Bodega Aurrera Express Format Innovation And In-fill Strategies

RETAILNETGROUP STRATEGY ALERT No. 24 Issue Format Innovation: Bodega Stores

February 2009

To read this article in your browser, click here. Greetings! Retailers all over the world are increasingly focusing on in-fill strategies as some retail segments & markets show signs of maturity. Last week Wal-Mart de Mexico announced that 2/3 of all its openings during 2009 would be in the form of a relatively new small-box Bodega-style store that will help them in-fill markets in key regions across Mexico. We believe the expansion of this Bodega format has far reaching implications outside of Mexico and for a wide range of demographic & ethnographic segments, both for North and Latin America. Read on to learn more about the key characteristics of this store & why we believe this is an important development. Aaron Chio, Senior Analyst RetailNetGroup.com

In This Issue Key Characteristics RNG Topic Survey Store Photos Differences vs. Discounters The Broader Landscape What's Next?

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Bodega Aurrera Express: Key Characteristics Wal-Mart de Mexico has experimented with different Bodega-style store concepts, from the larger sized Bodega Aurrera (41,000 sq.ft) to mid-size stores Mi Bodega (16,000 sq. ft) to the smallest of all Bodega Aurrera Express (4,000 sq. ft). All of the Bodega stores target primarily the +60% Mexican population that belongs to the E to D+ socio economic segment (SES). In Mexico, each store serves a slightly different purpose, with Mi Bodega aimed at rural areas as a destination store while Express is intended to be an in-fill store targeting convenience & closer-to-home consumption. This is not a fresh store and features an edited assortment with a focus on food essentials. It resembles a soft discounter, given its assortment focus on branded vs private labeled items. We can infer some interesting things about Bodega Aurrera Express' store economics based on their highly-urbanized (high shopper density) real estate model: ●

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Smaller ticket but more transactions. This type of store calls for shoppers to visit it a few times a week while spending a short amount of money on each visit. In a sense, this is very similar to how the Bodegas' core shopper behaves in the formal trade. Lower margins? A higher mix of consumables vs. discretionary/general merchandise items compared to a hypermarket could mean lower margins. Private label helps offset this, but so far Bodega Express' private label selection seems to be limited (see section below). Due to informal & open markets competition in Mexico perishables can be lower margin than center store foods or GM - in the US this is just the opposite.

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Wal-Mart's Other Formats Wal-Mart runs a variety of formats in Central and Latin America that fill similar wide variety of needs (RNG subscribers can see photo galleries of some of these stores, including Despensa Familiar, Pali, Maxi Bodega, Mas x Menos, Hiper Paiz)

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Lower operating costs. The store runs with less than 15 people. This has one key implication for suppliers: retailers typically will try to shift labor as a way of reducing costs & improving efficiency.

- Perishables Private Label 2009

Less capital intensive. Lastly, as mentioned before, investment on smaller stores is lower compared to big boxes, making it easier for a retailer to expand rapidly.

- How consumers are managing through the crisis

These four characteristics tend to be true for most small-box discounters. Outside of the economic model, Bodega Express lacks some unique features typically associated with discounters/small boxes.

- Latin America Outlook Pt. 1: Mexico

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Store Branding & Positioning No frills & convenient: No sign fixture on the façade of the store, which also has a pharmacy for shopping convenience.

Dan W. O'Connor is the President & CEO of the RetailNet Group. He also is the Founder of Management Ventures, Inc. (MVI), a WPP Group company. Dan is a widely known industry speaker and thought leader. Email | LinkedIn

(click images to enlarge) The store offers a dignified, well lit, & organized shopping experience that does not feel like a E/D+ store. Aisles are short and fixtures not high, improving visibility. The store consolidates all the products that can be found at a typical traditional trade store (i.e. mom & pops).

Not a lot of proliferation of private label, which is mostly at the OPP level. Below photos of Great Value & Aurrera.

Aaron Chio is a Senior Analyst leading RNG's development of new research, insights and growth strategies in Latin America. Email | LinkedIn | Twitter

Tim O'Connor is Vice President at RNG, currently responsible for RNG's Growth Strategies Curriculum and European market insights.

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Expertise clearly shown - stores offer baked breads on an open setting, similar to options shoppers could find in the informal trade. Perishables are limited as they are not the easiest to figure out from a supply-chain point of view.

Very basic endcaps with a minimalistic approach to pricing, promotion & visual impact. Signage (besides the price) is hard to read from far away, calling the need for products to be recognizable from afar. Big opportunity for improving messaging & visual impact.

Keith Anderson is a Senior Analyst and responsible for RNG's North American research practice and transformational capabilities curriculum. Email | LinkedIn | Twitter | Windows Live Messenger

Symantha Chow is a Research Analyst and supports RNG's North American and Latin American research, including its database of chain retailers. Email | LinkedIn

Packaging is in line with labor model where a lot of products remain inside their cardboard boxes. Again, no callouts/impactful pricing messaging.

