Beacon & Eggs
By: Vikram Kalia
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Following its acquisition of A&P in 2005, Metro Inc. has risen to compete on a national level in the Canadian grocery industry alongside goliaths Loblaws and Sobeys. Metro has recently performed impressively, beating earning expectations in Q3 of 2014. This recent 3.1% income growth, however, was primarily driven by an unsustainable 2.5% price escalation. In parallel, Loblaws’s and Sobeys’s strategies have focused on inorganic growth, exemplified by their acquisitions of Shopper Drugs Mart and Safeway, respectively. In this consolidating industry, acquisition opportunities have become increasingly exhausted. To grow sustainably, grocery stores must improve customer loyalty, direct spending towards higher margin products, and improve efficiency within the current customer base. The importance of customer loyalty will continue to grow and can be fostered through private label brands and customer loyalty programs. Compared to the two industry leaders, Metro has yet to fully capitalize on the two aforementioned factors.
Private Label Brands
From 2007 to 2012, the Canadian market for private label brands grew at an impressive compound average annual growth rate (CAGR) of 4.1%, compared to the industry CAGR of 2.8%. Total share of Canadian private label brands in the grocery industry reached 18.4%, higher than the global average of 16.5%. Private label brands have proven successful because they provide benefits for both consumers and retailers. Consumers save, on average, 30% on private label products compared to brand names. In addition, private labels typically have higher margins; for example, Safeway makes 25% margins on brand labels compared to 35% for private labels of comparable products. Private labels provide retailers autonomy over pricing and promotion strategies, allowing for flexibility to use pull strategies for attracting and retaining customers. For Metro to grow profits sustainably, it should aim to encourage loyalty to, and through, its private label brands.
The three major incumbents have all established their own private label brands – Loblaws with President’s Choice, Sobeys with Compliments, and Metro with Selections and Irresistibles. Loblaw’s brands dominate the private label market, with President’s Choice and No Name possessing 67% combined. Loblaws has one of the highest percentages of sales from private label, currently at 27%, significantly higher than Metro’s 21%. President’s Choice in particular has grown quickly due to its closed ecosystem built around Loblaws’s customers, with its assortment of products and services ranging from grocery and household products to financial and mobile services. Alongside mass marketing campaigns, President’s Choice’s success has been fuelled by Loblaws’s very effective customer loyalty program – PC Plus.
Loyalty at Groceries
Loblaws was the first major Canadian grocer to envision a shift towards personalized offerings through its PC Plus rewards program, and is the definitive leader in the space. The PC Plus Points card allows customers to collect points on their purchases, with additional points attached to President’s Choice label products. Purchasing data gathered from customers using the card is used to tailor personalized offers, which are sent to them through a mobile application. Since its launch, the program has successfully penetrated more than one third of Canadian households.
In comparison, Metro’s loyalty and data collection initiatives severely lacks efficacy. This weakness is evidenced by the My Metro mobile application, which has only a 4.5% adoption rate among its customer base. The application is integrated within Metro’s Air Miles rewards program, in which customers earn one reward mile for every $20 spent. Due to conflicts with Sobeys in Quebec, Metro offers a separate loyalty program, metro&moi that offers customers a single point for every $1 spent. Metro&moi points are added up every three months and converted to rewards vouchers at a rate of $1 for every 125 points accumulated. Aside from point collection, the application is highly static as it only allows shoppers to input their grocery list, use coupons, and scan barcodes to look for discounts. Customers with Air Miles can integrate their My Metro application with their Air Miles account to receive more personalized promotions; however, this limits those available to receive rewards and the company’s potential consumer outreach.
Beacons Beckon
Despite PC Plus’s ability to use purchasing behaviour to send out personalized offerings, it lacks the ability to track customer habits in-stores. This technology remains largely unused in the grocery industry. This ability to track in-store behaviour comes in the form of Wi-Fi beacon equipment provided by retail analytic companies, such as Toronto based Turnstyle. Beacon technology uses existing Wi-Fi sources to connect with guests via their smartphones and provides them with instant push notifications. Beacons have several benefits, as they can increase interaction with advertised products by up to 19x and increase in-store app usage by 16.5x.
