Podcast | Customer First Business Practices for Inflationary Times

Dave Clements (00:00): Hello everyone, and welcome to our next episode of the dunnhumby Customer First podcast. Today’s episode is all about one of the big challenges facing retail industry today and consumers, as we enter into 2022, and that is inflation. My name is Dave Clements, I’m the retail director at dunnhumby. And today I’m delighted to be joined by David Ciancio, our head of grocery at dunnhumby. And we’re going to share a little bit about our perspectives and what we’re seeing in the marketplace across the world around inflation. Welcome, David.

David Ciancio (00:46): Thank you, Dave. Thanks for having me. And this was such an important topic, isn’t it, for shoppers, for retailers, and even for service providers like us. I think it’s the most extreme inflation that our shoppers have seen, not only in a decade, but in some parts of the world, in four decades.

Dave Clements (01:09): I think that’s right. And obviously it’s a topic that maybe as retailers and as service providers, we haven’t been used to, used to dealing with for a number of years. So, we’ve almost got to make sure we can use those memory muscles, use those tactics that we’ve used in the past, and different strategies that may be more relevant today, to really tackle these challenges.

David Ciancio (01:32): I think that will be one of my messages is that these are extraordinary times just given that inflationary rate, on top of having coming out of a COVID pandemic. So, these are extraordinary times. They require an extraordinary kind of leadership. And one element of that leadership is absolutely the application of customer data science. I think that’s the only way clear forward. And we’ll give some examples as we go through.

Dave Clements (02:03): Well, maybe let’s start a little bit talking about the consumer. What are they seeing at the shelf edge? What sort of impact is it having on them? What sort of things are consumers trying to do to tackle inflation? We do some consumer pulses. What are we seeing? What are we picking up when we talk to consumers about what they’re doing to really try to mitigate inflation?

Tackling the impact of inflation

David Ciancio (02:27): Sure. Well, to set the scene just a little bit. Food prices around the world have continued to climb. As I mentioned, this might be the highest level of food price indexes in at least a decade. And that percentage of inflationary price increases is hovering around 5%. Now, historically that’s the tipping point. 5% is around which shopping buying habits and behaviors start to change for shoppers. That’s changed again, after the pandemic. Our pulse research says that shoppers are worried. And so, nearly two out of three feel that their country’s economy is weak, and about 50% see their own personal finances as challenge.

So, these economic pressures at a very personal level and the household level, really continue to persist. In short, Dave, customers are worried.

Dave Clements (03:30): Yeah. And of course, certain customers, I guess the more price sensitive customers, certainly having to take many more different actions to really manage their weekly food budget and how they’re spending money. I guess those customers particularly, and the families, really being hit hardest with at the moment.

David Ciancio (03:51): Sure. And just to name a couple of those groups, if you will. Throughout the pandemic, we saw the number of value seekers, so customers who defined themselves as seeking values and then indicating the kinds of behaviors that show value seeking. So, the number of value seekers far outnumbered the number of quality seekers. In fact, the value seekers were 71-72% of all shoppers that we talk to, amongst the thousands around the world. Whereas, quality seekers are only about 19% of customers. So, clearly value is top of mind. And now with this inflation, will remain top of mind.

Dave Clements (04:38): So, some of those value seeking strategies, what sort of things are consumers doing? Are they cutting back their spend in certain areas? Are they shopping differently? Are they looking for different types of products? What are some of the things that you’ve noticed?

Finding value in the shop

David Ciancio (04:52): Yeah. Specifically they tell us that they’re actively looking for lower prices, and that’s within brands or between national brands and private brands. One. Two, that they’re shopping formats or stores or brands that have more of an everyday low price, kind of a value proposition every day. Third is, they are shopping hard and looking at promotions, they’re trying to manage the total basket cost. So, even if individual prices are promoted and are inexpensive, our shoppers are thinking about the total basket cost. And they’re looking for value. There’s another form of value and that is time and convenience. So, that’s helped create that tipping point around the use of digital, and click and collect, and online shopping, and so forth.

So, I think it’s a really interesting time of customers asking for help from retailers, to make finding good value prices easier, to make promotions simpler, to make the channels easier to shop, so they can meet those value needs.

