From sustainability to digitalization, businesses in consumer goods, retail, and agriculture face a variety of challenges. Discover how Roland Berger can help.
Higher revenues with ultra-fresh produce
Why supermarkets and hypermarkets should not close deli counters and in-store restaurants even in times of crisis
Despite the continuing threat of inflation and cautious consumer sentiment, ultra-fresh produce remains important for the long-term profitability of supermarkets and hypermarkets. Retailers that cut out their ultra-fresh food offering will in the medium term lose a high-value customer segment – and crucial competitive edge against food discounters.
Food retail is in the midst of a deep crisis: For the first time in years, stores the length and breadth of Europe are reporting a decline in real revenues. Although the current troubles can undoubtedly be attributed to the price rises caused by the war in Ukraine and the reduction in consumers' purchasing power, the direction of travel is not entirely new: Over the last ten years, footfall in Europe's supermarkets and food discounters has been declining steadily – by an average of 1.6% per year.
Numerous food retailers paid insufficient attention to this decline. For a long time, the vast majority of supermarkets were able to offset the fall in the number of shopping trips with higher revenues per trip (+2.2% CAGR per year). But this is increasingly difficult in the current market. Customers are more cautious about their spending and are tending to leave higher-ticket products on the shelves.
Many brick-and-mortar stores are thus facing an existential challenge: If they do not manage to halt the negative trend in store visits, revenues will come under even greater pressure. Fewer shopping trips mean less customer contact and loyalty, and fewer opportunities for supermarkets and hypermarkets to differentiate themselves from online providers and discounters.
Supermarkets are already testing various approaches to counter the declining footfall trend. Among the most widely discussed are options for customers to order online (and collect in-store, i.e. click and collect), new marketing campaigns, and increased advertising or new customer loyalty systems. All of them have their justification. But there's one important customer magnet that is systematically underestimated: ultra-fresh foods as a category (especially meat, sausage, cheese, and fish).
A direct comparison between customers who only buy self-service produce from the ultra-fresh range and hybrid customers reveals some very interesting facts: Hybrid customers not only buy regularly from deli counters and in-store restaurants, they also visit the supermarket 50 times more often per year on average. As a result, hybrid customers generate a total of around EUR 1,200 in additional revenues per year (+30%).
Customer surveys also confirm the importance of ultra-fresh produce. In addition to low prices, the most important decision-making criteria for the majority of consumers are a wide selection and the quality of the produce. Research also indicates that "perceived choice" correlates very strongly with the visibility of ultra-fresh produce. Accordingly, a greater offer of meat, fish, sausage, and cheese at the deli counters trumps a greater depth of assortment on the refrigerated shelves. Supermarkets and hypermarkets that fail to exploit their potential around quality and freshness are purposely forgoing this important competitive advantage.
Of course, the cost structures of supermarkets and hypermarkets mean that they cannot lower their prices to discounter levels without sacrificing profitability. Supermarkets cannot afford a price war in key value items, for no other reason than that their personnel costs are significantly higher (5-10%). And even if it were possible to gain ground on the discounters, it would come at the expense of innovation and investment – often the main USPs of supermarkets and hypermarkets. Costly restructuring and capital investments would then be more or less unavoidable.
The ultra-fresh business case: More shopping trips, more customer loyalty, more revenues
With a successful ultra-fresh strategy, existing customers who buy only self-service produce from the ultra-fresh range can be developed into hybrid ultra-fresh customers in a first step. Our experience indicates that a revenue share of 12% for deli counters and in-store restaurants is in the lower range of the achievable target. But if a retailer applies targeted category strategies in a way that convinces customers, a 20% substitution effect can be achieved in self-service produce in our experience. This results in potential to increase revenues by at least 10% on a store-specific basis. That does not include possible spillover effects on other FMCG categories. Nor does it include the increase in the number of shopping trips and the resulting growth in competitive differentiation and customer loyalty.
One aspect that is often forgotten is the fact that deli counter and restaurant produce also tend to be carried less by the big brand manufacturers and often come from smaller and/or regional suppliers. Relying on them thus automatically reduces a supermarket's supplier dependency and increases the diversity of their assortment. In short, supermarkets primarily create their brand identity themselves at the deli counter and in-store restaurant. From the supermarket retailer's point of view, this is an advantage that should not be underestimated – especially in times of escalating conflict with suppliers over rising production and logistics costs.
The current tight situation in the food retail market makes implementing ultra-fresh strategies difficult. But it would be a mistake for supermarket retailers not to fully exploit the potential of this segment. In our view, there are three key prerequisites for a successful ultra-fresh strategy.
- Increase profitability: Given the intensifying price war, it would be a mistake to ignore profitability considerations. The good news is that, according to our experience, shopfloor productivity at deli counters and in-store restaurants can be increased by 25% with a broad package of measures. The key is to optimally plan the required space (back of house as well as in the service area), use hybrid display counters, optimize counter depths, and have adequate staff training (to reduce waste, among other things).
- Consider individual customer needs: Successful strategies are those that align the product offering at the deli counter and in-store restaurant with the specific needs of the customers. This means that the depth and breadth of the assortment, as well as regionality and sustainability aspects, must be in line with the preferences of the core customers in whatever region the store operates in. This is crucial for retailers to be able to establish the all-important regional and local connection and increase the loyalty of their customers. A 70% national, 30% regional, 20% local product mix has proven successful in most cases.
- Meet best-in-class standards: Ultra-fresh food offerings will only have the chance of success if they clearly stand out from the cut-price offers. This goes for the choice of location, category planning, and the entire purchase process and customer service (counter technology, weighing systems, price labeling, staff training). And of course, offering fresh, quality produce must always be top priority.
Sign up for our newsletter
Further readings