A Strategist’s Guide to the Digital
Grocery
As Amazon
and Walmart disrupt the grocery industry, smart retailers can compete by plying
their wares in a technologically enabled way.
Sometimes industries hit a tipping point. It looks like nothing is
happening for a long time, while forces of change build up, and then everything
shifts at once. That is happening in the grocery industry now. A shift is
taking place in the most fundamental form of shopping: consumers’ purchases of
food products and other basic household goods. The most visible signal of this
shift occurred in June, when Amazon announced its acquisition of the Whole
Foods grocery chain, but the basic trajectory was already long under way.
Central to this shift is the new digital grocery platform rapidly
emerging in industrialized countries. In the U.S., Walmart and Amazon are each
leveraging their scale advantages, but under different paradigms. Walmart has
achieved unparalleled success with a “push” model that ships full truckloads of
goods to more than 4,000 Walmart stores across the country, offering “everyday
low prices,” as the slogan puts it, without sales or promotions. Amazon
operates a similarly powerful supply chain but with a “pull” model that
responds directly to customer demand by shipping packages rather than pallets
of goods. The rest of the nation’s supermarkets and grocers must find a way to
compete in this environment. Other industrialized countries have similar
dynamics: traditional grocery competitors are squeezed between a “push” leader
like Walmart and a digital native “pull” player like Amazon or Alibaba.
Undoubtedly, the new competitive dynamics will give consumers many
more options for pickup and delivery of basic household goods, at lower cost
and with far more convenience than they have ever had before. But they come at
the expense of the traditional supermarket. For more than 50 years,
convenience, largely defined by store location, has been the dominant factor in
grocery retail. It has allowed even small players to survive, and thus helped
create a fragmented sector. But now, the digital reframing of the grocery
business, encompassing the entire purchase experience from order placement to
delivery, reverses that reality. Conventional supermarket companies face an
existential threat and must change their business models to compete and,
ultimately, to survive.
One potential approach shows particular promise. It could be
called the “ply” model — as in, “ply your wares with digital technology.” This
model seeks to offset the scale advantages of Amazon and Walmart by leveraging
the distinctive capabilities of a local grocery store: a supply chain fed by
full-truckload shipments (which Amazon lacks); dynamic pricing and promotion
(which Walmart disdains); and the ability to command intensive loyalty from
shoppers, because of its local community knowledge, customer segmentation, and
product customization. To compete in the coming decade against the twin
disruptions of Amazon and Walmart (and their equivalents), today’s grocers and
supermarkets need to return to the customer-centric mind-set of their
19th-century predecessors, while making the most of today’s digital tools.
A near-future scenario might involve a suburban family of two
adults and three children. They are mindful of both price and convenience.
Their favorite neighborhood grocer continues to win their loyalty because it
understands what they are looking for; it regularly stocks its shelves with new
items likely to appeal to them. On a Tuesday evening, the store sends the oldest
child, a 15-year-old being driven home from a soccer game, a text saying his
favorite box of prepared food, suitable for a low-cost and healthy school
lunch, is half-price in the store they are driving past. Moreover, other items
the family regularly purchases, including a new flavor of their favorite
breakfast cereal, their usual laundry detergent (which they haven’t purchased
in a few weeks), and a bag of oranges, can be boxed together for them along
with a few surprises that the grocery store will “throw in just to see if you
like them.”
The teenager receives the message because the store’s algorithm,
after years of data analysis and machine learning, recognizes that the parent
is probably driving and thus cannot text. Meanwhile, the other family members waiting
at home have also received the offer and have clicked a box to indicate their
support. The teenager alerts the driver to all this, and they stop at the
store. As the teenager steps out to pick up the package at curbside, a store
employee offers some cold sports drinks as additions to the boxed order. No
payment is required right then; the cost is added to the family’s monthly tab.
What the family members don’t know is that the pricing on those
items reflected economics put in place by the grocery chain for their mutual
benefit. The school lunch promotion resulted from a special deal with a
consumer packaged goods (CPG) manufacturer, interested in pushing out
particular products in that local market. Neither Amazon nor Walmart would have
matched that deal, because their approaches don’t favor the same kind of
supplier relationships. The grocery chain’s inventory-monitoring algorithms had
noted an oversupply of fresh oranges in the store, and its customer profile
data noted the family history of purchases, suggesting a win-win opportunity.
