1. Swot Analysis
2. Should Collins continue with the dollar specials campaign? What is the financial impact of this decision?
3. Problem Statement
JUNE 17, 2011 JOHN A. QUELCH
CAROLE CARLSON Reed Supermarkets:
A New Wave of Competitors
At 4:30 p.m. on December 6, 2010, Meredith Collins, VP of Marketing for Reed Supermarkets,
walked down the sidewalk of the 10-store strip mall that housed Reed?s Westgate Plaza branch in
Columbus, Ohio. Collins didn?t shop; instead she took mental notes about store traffic, first at the
Reed store and then at an indirect but increasingly worrisome kind of competitor?a dollar store.
The Reed was predictably well lit and inviting, and Collins could see three registers open and two or
three customers in line at each. ?Not too bad? she thought, ?but not what I would hope for at this
time of day, this close to the holidays.? She?d felt the same way at two other Reeds she?d visited that
Collins walked on to the Dollar General (DG). A fairly steady stream of shoppers entered DG?s
doors, their progress slowed by families exiting with plastic bags jammed full. When Collins looked
inside, she noticed workers filling what was obviously a new freezer case?the first freezer she had
seen in a dollar store that day. This DG was doing just as well, to judge from this glimpse, as the
Family Dollar she?d walked past half an hour earlier at North Valley?but no better than the Aldi
store she had visited in the morning. That Aldi trip was interesting: a bright and spotless minisupermarket, run by a giant firm from Germany that carried one-tenth the food items that a Reed did
and sold virtually no brand names, only private-label?but still posed a threat to Reed due to its
remarkably low prices.
As she drove out of the parking lot, thinking back to last week?s discussions with the management
team about the newest threats to Reed?s position as a leader among the region?s supermarkets,
Collins wondered how Marketing could target competitors like DG. It seemed clear to her that dollar
stores and Aldi both were taking bites from the Columbus region?s family food budgets. Moreover,
as she recognized from the diverse range of advice provided by her management peers at Reed,
defending against these competitors would not be as clearcut a mission as positioning Reed versus
other area supermarkets?or even against WalMart and Costco?had been. Nevertheless, with all
these competitive challenges, Reed CEO Jack Morrissey had held firm in his mandate that Reed
needed to grow its Columbus share in the coming year. Collins frowned as she drove to another strip
plaza to look around.
HBS Professor John A. Quelch and writer Carole Carlson prepared this case solely as a basis for class discussion and not as an endorsement, a
source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any
resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration.
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Harvard Business Publishing is an affiliate of Harvard Business School. Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 4296 | Reed Supermarkets: A New Wave of Competitors Company History
Reed Supermarkets was established in 1939, when William H. Reed opened his first grocery store
in Kalamazoo, Michigan. By 1960, Reed operated 25 stores in Michigan and Illinois; by 1980, Reed
had purchased two medium-sized chains serving Ohio, Indiana, and Wisconsin; and by 2010 the firm
had grown to encompass 192 retail stores, two regional distribution centers, and 21,000 employees in
five states in the Midwestern United States.
