Value for grocery shoppers is more important than ever, as revealed by our 15th annual “Customer Perception Mapping (CPM)” survey of nearly 7,000 North American shoppers. Consumer perception of certain store formats, especially those with better value for money, is driving increases in market share. Those who are not delivering good value for money have seen share erosions. The survey results, which reflect customer perceptions rather than retailers’ desired images, show a retailer’s position relative to the ‘fair-trade-line’, a marker of a satisfactory value/offer trade-off. Retailers that deliver above and beyond customer expectations score above this line, those that disappoint in one or multiple ways end up below. Exhibit 1 shows the distribution of retailers based on the latest survey.

On average, limited assortment and club retailers have the best above-the-line position, widening their advantage from last year. E-commerce providers struggle to deliver what customers would expect, something that started to emerge last year and is possibly tied to a broader e-commerce slowdown, with several companies announcing facility closures/investment reductions over the last 12 months. While about 70% of retailers remained on the same side of the line as last year, the remaining companies have fallen below (16%) or risen above (13%). The net change is trending positively compared to last year with almost 50% more companies moving up and about 10% fewer companies moving down. Retailers jumping above the line did so primarily because of an improved value score; those falling below did so because of a decline in offer performance.

The latest trends in grocery shopping

Increased economic headwinds from inflation, especially for lower income Americans, and increased expectations for the elements of offer have put pressure on all retail formats. Retailers have had to adjust their value strategy, product portfolios and in some instances revisit alternative business models. Three trends stand out on what is shaping current customer perceptions: inflation, the continued rise of limited assortment retail and challenges with ecommerce. AI-powered experiences have yet to shape customer perceptions, but could in future years.

1. Economic pressure persists in the food industry

Although inflation in the food industry has fallen to about 2%, after hitting double-digits in late 2022, the economic pressure and the uncertainty linked to it continue to affect shopping habits. While there already was a significant share of trade-down activities last year (83% of consumers adjusting shopping behavior in one or more ways), this pattern continues this year. More than 50% of the shoppers surveyed have been facing a higher grocery bill. Measures to generate relief include switching to private label items or using money-saving apps (33% each). While these numbers are smaller than last year, it is worth noting that a large part of the population did trade down last year already and has not come back to their old behavior this year, leading to an overall larger group of shoppers relying on private label products, discount retailers, and deliberate shopping lists to manage their grocery spend.

2. Limited assortment grocers see rising market share

Benefiting from the push towards value, limited assortment grocers were able to grow their market share over the last 12 months. The share of shoppers that have a limited assortment retailer as their main grocery retailer grew by 30% to now 12%, third overall behind traditional (53%) and supercenters (21%). Apart from the post-pandemic flexibility, key drivers for this include low-price points (54% mentioned this as the main reason), good-quality products (18%), and convenient store locations (7%). While the business model includes a smaller assortment, only 12% of shoppers see that as a reason to not shop at limited assortment retailers. Similarly, in-store service and quality are aspects customers value given the retailers’ price points, leading to overall outcomes above the fair-trade line for multiple retailers in this category. These headwinds are reflected in recent industry announcements related to additional store openings for grocers in this segment for 2024 and beyond.

3. E-Commerce post-pandemic challenges continue

Another category that saw market share movements was e-commerce. While the share of pure-play e-commerce grocers rose rapidly during the pandemic (3% in 2019, 8% by 2021), it has been in steady decline since (5% in 2022 and 3% based on the most recent survey results). Operational issues like managing perishability, dealing with ad-hoc substitution needs, or serving non-urban areas, along with financial challenges such as overcoming small basket affordability or affording fees for third-party picking and delivery providers make online grocery a hard business. This is evidenced by recent announcements related to store and/or e-commerce fulfillment center shutdowns. The shopper perspective sheds additional light on these trends. They prefer delivery over pickup (32% versus 24%), which is the more expensive model to serve from a retailer perspective. At the same time, having an attractive online shopping journey is the factor that correlates with overall retailer satisfaction the least and ranks last among reasons why shoppers picked their main retailer (2%, while low prices and convenient location lead with 26% and 19%, respectively). Without pandemic tailwinds, running a grocery business without a brick-and-mortar presence seems as challenging as it ever has.

