Adam Borchert: How Big Brands Can Prepare for US Grocery's Tectonic Shifts



With consumer trends changing the way Americans buy groceries, traditional grocers need to remain profitable and relevant. Adam Borchert, a partner in Bain's Consumer Products practice, shares what midsize and big grocers are doing to drive traffic, respond to changes in consumer preferences and find the greatest opportunities, while preserving profitability.

Read the Bain Brief: How Big Brands Can Prepare for US Grocery's Tectonic Shifts

Read the transcript below.

ADAM BORCHERT: Right now, we're seeing big changes in the way consumers buy groceries. Their definitions of value and convenience are changing rapidly. Their loyalty to brands is eroding, and the way they think about health and authenticity is changing rapidly. What that's leading to is some tectonic shifts in the retail industry.

We're seeing e-commerce penetration increase, and we're witnessing growth at the high end of the market and at the low end, with people focused on discount, the traditional clubs and dollar stores. But more importantly, the rising penetration of hard discounters like Aldi and Lidl.

What that then means is the traditional grocers are stuck in the middle. And to try to remain relevant and profitable, they're changing their operations in the way they work with consumers. So first, within the stores, they're allocating more space to fresh to drive traffic with consumers.

Secondly, the remaining space allocated to center store, they are increasing penetration of private label to increase their profitability and drive differentiation. And they're allocating more space to small brands that fit that authenticity desire from consumers. All of that takes money. And when you consider that on top of e-commerce, they need to fund that set of investments.

So they're trying to take costs out wherever they can in their operations and in negotiations with vendors. One of the big ways to do that is through M&A. And the wave of consolidation that we've seen is only going to continue. So all that taken together, when applied to large CPGs, says they might have some dire consequences.

Firstly, from a top-line perspective, many large CPGs are shooting for 2% to 4% growth. Our math would say they might be lucky to get a third of that if they're not proactive. Secondly, they've got profits at risk; 30% of their profitability could be at risk if they're not ready for tough retail negotiations, as well as increasing supply chain and packaging demands.

So that means to be successful as a large CPG in this environment, you're going to need to be prepared to effectively fight a two-front war. First is defending and taking share in the traditional channels without overinvesting. And secondly is finding a way to win in the areas of growth with the channels that are expanding.

Now to set yourself up for success, it starts with understanding where you are. Each category has got different levels of these trends happening and the competitive position is going to be different. So a rigorous analytical understanding is the underpinning of the strategy. That, then, translating into saying, "Where should we focus? Where are we going to win?" And then transforming the organization to do that.

It's the portfolio of products being tailored to the situation. It's reinventing the supply chain to meet the ever-increasing demands. And then it's tailoring the salesforce to go after those spots where there is the greatest opportunity. And probably needing to fund it all, there's a zero-based budgeting mindset to make sure that we've got the funds while preserving profitability.

Read the Bain Brief: How Big Brands Can Prepare for US Grocery's Tectonic Shifts