October 2008 Big Grower

Food for Thought By Visions Group

Tesco Plans “Pensioner-Friendly” Stores

Tesco, a British retailer and owner of new U.S. Fresh & Easy food markets, is planning to open a new concept store dubbed “pensioner-friendly” that will cater to the over-50 crowd. They plan to accomplish this not with product offerings, but rather with the facility design and outfitting. The initiative will include extra-wide aisles, antislip flooring, carts with seats and the availability of magnifying glasses. Other innovations will be extra-wide checkout lanes, large signs and labels, and alert buttons to summon one-on-one customer service. One existing “age-friendly” supermarket in Europe has reported sales increases of 25 percent in the redesigned store.

Anyone who has spent time in any of our big box retailers’ garden departments will quickly agree that one constant is that they are less than friendly to the aging consumer, regardless of store affiliation. In fact, they sometimes seem designed to make shopping as difficult as possible. With a large percentage of U.S. green goods customers from the baby boomer age and now approaching 60-plus, we might be well served to pay attention to the changing needs of such an important consumer group.

Are Purchasing Decisions Affected by Brand Ownership?

Consumers are presented — almost bombarded — daily with multiple brand choices in every product category and price range, from bathroom tissue to luxury automobiles. With the increasing number of “brands” in the horticulture marketplace, producers and marketers need to be aware of the psychology of branding. Do consumers really care who owns the brands they purchase? Does it matter when a small entrepreneurial company sells out to a big conglomerate? Are these entrepreneurs fooling themselves about maintaining their “small company” culture after partnering with a major corporation, and does it even matter to the consumer?

Consumers buy brands based on the performance of the product and not on which company owns the brand. Occasionally, a savvy consumer may try a product based on the ownership, but the repeat sale is almost always based on need fulfillment, value and product satisfaction. Very few consumers know or even care who owns their favorite products. And even if they care, discerning the tie to ownership can be difficult.

Independent brands either represent the outcome of some individual’s passion for an idea or are just another me-too camouflaged in chintzy packaging. Products from large conglomerates are usually the result of a stable process and have predictable — though not usually innovative — results. In the end, value, satisfaction, need fulfillment and problem solution determine the consumer’s purchasing habits. As always, there are two sides to the coin…

Sara Lee Realizes Sales Gain on Revamp of Brands

Sara Lee, based in Downers Grove, Ill., realized a fourth-quarter sales increase of 12 percent despite severe pressure from the rising cost of energy and commodities essential to the manufacture of their packaged-food products. The rising costs were fully offset by price increases passed down to the retailer and, in turn, to the consumer.

In a Wall Street Journal interview, CEO Brenda Barnes said they hadn’t yet seen consumers migrate to cheaper, private-label brands. “We believe it’s because our brands are strong,” she said. Although they anticipate commodity costs to increase another $500 million for the new year (compared with $300 million in the just-completed year), they anticipate that they will be able to fully cover these costs with price increases. In addition to raising prices, Sara Lee also increased the number of products it offered and reduced some package sizes while maintaining selling prices.

In the fourth quarter, earnings in their North American retail meats business, anchored by the Jimmy Dean brand of products rose 78 percent. In the same period, sales of Sara Lee bread products increased 13 percent. Both increases were attributed to the expansion of these two revered brands by the addition of many new products that were instantly accepted by consumers.

Urban Outfitters Sees Growth

Amid the worst consumer spending slump in recent memory, Urban Outfitters and its other stores, Anthropologie and Free People, have been experiencing large sales and profit gains without offering extensive discounting. With a quarterly jump in net income of 79 percent and an annual goal of 20 percent sales growth, Urban Outfitters stands alone among the many battered retailers. The Philadelphia-based retail group has been attracting shoppers with an eclectic mix of full-price clothing and home products to stores where employees create their own displays. Rather than saturate the market with cookie-cutter stores, management plans to cap each division at about 250 locations. Following in the founders’ belief that “big is the enemy of cool,” they plan to expand through the development of new retail concepts. One of these new store concepts, Terrain, a gardening and antique center aimed at baby boomers, recently opened its first location.

