. This type of analytics enables a merchant to plan effective ads with products that will deliver the biggest bang for the buck. You may have noticed in the last decade or so that products like strawberries and blueberries or pomegranates in season are advertised with significant frequency. Using analytics, these products have proven to be elastic, while inelastic products like iceberg lettuce and bananas, that were frequent flyer items of a bygone era, now rarely find their way on ad. This has been the biggest impact technology has had on promotion, in my view.

Packer: So bananas and iceberg lettuce don’t make good flyer items. Being two major commodities in the produce department that may surprise a lot of people. How about other commodities like potatoes and onions? Do they act the same way? And why do you think that is? 

MM: To some degree they do act similarly, and commodity is a good word for these types of products. Generally, any product that finds its way onto a large proportion of shopping lists fits this mold. Think of all the people you know, how many of them make bananas a regular purchase when they are grocery shopping? Now ask yourself, will these people buy more bananas if they are offered at a discounted price? And for the small group of people who do not buy bananas on a regular basis, is it because the price is too high? Will an advertised lower price be enough incentive for them to make a purchase? My guess is the answer to these questions is an emphatic no. So then, why advertise bananas? Without a sales lift, an advertised lower price only serves to erode sales and profit.

Packer: Speaking of lift, what can a supplier expect if their product is on the front page of the weekly flyer with a good price? Twenty percent? Fifty percent?

MM: All that and more. If it is a highly consumable product like strawberries or blueberries, you can see double and triple the sales when advertised on the front page of the weekly flyer. A highly sought-after seasonal item like cherries can be even more than that. One unique factor in produce is there is a smaller assortment than what is found in other departments and a lot of times products are very interchangeable. For example, you can buy a pint of blueberries one week and the next week purchase a 1lb. package of strawberries for the same use occasion and derive the same amount of satisfaction from both. The same can be said between an apple and a pear, or a broccoli and a cauliflower. Often the ‘game day decisions’ of what to buy are often made based on what’s on ad and at a hot price. You see that same sort of consumer behaviour in the meat department. You might be a fan of ribeye steaks, but when striploin steaks are featured at half the price of the ribeyes, many people, even many ribeye fans, will choose striploin steaks that week. Since some of the big fruit products, which are some of the best products to put on a front page, are interchangeable they end up getting get a big lift when promoted.

Packer:  Keeping with the digital era, people are becoming increasingly comfortable with purchasing all their groceries, including fresh produce online. Do promotions have a role to play for the online shopper?

MM: No doubt there is an increased level of sophistication when it comes to planning promotions for an online shopper. However, it should be noted that most online shoppers are omnichannel shoppers. Simply put, this means they shop both in store and online. The challenge in the digital era is to develop a seamless experience wherever the customers are. This experience can be created using a combination of digital alerts through email, text or instant messaging along with membership into some form of loyalty ‘club’ using membership cards and apps to maintain a personal history. There are two exciting elements to this type of promotion to an omnichannel customer. For one, using very advanced analytics and artificial intelligence, promotions can become very personalized. If a customer happens to be a frequent asparagus purchaser, personalized asparagus promotions, referred to as offers, can go directly to that customer, while a customer who is not inclined to purchase asparagus may receive an offer for a different product. At this level of sophistication, the promotion ends up being very efficient, communicating only to the people that it will resonate with. The other exciting element is that personalized offers can stay with customers for a longer period. Since they are delivered digitally and used in conjunction with an online presence in the form of a loyalty program, the offer stays in place and is accessible on an app or website until the customer is ready to shop. Compare that to a paper flyer that may or may not get read the day the ad breaks and quickly finds its way into the recycling bin.

Packer: Promotions are naturally tied to the concept of pricing. When a retailer decides to promote a product, say for example apples in September, do they bring their suppliers into the loop and ask for a special price? How does that negotiation normally work?

