Reed Supermarkets Case Analysis

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TEAM Case Analysis Company: Reed Supermarket A New Wave of Competition

Names: Nicolle ******, Rose *****, Cody Link Date: May 14, 2014

Advanced Marketing Management – Kuehl

When opening a business, in any industry, positioning oneself effectively amongst your competitors should be at the top of your priority list. If an entrepreneur cannot do that, the business’s chances of attaining market share and building a strong and loyal customer base is very small and often spells the demise for that business.

I. SWOT Strength

● Emphasis on Quality: To continue its long standing model of being an upscale provider of consumer goods for Midwestern residents, Reed Supermarkets wanted to retain its high-end position. Within the past two decades, the grocery store chain had diversified their product offerings with newer, higher margin departments which included expanded seafood options, floral department and wide variety of specialty offers like 27 types of mustard (2).

● Long Operating Hours: Reed’s provided a convenience for their customers by having longer operating hours than competitors. This convenience allows consumers to shop at their preferred time and not need to worry about rushing home or missing the opportunity to purchase family necessities (2).

● Elegant Display Cases: For Reed Supermarkets, the days of drab display cases no longer exist. In an effort to continue their trend of upping the quality of their products and the value-added dynamism of the high-end retail mentality, Reed Supermarkets improved their display areas to add both quality and esthetic appeal for consumers. We felt this particular differentiator could appeal to consumers sense of style and increase the number of impulse purchases made by consumers (2).

● Free Delivery to Vehicles: A trend which has increased to a national scale is a concept Reed’s began – delivery of purchased goods to the consumer’s car free of charge (with no need for gratuity). This 100% free service increases the high-end perception that Reed’s wants to provide for its customers while adding convenience and thoughtful touches to the end of the purchasing experience (2).

● Market Penetration: Compared to the other high-end retailers located in Columbus, Reed had 25 locations boasting 26.4 million dollars in annual sales for each one of its stores. Its

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closest competitor, Delfina, only had 18 stores to choose from for Ohio’s 3rd

largest city with sales that are lower, albeit comparable of 25.1 million annually (10).

Weakness

● Perceived as being High Priced: Reed Supermarkets was used as the baseline for

comparison when consumers were asked about price sensitivity. Whole Foods, who can arguably be called the closest competitor along with Delfina are 104.1 and 99.5

respectively with regards to a pricing index. Superstores and warehouses are often an alternative that have a price sensitivity of between 95 and 96. But proliferation of low-cost alternatives should not be ignored as they stand at less than 90 on the consumer price index evaluation and make up a considerable amount of market penetration (12).

● $1 Special could Confuse Consumers: A weekly dollar special was run at Reed Supermarkets showcasing 250 items to attract customers. This campaign, which was launched in June 2010, was aimed directly at its low-cost leaders so as to combat the perceived high-price image it retains. Signage and promotional campaigns spread the word of the new pricing strategy but some feared that the consumers would be confused. The reputation of being high-end was being muddied and now Reed has to decide whether to move down market or to remain a higher pricing structure. What was sacrificed was overall margins even as in-store traffic had increased 3% overall. One might argue that the cost of discounts and lower profit margins is not worth the extra foot-traffic the promotional materials aroused amongst consumers (7).

● High Pricing/Cost Structure: Reed Supermarkets made only modest profits yearly with only 2.1 million in net revenue. Comparatively speaking, dollars stores, who make up a majority of the low-end competition earn 8.5 million dollars after all expenses have been accounted for. Remarkably, total operating expenses were only marginally higher than Reed with 23.6 million for all dollar retailers. Thus, dollar stores have the capacity to operate at a lower cost and pricing structure creating a high margin for success compared to Reed (11).

Opportunity

● Focusing on Private Label Merchandise: Private label merchandise has emerged as a growing segment in the grocery store environment; an upward trend suggests that if a retailer wishes to remain competitive, the inclusion of more private labels will need to be incorporated. At 17% of overall sales, private labels had grown by 3% since 2005. The private labels also provide retailers with a high overall profit margin. What Reed and other retailers should be keen to watch is the consumer perception of this type of product. Although it has become less of an issue, private labels have been perceived as cheaper and of a lower quality than the mainstream labeled merchandise (3).

● Expand Organic and Health Product Selection: Where competitors like Whole Foods have excelled is through the offering of an extensive variety of health conscious products which has attracted an almost “cult-like” following. Reed, during its repositioning to the

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high-end, did include a large number health options but nothing close to the variety offered by Whole Foods. Even though they have only three locations, Whole Foods makes an astonishing 19.1 million in annual sales – only 7.3 million shy of Reed who has more than eight times the buying locations (3, 10).

