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July 28, 1998

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Subject: An Expose: Grocery Store Shelves Tell All!
Author: smmonohan

As Fools, we do not have easy access to the same information that Wall St. analysts have, such as industry sales trends to determine if beverage sales are growing or monthly market share data to know if Kellogg's cereals are selling more than General Mills'. Nor do we have tons of time to pour through industry magazines to piece this information together. So how is a time pressed Fool able to determine the strength of a company's brands? Well, there is a way and it is something that we already do about 2 times or more per week: Go to the grocery store. You may scoff at such an idea, but take a minute and walk through a grocery store and a ton of information about a company's brands jumps out at you. You just have to know what to look for. So, as a salesperson for a food manufacturer, I will let you in on some trade secrets.

First, you must realize that grocery store chains evaluate a store's success by sales per square foot. In short, this means grocery stores allocate more space to products that have higher sales. Now with that insight into grocery stores, we can get a rough idea about three qualities of a company:

1) The size of the businesses in which our company competes;
2) The strength of our company's brands within those businesses;
3) The level of influence our company's sales organization has with grocery store chains.

Before I get too far into the first quality, I must clarify something. Walking through a grocery store will only tell you whether a given business is small, medium or large, but that should be enough to give us the insight we need to make our investment decisions. Now how can a stroll through a grocery store tell us how large a business is? Let's look at P&G for example, since it is one of my holdings. Two of P&G's businesses are potato chip snacks and laundry detergent. Let's see how much shelf space these businesses have in the grocery store. Walk down the snack aisle at your local grocery store. Notice how much space is given to the potato chips vs. the peanut snacks and popcorn. At my local grocery store, a good 60 feet or more is given to potato chips, while about 8 feet is given to peanut snacks and 4 feet to popcorn. Over at the laundry detergent aisle, 68 feet is given to laundry detergent. Remembering that grocery stores want more sales/square foot, we can deduce that unit sales are probably higher for potato chips and laundry detergent than peanut and popcorn snacks. In our simple ranking system, potato chips and laundry detergent businesses rank as large. Now we have a rough idea that P&G is competing in some relatively high unit sales businesses. For all those Cash Kingers, high unit sales volume means a high level of repeat purchases.

Now, we want to know how strong P&G's brands are. Applying the same logic, look at which brands dominate the snack shelf. Doritos, Lays, Tostitos. All Frito Lay's brands! In fact, at my local grocery store, one complete side of the aisle is dedicated entirely to Frito Lay's brands compared to P&G's (Pringle's), which has about one tenth the size. Back down the laundry detergent aisle, Cheers, Tide, Gain, Downy, Ivory Snow, and Dreft, dominate the laundry detergent area with about 60% of the space in total. All P&G brands! The remaining 40% of the shelf space was fragmented across the generic brand and a few other national brands, giving no one competitor more than 10% of the shelf space. Well, now we have an idea that P&G is probably not a leader in the snacks business (Maybe I should look more closely at Pepsi/Frito Lay). However, we have an idea that they likely dominate the laundry detergent business.

Before we get to what this tells us about a P&G's sales force, there are two areas that require further explanation. First, for a good grocery store chain, the space allocated to a brand roughly equates to the percentage of sales contribution that brand has within its business. So, if P&G has 60% of the laundry detergent shelf space, you could roughly estimate that is has 60% of the chain's laundry detergent sales. The converse, basis shelf space, would say that the remaining 40% of sales for laundry detergent is so fragmented that no other competitor of P&G has more than 10% of the chain's sales. Now this is a rough estimate, but it can still help guide our investment decisions.

Second, a company's sales force typically has 3 areas of responsibility:

1. Developing and selling product promotions to the grocery store chains. Promotions are when you see a grocery store selling Coke on special for $1.50 a six pack, with a big banner displayed up front advertising the promotion to everyone walking in the store. This typically drives purchases by swaying consumers who do not usually buy Coke to do so during the promotion.

2. Getting new items on to grocery store shelves. This is where a salesperson convinces the grocery store chain that a company's new product will grow a chain's sales and therefore deserves valuable space on the shelf. Considering 90% of all new products fail, this is never easy.

3. Maintaining distribution and shelf space of a company's products. Here, a salesperson makes sure that a company's product is on the shelf, the space for the product is well organized, consumers can identify the product and price on the shelf, and the product has the appropriate amount of shelf space. All of this helps influence consumers to buy a company's products.

Well, what does all this mean? Well, based upon the amount of shelf space, we deduced that P&G is a significant leader, if not a dominant one, in the laundry detergent business. We estimated that their portion of a grocery chain's laundry detergent sales is approximately 60%, while any other single competitor is no more than 10%. That is a powerful amount of influence a company's sales force can have on a grocery store chain. Knowing this, which new laundry detergent items do you think the chain will put on the shelf? Which laundry detergent items will the chain advertise and promote? Which laundry detergent items will the chain ensure are constantly on the shelf, well organized, and easy to find? The answer is P&G's.

Now, if you are a P&G investor, you would want to continue down other aisles in which P&G has products, such as the Diaper/Baby Products & Paper Products, Cleaning products, and Beauty Care aisles. This would give you a complete view of P&G's brand strengths and weaknesses. And of course the more grocery stores you visit, the broader you can extend your insights on such strengths and weaknesses.

Wow! All this information from just a trip to the grocery story. Now, that you are armed with this new knowledge, I hope your grocery shopping will be even more Foolish. Fool On!


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