Chasing defectors with discounts won’t restart growth.
Most independent natural products retailers today are losing customers faster than they can replace them. This is the opposite of our history. Throughout the 1970s, ‘80s and well into the ‘90s, natural products retailers held an exclusive—if only because conventional grocers didn’t want or need natural products. This limited availability of natural products forced shoppers who wanted natural foods to travel to local, and sometimes not-so-local, natural products specialty stores.
The seemingly endless-and-increasing flow of new customers into natural products stores created automatic sales gains, year after year after year. Watching this pattern repeat itself for 20 or 30 years, we can understand how independent retailers came to believe that this effortless growth would continue forever.
But, the perpetual sales increases masked a reality of business: customers always leave for one reason or another. And just like every other business, natural products retail stores were losing customers; it’s just that new customers were streaming into natural products stores far faster than current customers were flowing out.
This new challenge for natural products retailers is structural. The flow of customers into and out of traditional natural products stores has changed—probably forever—from a gusher of new customers in—and a trickle out—to a dripping spigot in, and a swirling drain out, because conventional supermarkets have finally reached critical mass in natural and organic products.
Imagine a bathtub. Every bathtub I’ve ever seen leaks water down the drain. No matter how hard you push that little lever, the drain doesn’t quite seal. When the faucet is full-on, and the tub is filling up, you don’t hear the water leaking. But when you turn the faucet off, you hear the faint drip-drip-drip.
Now, imagine yourself in the shower. In an orderly household, people take staggered showers, so that everyone gets enough hot water flow. But if everyone takes a shower in every bathroom at the same time…you get the idea.
This bathtub and shower analogy describes the life cycle of natural products retailing. The bathtub has always leaked, but because we were the only ones taking a bath, we always had plenty of hot water—flow of new customers—filling the tub. Today, we’re taking a shower with every other supermarket in town and…well, it’s getting a bit chilly.
It’s not like we didn’t see this coming. For years, conventional supermarkets made a more or less clumsy effort to carry natural and organic foods, sometimes as a store-within-a-store, other times in-aisle, integrated with the regular items. Can we admit that we watched these efforts while feeling a bit smug because “we know more than they do” about natural products?
But guess what? Conventional grocers’ lumbering efforts are beginning to pay off. Supermarkets now carry enough of the everyday, high-frequency, top-of-mind natural and organic foods so that households dipping a toe in the natural and organic waters for the first time don’t have to travel out of their way to natural products specialty stores.
Adding to the customer-flow squeeze on independents, the new, typical natural products shopper is more casual and less committed than the traditional “core” natural products shopper who launched the natural products movement. In fact, these new folks are not really “natural products shoppers” at all; they are just “shoppers,” beginning to integrate better-for-you foods into their households. These more “integrated” shoppers can pick up a bag of mixed organic salad greens, a half-gallon of organic milk, some hormone-free chicken, trans–fat-free cookies and crackers, non-dairy beverages and—brace yourself—even gluten-free foods, right in the aisles of their regular supermarkets.
Because That’s Where the Food Is
And that is exactly what the new, integrated shoppers are doing. When asked why he robbed banks, Willie Sutton famously said, “Because that’s where the money is.” Well, integrated shoppers shop where the food is: in supermarkets. Now that supermarkets offer enough natural and organic foods, the average independent natural products retailer faces a dim outlook for being able to attract new, integrated foods shoppers.
It is much more likely that a typical 45,000-ft2 supermarket will attract and retain integrated shoppers—who spontaneously pick up a few natural and organic items during their regular shopping trips—before an average independent retailer, with just 2,500-ft2 of exclusively natural and organic products, will.
Add to this the fact that perishables and fresh proteins—meat, poultry, seafood and produce—are the most valuable food categories in shoppers’ minds. These high-value categories, which make up dinner, drive the intention to shop in one store over another. On this score, most independent natural products retailers are at a severe disadvantage to conventional supermarkets. If natural retailers want to stay in the food part of the business, they will have to consider expanding the footprint and the amount of perishables to better compete with conventional grocers.