Threats

● Competition: As in any market segment, competition remains a company’s largest threat. Low-end, high-end, warehouse, superstore – all providing a rivalry for the traditional group environment, and specifically Reed. In the Columbus market there are 180 grocery stores, ranging across 15 different companies, including the 25 Reed locations. Two competitors, Delfina and Whole Foods where Reed still commands the market. The biggest threat that remains is dollar store locations and low-end competitors; seven of the 15 companies compete in the low-end segment where consumers now flock to for the sake of saving money even at the sacrifice of convenience (10).

● Reduction in Consumer Loyalty: As trends in consumer buying habits changed and positioning amongst competitors became more fierce, so too did consumer loyalty. Supermarkets, like Reed, were not able to rely on consumer loyalty for many reasons most notably because a savvier modern consumer had developed. People are more apt to shop at multiple locations in search of deals across all different types of stores (3). ● Growth of Warehouse and Superstores: Shoppers have also become less likely to make

regular trips to the traditional grocery store setting. With the growth of the superstore and warehouse sector, consumers have become more inclined to buy in bulk while utilizing a budget. While superstores and discount locations drew in a large customer base due to the low-price model and promotional strategy. It has been observed in recent poll data that 60% of shoppers are more likely to make frequent trips to pick-up things here and there while the remaining population still makes the traditional stock-up trips (3).

II. Case issue:

In the case of Reed Supermarket, a grocery store operation that has long been a staple for Columbus, Ohio consumers, the issue has become retaining a competitive edge over the now flooded marketplace and providing customers - both previous and new customers - with a valuable and enjoyable shopping experience. As a team, we have formulated a plan that we feel will provide Reed Supermarket with the ability to regain its once formidable position in the Columbus grocery store segment while continuing to exceed the standards that it has set for customer service and product offerings.

Reed Supermarkets has a longstanding history amongst consumers in the Midwest; the chain which was opened by William H. Reed originally establishing itself in 1939 in Kalamazoo, Michigan (Quelch 2). Reed would not be the owner of a sole supermarket which held his sir name for long as his empire grew to more than 190 retail locations, multiple distribution centers and was place for employment for some 21,000 Midwesterners less than a half century later (2). As his empire constantly evolved through acquisition and expansion, Reed’s position among his

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competitors changed too. When William Reed opened his first grocery store locations, he had positioned his business as a low-end retailer and as time progressed so did his company’s positioning model (2). More than 80 years later, Reed Supermarkets had gone through a fierce period of diversification by offering its customer base an expanded selection of higher-end and higher margin products(2).

For the past 20 years, Reed Supermarkets has considered itself no longer be in the low-end retailer segment it once was. During the period of reinvention, the supermarket chain wanted to provide guests with a more high-end and unique customer buying experience. Upon reviewing the case, which was published by the Harvard Business School, we put together a comprehensive SWOT analysis for Reed Supermarkets that profiles what we think they do well, what they do poorly and where they could improve their business models to make higher margins:

III. Relevant Factors & Analysis & IV. Recommendations?

In order for Reed Supermarkets to succeed and potentially increase market share in Columbus, Ohio, the company needs to lower their pricing structure in order to compete with other retailers. One way the company can do so is to offer more private label brands in their stores. Private labels have become an increasing trend, with an increase in market share from 14% to 17% since 2005 (3). There is a low cost involved with private labels yet they yield high margins for supermarkets. According to the Reed email survey in March 2010 of 400 Columbus areas customers, 75% of those customers indicated that better prices were an important factor when it came to grocery shopping followed by 62% indicating that better discounts and coupons were most important to them. Reed Supermarkets have definitely differentiated themselves amongst other supermarkets with their “attractive stores, long hours, elegant (and often creative) serving-case displays, and exceptionally attentive customer service” (2) but it seems as though customers are more concerned with value these days as opposed to the exquisite shopping environment.

Switching over to more private labels could also increase foot traffic, even if the company

continues to promote unique store experiences. The case study states, “Everything we’re doing to build up our premium private labels and organic produce selections positions us for growth when the 10% to 15% of Columbus’s most prosperous customers get tired of big boxes and picking their cans off pallets” (8). Provided that Reed Supermarkets continue to push and expand their private labels, they can regain customers that they have lost to their competitors while gaining higher margins.

