Bill Bishop, Chief Architect of Brick Meets Click, sits down with two experts in grocery retail – Morgan Seybert of Nielsen and Ken Ouimet of Engage3 – to discuss how to navigate the upcoming challenges in pricing and promotions. You can also access this video at Brick Meets Click HERE.
The transcript, edited for clarity, is below:
BILL BISHOP: Hi, I’m Bill Bishop, Chief Architect of Brick Meets Click. I’m here today to talk with two experts about what’s happening in the grocery business in this COVID-19 impacted world: Morgan Seybert, the Managing Director of Analytics at Nielsen, and Ken Ouimet, the founder and chairman of Engage3.
BILL BISHOP: Morgan, what changes have you seen consumers make that have been most surprising to you in the last couple months as they’ve reacted to COVID?
There were three areas that surprised us as we looked at the consumer response to COVID – the shift to online, the scale of pantry loading, and the pull-back from smaller brands.Morgan Seybert, Nielsen US Analytics
MORGAN SEYBERT: At Nielsen, we’ve been watching the consumer closely through both our Point of Sale data, as well as our household panel information. As the consumer was faced with the COVID pandemic environment starting in early March, we saw a lot of behavior that we would have expected or intuitively makes sense. First and foremost, we saw consumers changing their trip dynamics – buying 20% more on the average trip than they did in prior years. At the same time, we saw consumers change where they were shopping. Over 90% of consumers throughout March and April did their primary grocery shop within five miles of their home, consolidating their trips at their local grocery store.
We also saw a significant amount of out-of-stocks in stores. Out-of-stocks spiked about 280% during the initial pandemic buying in late March and early April as consumers stocked up, putting real pressure on the supply chain for that grocery store close to home.
There were three areas that surprised us as we looked at the consumer response to COVID.
First was the shift in channels. It made a ton of sense to us that consumers were shifting to online as they looked for safety and the convenience, but we really saw the grocery class of trade winning. Grocery retailers increased their share of consumers’ wallets by nearly six points – and almost $5 billion of incremental volume flowed into that channel from other channels, with volume being sourced from mass retailers and dollar retailers, specifically.
The second behavior that was surprising to us was not the behavior itself, but the scale of the behavior – the tremendous amount of pantry loading from the consumer where they were really buying a lot more on a per trip basis. Certainly some of that led to increased consumption, since there was less opportunity to go to restaurants or other away-from-home consumption opportunities. But, about a third of those incremental units are actually items that are now being stored in the consumer pantry. We estimate that there’s about $13 billion of incremental inventory sitting in consumers’ pantries. We think this could create some headwinds down the line for brands as consumers work through that inventory.
The last thing that surprised us was how retailers are responding from an on-shelf availability perspective and an assortment point of view. At Nielsen, we’ve historically seen the smaller, more nimble brands be the growth drivers for fast moving consumer goods categories, and those brands have been most hard hit from a shelf perspective. During COVID, we’ve seen small brand shelf space being reduced by about 10%.
Retailers moved to using more online competitive data, and there was more focus on health.Ken Ouimet, Founder at Engage3
BILL BISHOP: That’s fascinating a change on a number of dimensions. Ken, what have you seen that surprised you?
KEN OUIMET: We’ve seen a lot more consumer shopping online, as Morgan was saying. We’re also seeing retailers be more open to using online for competitive pricing data. Because it’s difficult to get people in the stores during this period, that’s helped push retailers to using more online competitive data.
The other thing we’ve been seeing is much more focus on health. People with chronic diseases are ones who are more affected by COVID, and we’re seeing a lot more retailers put a real focus on health. Kroger, for example, now has a president of health. CVS recently acquired Aetna, and more and more progressive retailers are appointing health executives or health officers.
BILL BISHOP: So we’re going to probably see some very significant changes in the relatively near future as people make the adjustment that you’re suggesting.
KEN OUIMET: I believe so.
BILL BISHOP: Coming back to prices, Morgan, I know you’ve talked a little bit about your data showing price increases in a number of categories. Do you have a point of view on the outlook for food inflation in the next few months, maybe 6 to 12?
