April/May, 2009

Cover & Feature Stories

The Economy And The Deli: A Look At The Sunny Side Of The Street

Doing business in the midst of a major recession is fraught with challenges, but retail deli executives can look optimistically at the strategies ahead.

  The course to operating expediently may involve changing a merchandising approach, marketing program or product offering, for example, to focus on value for consumers. Or it may involve accommodating realities such as reduced or eliminated lines of credit, less profitable or unprofitable operations or cash-flow reduction. This may mean layoffs or salary reductions and other unpleasant necessities.

The course to operating strategically may involve maintaining a marketing proposition at the moment, thus watching sales drop and profits disappear. Operating strategically may also call for a continuation to invest in new facilities, upgrade equipment, recruit, hire and train intensively.

Few organizations have the luxury of walking just one of these paths. Most have to conduct business strategically in an age of expediency. They have to endure, do what is necessary to survive both their company’s financial situation and the demands of suffering customers. Yet they must prevail, prepared to lift off when the recession winds down and better times return.

Know Thy Customer

Doing business in difficult times starts with understanding consumers. To some consumers, economizing means buying more at warehouse club stores and stocking up at supermarket sales. Others drop the warehouse club membership and stop stocking up so they don’t have to shell out as much money at one time. Some use up their household inventory; others lay in a supply of frozen.

Recessions tend to reshuffle the cards. The Nieman-Marcus customer finds herself at Wal-Mart, which means Wal-Mart has a customer with different expectations from its traditional customers. But these new customers also represent new opportunities.

For the deli department, economic flux translates into a schizophrenic consumer profile. On the one hand, delis will lose customers. People traditionally turn to the deli because they’re time-starved; someone who gets laid off may have more time to prepare foods and less money to buy prepared foods.

On the other hand, trading down may take many forms. If consumers used to eat out every night and now go out only on weekends, they may see deli department prepared foods as an economical alternative for weekday meals.

For retailers and suppliers, the culture itself has transformed. A purchase at an upscale-retailer, which once communicated food knowledge and prosperity, now has a very different message. After six months of stock-market and housing-price dips, that same purchase now seems showy. As value shopping becomes a competitive sport, upscale shopping can be seen as foolish.

In general, retailers are now experiencing incessant consumer demand for value. Although individual consumers may be willing to pay premiums for certain products, the trend is clearly for consumers to seek products that meet basic needs,that involve staying at home and that forgo variety and convenience in the name of achieving value.

 

Follow The Value Road

Consumer desire for value has a specific and not always beneficial impact on retailer procurement policies. For well over a decade, the deli department and its supply chain have ridden a wave of continually higher standards, part of a concerted effort to produce “restaurant quality” food. Variety and convenience have proliferated due to a razor-sharp focus on meeting consumer needs as well as on staking a position as the “anti-Wal-Mart” — offering an assortment of specialty, organic and high-service goods and services the Bentonville behemoth can’t match. A massive focus on supply chain responsibilities has had retailers demanding allegiance to food safety, sustainability and traceability.

Today, retailers are increasingly willing to set aside their professed standards to offer a “value.” During a conference call with suppliers, a British retailer, long a force in sustainability — even while claiming it was reconfirming its commitment to sustainability — advised its vendors that due to the current situation, “All sustainability efforts must be immediately accretive to earnings.”

In other words, if a vendor could reduce carbon output or water waste and offer the retailer a lower price, the retailer was thrilled, but it had no interest in paying higher prices to act in accordance with its professed values.

The retail universe is turning a careful eye toward assortment. With its focus on cost-reduction through rationalization of SKU count, Ahold’s Value Improvement Program has established a model for retailers that believe an abbreviated SKU count will allow them to increase velocity, ensuring freshness and rapid inventory turns while maximizing retail leverage to get the best price. Many specialty vendors and those who offer secondary or tertiary brands find themselves in danger of being rationalized right out of many retail outlets.

The more urgent concern now is the rise of the “hard discounter,” such as Aldi. U.S. retailers are looking to markets such as the United Kingdom and noting chains such as Aldi, Lidl and Netto posing real competition to mainstream supermarkets. Aldi just opened its 1,000th U.S. store, but if it acquires the same market share in the United States it has in, say, Australia, it could justify over 3,000 U.S. stores.

Despite all the hullabaloo related to Tesco’s entry into the U.S. market with its troubled Fresh & Easy concept, remember that Wal-Mart had to withdraw from Germany because it could not acquire a position of low-price leadership as it has in the United States.

