What makes a winner: Insights from the 2020 grocery retailer preference index_dunnhumby

What Makes a Winner:
Insights from the 2020 dunnhumby
Retailer Preference Index for Grocery
Jose Gomes, President of North America
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What Makes a Winner:
Insights from the 2020 dunnhumby
Retailer Preference Index for Grocery
Jose Gomes, President of North America

© 2019 dunnhumby / All rights reserved / Confidential4
dunnhumby clients

5
© 2020 dunnhumby / All rights reserved / Confidential
But what does that mean?

Recreating personal relationships
at scale

Experts continue to puzzle over the economy and the longest expansion in history
7
Wall Street is obsessing over the
chances of a nasty U.S. recession
within the next year
Last Year’s Headlines This Year’s Headlines

Meanwhile, Customers remain fiscally conservative, keeping debt low and demanding
lower prices, despite rising incomes and historically low unemployment
8
Grocery Gross Margin %
24.0
25.0
26.0
27.0
28.0
29.0
30.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Pre-Great
Recession
Post-Great
Recession
Great
Recession
Customers have driven down gross margins by
seeking the most competitive prices
US Household Debt to GDP Ratio
Pre-Great
Recession
Post-Great
Recession
Great
Recession
Consumer debt levels have plummeted since the
Great Recession, despite the expansion

There are signs Customers have reached a stable point in their demand for Price
versus Quality
9
Quality
better
worse
Priceworse better
Grocery Retail Landscape 2019: Value Core Perception
Balanced-Value
Retailers
5 YR CAGR = 4.7%
Price-First
Retailers
5 YR CAGR = 4.9%
Quality-First
Retailers
5 YR CAGR = 2.4%
Balanced but
Weak Value Core
5 YR CAGR = 1.0%
94 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Grocery Gross Margin %
Stable
margins
24.0
25.0
26.0
27.0
28.0
29.0
30.0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Retailers strong on Price and Quality are
growing as fast as Price-First retailers
Gross margins have stabilized the past
few years

However, non-traditional competitors continue to disrupt traditional grocers
Leading Non-Traditionals are
especially strong
Balanced-Value
Price-First
• Since 2012, grocery stores market share has eroded by 13p.p. from
its 2000 high of 68%
• Of the 55%, an estimated 7p.p. has been lost to natural & organic
retailers and hard discounters
• Since 2000, mass merchants doubled from 17% to 30% driven by
Walmart’s 1,000 bps growth
Most food retail growth comes from
Non-Traditional Channels

How did this all play out in 2019? Key take-aways from the Retailer Preference Index
11
The Value Core still rules: Ensure your Quality / Price equation is right for your customer base
before prioritizing investment in the Amplifiers
eCommerce has been a rising tide for Customers, but not without inflicting pain: While ease of
eComm use is the biggest improvement market-wide, Operations have suffered
Traditional Retailers are fighting back against non-traditionals – and winning – by focusing on
Assortment Relevance, at a time when Customer trends favor it
Don’t just assume you know your target Customer – even most households making $100k or
more a year value Price over Quality
The Retail Basics still matter: Managing out-of-stocks, keeping stores clean and having excellent
store associates are still key elements of a traditional, regional retailer’s success
Even if you can’t win on Base Price and Private Brand, you can’t afford to wave the white flag.
Also, efforts to improve Price Perception must be sustained in order to change minds

© 2020 dunnhumby / All rights reserved / Confidential© 2019 Copyright dunnhumby / All rights reserved
Retailer Preference Index:
How putting Customers First
drives performance

The Retailer Preference Index connects what matters most to 7,000 U.S.
Customers nationally with retailer financial performance
13

Value Core = Customer’s perception of the quality of products & experience
they receive versus the price they pay
14
As perceived quality
increases, value
perceptions increase
As perceived price
increases, value
perceptions fall
Quality
Price
Retailer’s
Actions
Value
Perception
Customer
Preference &
Financial
Performance

Retailers that delivered both outperformed those that delivered none by 9X
5yr total sales
CAGR: 7.2%
PriceWorse Better
Average 3rd
Quartile Retailer
5 YR Sales CAGR: 1.8%
Quality
Better
Worse
15
Average 4th
Quartile Retailer
Average 2nd
Quartile Retailer
Average 1st
Quartile Retailer

The top grocery retailers in 2019 delivered on both
16
Value Perception drives both Financials…
First Quartile
Second Quartile
Third Quartile
Fourth Quartile
Value PerceptionWorse Better Value PerceptionWorse Better
WorseBetter
Financial
Performance
Better
Emotional
Connection
Worse
& Emotional Connection

Better value perception has clear implications for your brand
17
Brand Shortcuts: Top Quartile Brand Shortcuts: Bottom Quartile
Expensive
Good
Close
Sales
Cheaper
Great
Fresh
Produce
Value
Healthy
Fun
Quality