The store did not discount the laundry detergent since its algorithms noted the
brand loyalty; it reserved those trade promotion dollars for a different
customer. The cold sports drinks offered at pickup were among the higher-margin
items in the store, normally bought on impulse in the checkout line, but
explicitly recommended because the algorithm recognized the family as
participants in previous soccer league promotions. The retailer was plying its
wares: matching its preselected assortments to the customers most interested in
them, with offers designed to be irresistible — and profitable.
Many established grocery
chains will not gladly accept the dramatic changes involved in this new business
model, but some new approach is urgently needed. A study published in
2016 by
the Food Marketing Institute noted that as recently
as 2007, 67 percent of shoppers chose a supermarket as their primary source for
groceries. Nine years later, that number was down to 49 percent. And it’s
almost certainly continuing to fall, eroded not just by online shopping, but by
the increasing proportion of purchases made at supercenters such as Walmart
(picked as the primary source by 23 percent of shoppers), club stores such as
Costco (11 percent), and drugstores (5 percent). E-commerce will continue to
gain market share, especially with Amazon’s and Walmart’s increasing focus on
selling fresh food. Profitability and top-line growth are rapidly fading for
conventional supermarkets; so are shareholder returns. Overcapacity in the
grocery industry is growing, with too many facilities holding too much in
inventory. Consumers are getting savvier in using multiple formats (different
store types, online subscription models, online bulk orders, meal kits) and
using their smartphones to compare prices. And the global expansion of
discounters from Germany (Aldi, Lidl) and China (Bailian) may lead to even
greater competitive pressure in the U.S., U.K., and elsewhere.
For now, these changes will continue to be felt most strongly in
what grocers call the “center of the store”: the aisles of mass-market pantry
and household staples such as breakfast cereal, canned goods, cleaning
products, and frozen foods. Most incumbent supermarkets have responded to
industry changes by strengthening the periphery: prepared food, wine, artisanal
cheese, locally baked bread, and organic produce. That helps in the short run —
assuming the store can attract shoppers interested in more expensive, fresh
products — but fails to address the fact that the store center has been
critical to supermarket business models. With the decline of shoppers’
high-volume “stock-up” trips, the central aisles will be more like ghost towns,
and this will bring a new round of stress to margins and profitability.
Some traditional grocery chains will respond by pressuring their
core suppliers, the consumer packaged goods companies, to lower prices further.
They might also try to squeeze more items into the center of the store in hopes
of competing on variety. But they will have better success in collaborating
with CPG companies to achieve a unique capability in digital grocery. The
ply-your-wares concept could give them that capability.
Ply to Push to Pull to Ply
To understand the challenge
of the digital grocery disruption, you have to look back at history. Today’s
transition is one of three great shifts in grocery industry business models
since the Industrial Revolution. In the 19th century and several decades of the
20th, most grocers used an over-the-counterapproach. A merchant
interacted with each customer, bringing forward the requested household staples
from a narrow selection of options kept in the stockroom. A shopper had to
visit several shops — which might include a butcher, baker, greengrocer, and
packaged-goods store — to fully stock the household pantry.
Then came the supermarket,
pioneered by King Kullen in New York in the 1930s. Combining a broad array of
products in a large, self-service format, it seemed at first like a retail
miracle. During the next 40 years, supermarket chains built ever-larger outlets
with a discount push approach: “stack it high and sell it
cheap.” Simultaneously, consumer goods manufacturers built national and then
global brands. Together, the manufacturers and retailers created vast supply
chains to capture economies of scale, coupled with price promotions designed to
push products heavily. Large trucks delivered pallets to crowded backrooms;
weekly sales flyers attracted customers into the stores to empty the shelves,
using discounts that manufacturers generally funded. Today’s trade promotion
practices, which have grown to generate up to 25 percent of a typical
manufacturer’s gross sales, are descended from the coupons and flyers of the
past.