Dave Clements (06:11): And it strikes me as well that they’re looking for retailers to play a little bit of a broader role in some sense, because as we know, the pandemic has hit the hospitality industry very hard. And I don’t think with inflation looming again, one of the strategies that a number of consumers will be thinking about is, well, I’ll continue to spend less money eating out. And maybe the supermarkets can play much more of a role to meet that need. So, I’ll cook at home more still, and I’ll look to treat myself through shopping for the right sort of items in the supermarket rather than necessarily going out to restaurants. And I think we might see that continue. It’s happened through the pandemic because it’s consumers have been forced into it, but in a way they may just continue to drive those same behaviors because of the impact on inflation. And they may see it as another value seeking strategy, eat at home or keep that going.

David Ciancio (07:11): Yeah, I think that’s right. And the evidence is showing that. Although in some countries, we’re seeing a return to the restaurants and some good growth there. But I think what’s important to remember is that, there’s still a large percentage of the population that remains vulnerable to both the pandemic. And now they’re economically vulnerable too. In the UK and in the US, that’s up to 25% of shoppers, by age, by exposure, general health. But certainly because there’s so much pressure on the pocketbook. So yes, more spending in the stores for more cooking at home.

Dave Clements (07:52): And what are some of the successful strategies that retailers are starting to adopt to really lean into this challenge of inflation? What are we seeing? And you mentioned at the top how customer data science can play a role, how are some of the retailers using customer data science to help them to meet the challenge, and meet customer needs in this space?

A time to reset, rethink and reinvent

David Ciancio (08:15): I start answering that by saying that I don’t think that retail will ever be able to go back to the way it used to be prior to the pandemic and prior to this inflationary period. It ain’t going to be like it used to. So, this is a time to reset, to innovate for the future, and to think about how these shopping patterns and behaviors have changed. So the first number one step is, I think retailers must refresh their customer understanding. So, they have to reexamine their foundational, both data analysis and assumptions about how people have shop, so many things have changed. So, look at the data again and refresh what we think we know.

And then on top of that and related to it, but step two is to review the customer strategy. We have to ask ourselves, are we still focusing on the right strategic group of customers? Has there been a shift for example, to more value seeking or price sensitive customers? We see evidence that there has been. And then do we need to change the commitments that we make within our value proposition or our customer promises? So, I see statements every day, like fair prices every day. Is that a commitment that needs to be underlined? Do we need to think about how we talk and then how we set pricing strategy in the store, for example, based on customers. So, those are the first two, Dave. And if you want me to go on.

Dave Clements (09:55): No, that makes a lot of sense.

David Ciancio (09:56): Sure. And then there’s the grittier decisions. So, this is a time to look at categories again and ask ourselves if we’ve got the right range and really, especially now given even the supply chain shocks that have happened throughout the pandemic and now with inflation, in fact, and causing some of this inflation, we think, you and I know, think that this is a great time to reset categories. Those are very significant ways that retailers can help mitigate the effects of inflation and then mitigate even passing on inflation. So, this is about making the range work harder, to save cost to serve. You mentioned that at the top. And improve value perception. It’s about looking at all these items that are highly substitutable and just simply not carrying so much of those.

Dave, there’s so much behind this that I think changed. Just to give you one other example. I don’t think that customers are going to want to spend as much time in the store. We saw that throughout the pandemic, and we’re still seeing that in the data now, part of what’s driving online and click and collect. Because there’s more exposure, because shopping was always a chore, which means that the store just has to be easier to get through. So, looking at the range in the right way.

Dave Clements (11:27): Easier to get through the store. A really good experience when you’re in the store. The basics are right, great availability. Because you’ve got the challenges well of supply chain shortages and labor shortages. But when customers are there, they’re going to expect great availability. So, these basics are going to be really important. And I was going to add as well. I mean, obviously we talk a lot about, and people can talk a lot about optimizing prices, optimizing promotions. Again, just resetting the KBIs is really important, and reestablishing and reviewing have you got the right KBIs that are the right lines for the right types of customers, the price sensitive customers. Doing that, and generally investing a little bit more towards EDLP away from promotions, would be the right strategy to start adopting now.

Promotions always have a role, but now’s the time to certainly double down on more everyday low price to really help customers. And off the back of that, some further investment in private label, I think.

David Ciancio (12:31): I couldn’t agree with you more, around the role that getting the range right matters for customers. But it also matters for the operators. And we just had a client of ours, to your point, reduce the amount of promotions by 8%. Not only did they get more credit from customers for having better value, because in reducing those promotions, they converted those into everyday soft prices. Customers gave credit and customers gave more of the customer more of their spend. But also on the operations side, it reduced about 26% of the activity base cost to execute those promotions, which was money that the retailer could then turn around, reinvest in price again, and create this really lovely virtuous circle of just saving cost to serve and then passing that on to customers.