The recommendation above was made with the assumption that past, current and future Reed’s customers will see the value in the supermarket’s private label and all that the

supermarket has to offer and want to shop at this store. Evidence from the case points us in the direction to stress price and value in our recommendation. The pro of the first recommendation is that the store can retain its current customers, while attracting new customers with the high

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quality private labels offered. Customers will see that the company is trying to do what the customers want, which is providing better and more competitive prices. Reed’s wants to attract the 10% to 15% of customers that currently shop at other stores and with high quality private labeled goods they can do just that (8). Another pro to the recommendation listed above is the ability to position Reed’s as a regular trip store as opposed to simply a fill-in store. The added value of private labels should entice individuals to not necessarily buy in bulk but to make Reed’s their one-stop-shop. Currently, per transaction, Reed’s customers spend $31.48, which is 18% higher than supermarket averages across the nation (6). Increasing private labels will hopefully increase the average transaction of Reed’s customers.

A potential con to this recommendation is that competitors can begin to offer specials on their own private labeled goods, which might end up costing less than those at Reed

Supermarkets. If competitors do this, then Reed’s will have a difficult time selling their private labels. Another con is that Reed’s may not be able to attract the 10% to 15% from their

competitors. Loyalty programs, convenience and habit might keep those potential customers at the stores where they are currently shopping.

Reed Supermarkets needs to do away with the “Dollar Specials” that have been

implemented. It might have seemed like a good way to generate foot traffic, which it did increase store traffic by 3% (7). The company must also ask one question and that is at what cost? The case study stated, “the average price reduction was from $2.70 to $1.50, and since few if any of the items were purchased “on deal,” they lowered overall margins” (7). Reed Supermarkets cannot afford to have even lower margins and that is what this promotional program is causing the retailer. In 2010, the quality index for Reed’s in Columbus was 8.4 while Whole Foods Market’s was 8.6 (11). Doing away with the “Dollar Specials” can keep their quality and image high. One benefit of getting rid of the “Dollar Specials” campaign is that it will separate itself from its dollar store competition. As stated in the case, the offering “…seemed to be too close to the offerings of dollar stores, and several executives worried that this would at least confuse customers, and at worst muddy Reed’s image through association” (7). Reed’s is already having a difficult time regaining market share in the Columbus area and the dollar specials do not help because Reed’s is taking a loss by promoting the campaign. Discontinuing the “Dollar Specials” will continue to promote Reed Supermarkets as being a high-end grocer. A con to discontinuing the campaign is that Reed’s could potentially lose the 3% of increased foot traffic that was brought in and the additional 4% in sales. The increased foot traffic is beneficial, but if customers buy numerous dollar specials, Reed’s is not benefiting in the long run and will be losing money.

Another recommendation for Reed’s Supermarkets is to implement a loyalty/reward program. This could be done via birthday coupons where it is $5 off their next purchase coupon. Also, each time a customer was to scan their rewards card or input their phone number at the checkout line, they would be collecting points. Contingent upon other promotional campaigns

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and Reed’s advertising budget, there can be various reward tiers. When a customer reaches X amount of points, they will receive $5 off their next purchase and when they reach XX amount of points, they will receive $7 off their next purchase. Almost 50% of the 400 Columbus area customers surveyed reported that promotions and coupons that are mailed to the home are important factors when deciding to shop at a given grocer (12). Oftentimes, individuals forget coupons at home or will misplace them, missing out on the opportunity to save a few dollars. Using a phone number at the store or a card can be easily used and will not be left at home. The pro of such a program is its ease of use for customers and the increased loyalty of customers. Whole Foods Market, Trader Joe’s, warehouse stores and dollar stores do not have such a program so that would differentiate Reed’s from their competitors. A potential downside is that Reed’s competitors can implement the same loyalty program if they feel that they will lose customers.

Smaller, yet still specialized stores, can help bring down Reed’s costs. The company should roll out smaller stores going forward. Looking at the square footage of competitor stores and the sales per square foot, if Reed’s attracts and retains customers and provides the experience that Reed’s customer’s desire, the company can do with smaller locations. Aldi locations are typically 15,000 square feet and it is believed that the same store could generate the same amount of sales in a 35,000 to 40,000 square foot supermarket size location (5). It is not the size of the store that is attractive for customers, yet the quality, price and variety of the goods offered. Locating in smaller facilities will allow Reed’s to specialize in private labeled goods and save on rent. Smaller locations can have a negative effect on Reed Supermarkets by swaying customers to the other grocers, dollar stores and warehouse stores because smaller stores might indicate a lesser quality in goods and services.

