The Supply Side: Retail suppliers face growth-challenged environment

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.
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Retailers and thousands of product suppliers from Procter & Gamble to mom-and-pop operators face one of the slowest growth climates in recent retail history, according to a report by Nielsen and the NPD Group.

The report, recently presented to Wal-Mart suppliers at the retailer’s Open Call in Bentonville indicated that 45% of product categories are flat or declining, which represents about 40% of total retail revenue.

Nielsen and NPD pegged the entire U.S. retail market, which included commercial food service and online sales, at $1.888 trillion in the past year, up 1.8%. Without commercial food service the number is $1.441 trillion, up 1.6% over the past 52 weeks.

Following are some of the top 10 categories (ranked by market size) in the Nielsen report and the year-over-year growth.
Dry grocery, $275.5 billion, up 1.9%
Household products, $217.2 billion, up 2.6%
Apparel, $215 billion, up 0.7%
Perishable grocery, $192.1 billion, up 1.1%
Health & beauty aids, $100.9 billion up 2.7%
Consumer electronics, $95 billion, down 3%
Footwear, $66 billion, up 3.3%
Toys, $25.2 billion, up 5.4%
Office supplies, $24.5 billion, up 2.4%
Video games, $23.6 billion, up 4.4%

SHRINKING SHELF SPACE
The shelf space continues to shrink at Walmart Supercenters with 15% of displays being removed, aisles being widened from 4 feet to 10 feet, and the average supercenter will have 2,500 fewer items in stores than one year ago, according to the Nielsen presentation. Neighborhood Markets, which is the fastest growing format for Walmart U.S., also has far fewer overall products and shelf space than a typical supercenter.

The main challenges for product manufacturers requires suppliers to rethink their in-store strategy for Walmart as shelf space is shrinking and competition has likely never been this tough. Staying competitive on price and managing rising costs are also deemed as challenges for product suppliers. The report also urges suppliers to use caution when downsizing packages because 63% of pack downsizes hurt volume more than a straight price increase. Re-configuring packaging also dents margins because of added costs.

Earlier this year Kantar Research told Walmart suppliers to focus on a separate strategy for Neighborhood Market. They said this format doing well for Walmart U.S. and using the supercenter strategy for Neighborhood Markets in many cases could be a lost opportunity.

A survey of suppliers conducted by Cleveland Research in March found that 70% said they do not have dedicated teams specifically for the Neighborhood Market format, but that may change in the near future.

SMALLER STORE COMPETITION, CONSUMER BEHAVIOR CHANGES
While Walmart’s medium-sized markets have tremendous potential, they also face growing competition. Neighborhood Markets are Walmart’s front line of defense for going up against small format dollar stores and hard discounters like Aldi and Lidl, and fending off regional players like Publix that enjoy rabid followings, said Carol Spieckerman, CEO of Spieckerman Retail.

Going forward she said Neighborhood Markets are also Walmart’s main vehicle for providing convenience on three fronts: customizing assortments to focus on grab-and-go items, offering a more easy-to-navigate format and continuing to sharpen its clicks-to-bricks pick up capabilities.

A shift in consumer behavior is also hitting some product suppliers in the gut, namely packaged goods companies.

“Consumers have been shopping that perimeter of the store at the expense of the center of store categories, so that’s obviously a challenge that’s weighed on traditional packaged food companies,” said Erin Lash, equity analyst for Morningstar Inc.

Charles Redfield, senior vice president over Walmart’s grocery division, recently spoke with Talk Business & Politics during the retailer’s shareholder week about the need for more food innovation. He said more innovative products and packaging was at the heart of why Wal-Mart built its own culinary center at the corporate home base in Bentonville.

Talk Business & Politics asked Redfield about why large food companies continued to get more shelf space for items – like 17 varieties of a brownie mix. He said Walmart is constantly looking at the whole box and add-on products such as a new flavor profile is not the kind of innovation Walmart now pursues. That said, new “profiles” to existing products has been much of the so-called product innovation of the past few years.