While Reed had started as a lower-end retailer 80 years ago, it had continually expanded and
upgraded its stores, adding new departments and expanding higher-margin offerings like prepared
foods and flowers. For two decades, Reed stores had been considered high-end in the supermarket
business. In addition to a full assortment of standard groceries, baked goods, meats, seafood, paper
goods, and health and beauty items and a pharmacy, a typical Reed?s featured a vast case of mostly
fresh seafood, including live lobsters and crabs; imported packaged goods ranging from 27 kinds of
mustard to three different brands of snails; and an array of 20 different prepared entrees available for
takeaway. The chain was well-known for the quality of its produce and its emphasis on organic
produce. Reed also differentiated itself by offering attractive stores, long hours, elegant (and often
creative) serving-case displays, and exceptionally attentive customer service. The checkout clerks
wore distinctive red aprons, greeters offered free cookies to customers on the weekend, high staffing
levels ensured short checkout times, and runners shuttled bags to customers? cars?no tipping,
please. The Columbus Market
The Columbus, Ohio, market was relatively stable, but Reed had experienced modest share
declines in the past?which was why Collins had taken a week away from the home office to eyeball
shopping centers there. The Columbus metropolitan area, where 25 Reed stores were located, was the
third-largest in Ohio, with a population of about 2 million. Columbus?s 2010 median household
income of $52,000 was 11.6% higher than the state average and slightly higher than the national
median. Population growth from 2000 to 2009 was 11%, slightly above the national rate of 9%, and in
December 2010 the unemployment rate was 8.5% compared with the national rate of 9.8%
The fight for market share among grocery retailers in Columbus was intense. The metro area
contained outlets of three large supermarket chains as well as some smaller regional chains and
independents, including lower-priced TopVal, mid-range Galaxy (owned by large player Supervalu),
and top-range Delfina. Also in the competitive mix were three Whole Foods Markets, concentrated
mainly in the city?s affluent suburbs; 10 discount stores that included large food markets (five
WalMart Supercenters, four Target Superstores, and one regional chain); and five warehouse-club
outlets (three Costcos and two Sam?s). (See Exhibit 1.) The area thus reflected dramatic changes that
had occurred in the U.S. food retailing industry in the past few decades. Many of those changes had
made it more difficult for conventional supermarket chains to prosper. Despite this, Reed continued
to attract higher-end shoppers in the Columbus market?the median income of a Reed shopper was
12% higher than the area household average. The U.S. Food Retailing Industry
In 2010 the average American household spent $5,200 annually on grocery items and made 2.1
supermarket trips weekly (2009 had been a difficult year for food retailers, with food-at-home prices
increasing by only .05% according to the Bureau of Labor Statistics). In the 12 months ending April
2010, the consumer price index for food at home was flat.
2 BRIEFCASES | HARVARD BUSINESS PUBLISHING Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 Reed Supermarkets: A New Wave of Competitors | 4296 Several important consumer trends had shaped the industry over the past decade. First, there had
been a significant dwindling of customer loyalty. Traditional supermarkets could no longer count on
the loyal weekly shopper, who had been replaced by a savvy consumer who shopped several
different stores and formats in search of the best deals. The growth of warehouse and superstores
had attracted bulk-buying budget shoppers, while low-priced promotions drew consumers to specific
supermarkets, discount merchandisers, and dollar stores. In fact, supermarket poll data showed that,
relative to shopping habits a few decades earlier, when the weekly trip to the supermarket was
typical, only 40% of all shoppers made regular stock-up trips once a week, while 60% made regular
fill-in trips, purchasing 11 items or fewer, at least weekly.
A second seismic trend had been the growth of private label merchandise. Private label foods
were 17% of total food and beverage sales?up from 14% in 2005. Seeing the higher margin potential
of private label goods, retailers had worked aggressively to market these products and had been
reasonably effective at shedding the lower quality image many consumers had perceived.
Another key trend: American consumers had also become more health-conscious, and this had
enabled the growth of stores such as Whole Foods, as well as the expansion of health and organic
departments or product selections at conventional supermarkets like Reed.
Food retailer margins were low (with a few exceptions), so individual company profitability
depended on maintaining high sales volume and operating efficiency. Larger operators could offer
wider product selection and had scale advantages in purchasing, distribution, and marketing.
Smaller companies could compete effectively on location, product specialization, and customer
Supermarkets were the most widespread type of food retailer and the longest established. For a
few decades, supermarkets encountered competition mainly from other supermarket chains, but by
the 1980s new competitors?including warehouse clubs and supercenters like WalMart?had
forcefully entered the scene, driving supermarket chains such as Reed to new kinds of competitive
Specialty grocery retailers like Whole Foods and Trader Joe?s (owned by a German trust)
expanded dramatically in the early 2000s. The same period saw the emergence or expansion of
multiple lower-end channels, including the introduction of food items at traditional drugstores like
CVS or Walgreens, the entry by dollar store chains into food sales, and the expansion of food
selections at gas station mini-marts and convenience stores. All of these competitors helped to
threaten supermarkets? traditional dominance of the American grocery dollar.