Service offering is limited in line with labor model. Service deli is limited to prepackaged foods & only a few front-end checkouts available.

Differences vs. Traditional Discounters The store varies in some aspects vs. traditional discounters or even limited assortment grocers. Key differences include: ●

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Not as focused on private label. The majority of sales for a discounter or LAG are typically derived from private label; Bodega Express does not currently rely heavily on private label. The thinking behind Latin American's retailers lag on private label development vs. the rest of the world tends to be that lower income shoppers cannot afford to risk trying a private label item and have it fail -shoppers can't afford having to rebuy branded item if the latter was true. Though this might not be the case it is enough to defer purchases. Pricing positioning & messaging. The store does not appear to be trying hard to convey value outside of no-frills store experience (i.e., no

heavy signage, branding, or messaging) ●

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Very limited perishable selection. Either a function of supply chain complexities or the fact that people can find better assortments in the informal trade, but for the most part the perishable selection is extremely limited. Location. A proportion of LAGs and discounters are found both in highly urbanized but also more suburban areas. Bodega Aurrera Express is likely to focus only in highly dense areas, leaving the rest of the country to any of the other Wal-Mex formats.

The Broader Landscape There are more than a few reasons why people whose responsibilities are not directly tied to this geography, retailer, or segment, should still be aware of this important development. ●

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Store lifecycles are extremely important. Retailers are rapidly changing their food selling stores to adapt to a demanding economic cycle, making some of the assumptions that were previously successful less effective today. Stores are becoming more targeted. Retailers are specializing and targeting a narrower selection of shoppers and shopping occasions, highlighting the need for supplier organizations to segment their customers less by channel/format and more by trip positioning. Opportunity to leverage best practices. We have seen pricing communication, award winning private labels, labor models & practices, impulse merchandising & marketing strategies, among others, coming from small-box retailers & being incorporated into large boxes. Discounters are growing rapidly. We have seen discounters grow rapidly in Europe and we are starting to see this box & business model move swiftly into the US and parts of Latin America. Small boxes can be disruptive to the market. Talk to anyone familiar with Mercadona in Spain, where the company decided to cut 800 SKUs and up to 1,200 more in a matter of weeks while reducing its prices across the board by 10%. Or arguably Tesco's Fresh & Easy (not a pure discounter but similar concept) regional impact in the US, or the generic

pharmacies in Mexico which have gone from a few hundred to more than 4,000 stores in less than a decade, or even the impact Aldi has had in the UK/Europe. These are all examples of disruptive moves from small-box retailers that have transformed the retail landscape. ●

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Private label is growing everywhere. Most discounters' sales come from private label, with some retailers' mix upwards of 90-10 on private label vs. branded items. These small-box retailers are a great place to look at to understand shelf dynamics. New reference price points being established as a consequence. See our last newsletter for examples, but as more and more retailers expand their private label offerings many categories are getting more than an OPP price reference, with mid, mid-high, and premium price comparisons within and outside the store. Lower capex investments = ability to scale quickly. Zoning laws & permits are easier to obtain, and many stores can be dropped rapidly into a marketplace with a less intensive capex requirement. Think of what Fresh & Easy did in the US, or the rapid store growth of Oxxo in Mexico who has consistently opened on average 700 stores/year over the last 45 years. Lastly, as Perry Caicco's small box analysis from CIBC has indicated, scale economics are difficult and need to be managed carefully, which supports more private label and limited assortment vs. variety.

These are a few of the reasons why tracking the development of the Bodegas in Mexico is of importance - things that can always lead to new thinking for both supplier & retailer organizations.

Final Thoughts The real question is whether this format is just a formalization of the informal trade in Mexico and Latin America or if certain elements would work in the US. Without a doubt, the expansion & growth of small stores creates new opportunities for retailers to take share from the formal/informal trade. We have referred to this kind of outlet as a cross-over segment - one that is aimed at converting shoppers from the traditional to the modern trade. If Bodega Express succeeds, we would expect other retailers in Mexico to be fast followers - something we have seen in the past - which would bring a totally new dynamic to the marketplace with the proliferation of these types of stores. We won't see a discounter market as developed as the UK/Europe in just a few years, but 2009 could well be the beginning of a changing retail environment in Mexico and potentially the inclusion of its winning elements back into the US.

RetailNet Group is the leading insight and advisory firm focused on retail growth strategies and consumer-facing transformational capabilities. We are deeply experienced retail/consumer analysts and strategists working exclusively to help brand-led businesses and large-scale retailers grow. Sincerely, RetailNet Group Note: Articles contained in this newsletter are collected from a variety of sources and links can expire over time. Email Marketing by