In the 1980s, the next
great shift occurred, with Walmart’s entry into grocery categories. Walmart, founded
in 1962, had achieved US$1 billion in sales by 1980, just 10 years after going
public: This was faster growth than any company, in any industry, had
previously achieved. It continued to grow through its steady push approach:
eschewing discounts, building large stores with varied selections, targeting
underserved locations (especially in rural areas), and maintaining stability
through its low prices. This removed the bullwhip-like vicissitudes of discount
pricing and the excess costs of the traditional supermarket. The company
shipped goods in full truckloads, just like its rivals — but it achieved a
steadier flow and enormous scale, which kept supplier plants and retail stores
running at full capacity.
Grocery now accounts for more than half of Walmart’s U.S. sales,
making the company the largest purveyor of groceries in the world. Even Walmart
engages in some temporal discounting, but it tends to use trade promotion
dollars from manufacturers to fund its everyday low prices, setting a calendar
of very limited weekly promotions. Some of its key suppliers, including Procter
& Gamble, have adjusted their practices to accommodate the steady push
approach. By any standard, the approach is successful: In the fiscal year
ending Jan. 31, 2017, according to the data Walmart releases, its revenues
totaled $487 billion from more than 11,500 stores in 28 countries.
But the power of a steady
push system wasn’t enough to prevent a third paradigm shift. This was the digital
pull system, made possible by the Internet and supersized by the
smartphone. In a pull system, customers identify what they want and the system
delivers it on demand. To make smaller orders profitable, the supply chain has
to be restructured. The pathbreaking digital pull pioneer, of course, was Amazon,
whose skill at user experience and operational excellence has made it the only
general retailer adept at this approach. (Some pull purveyors have succeeded in
specific categories, such as Inditex/Zara in apparel.) Amazon developed its
remarkable pull-based supply chain by borrowing lean management techniques from
the Toyota production system (TPS). Coincidentally, Taiichi Ohno, the father of
TPS, drew some of his original inspiration from a visit to an American
supermarket in the 1950s.
After the crash of the Internet bubble in 2000, Amazon continually
kept costs low, sacrificing delivery time by centralizing its facilities in
Kentucky. At that time, its guaranteed delivery time frame was a range of two
to five days. But the company kept investing heavily in its distribution
network, always seeking to increase speed and precision. Today, after an order
is placed, the site displays a countdown clock indicating how many minutes
until the product ships. In fiscal year 2016, Amazon revenues totaled $136 billion,
which equates to just 28 percent of Walmart’s revenues. But Amazon is growing
faster; in 2016 it captured one-fourth of the total growth of all U.S. retail,
half of all online growth, and the fastest share price growth in the global
economy.
Amazon’s entry into the grocery sector can be traced to 2005, when
it introduced Amazon Prime, a service guaranteeing free two-day delivery of
selected products for members who paid an annual fee. Currently, 40 million of
the 400 million items sold on the Amazon online platform qualify for Prime
shipping. A more explicit food business began in Seattle in 2007 with
AmazonFresh, which now offers 500,000 perishable and nonperishable products. In
2014, Amazon launched Prime Pantry, offering tens of thousands of grocery items
for two-day delivery to doors anywhere in the U.S. for a $6 fee. The last
barrier has been fresh and frozen foods. Amazon has struggled to master the
“cold chain” required to handle refrigerated groceries: It took six years of
experimentation before AmazonFresh expanded to other locations in 2013. It is
now available in many major U.S. metropolitan areas (Atlanta, Boston, Chicago,
Houston, Los Angeles, Philadelphia, San Francisco, and Washington, D.C., among
them) and London.