MORGAN SEYBERT: Absolutely Bill, our data is definitely showing a pretty significant increase in prices that consumers are paying at the shelf for products. Since the pandemic started, we’ve seen grocery prices rise by about four points across the total store on a like-for-like item basis. That was really driven by a 30% reduction in promoted volume we saw in the average grocery store.
When we went out and talked to our retail partners, they told us that they were really just focused on getting the product on the shelf – making sure they had the proper stock of the item that consumers were looking for. They cut back on their promotions to ensure that they could meet the demand that their consumers have.
In those same conversations, our retail partners told us that they wanted to get to a new normal as soon as possible around their promotional cadence. Historically, promotions have been a great way to drive traffic into the store, and they see an opportunity to win a disproportionate share of volume as they return to a normal promotional calendar. However, what we are seeing in our data over the last few weeks is that the return to normal or historical levels of promotion has been very, very slow. Given the pace – or lack thereof – of that return to normal promoted volume, we’re still seeing price elevated about two to three points in the average grocery store versus historical levels.
As we head into the back half of the year, I think we’re going to see elevated grocery prices and I don’t think we’ll see inflation rates return to normal. I also think that some of what will drive this is retailers using COVID as an opportunity to clean house – to look at the promotions they brought historically and potentially prune out some of the inefficient or ineffective ones.
In addition, I think they’re going to be faced with higher supply chain costs, specifically in areas like meat and areas where the supply chain is still struggling to keep up with demand. I absolutely expect a higher price over the next three to six months, and potentially longer. That has the potential to add about 300 to 400 additional dollars of cost for the average consumer as they face those higher prices in the back half of the year.
There is a potential of adding $300-$400 cost for the average consumer as they face those higher prices in the back half of the year.Morgan Seybert
BILL BISHOP: For millions of households, that’s going to represent a tremendous challenge because they don’t have the dollars they used to have. Ken, what’s your experience in terms of how retailers have to respond in periods of rapid inflation? How does their ability to price and promote change?
Retailers need to be proactive in messaging why they’re increasing prices … transparency is the best defense.Ken Ouimet
KEN OUIMET: That’s a great question. I think retailers don’t want to repeat the mistake that they made in the seventies, which was not being proactive in their messaging about why they’re increasing prices. In the seventies the retailers were passing on cost increases, but the government and the newspapers blamed the retailers and manufacturers for those increases – and then they implemented price freezes. It was very painful, because retailers weren’t able to raise prices, but their costs were going up. Given that experience, it’s really important for retailers to get in front and help people understand that the costs are increasing and they’re just keeping up with the increases.
BILL BISHOP: Okay. So, it sounds like we really need to be as transparent as we can, explain exactly why we’re doing what we’re doing, and establish a context of this being a necessary activity. Am I reading you properly, Ken?
KEN OUIMET: Exactly. Transparency is the best defense from getting scapegoated.
BILL BISHOP: Morgan, you gave us a pretty good picture of what the landscape is, including the growing shift of grocery spending online. Do you expect that share of online spending to hold, or are we going to see a lot of that spending revert back to the stores?
MORGAN SEYBERT: We’ve seen about two extra points of share of wallet move online from traditional brick and mortar retailers, and about 40% of online users tell us they expect to continue to buy online post-COVID. I think this is a real inflection point for online eCommerce-based purchasing in CPG. Most consumers, from what they tell us in survey results, have had very positive experiences with their online purchasing.
There are still traditional fears: Do I get good produce? Do I get the items that I want to get? Many of these concerns have been addressed by the great experiences that they’ve had online, so we definitely believe there’s going to be a significant and sustained shift to online as a result of COVID. I think we’re going to see continued strong growth and shifting in the direction of online.
BILL BISHOP: Ken, as more groceries are bought online, what impact do you see that having on pricing as more groceries? How does it change the pricing dynamic?
KEN OUIMET: One thing I’ve seen is retailers try to align their in-store and online pricing, which means online pricing has started to become more localized. This also gives retailers an ability to be more dynamic on their pricing, especially with their assortment.
