In a year when Lidl began invading America and Amazon bought Whole Foods, retail is the nexus of concern in the industry. Cornell University’s Ed McLaughlin is recognized as the world’s single most prominent expert on the evolution of retail as it connects to the food industry.
Though his roots are American, McLaughlin’s involvement in Europe is substantial. He has been a visiting professor of retailing at IESEG in France since 2009 and an adjunct professor of retailing at Nijenrode University, the Netherlands School of Business, since 1989. He has worked closely with Dutch supermarket Albert Heijn since 1989 and founded the Ahold Retail Academy, which he has directed since 1998.
McLaughlin will be the keynote speaker at our Amsterdam Produce Show and Conference, Nov. 15-17, 2017. We asked Pundit Investigator and Special Projects Editor Mira Slott to get a sneak preview of his presentation.
Q: The topic you’re tackling in your keynote is no small feat: Disruptions in the Food Retail Landscape — Implications for Fresh Produce.
A: The food retail sector is experiencing more radical change and disruption to its structure and conduct than at any time in its history. I see three main disruptions: the rise of the discounters around the world, particularly in the United States; the Amazon-Whole Foods deal impact; and Wal-Mart’s dominance and strategic reaction both to the other two disruptors.
Q: How did you key in on these disruptors? Aren’t there other disruptors in play?
A: I may bring a fourth one to the discussion. Another important disruption is technology, and particularly in the produce industry, grower-oriented product and genetically modified changes that will affect the produce system and the branding.
Q: Can you elaborate on what you consider the retail-oriented game changers — the infiltration of discounters, the Amazon-Whole Foods merger and what Wal-Mart intends to do about it?
A: Aldi and Save-A-Lot, along with a few other equivalent-type stores, have existed for a long time. We used to call them “hard discounters.” Aldi started in the United States 40 years ago. A foreign company thought it could survive by selling 600 SKUs, no brands, no bagging, no phones and no Coca Cola. It was a preposterous concept, and 1,500 stores later, it’s booming.
Q. But isn’t that growth also predicated on its evolution into fresh food categories, including produce?
A: For the past 15 to 20 years, Aldi has carried fresh foods — and fresh produce, particularly — although it didn’t start out that way. There’s a major acceleration going on now in the growth of discounters, with people keenly aware of Lidl’s entry into the United States. German company Lidl, with 10,000 stores, is a very proven concept. In Europe, Lidl has more extensive produce offerings than Aldi, so it represents a substantial threat to Aldi in the States, where it’s opened about 40 to 45 stores and announced that number will be as high as 100 by year-end. Aldi announced it will increase from 1,500 stores to about 2,500 stores by 2022. Aldi has begun an aggressive capital expenditure program. Instead of remodeling while the stores remain open, it is closing the stores until renovations are completed.
Q: Is that advisable?
A: This is a risky step for Aldi because during the time of its closing, consumers must go to a competitor to get their food. Aldi risks they’ll prefer the competitor and not return. If Aldi completes the 900 more stores than they have now, it will be the third-largest food retailer in the United States in terms of store numbers.
There are two prongs, or somewhat three prongs, in this disruption development: Number One is Aldi; Number Two is Lidl; and the third, which is often overlooked, is the rapid growth of dollar stores.
If you think of just the two largest publicly held dollar stores, it’s Dollar General and Dollar Tree. Between just those two companies, they have about 28,000 stores; Dollar General announced 1,000 new stores this year. One-third of those stores will have substantial fresh produce departments. You remember when dollar stores used to be cans and cheap paper goods.
Q: Are dollar stores a threat for produce department-rich food chains?
A: They didn’t used to have refrigeration, now they do with money back guarantees if shoppers are not satisfied. And they have produce ads on the front page with aggressive pricing.
Q: Are the discounters realigning or customizing product selection to adapt to different market demands?
A: Two things are obvious: they are expanding their fresh presentations and offering higher quality products that are competitive with the conventional supermarkets.
Q: Did Wal-Mart miscalculate the full-on discounter incursion?