In March 2017, two AmazonFresh pickup locations in Seattle began
offering curbside service, placing groceries in customers’ cars at a time
specified when the online order was placed. Thanks to Amazon’s small-batch
delivery capability, the Fresh pickup sites are no more than one-fourth the
size of a typical grocery store carrying the same variety. Another retail
experiment is a small-store format called Amazon Go, which has adopted the type
of sensor technology and artificial intelligence used in self-driving cars to
eliminate cashiers and checkout lines; the building is designed to track
purchases as customers walk around. The prototype stores will be about 1,800
square feet, and carry only 500 to 1,000 items, most of which will be freshly
produced on demand (applying the pull approach) by a dozen or more on-site food
preparers. And of course, with the purchase of Whole Foods, the company now has
a viable presence in communities throughout the U.S. (and a few outposts in
Canada and the U.K.), providing a platform for further experiments. Meanwhile,
on the supply chain side, the company has announced plans that include adding
48 new distribution facilities worldwide to its existing 380, about 230 of
which are in the U.S., building upon a current global total of 139 million
square feet — plus its own air hub in northern Kentucky to house 40 leased
air-freight Boeing 767-300s. These numbers represent such a high competitive
bar that no single retailer, and certainly no supermarket, can feasibly match
Amazon’s pull approach.
Walmart, meanwhile, is acquiring online retailers (notably Jet.com
in 2016 for $3.3 billion and the men’s apparel outlet Bonobos in June 2017 for
$310 million), and offering its own online-order-and-store-pickup services
called “Click & Collect” and “Pickup Today.” Collectively, the two
behemoths — along with a group of smaller startups — are shifting consumer
expectations about ordering food online. The perception of food shopping
convenience is changing from an open checkout lane to a smartphone app with a
frictionless user interface. Even a small shift in customer attitudes can
disrupt traditional supermarkets. Unless traditional grocery stores respond
aggressively, Walmart, with its push model, and Amazon, with its pull, could
plausibly divide most of the grocery category between them — a category that
represents roughly half of retail sales.
Introducing the Ply Model
How, then, can traditional grocers respond to these threats? They
don’t have the scale to match Walmart’s steady push or Amazon’s digital pull.
But they do have advantages that Walmart and Amazon can’t match: their supply
chains, dynamic pricing and promotion, and customer loyalty. Digital technology
can and probably will be used to increase the value of these advantages. On the
supply chain side, new entrants are already setting themselves up as platforms
that established retailers can deploy. These include Instacart, a $3.4 billion
startup partly owned by Whole Foods, which has tried to explicitly compete with
Amazon on grocery delivery; other delivery startups such as Postmates, Shipt,
StorePower, and GrubMarket; Google’s version (known as Google Shopping); and a
growing number of food preparation startups, such as Blue Apron and Sun Basket.
To be sure, the costs of home delivery (the “last mile”) are still as great as
they were when one of the first such startups, Webvan, failed in 2001. And the
initial partnerships between these new companies and traditional retailers have
primarily been “no regrets” experiments, largely funded by the startups and offering
little risk to the incumbents. Home delivery will need to be a more integral
part of digital grocery strategies in the future.
In customer relationships and promotion, digital technology will
be critical for enabling the ply-your-wares approach. A food retailer will now
use mobile devices, customer segmentation, and pricing to change the promotion
game entirely. This new paradigm is, at its core, a digital upgrade of the
earliest retail model. In medieval village marketplaces, merchants aggressively
hawked their products and haggled over prices, using a keen eye to assess each
customer’s willingness to pay. They also kept watch for regulars who could be
counted on to show up every week. At the end of the market day, savvy merchants
had fully depleted the inventory of goods — be it fresh meat cuts or fur hats —
that they had already purchased.
A digital ply model gives consumers something they can’t get from
a scale-based model: tailored offers based on historical in-store shopping
patterns and micro-segmentation derived from big data. The family being
targeted by a digital message is not just segmented, but analyzed for its needs
and wants, almost down to an individual level. The supermarket no longer tries
to compete with Amazon or Walmart by providing everything; instead, it provides
what it perceives its customers will want and need most. Sometimes this will be
fresh or precooked food; other times, just the right assortment of staple
goods. Sometimes, the supermarket offers rare items that a few key customers
have bought in the past, and that happen to be available now.