Wi-Fi beacon technology provides retailers with the ability to create customer profiles consisting of preferences and habits. This knowledge building is accomplished by taking advantage of a smartphone’s MAC address, a unique code that devices use as an identifier when connecting with Wi-Fi networks. The MAC represents individuals as they enter and exit the store, allowing retailers to learn how many times an individual has visited, their footpath, and duration of stay.
Grocers can also interact directly with customers within stores via beacons. These retailers can offer guests targeted promotions through their mobile device if customers consent to providing their basic Facebook information in the Terms and Conditions of the Wi-Fi when logging in. The retailer can subsequently curate a promotion based on any data collected. Guests may receive instant promotions and information on their mobile device as they walk in a store if they fall within a campaign’s criteria, based on factors such as time of entry, frequency of visits, and demographics.
Becoming a Personal Shopper
With a struggling private label market share and lower gross margins compared to the rest of the grocery industry, Metro is in need of an upgrade. Metro should employ Wi-Fi beacon technology in all retail locations, around which a customer loyalty program can provide offerings that are more sophisticated than the ones provided by PC Plus. Specifically, offerings can be founded in demographic information, purchasing history, and in-store behaviour. Higher margin private label brands, Irresistible and Selection, should be the focus of promotions in an effort to grow profitability through this investment.
While Wi-Fi beacons can push notification to mobile devices using the network, it can create the impression of spam and lack of privacy. Metro can overcome this by using the acquired data and promotion capabilities only through its existing mobile application, My Metro. The company can provide education of the service prior to download, assuming participating customers will be more receptive to push notifications.
Once the app is downloaded, Metro needs to encourage users to use in-store Wi-Fi to make the offering effective. Beacon technology will then be able to collect a plethora of information on customers across multiple Metro locations and visits. This data, combined with demographic information and purchasing history collected from My Metro’s integration with Air Miles will allow the creation of a detailed profile for each shopper.
Over time, as data is continually collected, Metro’s customized push notifications sent through My Metro will become increasingly personalized and be offered while shopping in realtime. This increased knowledge and access to customers should be used to upsell Metro’s private label brands, which have product offerings that range all grocery types. By promoting these private label brands, Metro will be able to increase the profitability of each customer’s basket.
Promoting the Application
The most challenging aspect of a successful mobile application strategy is guiding customers to download and use the application. There should be a low level of promotion needed to encourage those who already have My Metro to use the Wi-Fi network. To encourage application downloads from new users, Metro will have to promote clear incentives. A proven strategy employed by current Turnstyle partners is to have physical signage that will encourage shoppers to sign on to the Wi-Fi network. In its initial promotion, Metro could provide deep discounts or giveaways of its private label products if shoppers sign on to the network and download My Metro. Continual usage of the application will be dependent on Metro’s ability to provide valuable offerings and discounts to customers.
Worth the Investment
Installation of storewide Wi-Fi with beacons at all Metro locations would require an initial investment approximately $21.6M and a yearly cost of $3.5M. Through Wi-Fi beacon technology, Metro can convert customers from purchasing brand name products to Metro’s higher margin private label brands instead, generating 4.7% incremental gross profit per basket. If Metro can increase its app adoption rate by 2% of its customer base and assuming a gross margin of 27% – within the range of industry standards – this venture would increase Metro’s gross profits by $6.8M annually, or 0.31%. While this is relatively small compared to Metro’s size, growth of gross profits are in constant flux and only experienced a 2.4% CAGR over the last four years; any sustainable increase is a benefit when every percentile matters in the grocery industry. This would yield an ROI of 15%, which is standard for the grocery industry. In the long term, if Metro is able to match Loblaw’s current private label percentage of sales of 27%, the company would see gross profit growth of 3.14%.
Financial gains aside, in-depth customer data and direct customer access can only be beneficial as technology becomes more ingrained in the lives of consumers. By adopting beacon technology, Metro has the opportunity to obtain loyal customers who will visit the stores for far more than just eggs.
