Winning in the grocery market Six actionable imperatives for the retail CEO

Think Tank: McKinsey & Company – Report summarized by : Bummary

Introduction

Discount, online and non-grocery channels are on the way to capture almost $200-700 billion worth of sales away from traditional grocery chains. This could wreak havoc for the incumbents and put them at the risk of losing EBIT of more than $1 trillion. Higher costs, falling productivity and race to the bottom pricing are the key drivers of this downward spiral but it’s not the only thing. Monumental forces in digital and technology are disrupting the very core of the business, and grocers need to swiftly adapt new agile business tactics to survive.

The key disruptive trends hurting the retail sector

A business usually has to deal with changing consumer trends, attack from competition and disruption resulting from new technology but this time around, these activities are at such scale and speed that the impact on traditional grocers is resulting into dropping real economic profits and declining growth. Below are the three key trends causing wide spread disruption in grocery retail:

Gen Z and Millennials are a different audience with distinct tastes and preferences

The internet generation is always looking for services with little lead-time. They love personalized access, and the ability to buy anything almost immediately. They want to consume better food, want companies to be socially and environmentally responsible and provide deals and discounts that fit their budget. One common challenge across all generation of shoppers for the grocery retailer is a growing number of people moving away from home cooked meals to readymade meals. In the mature markets of Western Europe and the US, food service business revenues are already exceeding food-at-home sales and this trend is likely to continue.

Massive new competitors and ecosystem enablers are creating more trouble

Rising commodity prices in the last decade hurt grocery retailers bad. They could not pass through the rising costs to their consumers owing to intense competition emanating from discount, online and other non-traditional retailers.

Further, being late to understand the changing consumer trends allowed other firms to enter the market and quickly capture market share. Online players like Amazon with deep pockets are now beginning to focus their energies in this space too. The recent acquisition of Whole Foods provides Amazon with an omni-channel sales presence. Combining the power of brick & mortar with the solid operational and technological background provides Amazon an opportunity to build an eco-system for consumers to access products at low prices and convenient & consistent experiences.

McKinsey’s analysis shows that these new modern retail eco-systems will soon dominate sales and takeaway $200-700 billion in sales from traditional grocers.

Technology and digital disruption are hurting traditional grocery business

Lagging to adopt new technologies like advanced analytics, AI, IOT, Machine learning and advanced data sciences for supporting and building unique customer experiences and value is the primary reason for the rapid decline in retail business growth.

Amazon for instance deploys a sophisticated product recommendation system, provides price transparency and uses an army of robots in its fulfilment centers building technological prowess and efficiency across the front and back-end systems of the company. This has enabled it to quickly enter new markets and disrupt long-standing players.

Six actionable imperatives for profitable growth

Companies in the grocery retail space need to realize fast the importance of reinventing their core. If affirmative actions and strategies aren’t executed, the results could be catastrophic. Below is a list of the key actions you need to take today to restart your growth journey and build a sustainable and profitable company.

Let the users identify you with a distinct value proposition

Convenience, inspirational and value for money are the mantras for success with today’s consumers. Your brand, product and company should be closely associated with these critical value propositions.

Convenience: Planning your store locations strategically is a good start to build up the convenience factor for customers but it isn’t the only thing. It’s about creating a consistent shopping experience across channels and making life simple from product selection, billing and delivery. Food service is fast taking over the market, and one good way to improve customer experience is to have kiosks with ready to eat food thus creating both an experience and enticing them to visit the store to try out new stuff as and when it’s introduced.

Using technology for navigating in-store and using express checkout technologies further the overall customer experience.

Tip: McDonalds allows people to order their favorite meal from their mobile app and then park their vehicle at a designated spot outside the restaurant where the meal is delivered straight to their car. The convenience of shopping for food in this way has delivered solid results for the firm with 13 straight quarters of same-store sales growth.

Inspiration: Consumers today like to feel informed. They want to know what they’re eating and where it’s sourced from. Providing a digital tool like signages and mobile applications can go a long way in creating an enabler for customers to resonate with your brand and offerings. Further, building kiosks and an in-store walk experience with custom themes can help differentiate yourself from low-cost competitors only fighting for customer attention through value for money.

Value for money: The toughest part of the business model puzzle is competing with big box retailers and discount stores. Their core value proposition is predicated on providing food items at ultra low prices. To compete, you’ve no option but to make agile and lean the center of your strategy and operations. Because pricing is market driven, a better strategy is to compete on the twin differentiators of convenience and inspiration, which is all about an incredibly sleek, sophisticated and simple experience for users to resonate.

Build an ecosystem of collaboration and partnerships

Forward looking perspective on how consumer behavior, the competitive landscape, and technology are likely to change in next five years will be the key drivers for grocery retailers to make big bets on the future.

Choices will have to be made around food and non-food assortments, payment systems, customer interfaces, service options and last mile delivery. Answering the key questions on what these potential disruptions are going to be, and what the growth areas and profit pools are, will make all the difference.