The most important technological enabler for this new format is
real-time, big data software that maximizes the return on the investment in
store-based inventory. Under the digital ply model, retailers and their brand
partners manage product promotions the way airlines manage airplane seats. The
most loyal customers don’t get the lowest prices, but they get priorities and
special perks. When the supply of inventory is sparse, it is set aside for
loyal customers. When abundant inventory needs to be sold, selective promotions
target the price-sensitive customer who would not purchase otherwise. The
retailer models the economics of customer purchases — including the likely
impulse purchases made by customers drawn into the store through promotions —
and adjusts the assortment and pricing accordingly.
Some companies are already applying elements of this approach,
using technologies emerging now. One forerunner is the Safeway chain “Just for
U” app that identifies individual tastes and directs consumers accordingly.
Another is the Denver-based analytics firm FullContact, founded in 2010, which
helps companies combine their customer information with data from platforms
such as Twitter and Facebook. Ply marketing isn’t easy, and it won’t solve all
problems. But those who embrace it could find that it allows them to survive
the coming battle between Amazon and Walmart.
Getting to the Digital Grocery
Whether they adopt the digital ply-your-wares paradigm or another
framework, supermarkets will end up shifting their operating models
dramatically during the next few years. There is no other way to counter the
loss of business to Amazon, Walmart, and a few other multichannel platform
creators. Collaboration among grocery manufacturers and retailers probably
represents the best way to begin. Both sectors are threatened by the same
industry dynamics. They are both aware of the power of the Internet, and
particularly mobile devices, to reach consumers on the move. Together, they can
reach out to loyal customers, alert them to opportunities at stores near their
locations, and attract spur-of-the-moment purchases that offer real value and
yield incremental revenue.
Unfortunately, the apps from traditional retailers are not yet up
to the challenge. According to a recent analysis by the business intelligence
research firm L2, only one of 15 grocer apps and five of 10 general retailer
apps provided information on individual stores’ inventory, a critical
functionality for purveyors of groceries. Today’s grocers, like the village
merchants of the pre-industrial era, need to focus on selling their inventory
at the highest margins possible. But all too often, that inventory is put on
sale across the board, independent of the store’s current portfolio of goods.
At times, the products advertised in a traditional push promotion are out of
stock at some stores, because the space allocated to the inventory was
insufficient to cover the increased demand. So rather than finding a great
bargain, the consumer is frustrated by an empty shelf — particularly maddening
to stores if the consumer was a loyal shopper who would gladly have paid full
price. Out-of-stocks, whether on promotions or not, represent a failure for the
store, the brand, and the consumer.
Admittedly, maintaining an accurate view of inventory is far more
challenging in a grocery store than in an e-commerce fulfillment center of the
sort that Amazon runs. The fulfillment center operates in a highly controlled
environment, using best practices such as “cycle counting” (an auditing
practice in which part of the inventory is counted on a particular day) as well
as draconian measures such as pat-downs of every employee exiting the facility.
In a grocery store, when the computer shows an item in stock but the shelf is
empty, it could be in the back room, in a shopping cart awaiting restocking, or
in another consumer’s hand in the checkout line.
Digital grocers will use big data to address this problem. It can
help stores improve inventory accuracy by noting sales patterns — such as a
significant drop in sales when an item is out of stock — in order to trigger a
targeted inventory count to address the issue. Loyal customers could help by
clicking a button on their mobile app if they don’t find a desired product on
the shelf. The signal alerts the store manager, who might intervene on the spot
and find a substitute, suggested by the algorithm, perhaps with a discount to
keep a loyal customer, or a promise to deliver the item the following day.
Customer data can also identify habitual purchases, say, the largest package
size of a favorite cookie brand, and offer two-for-one promotions to specific
customers when there is too much of the product in inventory.
Few things are certain about the future of traditional grocers in
the digital world, except that decline awaits those who sit back and do
nothing. But supermarkets should take heart — loyalty to grocery store chains
sometimes scores higher than loyalty in any other retail category. The shoppers
are supermarkets’ to lose. It’s time for grocers to stop thinking about the
coming threat, and start planning for the opportunity.
by Tim
Laseter, Steffen
Lauster, and Nick
Hodson
https://www.strategy-business.com/article/A-Strategists-Guide-to-the-Digital-Grocery?gko=16529&utm_source=itw&utm_medium=20170831&utm_campaign=resp
No comments:
Post a Comment