BILL BISHOP: Do you have a point of view on how product price and service price blend? And will this result in anything different from the standpoint of pricing dynamics moving forward?
You can’t control what you can’t measure. Retailers have to measure their Price Image so they can control it.Ken Ouimet
KEN OUIMET: I really believe that you can’t control what you can’t measure. So we’ve been helping retailers measure their price image so that they can control it. But I believe in another measure is going to be important as retailers move into health: What’s the health image of your assortment?
BILL BISHOP: Ken, from your point of view, what are the big implications of this COVID event for retail pricing moving forward?
KEN OUIMET: I think there are two major trends to be aware of. The first is the shift toward a health focus, and the retailers that will win are the ones that develop loyalty because they’re helping consumers achieve their health objectives.
There’s going to be a lot of inflation rippling through the system, and retailers need to be prepared for that. This means that they’re going to need to be faster in their pricing, and they’re going to have to be more precise.Ken Ouimet
Second, there’s going to be a lot of inflation rippling through the system, and retailers need to be prepared for that. This means that they’re going to need to be faster in their pricing, and they’re going to have to be more precise. If not, consumers will be more price sensitive while retailers need them to adapt to more and faster pricing increases.
BILL BISHOP: So this game is really going to speed up.
KEN OUIMET: Yes.
BILL BISHOP: Morgan, you mentioned hearing from retailers about how they were aspiring to make some changes over time to align their pricing and promotions more closely with the way they saw their customers buying. Could you elaborate on that?
I think it goes without saying that we’re headed into a recessionary period, and that’s going to mean shoppers will have less dollars available in their pockets.Morgan Seybert
MORGAN SEYBERT: I think it goes without saying that we’re headed into a recessionary period, and that’s going to mean shoppers will have less dollars available in their pockets. As we’ve spoken with our retail partners, one of the things that is very clear is that they’re trying to prepare now for what’s coming three, six, nine, or even 12 months from now.
Our retail partners tell us this is actually a very interesting opportunity time for them. Given the huge shot of volume that they’ve received, they view this as an opportunity to hit the reset button in certain problem areas. One of the things we know they’re going to focus on is promotions. Our data tells us that about 72% of promotions have failed to break even in the average grocery store historically. I think retailers are going to take a very hard look at what promotions they’re running, and ask themselves if they need to run all of those promotions going forward to maximize both their price image, but also to maximize their financial ROI.
Inflation is the other thing I think we’re going to face, and retailers share this concern. As those additional cost increases come through from their manufacturer partners, how do retailers pass that cost onto the consumer? Do they do it in the right way? I think a lot of retailers are going to be relooking at their KVIs (known/key value items) – the items that drive price image – to make sure they have the absolute right price, the sharpest price on the items that matter most. And, that they’re passing through some of those price increases in the most thoughtful way. That’s going to allow retailers to continue to drive their price image, but also hit some of the financial targets they have for their business.
The last opportunity, as Ken talked about, is really in the area of assortment. Certainly there are a lot of tailwinds behind health and wellness and the importance of those items to the consumer, but as we head into a recessionary period, consumers are going to have fewer dollars in their pockets. A lot of retailers have talked to us about making sure they have the right opening price point in each category. So, they have not only the health and wellness items, not only the core, big brand, highly loyal items, but they also have an opening price point. That’s going to allow consumers to get the products that they want, but at prices they can afford.
BILL BISHOP: You paint a picture of change on a number of different dimensions, some of which is overdue. That brings me to the subject of tools. Ken, you created a price optimization tool in the supermarket space that’s been around for a while now. How’s that working in today’s environment? Does it still do the job or is it a rough base?
KEN OUIMET: The price optimization platform that we’ve been developing and evolving over 25 years now is based on machine learning, which is built for these kinds of environments where everything changes all the time. It’s called machine learning because the machines learn the environment and adapt to the changes in the environment. It enables you to control your price image in an environment where there’s a lot of volatility in cost, like now. It’s very helpful to know where to put your prices so that you’re managing your price image and you’re not increasing it or decreasing.
BILL BISHOP: Morgan, Nielsen just announced a new service, Retail Pricing Analytics. Can you tell us about that tool and the main benefits that it gives to retailers?