Amazon and Alibaba have shown the way to building robust ecosystems, and challenging them alone is suicidal. Building the right partnerships from backend to frontend needs a fundamental re-thinking of the core product offerings and the customer value proposition and overall experience.

The goal is to leverage data and analytics from storefront to back office activities. Automation, AI and agile systems can help speed up the process and allow you to make the right choices to fill capability gaps either through M&A or strategic partnerships.

Example: Delivery is a major challenge for firms because the high costs of last mile delivery makes online grocery a loss venture. A typical grocer in this space can overcome this challenge by warehouse relocation, automation and using advanced analytics to understand delivery patterns and user behavior. Low ‘drop density’ is the biggest reason for the unit economics of the grocery delivery to fail. A typical delivery-van driver in the UK for instance delivers, on average five deliveries per hour. A potential solution is the milkman model whereby retailers deliver to specific locations and communities on pre-defined timelines and a pre-planned schedule. Picnic, a small Dutch grocery chain has successfully improved their delivery density to 14+ deliveries per hour with the milkman model.

Technology is your best friend and must be used at all levels and functions

Technology is a buzzword for most corporate leaders. They understand the value of technology but are not sure about where to begin. First, it has to be pervasive across the organization and encompass all levels and touch both back office and front end customer centric operations.

Grocers who’ve taken an early lead over their more resistive competitors have been able to capture 2 to 5 percent higher EBIT margins owing to early adoption. Digitization, AI and building technology that makes in-store, warehousing and back office activities efficient can go a long way for a traditional grocer to build strong value differentiators in the market.

McKinsey’s research shows that automating portions of back office processes like accounts payable handling or payroll processing could yield savings of up to 15 percent in employee hours, an enormous value proposition for grocers.

In-store automation is also a reality in today’s world. Kroger, an American retailer has tied up with Ocado, a global leader in warehouse automation and end-to-end use of advanced analytics, suggest opportunities for same day, and same-hour delivery from dark stores with little or no staff.

Retailers like Amazon and China’s BingoBox are trying their hands at building unstaffed convenience stores to leverage technology for an elevated customer experience. From digitized shopping carts to payment on the go, are all new ways to create a differentiated customer experience for convenience and inspiration.

Finally, personalization is considered to be an important part of building a streamlined and focus marketing strategy. Using AI and analytics to understand customer tastes and preferences could play a big role in igniting sales growth, and initial data suggests it could help the companies achieve as much as 2 percent increase in the top line.

Winning consumer lunches and dinners will be the key to sustainable growth

As consumers shift from home cooked lunch and dinners to cooked food service providers, grocers have had a big impact on their margins and profitability. To win the game, they need to win back this market. Building an inventory of ready-made meals and offering a combination of food-service experience through in-store dining, retail shelves, food halls with store-in-store features are ways to win back this market. However, as a grocer you need to answer these key questions to take on the food-service business:

What kind of food choices to serve? (Food now or food-later)

How much store space to be dedicated for food-service?

Who will operate the food service – in-house staff or third party?

What brands to carry?

Is home delivery a model to explore? If yes, what’s the solution to manage last mile delivery?

Real estate isn’t bad but you need to put a lot of thought into it

With pricing no longer a prerogative for grocery retailers, building lean shops is the way to manage the glut in revenue and margins. Re-thinking store concepts to make them leaner and strategizing progressively on where to open and shut stores will be a make or break decision. Here’s some potential levers to restructure physical real estate:

Reinvigorate – Invest space in key categories that drive footfall to compete effectively with discount chains.

Repurpose – Add new categories like café, sushi bar etc.

Rent out – Give out shelf space and small kiosks to new products and brands that appeal to the target market thus bringing additional value.

Right-size – Shrink the size if it makes sense.

Remove – Close unprofitable stores, sell building or end lease while maximizing profits.

Reinvent – Unlock property value by adding differentiated services like offering a co-working space or hotel services.

Innovate at rocket speed

Concept to market sprints are extremely important to unlock value and beat competitors to capture consumer attention and value. Having small focus groups of inter-operating teams with clearly defined goals and responsibilities should take up agile development and deliver on the twin challenges of growth and value.

The idea is to have agility at the center of your go-to-market strategy. Key characteristics are quick decision making, focus on tangible outcomes, constant customer validation, co-located and multidisciplinary teams, rapid iteration, and careful attention to internal capability building can help reduce time to market by five times.

Final summary

Grocers are losing market share and consumers to new age ecosystems and discount retailers. Winning in the market will require a fundamental re-thinking of the way business is being conducted. Agile should be at the center and technology has to be trickled down to all areas of the business. Building unique customer experience and providing them with some to resonate with will be the key differentiator in a market where discounters and eco-systems have taken away the grocers ability to play around prices.

Here are the key areas you need to think about as a grocer to win in the market:

  • Build automation, AI and analytics at the center of your business process.
  • Adopt agile cross functional team structures with pre-defined and uncluttered roles and responsibilities for faster GTM.
  • Restructure the store and look at multiple parameters to unlock real estate value.

Build eco-systems through M&A and strategic partnerships with common areas of growth.

 

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