So, we are passionate about that. And you’re exactly right. This is the time to look at that range to convert promotions, to EDLP. And here’s my fear, Dave, that if a retailer isn’t progressive and doesn’t get on the front foot of that, then I think they’re in for very hard times from the more responsive retailers who are doing that right now. And they’re plenty.

The Sweet Spot – Driving value for the consumer while reducing the cost to serve

Dave Clements (14:00): Yeah. And I like that point about that. There’s a certain sweet spot on certain initiatives, aren’t there? So, it’s those initiatives that can both drive value for the consumers, but also reduce cost to serve for the retailer. Those of initiatives, whether it’s on thinking about that in the promotion space, thinking about that in the price space, thinking about that on the assortment and layout space, the activities that can do both, are really going to be the ones that pay off for retailers, as long as they’re also doing it in a customer centric way, using the customer data to make the right choices when resetting the range or resetting the promotions. The ones that are cannibalizing, the promotions that are cannibalizing, look at the data, use that customer data to really understand the impact on the category and the consumers in making those decisions.

David Ciancio (14:52): I just saw a byline today on an article from Paco Underhill. He was the author of the book of Why People Buy. And he’s got another book now about How People Shop. But he has a line that it’s time for supermarkets to reinvent themselves. In fact, it’s way past time. And that’s what you’re talking about, isn’t it? Where if we examine shopper behavior, really understand what’s changed for shoppers to understand the pressure, look at that in the light of the gritty retail decisions, pricing, promotional range, reducing the range and optimizing it, it should create this flywheel around more efficiencies. That’s the kind of reinvention that we’re talking about. To me, it’s never been more important and never more exciting, by the way, in all the years we’ve spent retail, you and I.

Dave Clements (15:51): I think that reinvention point also raises the other side of the coin for me around inflation. And that’s about looking at ways to fund your investment for customers, and actually that importance of, and what a lot of progressive retailers are doing is looking for new revenue streams that can actually really help in managing the impact on consumers, on things like inflation, because they’re driving new revenue streams elsewhere that can really help them. And we’ve seen some of that. We’ve seen a big push with some retailers looking at retail media, using their data, their data insight better. Do you think new revenue streams are an important aspect of how one of the things that retailers can start thinking about to help fund and invest some of this activity back into value?

Creating value by creating new revenue streams

David Ciancio (16:45): Oh yeah, absolutely, and of critical importance. And it’s really interesting. Look, customers have given the gift of information about how they shop. And that’s what we mean by finding revenue sources from that kind of insight, in a collaborative process with suppliers, everyone wants to be more efficient; suppliers, and retailers, and shoppers. So this is using some of that insight to improve the supply chain, to improve innovation on the brand side. But the revenue comes from simply looking at those insights and having that insight available as an asset in the business, one.

And then the media that you mentioned is grocery stores and supermarkets are fabulous channels to talk to customers. There’s more exposure in a typical supermarket than many television channels. When I was a store manager, my customer count was 20,000 customers a week, even in one of my smaller stores. And this is just a way that I used to talk to myself and my team. I would say, there was a local sports team that would have 70,000 fans attend for eight games a year. So, you could do the math, but 70,000 fans a week sounds like a lot. But I had 20,000 fans every week for 52 weeks, a year, and even more on the holidays. I used to tell my staff all the time, we’re a bigger channel than the Denver Broncos. What a great place to advertise, what a great place to communicate. And when we talk about media, you and I, that’s what we really mean is that, those spaces that a retailer has, advertisers are interested in those. But it’s material, the insights and the media part, you have the numbers in front of you. It could be a couple percent of sales, and that could be reinvested into price and reinvested into improving the shopping experience. That’s the real win. And thereby driving that whole flywheel, again, of earning more loyalty from shoppers as you go through.

Dave Clements (19:01): Yeah. It can make a real difference. And at the end of the day, as well, if it’s used in the right way, customer-focused use the right customer insight, use the right media to put personalise the experience, you’re actually also making the experience a lot better. You’re making better decisions for customers. So again, it is that virtual circle that can, not only drive new revenues, it drives new sales, it drives a better customer experience. It really wins on all fronts.

And are there any other particular strategies that you think retailers need to think about, or maybe behaviors and things they might want to stop doing, to help them really tackle inflation in some of their other processes. I’m just thinking about other things they can do as part of the operating model to really, I guess, make more investment available to put into value.