MORGAN SEYBERT: We’re incredibly excited about this. Over the last three to four years, we’ve made a significant investment in helping our retail partners optimize their price promotion strategies. We know this is often one of the largest costs of doing business for our retail partners, and we realized we were sitting on a gold mine of information that would allow us to help retailers make sure they were getting the right items on the shelf at the right price points, with the right promotions to support those items. In short, our tool leverages Neilsen’s retail point of sale information with great partners like Engage3 to help retailers understand how they’re priced relative to the marketplace.
It uses machine learning algorithms to identify how the retailer can be competitive in their pricing environment by making sure they get the price that’s going to drive a great price image relative to competition, but also allow them to hit their financial objective. We’ve seen great response from the marketplace. We’ve got over 60 customers live on our solution today, and many of our customers are seeing 5% to 10% increases in bottom line gross profit dollars as a result of leveraging our solution to optimize their price and promotion strategy.
BILL BISHOP: Those are impressive numbers. Ken, you’ve recently been working on price image management. Could you give us an overview of what that is?
KEN OUIMET: Price Image Management is a solution that helps retailers manage their price image and their pricing strategically. It’s an enterprise pricing solution that supports what we call a hierarchical optimization which means we look at how they manage their business, wherever there’s a P&L would be a note in the hierarchy where we’d put a — where you can have a strategy for what’s your price image versus profit trade-off. How much short term profit will you sacrifice for a better price image?
It supports a total data-driven decision making that addresses where a retailer wants to be at the enterprise level. Then, all the way down the hierarchy, the optimization tells you where you should, that’s data driven, and where the art and the science come together is when you override it because you have a certain strategy.
So for example, one of our customers, they had a private label strategy that they wanted to invest in. So they created a strategy around their private label products, and then they could manage that strategy independently to easily get an efficient frontier curve for the private label. And they can invest heavier in the private label to drive their long term strategy where they wanted to be.
BILL BISHOP: Morgan, I understand that in your work with Engage3, you’re able to extend price image to the market beyond the named competitors. I’m having trouble imagining how that works. Tell me more about it.
MORGAN SEYBERT: We are incredibly excited about our partnership with Engage3. Many retailers have historically relied on audit data – often in-store audit information – to collect competitive price intelligence data. It is very expensive to do. You have to actually send a human being into these stores. These human beings walk the shelves and capture all these prices. Then they collect and collate that information, and turn it back to the retailer. Because of how much it costs, retailers are typically only able to look at only one or two competitors across a handful of items in a handful of stores, so it provided a very incomplete view of the competitive set. Through our partnership with Engage3, we’re able to leverage Nielsen’s point of sale data for almost 100,000 stores within the U.S. to provide a total market view of an item’s price – not just for one or two retailers, not just for a handful of items, not just for a couple locations, but all items, all retailers, and all locations for those retailers.
With Engage3, we’re able to leverage their advanced price image algorithm combined with our total market data, to provide a retailer an understanding of how their price and their price image compare relative to one or two key named competitive retailers, but also relative to the total market. It gives the retailer a the most holistic view of competitive price intelligence and price image that’s available today.
BILL BISHOP: To be able to move from the constraints of working with just named competitors is a revolutionary breakthrough. Ken, could you give us an example of how a retailer might use price image management, focusing directly on the tradeoff between margin and price image?
KEN OUIMET: Organizationally, it’s usually going to involve just a few people, probably the CMO and maybe a couple of their key reports, because they’re responsible for setting the strategy. The process might be done once every three months, and they’re going over the strategy for each category. For each unique strategy they have like a KVI strategy or private label strategy. And they’re basically setting how much they’re willing to invest to have a better image in those areas. Once those targets are set (that’s the price optimization), it’s managed by hitting those targets. After that it’s a matter of managing it until they reevaluate the strategy.
BILL BISHOP: Is it fair to say that once they’ve implemented price image management, it’s almost on autopilot against very specific objectives – and they keep bringing the prices back on course to stay in that direction?
KEN OUIMET: That’s right. Going through this period in which all of a sudden there’s a lot of volatility of cost, it’s going to help you manage where to put your price to manage that price image and maintain that strategy.