Supermarkets had complex, collaborative relationships with food manufacturers. Large
companies such as General Mills, PepsiCo, and Nestle were major suppliers and participated with
retailers in trade promotions. The growth of private label products had created more pressure from
the manufacturers to promote branded products (although many manufacturers also produced
private label products), and during the economic downturn tensions had emerged as supermarkets
pressed manufacturers to reduce prices to improve customer retention while manufacturers
promoted product innovation in an attempt to increase share while maintaining margins. Supermarkets and the first generation of competition
Supermarkets evolved in the 1950s and were widespread in the United States by the 1960s. The
U.S. supermarket industry in 2010 was relatively concentrated, with the 50 largest companies
generating 70% of revenue. Curiously, no major player was present throughout the country, but
near-national brands like Kroger, Safeway, and Supervalu had large footprints, and they competed
with regional chains like Reed and a shrinking number of independent retailers.
HARVARD BUSINESS PUBLISHING | BRIEFCASES Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 3 4296 | Reed Supermarkets: A New Wave of Competitors A typical supermarket averaged about 46,800 square feet, carried nearly 50,000 different items,
and generated weekly sales of $485,000. Supermarkets generally served customers who lived within
a one- to three-mile radius, making store location selection a key driver of any chain?s profitability.
With net profit margins typically in the 1.5% to 2.5% range (lower for troubled chains), there was
little room for error in marketing and merchandising.
Traditional supermarkets distinguished themselves on selection, with nearly all offering a
complete range of departments such as in-store bakeries, seafood, meat, cold cuts, produce, various
packaged foods, cleaning products, health and beauty aids, and other departments. While these
departments created value by offering one-stop shopping, during difficult economic times, such as
the downturn of 2008?2011, consumers tended to opt for value over such convenience. Supercenters
In the 1980s, supercenter stores?large discount department stores that stocked both general
merchandise and grocery items?grew quickly. First WalMart and then Target exploited the
opportunity to use groceries to drive additional traffic and general merchandise sales. WalMart?
already the nation?s largest retailer?became the leader in food retailing as supercenter growth
accelerated during the 1990s and continued to grow through the early 2000s.
The food section of a typical supercenter featured décor and organization like a typical
supermarket but was much bigger, commonly occupying nearly 70,000 square feet of a 170,000
square foot store. Typically housed in large free-standing buildings in suburban areas, they provide
convenient one-stop shopping for multiple needs and were notable for prices below those of standard
supermarkets. Despite longer travel times (supercenters might be 5?10 miles away), the concept
resonated with cost-conscious consumers. Warehouse clubs
This segment was dominated by Costco, Sam?s Club, and smaller BJ?s Wholesale Club. These
stores looked more like airport hangars than supermarkets; most items were merchandised straight
from manufacturers? packing crates stored on gray industrial shelving. Most carried one brand of
soup, one brand of butter. With retail prices as much as 20% below conventional supermarkets, yet
similar operating profits, these no-frills providers drew a wide range of customers. Although
merchandise was often bulk-packed (six boxes of pasta, two to four jars of spaghetti sauce), an idea
obviously inviting to large, middle-class families, many of these warehouse outlets also drew smaller,
prosperous families with large homes (and large storage areas)?that valued the opportunity to buy,
say, six months? worth of paper towels at a discount price. They also drew small business owners. The second generation of competitors emerges: Dollar and limited selection stores
Dollar stores. The dollar store market was dominated by three large chains?Dollar General,
Dollar Tree, and Family Dollar?that together accounted for 60% of the category. The 33,000 dollar
stores in the U.S. sold a mix of packaged food, housewares, clothing, seasonal items, and other
general merchandise often priced at $1 per unit or at low-dollar multiples. The typical size of dollar
stores was 7,000 to 10,000 square feet, and net sales per square foot ranged from $158 to $190 in 2010.