David Ciancio (19:58): We touched on a number of those, Dave, talking about the activities where retailers spend most of their time, like planning promotions. I think it’s time to streamline promotion types and schemes, because there’s a lot of mechanics. And not all of those work for customers, according to the data. So use the data to understand which ones really are driving larger baskets and happier customers, and performing more profitably for the business. But there’s layers of costs in there. We talked about the activity based costs of one of our clients.

It’s time to rethink even the way that retail looks at front margin and back margin. So, front margin is the selling margin of the profitability earned from sales in the store. And back margin are some of the other costs in the business like slotting fees and funding and advertising allowances and so forth, which can be really helpful in promoting products. But some of which tend to promote some products that really don’t drive incremental volume or incremental satisfaction for shoppers. So, it’s using the insight to say, well, there’s some that work for us and the customers. And some that don’t. Let’s stop doing the ones that don’t, because those unwittingly create some costly inefficiencies, et cetera.

Customer First doesn’t mean being all things to all customers at all times

Let’s see what else. So, let’s stop doing, stop doing some practices that have been common and that the industry is forcing changes in anyway, if you look at the discounters and you look at the big mass merchants who tend not to have some of those same cost models. To start doing is to help make the store easier to shop, as we mentioned. That’s looking at which items are substitutable. It’s looking at the layout. May not be moving the dairy to the back of the store to force customers, to have to take the long trip through the store. It’s helping customers find cheaper alternatives, using an app, using really interesting recommended capabilities like you might have forgotten, or what’s on sale just for me this week. You know what I like. Tell me when my preferred products go on sale. It’s that kind of a thing.

And finally, I’m going to say maybe it isn’t looking at some helpful service tradeoffs in the store. You and I talk all the time. Customer first doesn’t mean being all things to all customers at all times. Instead it means doing the right things right, for the right customer, at the right time. So, I’m thinking about things like how self-scanning, how even reduced service department hours, can help save costs in areas where customers really don’t think those matter, or really aren’t taking advantage of those services. So, there’s some business practices that can be stopped being done.

Dave Clements (23:14): Well, it’s certainly going to be interesting to see how this plays out in the coming months. I mean, bottom line, I expect we’re going to see those progressive retailers continue to focus on driving greater value perception, continue to focus on how they reduce the cost to serve and safe to invest, and accelerate growth in new revenue streams. And it’ll probably be interesting to see. We’ve got our consumer pulse coming out in about a month’s time, to see what some of the latest consumer reactions are to that.

David Ciancio (23:45): Yeah. I’m excited to see those. Dave, I’ll just mention one more on looking at new forms of loyalty. And you taught me an awful lot about this with things like delivery savers and subscriptions, on ways to help customers lower their prices and their costs, in exchange for committing to in Tesco’s case, what it’s six months of delivery. It’s in exchange for programs like Chewy’s subscription programs, which are some really interesting takes on both building loyalty whilst it’s same time saving money for shoppers.

Dave Clements (24:27): Yeah, absolutely.

David Ciancio (24:28): Let’s not forget that one.

Dave Clements (24:29): Well, look. Thank you, David. It’s been a great discussion as ever. I’m sure we’ve got to discuss this topic again very shortly.

David Ciancio (24:37): I’m excited to see how the industry will respond. So, I’ll add one more thing. And I’ve mentioned that greatest inflation, at least a day decade, and maybe even in 40 years. I was just getting my first store 40 years ago. And I’ll never forget resetting a whole aisle for generic black and white goods. We created a store within a store, hung black and white crate paper. Every label in the shelf was black and white. But it was a really fun lesson in how the industry responds to meet customer needs in times of inflation. And so, I find myself wondering, I wonder how the industry will respond now. Will it go back to plain label, private branded goods? Will it look for more answers to help customers for ready to heat ready to eat, which I think it might? But it is a time of change, a time of transformation. And so long as we’re starting with the customer, and so long as we’re basing it on the data, I think it will be helpful for shoppers and be helpful for retailers.

Dave Clements (25:47): Yeah, I agree. I think we’re going to see some great new innovations evolve around driving value and value strategies. So, look forward to seeing those.

Well, thanks everyone for listening today. I hope you found the discussion useful. Inflation’s certainly a hot topic that’s going to run and run. And if you’d like to discuss the topic further, feel free to email myself or David Ciancio at dunnhumby.com. And join us again soon for our next Customer First podcast. And remember, you can access all of our podcasts on a variety of the different subjects impacting retail at Customer First Radio on Spotify or on our dunnhumby.com website. Thank you, David. Thank you, everyone. And we’ll see you next time.

David Ciancio (26:33): Take care.