MM: You are correct that pricing is an important element to promotion. After all, a typical promotion of the sort we are talking about is, at its core, an offer for a product at a special price. Generally speaking, the investment in that special price is shared between the retailer and the supplier. The retailer will often take a lower margin and the supplier will often sell for a lower product cost. This transaction can come about in one of two ways. The first way is planned out well in advance. Commonly, a retail Category Manager will work with their suppliers to program the full season for a particular product or category. In this scenario the key players map out the peaks and valleys in production to determine projected availability and costs. This information will enable a tentative plan to promote when the product is at its peak quality and availability. Customers are well attuned to seasonality and will be happy to purchase seasonally relevant product at a good price. But that doesn't capture all of your ads. There will always be a need for fill-in products to round out a promotional plan. Ongoing conversations with suppliers, gathering near term opportunities and unanticipated market flushes will keep the promotion plan fresh and relevant. By using both techniques in combination, a retailer can build a promotion plan that is well thought out, capturing opportunities that require forward planning while still taking advantage of short-term market fluctuations.

Packer: What can produce suppliers do to get their product promoted? What is the interaction like between the buyer and the seller?

MM: One of the big differences between the produce business and most other departments in the grocery store is that just about every fresh produce item must be negotiated every week. Unlike other categories volume and cost is not static week to week. This basic difference necessitates some sort of weekly communication between the seller and the buyer. Meaning at least once per week, most produce suppliers have an opportunity to make a promo pitch to their buyer. To answer your question, a produce supplier can use this opportunity to make an offer worthy of promoting. This will undoubtedly be some combination of increased supply, a low cost and good quality product. If the offer is compelling enough and it is for a product that we earlier classified as elastic, meaning it has a strong sales lift when advertised at a discount, there is a good chance the offer will be accepted. In other departments, where the cost and volume negotiations do not happen weekly, the opportunities for ads can be harder to come by. A good reason for produce suppliers to use that weekly discussion to drive their volume through promotions, plus other avenues.

Packer: You mentioned that the goal of the weekly flyer is to attract new customers into the store. What happens next? How does the store keep those new customers coming back?

MM: One way is to continue to have the best weekly flyer in your trading area. Coaxing your competitor’s customers to shop your store for consecutive weeks is a great way to permantly change shopping habits. But the real trick once they’re in your store is to keep them shopping with solid operations. Having a great flyer is one thing, but for many customers the shopping experience is paramount. This is where all the other merchandising elements come into play such as offering a relevant product assortment and a competitive price. Plus ensuring the store is laid out properly. Other operational elements also factor prominently such as ensuring a clean store, having friendly staff and a positive checkout experience. Two aspects of the shopping experience that can be overlooked despite constantly ranking as some of the most important attributes customers use when deciding where to shop are store cleanliness and front-end efficiency.

Packer: That makes sense, the ad is important but it’s not all about the ad. Now you have a lot of experience planning promos. I’m sure you’ve had many wins and many fails over the years. Perhaps you’ve tried hard to forget, but can you think of an example of a failed promotion, you know, when it seemed like the whole world was working against you?

MM: Oh boy, we could have an entire session on ad failures. And they come in all shapes and sizes. Sometimes the printed ad itself is incorrect, with the wrong price or product showing up. Sometimes, you advertise at what you thought was an aggressive price and you get undercut by a competitor, that’s embarrassing. And then there are times when you have the right product, the right price, it’s printed correct, timed perfectly and you just cannot get enough product to service the ad. In my experience those weeks are the most painful. Thinking back, it was the Valentine's Day strawberry ads that were always at risk of undersupply. I still sometimes wake up in a cold sweat thinking about those ads.

Packer: Take out your crystal ball. As you look ahead at the next few years at retail, how do you see promotions changing over that time? And what impact will it have on produce?

MM: The big change that is still gripping retail is the constant movement into e-commerce. Today, retailers are still focused primarily on getting the technology and basic digital experience right. Much of the promotional heavy lifting is done with conventional methods, either with the weekly flyer or with in-store features. As much as these traditional methods are being integrated into the new e-commerce platforms, new methods will likely be on the horizon that are more suitable to the digital experience. Think about an evolution of the digital offer. This is where produce will come into play. With so much of the produce spend being on impulse, in-store sensory cues are lost on the digital experience. A better, more integrated digital offer may be necessary to replace those sensory cues.