With an average total shopping ticket of $7 to $10, dollar stores targeted a different kind of
shopping expedition?a fill-in trip instead of a full grocery run. Dollar stores typically devoted an
aisle or more to food lines, and included a very limited range of breakfast cereals, canned meats,
cookies, snack food and other packaged items, including a mix of national and private brands. They
also competed with supermarkets and drugstores by devoting significant space to selling a wide
4 BRIEFCASES | HARVARD BUSINESS PUBLISHING Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 Reed Supermarkets: A New Wave of Competitors | 4296 array of paper products, cleaning supplies, and lower-priced health and beauty items. Some dollar
stores had started to offer refrigerated dairy products and were beginning to stock frozen food items,
but virtually all avoided perishables such as produce items and meat. A limited range of brands and
a high proportion of merchandise bought ?on-deal? as closeouts or overstock, as well as low
operating costs, enabled dollar stores to operate with a lean cost structure. This cost structure was
often apparent in the cluttered feel of the stores, lower maintenance levels, and sometimes haphazard
stocking, but consumers seemed willing to overlook these liabilities if prices were sufficiently
attractive. With average gross margins of 32% and SG&A margins of nearly 24%, major players
maintained net margins of over 8%?vastly better than the roughly 2% that most supermarket chains
earned. (See Exhibit 2.)
While their core consumer was a low- to middle-income earner, dollar stores did not rely
exclusively on these buyers. A recent survey had found that 65% of consumers with households
incomes under $50,000 had shopped at a dollar store over the previous six months, and 47% of
households with incomes over $100,000 had done so as well. The threat these markets posed was
limited. Meredith Collins had seen research from the Grocery Retail Industry Association comparing
markets nationwide which demonstrated that dollar stores, once they were well-established in a
market, occupied a niche position and never seemed to rise above 3% market share even after these
stores expanded their food offerings. But Collins also knew that supermarkets could not afford the
luxury of dismissing dollar stores as a minimal threat.
Limited selection stores. Limited selection retailers, a rapidly growing category, had smaller store
formats and typically specialized in private label food items?particularly staples. They may offer
produce and baked goods but typically do not have in-house meat departments or bakeries. An
example is Trader Joe?s, with 353 stores nationwide and $8 billion in annual sales. With store sizes
averaging 8,000?12,000 square feet, a limited inventory of about 1,500 items per store (85% private
label) and an emphasis on imported and specialty food items, President Doug Rauch boasted in 2001
that his chain had ?the highest sales per square foot of any grocery chain in America.? Owned by a
German-based trust that also owns the Aldi chain, Trader Joe?s had maintained a specialty store
image while managing to increase its margins through an efficient operating model and its private
Limited selection stores had also expanded at the lower end of the market. Famously low-priced
German operator Aldi entered the United States in 1976 and by 2010 had grown to over 1,000 stores.
Well known for a very lean operating model, Aldi targeted efficient operations and high volume (a
15,000 square foot Aldi could generate the same sales as a 35,000 to 40,000 square foot supermarket.)
Like Trader Joe?s, Aldi relied on a high proportion of private label merchandise (95%), a limited
selection (1,400 items), and heavily discounted prices vs. conventional players. A typical Aldi
combined the clean, bright, pleasant ambience of a modern supermarket with the no-frills, out-of-thecarton presentation of a warehouse club. (Exhibit 2 compares estimated Aldi?s margins with those of
dollar stores and Reed.) Similar to dollar stores, research indicated that limited selection stores?
market share appeared to be capped at 3%?5%. But Collins realized that if well-funded players like
Aldi opened new stores aggressively they could be in a position to top that estimate. Reed?s Position in Columbus: 2011
Meredith Collins believed that Reed?s competitive position was challenging, but she was
encouraged by the fact that the company had continued to grow revenues by an average of 1% to 2%
per year across its markets. Reed had worked hard to maintain margin over the past decade by
adding specialty items, widening the selection of higher-end prepared foods (e.g., salmon fillet with
crab stuffing), increasing the private label mix, and using weekly promotional specials to drive traffic.