BILL BISHOP: Morgan, I understand you’re able to give retailers feedback on the impact of a price change in almost real time. Tell us a bit about what you recommend retailers should do with this incredible capability to get the best value?
MORGAN SEYBERT: One of the things retailers have historically struggled with is that they made all these changes, but then they didn’t have great insight into what those changes did for their business. And for those that did gain insight, they’d only be able to see what the changes did in the context of what happened inside their four walls. With our Engage3 partnership, we’re able to bring a total market view to how these different price changes are actually impacting volume financials and share of market. Today we can get a nice benchmark relative to other competitors on how volume is moving as a result of those price changes.
What we recommend that retailers do with this information is to constantly monitor the price changes that these systems are creating to make sure they’re driving the right blend of KPIs that the retailer is looking for. From a price change perspective, making sure they’re hitting their price image objective, their financial objective, and their topline objective is the true win-win for a retailer. Leveraging the machine learning capabilities that Nielsen and Engage3 bring to the table really allows retailers to quickly see how their changes are impacting those three KPIs and make course corrections in live time. This way they can continually refine their pricing strategy, respond to competitive activity, and make sure they’re putting the best price forward for their consumers.
BILL BISHOP: In the early days of computer-driven replenishment, retailers were reluctant to delegate important decisions to a machine because they didn’t have the ability to cross-check or validate those decisions until holes appeared or inventories went out of whack. What was needed was the regular feedback system you’re providing in your combined service. I imagine that makes it a lot easier for retailers who may not necessarily be able to follow the algorithms to be comfortable with the recommendations.
Looking back at the developments that have occurred and the things that you have all experienced, what have you seen or learned that informs your intuition as to what’s going to be facing us in the future
KEN OUIMET: Over the next six months, I think we’ll continue to have challenges in the food supply chain, as a lot of the meat processors are still not up and running. I also think we’re going to see inflation starting to move through the system. At the same time, we’re going to see people becoming more budget-conscious. So it’s going to be a challenging environment.
BILL BISHOP: Morgan, what’s your gut tell you about what lies ahead?
MORGAN SEYBERT: A lot of that’s going to depend on the trajectory of the virus, Bill. But one of the things that we’ve seen is a huge demand from our retail partners for the types of solutions that we’ve talked about and the solutions that we provide in partnership with Engage3. Retailers are really going to want to get on top of their pricing dollars, now more than ever.
Recently, one of Neilsen and Engage3’s joint clients actually reduced their investment in competitive intelligence data, but increased the amount of insights and data that they were collecting by over a thousand percent. I think you’re going to see retailers navigate to more of these machine-driven capabilities that leverage price, image, and web scraping to collect competitive data or information combined with Engage3’s data, to provide a more holistic view of price. I think we’re going to see a step-change in the adoption of price image and price optimization tools going forward as retailers have to respond to a changing consumer demands and a more value-focused consumer due to the recessionary period we’re headed into.
BILL BISHOP: So this is truly going to be a more data-driven business than it has been in the past.
MORGAN SEYBERT: That’s right.
BILL BISHOP: IF a retailer wants to learn more about the tools, what should they do?
MORGAN SEYBERT: We encourage retailers to reach out to either Engage3 or Nielsen. We’re excited about our partnership because of our ability to leverage Neilsen’s point of sale data with Engage3’s algorithms. We can show retailers how we can truly help them going forward by showing them how they are doing from a price image perspective and by highlighting some of their opportunities.
BILL BISHOP: Morgan, I have to ask you this question. As you took part in Neilsen’s aggregation of a tremendous amount of data, did you ever anticipate it would eventually be massive enough to allow the kind of value creation that you all are working on delivering today?
MORGAN SEYBERT: Arthur Nielsen founded this company almost a hundred years ago to provide a total market measurement view of all consumer purchases across all classes of trade, and we still aspire to that today – to make sure we can provide the most complete and holistic view of the evolving consumer for our clients.
BILL BISHOP: What’s impressive is that between the two of you, you’re doing it. Thank you very much for talking to us today.