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In this series, we discuss how an approach known as “managing for value” can help grocers develop a powerful reinvestment advantage. We’ll cover five steps in the process: aligning on a single measure of success; identifying internal and external concentrations of value; establishing management’s key priorities; creating differentiated strategies and resource allocation; and building a culture of ownership.
In our last article, we explained how a grocer can identify and capitalize on value concentrations within their company and industry. Armed with this understanding, the next step for management teams is to translate these insights into a set of opportunities and actions to pursue.
We have found the most successful companies do this by setting an “agenda” for value growth – essentially a short list of the most critical opportunities for executives to concentrate on. This agenda should be prioritized by value creation potential (i.e., sum of discounted future economic profit), as this is a company’s “North Star” for winning with shareholders and other stakeholders. The list needs to be short to allow executives the focus required to solve these issues effectively, but it should be refreshed regularly to ensure priorities are updated as needed.
Many grocers would say they have something similar in place, but we have seen several areas where executives can strengthen their short lists in practice:
Set a standard measure for prioritization
Without an apples-to-apples metric, executives may struggle to choose between initiatives that measure value differently (e.g., a marketing push expected to grow revenue by $300M versus a supply chain refinement expected to save $100M in cost).
Mitigate the role of politics in deciding where time is spent
Generally, each business unit or functional area will vie for executive attention, promoting their issues as the most important. When internal politics influence priorities, the C-suite can be left with conflicting, lower value, or an unmanageable volume of initiatives.
Balance urgency with importance
When management regularly prioritizes the “urgent,” companies cycle through initiatives that require immediate action and never get to longer-term opportunities that provide greater value.
Reduce distraction from changing external factors
When executives are highly reactive to new trends — trying to get ahead of the competition — priorities change constantly and the quality of solving the issues that really matter is reduced.
Having a true value growth agenda addresses these issues by providing a consistent and unbiased method for executives to evaluate what is most “important.” Done this way, it is easy for the rest of the organization to understand why priorities exist, removing politics from the equation. Using discounted profit factors in time to realize value, thus revealing when longer-term actions are still more important to start addressing now than the “urgent.” Finally, refreshing the agenda annually allows grocers to re-evaluate priorities regularly enough to capture meaningful changes in market trends, but not so frequently as to create unnecessary distraction.
On that last note, it is understandable why a grocer would find it difficult to “limit” themselves to a short, set list of actions with everything happening in the grocery market today. Just consider a few (certainly not an exhaustive list) of the trends we believe will be most impactful to grocers over the next few years:
Trying to address everything at once is rarely met with success. Take Grocery Outlet for example. In 2023, the grocer upgraded product, inventory, financial, and reporting platforms while also releasing a new personalized app to customers, acquiring another company (UGO), and building a private label.
Any one of these major efforts requires significant management attention to execute successfully, and juggling all of them together only increased the risk of an unexpected hiccup. In this case, the issue arose in their systems transition, which disrupted business operations and financials for nearly a year and resulted in ~100bps decline in gross margin.
Additionally, the capital employed across all of these initiatives was significant, and while Grocery Outlet has experienced revenue growth, economic profits have declined to nearly flat over the past couple of years.
On the other hand, grocers like Publix have been quite successful tackling a narrower set of important issues by prioritizing their consistent and superior brand experience over chasing each new trend that comes along.
Initiatives have centered on making existing store formats and offerings more relevant to their customer base while adding technology to streamline the customer experience. Additional growth has come from tactically increasing density in loyal markets and extending into similar adjacencies. This focus has resulted in Publix delivering profit margins and sales growth over twice that of peers over the past five years.
So where should a grocer center their efforts? The answer is not one-size-fits-all; instead, executives should first consider what will be most impactful to their company and customers.
For example, a discounter may not need to think about offering delivery or organic options if their customers’ number one priority is saving money. However, they will certainly need to address increasing costs pressuring already thin margins, which may require steering customers towards more profitable (but similarly priced) products.
Alternatively, a natural grocer with healthy margins may have a bit more financial leeway, but they may be under greater pressure to justify their premium by providing quality products and a differentiated experience to their wellness-seeking customers. For a more traditional grocer, an agenda for the highest value growth items might look like:
To build a similar agenda for your company, start with a fact-based understanding of where value is concentrated within your company and industry – at a highly granular level (as explained in our last article). Combine this with the market trends (likely sourced from your business intelligence team) most relevant to your customers, geographies, products, etc. to identify a broad swath of opportunities. For each, have your strategy team determine the most relevant tactic (build, grow, fix, wind down, etc.).
Next, finance teams should partner with strategy to estimate the economic profit growth potential of each opportunity. This is not an exact science (similar to forecasting) but is critical to ensure the profit implications of taking each action are carefully considered. For example, weighing the impact of cost reduction to profitable revenues – or the capital investment required to create a new capability.
Executives must then ask themselves: how long will it take to realize this profit growth? Remembering that a dollar today is worth more than a dollar several years from now, time to achieve each opportunity should be factored into prioritization. In technical terms, this can be achieved by discounting economic profit growth realized in the future back to today’s dollars (which is the true measure of value). A more visual way to think about this concept looks like:
The highest priorities are generally those that generate the greatest near-term economic profit improvement (e.g., addressing areas of the business that are actively destroying value). The next wave is usually those that generate significant economic profit but over a longer time horizon (e.g., standing up new stores in locations where the company is well-positioned to win with customers). Depending on the associated value, some of these opportunities may become higher priority.
Third come opportunities where value can be realized quickly but is lower overall (potentially reducing indirect spend). The lowest priority items are those with smaller value creation potential that would take a long time to realize value from. These rarely make it to the management agenda and should only be addressed if sufficient resources exist (e.g., can be delegated to the business unit level without distracting from corporate priorities).
For similarly valuable and fast opportunities, management teams can use additional criteria to “break ties.” For example, all else equal, prioritizing issues that management has the greatest control over and ability to resolve will increase the odds of success. Similarly, first sequencing opportunities for which decisions are central to the overall business strategy, or those that provide learnings necessary to address other important issues, can provide cascading benefits to later agenda items.
Management should then narrow down their agenda to around five items for immediate attention, but that does not mean all of the lower-priority opportunities are “lost.” The agenda should be dynamic: sustained and regularly updated to drive decisions and actions over time. We recommend refreshing annually; while conditions may not have changed materially each year, this discipline will reveal important new issues when they do arise. And as agenda items are completed, this also allows management to develop a plan for tackling the next set of priorities.
Now, it comes time to deliver on the agenda. This will require building strategies for each opportunity that are differentiated from peers – serving your customers’ needs better than the competition. These strategies will need to be supported by the proper resource allocation and organizational conditions, all of which we will dive into during the next article in this series.
Need to catch up on the earlier articles in this series? Check them out at the links below.
Managing for Value, Part 1: A new way to think about winning in grocery
Managing for Value, Part 2: What grocers gain from a closer look at profitability