V. Marketing Plan

The Marketing Plan that our team has proposed for Reed Supermarkets contains target market, product, price, promotion, and place.

Target Market:

We have concluded that Reed Supermarkets will have a target market composed of the middle class and people who are health conscious.

Middle Class Consumer:

We have chosen the new target market to be the middle class because we have

recommended Reed Supermarkets to lower their pricing structure and increase private labels, due to the statistics of the Columbus Ohio market. Columbus's 2010 median income of $52,000 was 11.6% higher than the state average and slightly higher than the national median (2). Also, in December 2010 the unemployment rate was 8.5% compared to the national rate of 9.8% (2). Looking at these statistics, it seems like the Columbus Ohio Market does not have a lot of money

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to spend on groceries or in that case have income coming in to be able to spend on groceries. This fact is why the Dollar General and Aldi, the stores that Collins' visited, seem to be doing just fine and doing better than Reed Supermarkets because of their everyday low prices and people are able to afford them. In order for Reed Supermarkets to compete, they need to make their products affordable to the middle class. Our team also discussed that the only reason that Reed's typical consumer is affluent is because they are the only ones who can afford them and they do not care if Reed Supermarkets has higher prices. In addition, the target market should be the middle class because there is already a crowded upper end of the market (6). It is hard to compete because it is so crowded.

Health Conscious Consumer:

The next aspect of the target market is people who are health conscious. Another key trend is that Americans had also become more health conscious in recent years (3). Since this is a growing trend in America, it would be a perfect opportunity for Reed Supermarkets to

capitalize on the trend. Reed Supermarkets is also known for emphasizing its organic produce and the health conscious consumer would be the consumer who would buy organic foods and produce.

Product:

Our team believes that Reed Supermarkets should continue what it does best - that is to produce high quality products, have great customer service, as well as to place emphasis on their organic produce. We also believe that Reed Supermarkets should expand their health and organic products and departments to fit the needs of their health conscious consumers. Our team also believes that their products and merchandise should be private labels. According to the case, private labeling has been growing and a trend in many supermarkets. Private label foods were 17% of total food and beverage sales in 2005 (3).

Pricing:

Reed Supermarkets should have everyday low prices to fit the budget of their target market - middle class and health conscious consumers. This will also allow them to compete with other stores nearby such as the Dollar General Store as well as other competitors. Promotion:

Reed Supermarkets should emphasize in advertisements on the ways that they

differentiate from their various competitors. As mentioned above, Reed Supermarkets should focus on their strengths of high quality and organic products as well as their exceptional customer service.

Television Commercials: Reed Supermarkets should have commercials on stations like the Food

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Magazines:

We believe that Reed Supermarkets should advertise in health and wellness magazines to reach their target audience of health conscious consumers. The titles of these magazines include

Women's Health, Living, Family Health & Living Magazines, and Organic Living. Direct Mail:

In order to reach their target market and to raise awareness of their new positioning, Reed Supermarkets should send out postcards to their consumers. On these postcards, Reed

Supermarkets should give out special promotions such as double couponing to entice this new target market to the store. According to the case, the loyal weekly shopper has been replaced by a savvy consumer who shopped several different stores and formats in search of the best deals.

Website:

Reed Supermarkets should redo their website to fit their new target market. On their company website, they should have blogs and organic food recipes. Reed Supermarkets will use inbound marketing, like Hubspot, to have their customers come to their stores instead of pushing information on their customer.

Social Media:

Reed Supermarkets should use sites such as Facebook, Twitter, and Pinterest. Like the website, these social media sites could also show organic food recipes. In addition, there could be a campaign where customers can take a picture of their organic dishes and then post and share them on the social media website.

Place/Distribution:

As recommended in earlier sections, we believe that Reed Supermarkets should open smaller stores. This will lead to lowering the current operating costs in the future.

VI. Measurement:

In order to measure our progress, we will measure market share after a couple of months down the line once the new prices have been implemented into the stores. Reed will also

measure the sales they get after the fiscal year. Reed can also measure social media by seeing how many qualified likes or followers on Twitter. Also, we will conduct market research about the demographics of our customers and conduct surveys in order to conduct a perceptual map or a map of what consumers think about Reed Supermarket stores compared to their various

competitors. Since Reed is establishing a loyalty program, we will measure how effective it is be by looking at the data from the program.

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