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Supervalu May Learn That Cutting Costs Without Customer Concern Will Ultimately Affect The Sales Side Of The Equation

Jim Prevor’s Perishable Pundit, March 28, 2011

Back in 1987, American Airlines infamously eliminated olives from its salads to save about half a million dollars a year. It is a simple story, demonstrating the power of scale when it comes to savings. The way the story was popularized, it was said that it was assumed the salad ingredient would never be missed and so, Bob Crandall, then CEO and a legendary cost-cutter, saw it as an easy place to save money.

The story makes sense. After all, how many people select their flights based on the quality of the food — much less whether there are olives on the salad?

Yet the story is incomplete. Here is how they explain what happened in a book called Corporate Creativity: How Innovation & Improvement Actually Happen by Alan G. Robinson and Sam Stern:

Over many years of collecting meal trays in aircraft cabins, flight attendants had come to know that most passengers did not eat the olives in their salads. Somehow this fact came to the attention of Crandall, who ordered a study to determine how much money would be saved if olives were eliminated from salads. The study showed that 72 percent of customers were not, in fact, eating their olives.

Moreover, the airline paid for salads based on the number of items in them sixty cents for up to four items and eight cents for five to eight items. The olive was the fifth item. The olives were discontinued for a savings of roughly $500,000 per year. Soon afterward, an association of olive growers found out about this. They contacted Crandall and threatened to boycott the airline if olives were not restored to the salads. After some negotiations, American agreed to stock every flight with olives and to make them available to any passenger who requested them. This arrangement required no extra catering, since some olives were already put aboard every airplane for martinis.

On the one hand, this is a story of exemplary management. There was some mechanism to bring staff observations to the CEO’s attention; there was a willingness to listen; there was research conducted to confirm the assessment of the associates and to quantify the impact if a cut was made in this area. So management was both concerned with the customer experience, vendor relationships and looking for opportunities to save money.

Yet it is not at all obvious that the optimal decision was made. The big savings came about because of peculiarity in how salads were priced with olives pushing the salad price into the 5 to 8 item bracket. The study showed that 28% of customers ate the olives. Maybe those 28% of customers, or some portion of them, preferred American Airlines because they had an overall better experience on the airline due to their enjoyment of the airline’s meals.

Perhaps what the story was actually showing was a disjunction between the menu planning and procurement operations. The salad was designed, perhaps, without the Chef realizing he could have three more ingredients for free. Perhaps some cucumber, an artichoke heart, heart of palm, some peppers, a baby potato or any of dozens of other possibilities could have been added to the salad to delight customers.

One of the most common errors in interpreting research is to think that the most commonly appreciated attributes are the place to focus one’s attention. Virtually all studies of consumer shopping venues indicate that cleanliness, assortment and price are the top three attributes that consumers value in a store. It would, however, be a big mistake to think this means that the most effective customer solicitation effort would involve cleaning the store twice as often.

In most cases, the very preeminence of a consumer desire for cleanliness means that it becomes a kind of “ante” that one must pay up on if one wants to be in the game. So the local Safeway, Kroger, Publix or HEB store is likely to be sufficiently clean to attract customers. The key to gaining customer loyalty may be a great offering of organic product or kosher product or Asian specialties. All these attributes may only show up as important to a relatively small percentage of shoppers. Precisely for this reason, however, not every store will excel in these areas and therefore an opportunity is created for those who wish to seize it.

What Crandall did was to ensure that the salads American Airlines served would meet the requirements of most customers. He also ensured that they would be nothing special and not be a reason for people to prefer to fly on American Airlines.

This all comes to mind because Ilan Brat wrote an article for The Wall Street Journal titled, At Supervalu, Cost Cuts Are in the Bag:

As Jenn Cooksey watched baggers at an Albertsons supermarket in Boise, Idaho, recently, she spotted a no-no: A bagger had stuffed a jug of milk in a plastic bag all by itself.

Ms. Cooksey, the store’s customer-satisfaction manager, pulled the bagger aside and reminded him that under the store’s new bagging guidelines, large items with handles get bags only if customers ask.

The new rules are part of a training program that Supervalu Inc. believes will save it millions of dollars a year by putting more items in each bag or skipping the bag altogether. Plastic bags cost about two cents apiece and paper bags cost five. The Eden Prairie, Minn., operator of Albertsons, Acme Markets and Jewel-Osco stores uses more than 1.5 billion plastic and paper bags a year at about 1,100 stores, not counting its Save-A-Lot discount stores, where customers bring or pay for their own bags.

“We’re in a very competitive industry. Anything we can do to lower our expenses will help us keep our prices as fair as possible,” says Supervalu spokesman Mike Siemienas.

We will put aside for a moment the Orwellian nomenclature that gives a “customer-satisfaction manager” the job of depriving customers of choice in bag options. All we have to recognize is that bagging is, of course, part of the customer experience and changing that experience can impact customers. The same story points out that Wegmans had to backtrack on a bagging change:

The efforts carry risks, as Northeast grocer Wegmans Food Markets Inc. discovered in 2009 when it tried its own bagging switch. The Rochester, N.Y., chain of 77 stores adopted a bigger, sturdier bag to boost the average number of items per bag, but customers complained that the filled bags were too heavy, says spokeswoman Jo Natale.

Last year, Wegmans returned to a smaller bag, and this year it is testing a smaller bag that includes 40% recycled plastic.

Some of Supervalu’s efforts don’t seem very customer-driven:

Some of the Supervalu guidelines reinforce familiar bagging rules, such as starting the packing at the corners and moving from the outside in. But others break with common practices: No double-bagging. No bags for large items or items with handles, like one-gallon orange-juice containers. Never ask, “Paper or plastic?” — just use plastic bags. The rules can be broken, but only on request.

It is true that plastic is cheaper than paper, that double bags cost double the money and that a few pennies can be saved if things with handles don’t get bags. What is missing from this story, however, is any indication that Supervalu tested this and determined that shoppers were happy with the new bagging regimen.

It is often said that one can only manage what one can measure. Fair enough. But the corollary of this is that management has to always be on guard against making choices simply because data on that particular thing is often available.

We see this all the time with shrink, and we once wrote a column about this issue as related to floral. Management, especially senior management, wants to increase profits. They have no particular ability to divine how to sell more floral products but they can get a report that identifies shrink. Then it is easy to order a reduction.

They can give bonuses for achieving a reduction in shrink; they can place flowers behind closed door displays; they can create an incentive for store level personnel to order fewer flowers, etc. They can achieve the reduction in shrink.

Most often, though, the big shrink reduction effort also reduces sales and profits.

So this Supervalu effort of trying to push plastic bags on consumers who might prefer paper… trying to require a hyper-consciousness to get a double bag as the effect won’t be felt in the store parking lot where people have carts, but only at the house where bags will break because they are being carried… this whole effort will probably achieve its goal of saving money on bags. But some small percentage of shoppers will find the shopping experience, which includes getting the goods in the pantry and refrigerator and freezer, to be less desirable and will switch to stores that respect them enough to ask them their preferences: paper or plastic?

They will like shopping someplace that cares about whether the bag will break as they go from the street or garage to the kitchen.

In other words, because this is not driven by an urge to delight the consumer but by an urge to avoid giving the consumer what he or she wants, the savings in bags will likely be quickly exceeded by the cost in lost customer preference.

They have a lot of talented people at Supervalu. The CEO should focus on finding out how those people would propose to delight the consumer. Sticking people who like paper with plastic hardly seems an auspicious start.

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