Eventually, once the rest of the bugs are worked out, retailers will need to use the benefits of their e-commerce solution as a competitive advantage. Their success in communicating those benefits to their competitor’s customers may eventually replace the weekly flyer as the best way to coax new customers into their store, or in this case, their e-store.

Packer: It will be interesting to see how it all comes together. We’ve been focusing a lot on traditional distribution lanes, namely grocery retail. Recently we’ve seen the growth of producer direct distribution, effectively cutting out the retailer. Do you think we’ll start to see a lot of direct-to-consumer promotions for individual produce items? Is it just as simple as offering a product and promoting it?

MM: Not an easy business to get into. Certainly e-commerce has been a massive consumer trend, starting with the meteoric rise of companies like Amazon and Shopify. And now a significant chunk of retail businesses has some sort of e-commerce service, be it home delivery or curbside pickup. And the growth of e-commerce has only been hastened by the pandemic. But it should be remembered that last mile distribution is difficult and costly. One of the reasons curbside pickup is so common and that most direct to consumer models in the produce business are u-pick operations, is partially due to the cost of delivery. It works best with big ticket items with lots of turnover, think Amazon. For smaller ticket items it can be challenging, it’s no secret that meal kit companies and grocery retailers have had a rough time with last mile distribution in the early stages. If you take it to an even finer level, for example a niche business like produce boxes, or fruit of the month, delivery can be even more cost prohibitive. And until that changes I figure it will continue to be a niche play.

Packer: Very interesting. I appreciate that insight Mike. Anything else that you wanted to cover that we haven’t talked about yet?

MM: One thing we did not talk about is the differences between the front page of a flyer and the inside pages. We talked about the weekly flyer’s primary goal to promote to your competitor’s customers. And this is often done with a ‘loss-leader’ on the front page, meaning a hot seasonal item at a great price. The term loss-leader refers to a product that uses an extremely low selling price to draw customers into the store. Although the product will likely lose money, it will gain customers who will hopefully purchase other, more profitable products.  The inside pages do not frequently have these types of loss-leaders, but the purpose for these pages is also important. Not only can the inside pages be great for basket building, but they can also be used to showcase the strengths of the store. For example, the inside pages are good for launching new items, introducing a themed sales event or showcasing a superior assortment. So, if on the front page, you tell your customers, “Shop here this week, we've got a great price”, the message on the inside pages can be more like “Shop here this week, we’ve got lots of organics and we’re introducing new items sold exclusively at this location”.  

Packer:  Good point. It makes sense, you cannot have every item on ad at a season low price. That would make it hard to make an acceptable margin, wouldn’t it?

MM: Every retailer does have an investment plan for the flyer. This investment gets balanced off with their shelf pricing to achieve an overall margin objective. If the flyer is too hot, then the shelf must make up the difference. Having shelf pricing that it out of line with like competitors within your trading area is a sure-fire way to lose market share. Therefore, getting the ad investment right is critical. Sometimes, there can be an urge to treat the inside page like a mini-front page, but with the investment restraints on the inside page, a merchant can be forced into planning a mediocre price that will not get a big enough lift to warrant even the small investment made. Whereas perhaps showcasing fantastic assortment would have a bit of a better payback.

Packer: How does store format influence promotions?

MM: That’s a good question. Promotions are not a one size fits all discipline. For a price focused retailer, showcasing a superior assortment is not a reasonable tactic considering they will likely be a limited assortment operation. Since the one competitive advantage is price, the front page for a discount retailer becomes more important. This is why you’ll also see fewer pages in a discount flyer, the inside pages just don’t have the same drawing power with this format. But the inside pages can still be used to showcase just how much money a discount store’s limited assortment can save their customers. Showcasing store brands, off-sizes or imperfect produce can send a message to discount shoppers that good food can be purchased for lower prices. Whereas a full-service retailer would be better served to feature their more extensive offerings in organics, fair trade or value-added produce showcasing superior variety, convenience and service.

Packer: Such a fascinating topic there is so much to explore with it. Thanks again  Mike for this Retail 101 experience. We appreciate it.

MM: You’re welcome Tom, it’s been my pleasure.

 

 

 

 

 

 

 

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