HARVARD BUSINESS PUBLISHING | BRIEFCASES Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 5 4296 | Reed Supermarkets: A New Wave of Competitors The company had expanded the chain by two to three new units per year in areas that promised
above-average population growth, and these stores had achieved similar margins to existing stores
within two years. In Columbus, Reed had added no new stores and none were planned.
Reed led food retailers in the Columbus area with a 14% market share. This number had remained
stable for two years, although it was slightly lower than the 15% Reed had held five years earlier?a
decline that Reed executives attributed to the peak in encroachments by superstores and warehouse
stores. Even so, Reed?s CEO had set a Columbus market share target of 16% by 2011. Collins
described Reed's positioning strategy in the Columbus market: "We have always emphasized quality
and service in our operations and advertising. Our problem is that, as a result, many consumers
perceive our prices to be high." A monthly tracking study (see Exhibit 3), which used consumer
interviews to develop a price and quality index for the major chains in the market, appeared to
support this analysis. A second study (see Exhibit 4) showed that prices were, in fact, higher at Reed.
Because of this, and their full service offerings, Reed?s average sale value per transaction of $31.48
was 18% higher than the national supermarket average.
Each of Reed's major competitors in the Columbus market had slightly different positioning. Like
Reed, Delfina was considered high-end, with large stores offering a balance of conventional and
gourmet/organic items, above-average service, and a bright, clean ambience. The Galaxy chain,
owned by near nationwide chain Supervalu, also advertised weekly price reductions on selected
items. Many of its stores, however, were old, poorly located, and only marginally profitable. It was
rumored that the chain was considering selling some or all of its Columbus stores. TopVal followed a
different pricing policy. Rather than offer deep discounts from regular list prices on a narrow range
of items each week, they offered everyday low prices; up to 2,000 high-turnover items, often
including several brands in the same product category, were continually offered below regular list
price. TopVal was headquartered in Columbus, and Collins believed its management would be
aggressive in attempting to maintain its market share if challenged.
At the upper end of the market, Collins was also worried about the entry of Whole Foods Market.
It currently had three stores in the metro area, two of which had been added during the past five
years. Although their market share was a low 1.2% (see Exhibit 1), Collins was unhappy about their
encroachment on the already crowded upper end of the market where it played along with Delfina.
But, she also knew that Whole Foods had dramatically slowed their expansion, so she was willing to
put her concerns on the back burner while she focused on more immediately troubling competitors,
like dollar stores, that were expanding rapidly and targeting price-sensitive buyers.
Reed had conducted extensive consumer research and this data, coupled with data mining from
its loyalty program, had learned much about its customers on both a store and market level. Across
all markets, a Reed customer was somewhat older, more affluent, and had a smaller household size
than the typical consumer. Curiously, pet ownership was 20% higher than average among Reed
shoppers, supporting the company?s decision to carry three lines of organic pet food.
In mid-2010, Reed had surveyed Columbus consumers (those that were principal food purchasers
in their households.) and found that 61% of respondents reported they were conveniently located
near a dollar store ?vs. 36% five years earlier. However, the likelihood of regularly shopping at
these retailers had increased only marginally?from 7.5% to 8% in Columbus according to consumer
surveys. Similarly, customer intent to shop at supercenters and warehouse stores had also stabilized.
Customers less interested in these alternatives cited inconvenient store locations and a lack of service.
This seemed to confirm market research from the Grocery Retail Industry Association that Collins
had seen indicating that, at best, warehouse stores and supercenters could expect to capture a 17%
share in a market like Columbus. Likewise, dollar and limited selection stores together were thought
unable to achieve more than 8% share because of their limited offerings. But Collins knew that these
6 BRIEFCASES | HARVARD BUSINESS PUBLISHING Downloaded by Andrea De cassan on 11/29/2015. Nova Southeastern University, Dr. Russell Abratt, Fall 2015 Reed Supermarkets: A New Wave of Competitors | 4296 low-cost competitors had drawn away customers during the...
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