Bottom line: when it comes to the next layer of growth, the new generation of integrated shoppers will tend to expand its natural and organic purchases right where it already shops for food; in the local conventional supermarket.
Money Down the Drain
In an effort to slow the rate of defecting customers, some natural products retailers are slicing profit margins, offering “deferred discounts,” which is the Internal Revenue Service’s definition of “loyalty” programs. What is interesting to me about the so-called loyalty concept is how quickly it has deteriorated from its original design, which was to track customer purchases, analyze those purchases and then create tailored offers based on those purchases.
Loyalty marketers know that the Track/Analyze/Offer model is the only thing that separates loyalty programs from straight discount programs. But loyalty marketers also know that small retailers—those with less than several hundred stores—don’t have the time or skill to do the analysis themselves, and don’t have a large enough customer base to justify the expense of hiring the highly skilled analysts to create and evaluate offers.
If all the retailer is going to get is a straight discount program, why does he or she need to pay a third party to seize proprietary customer data and mail out a reward coupon? For the fancy postcard? For the electronic database? To feel modern?
It wasn’t that long ago that some natural products retailers kept a little index card file with the punch-cards of customers who were participating in the store’s frequent-buyer program. Every $10 or $20 purchase got a punch, and when the card was full, the customer got a discount reward. While I never thought these were great ideas, at least they were simple and inexpensive to administer. And, at least you got to keep your customer list to yourself.
Discounting to existing customers won’t bring in new customers, who are the key to sustainable sales growth. And, discounting won’t stop customer attrition. You’ll just make less money.
Winning New Customers
As we’ve said for several years at Retail Insights, bad ingredients are out and good ingredients are in. Natural and organic foods will continue to grow and, by the year 2030 or 2040, good ingredients will make up the majority of total food-store sales. That should increase the size of our industry tenfold, or by $350 billion, adding an average $3.5 million in sales for each of the 10,000 independent natural products retailers in existence today.
In our view, the only two questions are what is the size of the box? (Answer: For food stores, anywhere from 10,000 to 30,000 ft2), and who owns the box? (Answer: Anyone with the gumption.)
The average independent natural products retailer still has a viable business model selling supplements with some foods. And, independent retailers can improve their competitive stance against supermarkets by—carefully!—adding perishables departments. But because the flow of new customers has been siphoned off by conventional supermarkets, traditional independents need a plan to generate new customers.
There are several ways to get new customers in your door, all involving communicating your message. And this is where the average independent natural products retailer is weakest. What is your message? Good customer service? That’s not specific enough. What is it about your customer service? What are you willing to do that your competitors won’t do?
Answering this question honestly eliminates discounts because every one of your competitors can cut a price as easily as you. Independent retailers offer value. Otherwise, they would be out of business. Taking the time to figure out where your value comes from is the first step toward attracting new customers. Your message makes a difference. But first, you must believe that you add value to your customers, and maybe that’s the hardest thing to do. WF
Jay Jacobowitz is president and founder of Retail Insights®, a professional consulting service for natural products retailers established in 1998, and creator of Natural Insights for Well Being®, a holistic consumer marketing service designed especially for independent natural products retailers. With 31 years of wholesale and retail industry experience, Jay has assisted in developing over 800 successful natural products retail stores in the U.S. and abroad. Jay is a popular author, educator, and speaker, and is the merchandising editor of WholeFoods Magazine, for which he writes Merchandising Insights and Tip of the Month. Jay also serves the Natural Products Association in several capacities. Jay is next scheduled to speak in Orlando, FL at SOHO on December 3 at 7:30 p.m. on “How to Get New Customers into Your Store.” He will also be on the panel, “Finding Our Blind Spots” on December 4 at 3:30. Jay will be available at Booth 304. He can be reached at (800)328-0855 or via e-mail at firstname.lastname@example.org.
Published in WholeFoods Magazine, Nov. 2009