Competing In Tough Times for Convenience Stores
By Barry Berman, Ph.D
Best-in-class retailers choose between low-cost and differentiation strategies
I recently studied the retail strategies of 10 world-class retailers to identify shared strategies every retailer (including convenience stores) can use to drive performance improvement. These firms include six food-based retailers: an extreme value merchant (Aldi), two specialty food retailers (Trader Joe's and Whole Foods), and three traditional supermarkets (Publix, Stew Leonard's and Wegmans), as well as a warehouse club (Costco) with significant food sales. I chose these firms based on their consistent financial performance (for example, Trader Joe's and Stew Leonard's sales per square foot have been estimated at $1,750 and $3,750, respectively), as well as their high employee and customer satisfaction scores on accepted measures. Let's look at what lessons convenience stores can learn from studying the strategies of these very successful retailers.
According to Michael Porter, the Harvard Business School strategy guru, there are two major competitive strategies that firms can pursue: low cost and differentiation. Porter cautions retailers against being "stuck in the middle," whereby they are unable to offer consumers price or customer service benefits. These low cost and differentiation strategies will be discussed separately.
Low Cost Strategies
Retailers need to constantly resist the temptation to increase operating costs via services that may not be viewed as valuable or important to its store's target customers. Even retailers with a loyal base of customers and a clear market positioning as a "fun place to shop" like Whole Foods have had to adjust its pricing strategies to deal with an increasingly value-conscious consumer base.
"Bad costs" can creep into a retailer's cost structure due to various factors. As many chain retailers grow geographically, they often impose common store hours over the entire chain, centrally purchase goods (despite local and regional differences), and include common services across the entire chain (even though many of these services are not equally valued by consumers on a store-by-store basis).
Convenience stores need to continually reduce bad costs through "customer-benefit costing." This process links the cost of each service element (such as product choice, store ambiance and waiting times at registers) to a benefit that its customers value. Service costs that are high relative to perceived customer benefits need to be carefully reviewed for possible deletion. In contrast, service costs that are low in comparison to benefits may be targeted for expansion.
Table 1 describes how convenience stores can differentiate themselves from other directly competing convenience stores as well as from indirect competition from supermarkets, warehouse clubs, mass merchants, chain drug stores and dollar stores.
A second factor impeding growth in convenience store sales is the continuation of consumer caution that was originally associated with the current recessionary period. A number of studies suggest that many of the competitive inroads made by mass merchants, warehouse clubs and dollar stores will continue even after the recession ends. These studies argue that behaviors consumers used to adapt to the recession (such as increased purchases of private brands, increased usage of coupons) will continue long after the recession ends.
Barry Berman, Ph.D. is author of "Competing in TOUGH Times: Business Lessons from L.L.Bean, Trader Joe's, Costco, and Other World-Class Retailers" (FT Press, 2011). He is also the Walter H. "Bud" Miller Distinguished Professor of Business at Hofstra University and Director of Hofstra's Executive MBA program. Dr. Berman serves on the board of the American Collegiate Retailing Association (ACRA). He has consulted with a wide variety of retail clients ranging from Tesco to NCR, Simon Property Group and others.
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