Quality
Price
Base
Prices
Personalized
Offers
Promotions
Assortment
Private Brands
Communications
Store Experience
2
7
6
1
53
4
Value perception is influenced by many factors

How can your improve your value perception?
19
2
Develop a Customer strategy: Diagnose your key value perception
issues, focusing first on the value core - Price, Assortment & Store
Experience
3 Take a long-term view: executing Customer strategy is not a quick fix, it
requires discipline, consistent execution & a willingness to say "no"
1
Start & end with Customer data about what they feel, think & do:
Understand & measure how your actions drive value perceptions for your
Customers - you can’t change what you don’t measure

Key Insight:
Convenience is playing a bigger and bigger
role for Customers
Traditional, regional grocers are benefitting

Retailers that are winning are putting their Customers First
21
1 2 3 4 5
6 7 8 9 10
12 13 1411 15

Excelling at Price and Quality is required to win. Speed and Convenience
have increased the most in importance over the past 3 years
22
Discounts,
Rewards, Info
Speed Convenience Operations Digital Quality Price
Pillar Importance
2017 2018 2019

Rising trends in Customer preferences are enabling traditional retailers to
make a resurgence
23
change in ranking of average
traditional grocer in the top
two quartiles
change in ranking of average
non-traditional grocer in the
top two quartiles
+2 -31
Took over first place from
Trader Joe’s
Made biggest improvement in
Top Quartile
In Top Quartile for first time In Top Quartile for first time
Notable gains for traditional, regionals in the
Top Quartile
These moves aren’t the product of big improvements
in their Value Proposition – rather, they are the result
of shifting Customer needs
2 The top Overall Gainers are all traditional,
regional retailers
These moves are the product of relatively big
improvements in the retailers’ Value Proposition
3

What does this mean for you?
2
But Convenience and Speed are trending up: Customers are smarter
with their savings and spending, leaving more room in the budget to seek
easier solutions. Prioritize these after your Value Core is solid
3
This is a competitive advantage for some Traditional, Regional
retailers: Their footprints usually have a more dense store base than the
competition and are speedier to get in and out of than larger format
competitors
1 The Value Core still rules: Ensure your Quality / Price equation is right
for your Customer base before prioritizing investment in the Amplifiers

Regional Grocer Formula for Success:
Win on Assortment Relevance and Retail
Basics, minimize gaps on Private Brand and
Base Price

The best Regional, Traditional grocers separate themselves from the bottom
with a strong Value Core, supported by Assortment Relevance and a focus
on the basics of managing out-of-stocks, staff and store cleanliness
26
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
(Doesn't) Sometimes run out of items I buy regularly
Staff make me feel valued
My store is clean and up-to-date
I love their private/store brands
Already low prices w/o coupons/discounts
Offers the highest quality products
New and different products
Has right product variety to meet my needs
How are the Top Quartile Traditional, Regional Grocers
Most Different than the Bottom Quartile?
-3 -2 -1 0 1 2 3

Against the leading non-Traditionals, many of these are competitive
advantages, especially Assortment Relevance. Base Price and Private Brand,
are critical gaps that are just being minimized
27
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
Staff make me feel valued
My store is clean and up-to-date
Already low prices w/o coupons/discounts
New and different products
Top 4 in Assortment
Relevance
Avg 5 YR Sales
CAGR: 4.7%
How are the Top Quartile Traditional, Regional Grocers Competing
Against Leading Non-Traditional Grocers?
-3 -2 -1 0 1 2 3

There is a strong correlation between having Private Brands that are good
enough & sustained sales growth
28
Key Learnings:
1. Private Label is a
Sales Driver
Outside of WinCo,
banners with lower
private label scores
grow much slower
2. Good Enough
versus Great
There’s a point when
additional Private
Brand improvements
have minimal impact
on sales growth
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRA
NGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE][CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
Trader Joe’s
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
[CELLRANGE]
-5.0
-3.0
-1.0
1.0
3.0
5.0
7.0
9.0
11.0
3.5 3.7 3.9 4.1 4.3
5YRSalesGrowth
“I love their private/store brands”
Point of diminishing returns11
9
7
5
3
1
-1
-3
-5

The best Regional, Traditional grocers aren’t any better than the bottom at
Promotions, Rewards, Digital, Speed or Location convenience
29
-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0
The retailer rewards me for shopping with them
Sends me useful information
This stores phone app makes shopping easier
It’s easy to get in and out quickly
Has discounts/coupons on items I buy regularly
This retailer has easy ways to shop online
Discounts/coupons here are easy to use
Has convenient locations
How are the Top Quartile Traditional, Regional Grocers Most
Similar to the Bottom Quartile?
-3 -2 -1 0 1 2 3