All this expansion comes amid a broad industry move toward faster rollout of new store concepts. A few years ago, it was generally believed that a retailer could open 800 to 1,000 locations without cannibalizing same-store sales growth. Slowing consumer spending coupled with increased competition has caused retailers to revise that number downward by a few hundred. To meet its growth targets, Urban Outfitters will need to launch two to three standalone new concepts every few years. Some investors worry that Terrain is too far outside what they have traditionally done because it involves selling perishable plants rather than fashion. Management counters that Terrain allows them to avoid a fashion-against-fashion competition with their other concepts.

Urban Outfitters could stumble if economic woes deepen sharply or unemployment spikes, making job hunting difficult for new graduates who make up a significant percentage of its customer base. Management contends they can’t control the economy or oil prices, but they can dictate what they sell along with creating a unique shopping experience. The best defense is to focus on improving the stores’ shopping experience and products offered.

Don’t Back Off Marketing Efforts

When the economy sputters, the first thing many businesses do is rein in their marketing expenditures. Often, this is a short-sighted strategy, as poor economic times can create opportunities to make inroads on your competitors. Expanding marketing efforts is often the correct response.

Based on a recent survey of businesses with 100 or fewer employees by MarketingSherpa Inc., the majority are taking a wait-and-see attitude before adjusting marketing expenditures. The second-largest group is reducing marketing spending, and a third, smaller group sees the down economy as an opportunity and are increasing marketing efforts and spending. Those who are increasing spending are taking money out of traditional advertising vehicles, such as print and broadcast, and placing it in nontraditional avenues, such as online advertising and direct marketing.

One challenge in a tough economy is matching your message to consumers’ needs. Companies that have sold the idea that their product delivers high quality at a somewhat higher cost may have to modify the message to convey that the product’s reliability and longevity delivers a real long-term value. Another opportunity in a down market is to develop or increase brand imprint. Effective brand development makes a consumer trust a company and its products and entices them to purchase when they see that brand later on. Increasing brand activity and imprint is the key to leapfrog the competition.

The challenge to increasing marketing activities and expenditures is where the dollars are going to come from in a tight economy. First, always negotiate prices in a down economy. Costs that used to be rock solid are usually negotiable when there are fewer takers for those products or services. Also consider negotiating costs on a sliding scale dependent on some type of performance criteria.

Redesigning marketing pieces smartly can reduce cost while not reducing effectiveness. A 20-page, full-color brochure — with the right elements included and highlighted — can be just as effective as a 34-page one. In any event, the ability to measure the effectiveness of a marketing element and paying for only successful results can help balance cost with return. Measuring return on investment (ROI) is the key to allocating budget expenditures by category. If, for example, you can determine that online efforts yield an extremely high return, it’s an easy decision to shift dollars from efforts with a lower return. And you should never sacrifice long-term returns for the sake of short-term gains.

Home Depot, Lowe’s Cut Specials

As many retailers increase discounts and promotions to entice cash-strapped consumers back into their stores, the two largest home improvement retailers are pulling back on such margin-eroding moves. Lowe’s and Home Depot, facing the worst demand environment in decades, are instead focusing on offering the lowest prices every day. Both retailers trialed aggressive promotions early in the housing downturn and came to the conclusion that it will be many quarters before demand picks up, regardless of how big the discounts are, and have backed off the heavy price promotions.

While this approach may cost them some customers in the short term, most retail analysts agree that it is the right approach for the long term. It’s also easy for Home Depot and Lowe’s to pull back from promotions because they sell less merchandise that goes out of fashion than other retailers. Apparel is very time sensitive, and groceries expire or spoil. Sporadic sales events and promotions can complicate shopping for the consumer when all they seem to want is a simplified experience during economic hardships. Specials and discounts tend to force a consumer to buy even if they are not ready or needy because it’s going to be the best deal and only available now.

Everyday values allow the consumer to purchase on their timeline and makes them feel better about frequenting that particular retailer knowing that delaying a purchase doesn’t mean they will miss out on an attractive price. Unlike other industries, where market share is divided up among multiple retailers, the “duopoly” in home improvement created by Home Depot and Lowe’s allows for more rationality in retail pricing. While they together command almost a 50 percent market share, this low-cost everyday pricing strategy should result in an increasing market share independent of new store openings. Still, uncertainty over when the housing market and the overall economy will improve has led both retailers to be very cautious in sales and profit projections. A longer and deeper slowdown adds more uncertainty to the competitive environment, resulting in more promotional pressure from the competitors.