 

Bright Spots Ahead

While these market disruptions are probably not permanent, this recession is expected to be deep. Just as the Great Depression defined the mentality of a generation, the effects of this economic decline are likely to be long-lasting, affecting how consumers and retailers think for some time to come.

For the immediate future, we can expect a triumph of tactical efforts over strategic thinking, especially among public companies managed for the next quarterly earnings release. Similar focus can be expected from companies owned by private equity groups focused on their own exit strategy as well as from highly leveraged players managed to meet the next interest or principle payment on their debt.

There are always bright spots even in generally gloomy times and there are many opportunities on the sunny side of the street. To name a few:

  • In an age of deferral of gratification, there are multiple places for the small indulgence. The tendency of consumers not to buy big-ticket items can increase the disposable income available for deli department purchases.
  • This is a big country. Few have market shares so large as to be driven primarily by macroeconomic trends. The success or failure of most companies in the industry depends far more on what they do than what the government does.
  • It is a bigger world. The recession has led to empty boats and cargo planes with concomitant reduction in freight rates, making it possible to find opportunities beyond our national borders.
  • Labor is available. Quality labor, often with specialized training, is available at a reasonable price.
  • Real estate is available. New concepts have an opportunity to bloom. You can expect a flowering of ethnic and discount concepts, and all businesses have opportunities for expansion as the recession transfers available assets to new uses.

Yet beyond the specifics, perhaps the best advice on how to do business in troubling times was given by President Obama’s chief of staff Rahm Emanuel, speaking before his appointment: “Never let a serious crisis go to waste. What I mean by that is it is an opportunity to do things you wouldn’t do before.”

The most useful advice is to use the crisis as an opportunity to reorient your business. Use the crisis to think through issues such as strategic positioning, capital investment and brand development.

An important aspect of a severe recession is to strategize on your competitive position. Well-capitalized organizations can adopt a “last man standing” strategy in which they continue to grow and invest, confident they will be there to pick up the business left by under-capitalized competitors and to profit from the eventual recovery.

 

Time For A Tune-Up

Using the crisis can simply involve cleaning up your own mess. During years of growth, companies tend to acquire inefficiencies, and a recession is an opportunity to act.

  • You can often identify departments or functions with excessive staffing. In other cases, staffing levels may be fine but the compensation structure is not sustainable.
  • Most organizations have a few people who may not be desirable staffers or whole business units that may not be contributing. Businesses are often filled with people and units that have been expected to perform better “next year” for 20 consecutive years.
  • Look for any activity done simply by “force of habit.” It is shocking how often a company continues exhibiting at a regional trade show long after the person who championed it left and long after anybody in the organization cares.
  • Facilities and policies may be overly grand. Do fancy headquarters serve a business purpose? Do they send the right message to the staff? Can your business sustain executives who fly business class internationally and single rooms for all convention attendees?
  • Can you reexamine vendor agreements? Can vendors help your operation?
  • Have you built up layers of complexity in middle management or regional distribution and do they pay?

Dealing with these issues is difficult but a crisis can provide the impetus for everyone to do so. FedEx, for example, imposed a companywide pay cut — 20 percent for top executives, 10 percent for many others and 5 percent across the board — and dropped its 401(k) match. Some employees are surely unhappy, but many others accept it as necessary to keep the business strong and provide employment.

A crisis is also a PR dream. Need to close a division, close stores, lay off staff, cut pay? You can blame it on Alan Greenspan and the sub-prime mortgage crisis — and the media will mostly nod understandingly.

 

On The Horizon

There will be victims in this downturn — those that are undercapitalized or without a viable business model, that sacrifice long-term strategic positioning to achieve short-term survival. The winners will offer something compelling. On the vendor side, this may mean superior taste that results in repeat purchases or powerful brand equity.

Both vendors and retailers should be mindful of the need to continuously provide evidence of their value proposition. They need to continuously market that evidence and be on the lookout for niche opportunities to serve customers or pick up margin.

The whole industry should try to encourage a broader perception of value in which food safety, sustainability and traceability are seen as important components of value.

Businesses close because they run out of cash, so watching cash is crucial, but only watching cash is a guarantee other operators will exit the recession in a position to pick off your customers.

Live to fight another day — that is prerequisite to success but success requires us both to endure and to prevail. Let us draw on our deep reserves of talent and resourcefulness to position ourselves for a brighter day we know will dawn.   DB