2
Retail Basics matter: While Personalization and eCommerce grab headlines,
managing out-of-stocks, keeping stores clean and having excellent store
associates are still key elements of a Traditional, Regional retailer’s success
3
Even if you can’t win on Base Price and Private Brand, you can’t
afford to wave the white flag: These separate the best Traditional,
Regional retailers from the worst
1
Assortment Relevance is the most important Value Amplifier for
Traditional, Regional Retailers: Assortment Relevance is an element of
Convenience. Get this right to keep up with non-traditional leaders

Key Insight:
The digital rising tide has lifted all boats, for
the Customer… but at the expense of the
retail basics

Customer perceptions of retailers’ digital offerings, transparency, rewards and
private brand have improved more than all other levers, the past three years
32
This retailer has easy ways to shop online
ImprovedDeclined
Changes in Customer Perception of US Grocery Market,
since 2017 Biggest Improvements

Operations (Price consistency and Out-of-stocks) perception have declined,
while speed and RTE experiences the weakest improvements, market-wide
33
It’s easy to get in and out quickly
Offers appetizing prepared and ready to eat foods
Doesn't change prices too often
Doesn't run out of products I regularly use
ImprovedDeclined
Changes in Customer Perception of US Grocery Market,
since 2017 Smallest Improvements

Not only is the market offering of Operations declining, Customers are also
seeing the most changes in competitive position here – it is not a sinking tide
lowering all boats; some retailers are faring better than others
34
(Doesn't) Change their prices too often
Offers fair prices on natural/organics
Biggest Changes in Retailer Competitive Position in
US Grocery Market, since 2017

Retailers focusing on Digital open themselves up to damaging their
Operations perceptions
better
worse
Digitalworse better
The Relationship Between Digital and Operations
negative
correlation
Digital
negative
correlation
Operations
The Relationship Between Digital and Operations

1
eCommerce has been a rising tide for Customers, but not without
inflicting pain: While ease of eComm use is the biggest improvement market-
wide, Operations have suffered. Don’t take your eye off the retail basics
2
Overall, it is the Customer who is winning: Most levers have improved,
market-wide. Retailers must seek continuous improvement, in areas that
matter most to their customers

Key Insight:
Differentiation through Assortment is more
achievable than Differentiation through Price

Operations, Transparency, Assortment Relevance and Private Brand has seen
the biggest shake-ups in competitive position the past three years
38
(Doesn't) Change their prices too often
Offers fair prices on natural/organics
Biggest Changes in Retailer Competitive Position in

Offers a wide variety of natural/organics
Has discounts/coupons on items I buy regularly
Discounts/coupons here are easy to use
Prices are lower than other retailers
Changing competitive position has been hardest for retailers in: Lower Prices,
Promo/Rewards, Product Quality and Natural/Organic variety
39
Smallest Changes in Retailer Competitive Position in

1 Differentiation is harder in some areas than others: Differentiate with
Assortment Relevance, Transparency and Private Brand
2 Changing minds is harder in some areas than others: Pricing and
promotion will require a sustained effort to change competitive position

Key Takeaways:
Four Rules For Thriving In The
Retail Revolution

What we hear from retailers…
Even as many retailers’ value propositions erode, there is a hesitancy to
deviate from outdated, internally-focused planning processes
We spend little
time on strategy.
We simply don’t
have the time or
people.
[For] our strategy
and planning
efforts … we
spend minimal
time focusing on
consumer and
competitive
trends.
Our strategy …
often lacks the
evidence,
reasoning, and
actions to achieve
[our] goals.
Our strategic plan
is a long to do list
that lacks priorities.
Our current
planning
process … is
driven largely by
our budgeting
process.
42

A Customer First approach delivers a differentiated & competitive
Customer Strategy
DEFINE YOUR TARGET
CUSTOMER SEGMENT
VALUE PROPOSITION
DEVELOPMENT
MARKETING &
MERCHANDISING LEVERS
CONSULTING, SOFTWARE
& TECHNOLOGY
CUSTOMER
STRATEGY HEALTH CHECK
STRATEGY
Diagnosis and development of coherent Customer Strategy
ASSESSMENT
Collaborative review of current Customer Strategy
TACTICS
Granular functional strategies
EXECUTION
Various enablers
CUSTOMER
INVESTMENT
43

The 4 things retailers are doing today to weather the storm:
2
Make Trade-offs: Diagnose your key gaps and focus your finite
resources on those areas that drive value perceptions and divest in
those activities that do not
3
Invest with precision: Not all Customers, stores, categories or
products are created equal. Use Customer science to determine how
& in whom to invest
1 Put Customers First: Understand your target Customers’ needs and
tailor your organization to meet those needs better than the competition
4
Measure, measure, measure: “you can’t manage what you don’t
measure”, include Customer KPIs in your bonuses & remember
indices ≠ perception

What makes a winner: Insights from the 2020 grocery retailer preference index_dunnhumby

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