A: Wal-Mart has been in food since 1989, but it’s struggling a bit with fresh food and fresh produce. I think it is fair to say most industry analysts would not regard its produce quality equal to that of conventional supermarkets, but its produce department performance overall is equal to that of conventional supermarket companies.
Q: At Produce Business, we’ve long tracked how prices on the same produce items, and average shopping basket totals, compare at competing retailers within different markets in the United States. For many years, it was not a contest. Wal-Mart dominated markets as the low-price leader, with significantly lower prices on nearly all comparable SKUs. That changed even before Aldi entered markets.
A: Wal-Mart is returning to its former positioning of always the low, sometimes the lowest price. It used to be more expensive than Aldi in most markets. The company has invested billions of dollars to lower prices and now it is actually at par in many of the markets. So, Wal-Mart is being very aggressive in pricing, and this is a challenge for all suppliers, not just produce suppliers.
Wal-Mart goes to its suppliers now and says, “Look, we have this competitive pressure, we have to lower our retail prices even more, and your suppliers have to help us do that.” Wal-Mart has announced that it expects suppliers to help it to be at least 15 percent lower than its competitors’ prices, some 80 percent of the time. This requires substantial price concessions. Suppliers need to figure out how to do that or not retain Wal-Mart as a customer. For many U.S. suppliers, Wal-Mart represents 15 to 20 percent, and in some cases 30 percent, of their business.
Q: A 15 percent reduction for produce suppliers sounds challenging in what is already a low-margin, cut-throat business. Still, does that pricing reduction strategy apply across the board, or is it focused on particular products and brands?
A: It’s primarily targeted at major grocery brand suppliers. I don’t have evidence that it’s being applied to fresh produce companies, but frankly, I think it’s likely. I’m doing more research on that; for Amsterdam, I’ll have more information to share.
Q: After its Whole Foods purchase, Amazon created a media buzz with price cuts of certain Whole Foods items. Under closer examination, those price reductions were selectively employed.
A: What you are referring to is the tactic of slashing prices on 12 items while the other items are still high margin. It was somewhat of a PR stunt, but also a brilliant strategy because it seems to be working.
Q: How much of a threat does the merger really pose?
A: The deal sends shivers up the spines of virtually every retailer in the United States. The day the deal was announced, Kroger, which is the largest supermarket chain in the United States, had its stock decrease by 9.2 percent. Then on the day of the closing, Aug. 25, 2017, Kroger stock dropped $2 per share in one hour, and the six largest U.S. brick-and-mortar retailers lost $12 billion in value in that same hour. That’s because these retailers and investors understood this represents a significant share of the market.
Q: What implications does this have for produce suppliers?
A: I think they have to understand conventional retailers are going to be under more pressure to have a differentiated strategy from the high-end specialty stores to the low-end discounters. Retailers need a brand story from their suppliers. This is also an opportunity for suppliers to develop more innovative products. I think suppliers have to help retailers with an ecommerce strategy. It’s no longer enough to just have a brick-and-mortar store.
Q: Consumers have myriad choices of where to buy produce. Is there a risk in retailers trying to be all things to all people and dilute their core strengths and what they’re best at doing?
A: The very high-end and very low-end retailers have a strategy targeted more narrowly on a customer segment than conventional retailers. On the other hand, conventional supermarkets are trying to be all things to all shoppers. These retailers understand these discount stores are increasingly important competition.
Q: Do you see similar dynamics in the Netherlands and other countries in Europe and beyond?
A: All three of these disruptions are global trends.
Q: Going forward, what are the key strategies retailers need to employ for survival?
A: First, retailers need to sharpen prices to align with the consumer segment they are addressing. Second, they have to develop compelling strategies to retain their customers. They have this double-barreled gun looking right at them, one is discounters, and the other is ecomm combining with high-end Whole Foods, and if conventional supermarkets don’t respond swiftly, they will get caught in the crossfire. To develop a compelling narrative, they have to focus on the fresh department.