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Background: Meredith Collins, VP of Marketing, Reed, needs a plan for 2011 to execute to
grow its current market share from 14% to 16%. Margins for error are negligible as
competition has intensified in every segment and current economic conditions arent looking
good.
clean stores and convenient locations. These promotions will drive the increase in customer
loyalty, awareness, choice and will increase the trips to store.
Maintain Current Locations As far as distribution is concerned dont add new stores or
acquire any new store this year. Lot of dollar stores have come up at convenient locations to
consumers but it has made only a marginal impact (increase of 0.05%) on their habit of
regularly shopping at supermarkets, so dont react to it. Additionally there are no plans for
any capital expenditure for next 2 years as market conditions are quite tough.
share of Reeds customer is 8.93% (refer Appendix) as compared to 10% wallet share of an
average customer. Additionally, on average customer in US spends $47.62/trip to a
supermarket and currently Reeds Average Sales Value is $31.42/transaction. This must be
leveraged to increase the average sales value and wallet share. Having said that, it seems
that current downturn has impacted the spending habits of Reeds customer segment.
Competition and Brand Positioning: Reeds main competitor is Delfina, Whole Foods
Market, Galaxy and TopVal. These players together comprise 45.10% of total market and
Reed is leading overall. Since they are in same segment of market (except Top Val), its vital
Reed maintain its current brand equity and position (defending the territory) which has been
built over the years. Whole Foods which is competing with Reed on same positioning in
same segment, but it has only 3 stores and has 1.2 % of market share. Reed need not worry
about them at this stage. As far as threat from Galaxy (supervalu) is concerned, they dont
have good locations and only some stores are marginally profitable. They are in trouble and
its a matter of time when they are up for sale. Reed doesnt need to react to them, in fact
there is a potential for Reed to get some customers from Galaxy.
On competition from TopVal it is positioned as low price player in the middle market
segment. Its very aggressive and is reacting hard to maintain its presence in competition
with Wal-Mart & Costco, this is not sustainable, and therefore there is no need to react to
their everyday low pricing discount roll out. To further defend against competitors, continue
leveraging on better customer experience by providing attentive staff, shorter check out
times, and opening stores for long hours with clean and better lit layouts. Its neither
attractive and nor possible for Reed to move to middle end of market where bigger players
like Costco and Wal-Mart hold the place with total share of 13.46%. Any signalling (using
Game Theory)/movement in that segment can drive the price wars leading to a disaster for
Reed as they have bigger pockets and global capacity to sustain the price war.
On the lower end of market dollar stores doesnt impose any serious threat as they have
combined market share of 1.2% and can reach up to maximum of 3%. They have a different
customer segment and market positioning. Similarly Aldi/Trader Joe has 1.62% of market
share today and can reach up to maximum of 5%. Store like Aldi rely heavily on lean
operating model and efficiency. It leverages private labels (95%) and limited products
(14,000 only) compared to 50,000 in a supermarket) by Reed. Aldi targets niche customers
with low and medium end of price market. In short term it doesnt pose any threat to Reed, in
longer term they can pose some threat as they have the expertise to compete and can grow
aggressively by introducing private labels for high end of market.
Improve Product Mix: Currently 17% of sale is attributed by private labels in food and
beverage and has grown since 2005. Private labels arent perceived a low quality product
anymore because of aggressive campaigning over the years in industry. These are being
used successfully at lower and middle end of price market by Aldi/Joe Traders. It will be wise
for Reed to increase its product mix by increasing their intake of private labels in high end of
products (high price and quality). This will add more choice for consumers along with
branded ones. Negotiate with the bigger suppliers and tell them that they need to
increase/add private label offerings as consumer doesnt perceive them low value anymore.
If they dont come to the party then look for new suppliers in private label category.
Bundling of food and beverages must be done as they complement each other and goes
well with target customer base. This will help in driving the sales and margin. Organic and
prepared food is high margin as a product category and goes well with the health conscious
and affluent people (less time for cooking). So these products need more attractive shelf
space and intake by Reed and it will help in driving the increase wallet share. Organic pet
food is a good way of retaining (loyalty) affluent segment and increasing the trips to store as
they take their pets when they go out for shopping.
Increase Customer Base: Reed need to target to grab at least 1% of market share
($47.15MN) of Galaxy. These stores are poorly located & are in trouble as they cant sustain
these promotions. Addition of more private labels, more prepared food, good customer
service & convenient locations will help in driving the customers to Reed.
Scrap Dollar Special Promotions: Since June 2010, 250 items have been offered on a
dollar special on weekly basis where prices have been reduced by 44% (refer Appendix).
This sale constitutes 4% (12.69 Mn.) of total sales in a week, which is 0.51 Mn/week of
sales. This has increased the traffic in some stores by 3% but each sale is registering a net
operating loss of 76% on these discounted items and decreasing the overall net profit of
Reed for 2010 to 0.4% only (refer Appendix). This is not sustainable from economic point of
view, if this is run for 12 months Reed will make a loss. Secondly from brand equity point of
view it is destroying the equity built over the years. It is sending mixed signals to target
customer segment as dollar stores are nearby. The 3% increase in traffic at some stores is
driven by bargain hunters, which is opposite to Reeds Positioning.
Price: There is no need for change in pricing policy for all products as COGS and Expenses
are built in using economies of scale. Its already a very low margin business (NPM of 1.5%
to 2.5%); further reduction of price (only and having same GM and S&A) will impact the
economic model and the bottom line of Reed. This is also evident from the Dollar Special
Promotions.
Recommendations on Distribution & Promotion dont need further explanation as they are
justified while making the recommendation.
Conclusion: These points above provide the justification for recommendations. Reed must
stay the course on what it has done successfully over the years. This current cycle of
downturn and increasing competition must be used to focus on target segment & defend the
territory and grow on what Reed does well. Reaction like weekly Dollar Special without a
thorough analysis and plan can be detrimental to business. Soon there will be more
opportunities as some players will burn themselves by employing unsustainable practices.