4. Consumer interest in AI-driven shopping experiences is still low

While there are many use cases for generative artificial intelligence (AI) in today’s retail environment, consumers do not yet have a clear interest in many of those that impact their immediate shopping experience. When asked for their interest in a series of grocery AI applications, only custom promotional offers received net positive feedback. Other ideas that could simplify shopping trips like just-walk-out transactions, minimized exposure to less relevant items online, ideas that provide a more personal experience like custom marketing or smart item recommendations, or ideas that make the retailer interaction more effective such as chatbots are not yet AI applications that customers are overwhelmingly interested in.

One reason for the limited excitement is privacy concerns linked to the data that would be required to feed such new technology offerings. While only 31% of shoppers are not comfortable with retailers using past transaction data to generate insights and enhance the shopping experience, this number is higher for data-capturing browsing behavior (41%), in-store movement (55%), or social media activity (71%). Another reason could be that respondents assessed these applications isolated from any potential shopping experience that retailers could embed them in in which case the focus might be less on AI and data, but more on the overall in-store/online journey.

How retailers can defend leads and claw back share

With all these industry dynamics and insights on customer perception, how should retailers adjust course, if at all? How can limited assortment grocers build on the new influx of shoppers, how can more diversified retailers continue to operate financially successfully in today’s economy and with customers prioritizing value more than ever?

1. Harness implicit AI for increased productivity

Even though customer-facing generative AI applications may not yet be a draw for shoppers, retailers should invest resources in setting up the relevant insights- and data architecture. It will be crucial to build capabilities now, hire talent, and grow teams to be ready for customer-facing applications in the future. At the same time, there are various ways to use the same technology in a non-customer-facing way to achieve significant cost/productivity improvements, such as preparing for vendor negotiations, analyzing competitors’ ads, and facilitating store operations. Retailers that have not invested much time or resources into generative AI should start by evaluating organizational readiness and risks, standing up governance and policy structures, and formulating broader strategies and roadmaps before starting to work on specific initiatives. First internal projects could be related to planogram compliance or operational forecasting to ensure new trade-down demand can be met with an appropriate service level.

2. Focus on destination retail to attract customers

If capturing trade-down dynamics with price moves proves challenging due to a retailer’s current value proposition, it is also possible to differentiate by becoming a destination for customers. This corresponds to moving up in the value/offer matrix, providing a better offer for a given value. Offering additional services beyond groceries, such as pharmaceutical/veterinary services, unique product selections, or an innovative in-store experience can draw customers from afar. Using survey data, the strength of such an outer draw is positively correlated with overall customer perception. While this approach will likely require investments, it helps to diversify income streams and avoids diluting brand perception that might be the consequence of trying to combine diversified offerings and competing with a limited assortment of retailers on price.

3. Build loyalty with a strong brand

Another way to attract shoppers is by building and maintaining a strong brand. In the past year, however, retailers across the board have been experiencing a decline in brand perception. Assessing shoppers’ perspectives on connection (“I love this retailer”) and progress (“This retailer helps me do things I could not do before”), brand relationships are largely transactional. Apart from leading to a stronger shopper-retailer connection, robust brand performance is also positively correlated with a retailer’s ability to perform above the line. To strengthen existing brands, retailers can engage in direct customer-facing measures like personalized loyalty programs or unique product offerings but should also look inward. Beyond being brand ambassadors, employees are a critical brand component. Ensuring that they feel connected to the organization will help them project the same qualities in day-to-day in-store customer interactions.

4. Ensure attractive private label offering

One more way to square the circle and offer value-seeking shoppers something they are looking for without diluting the brand is having an attractive private label offering. As one of the main mechanics to cope with the increased prices of groceries, switching to private labels has become a common shopping pattern. Overall, across categories, two-thirds of shoppers already buy private label products on more than half of their trips (with shares as high as 83% for limited assortment grocers but also lower than 60% for retailers in the e-commerce and ethnic categories). Ideally, these items are not simply less expensive versions of national brand products but are also used to address unique factors in the customers’ decision tree that the national competition might not (fully) cover. When asked for the most important factor in the decision to buy or not to buy a private brand item, customers value quality over price (in every single retailer category).

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