With their business models under attack from all sides, grocers need to embrace innovation and creative supply chains to survive
Would you pre-order a year’s worth of groceries? That might sound crazy, but it’s exactly the kind of out-of-the-box thinking supermarkets need to consider if they are to survive.
Supermarket executives are living in a world that is highly unpredictable, and know that whatever change has gone on in the past five years will accelerate even further in the next five.
Current challengers include discount stores, delivery and subscription services, meal kits, the rise of eating out… it’s fair to say that today’s supermarkets have to be set up to be able to deal with ambiguities.
In simpler times, the discounters such as Lidl and Aldi were the biggest cause for concern. But although their market share is rising – Aldi and Lidl took 10.4% of the market in the first quarter of 2017, and their own-label brands are performing well ahead of the rest of the market – there exists an army of new disruptors ready to pick a fight with grocers.
As well as established online delivery specialists like Ocado, digital aggregators like US-based Instacart, which delivers groceries from a choice of stores, and the UK’s Fresh Direct, which wholesales fresh food, are gaining ground. Some brands are also increasingly exploring selling direct to the public: Toblerone owner Mondelez expects to have $1bn direct sales in e-commerce by 2020. And online behemoth Amazon is predicted to take 3% of the UK’s grocery market – that’s $1.4bn in sales – by 2020.
Then there is the rising popularity of meal kits for home cooking, delivered by companies such as Hello Fresh and Gusto, cutting out the need for a consumer to visit or engage with a supermarket at all. Spending in the UK on such services grew by almost 65% year-on-year in the first half of 2016 and, in the US, sales for that year were predicted to top $1.5bn.
Add the rise in eating out – UK consumers will spend £54.7bn on eating out in 2017, says an NDP Group study – and the outlook for supermarkets is rather bleak. In summer 2016, UK supermarket sales dipped below £100bn for the first time since 2010.
So, what’s to be done to ensure there is a future for traditional grocers? The answer, according to Paul Martin, managing director of KPMG Boxwood Insights, is for supermarkets to rethink their operations from scratch.
There are three key factors that drive shoppers, according to Boxwood’s research: value, convenience and experience. If value is seen as most important, getting the lowest price is what matters. Convenience means using local corner stores and embracing online and subscription-style models for delivery. Experience is about the feeling one gets on visiting a store. Waitrose is a great example of this. “Shoppers enjoy going there, and because of that they’re prepared to spend more,” Martin told KPMG Consumer Currents.
To be successful in a volatile and uncertain future, grocers have to be very good at serving one of these three drivers. If that sounds deceptively simple, that’s because it is: shoppers can be influenced by any combination of factors at any time. For example, Texan supermarket H-E-B uses tactics such as fish-on-ice and mist-spraying its vegetables to imply freshness in its huge stores, but makes shopping as uncomplicated as possible and goes heavy on coupons and offers. This calculated appeal to old-fashioned values strikes a chord with its chosen demographic.
The need for change means rethinking traditional routes to market – the days of rushing to open superstores in pursuit of market share are over. At its peak, about 78% of grocery shopping was done in out-of-town superstores, but this has declined to about 70%, as consumers opt for a ‘little and often’ approach. A February 2017 Harvard Business Review study showed that corporate US retailers who opted for costly high-growth policies had struggled with diminishing returns. In contrast, their most successful competitors in the US have abandoned – and in some cases reversed – this expansionist policy in favour of improving operations, inventory and customer service at existing locations. This low-growth strategy has resulted in revenues increasing faster than expenses.
“The extent to which customers can find the products they want at a reasonable price and get help from sales associates as needed is a crucial determinant of whether they buy something or leave a store empty-handed,” says the report. “Many analytics tools are available today that help retailers decide what assortment of products to carry in what quantities, how to price them, and how many sales associates should work in each store, at what hours.”
Online shopping and delivery also isn’t performing as strongly as it could be. In their haste to offer convenience to online shoppers, many British grocers have saddled themselves with delivery to the door – on which making money is tough. “You need at least $140 per order to make a profit on home delivery,” points out Martin. “The average order size is nearer $105, so grocers are losing money on each delivery.”
The success of Ocado, Britain’s largest pure play online grocer, shows that home delivery can turn a profit, but it took 15 years to report its first one – just 7.5% pre-tax in 2015.
In rethinking their operations, Mark Essex, a partner at KPMG UK, believes large food retailers need to change their business models to be focused much more on the consumers’ needs. “In the UK, the farm to store or farm to doorstep value chain is dominated by the top five,” he told KPMG Consumer Currents – these are Tesco, Sainsbury’s, Asda, Morrisons and the Co-op. “We’ve never had so much access to what we want, when we want it,” he adds. “And every year, new tastes and sensations arrive. This is expensive to provide – the scale and scope of all that inventory creates a lot of waste through the supply chain, from farmers discarding apples that aren’t spherical enough to consumers throwing away uneaten produce.”
But consumers are demanding, and balancing pleasing them with the ever-present need to keep costs down presents a conundrum for supply chains. As one chief supply chain officer at a leading food manufacturer tells SM, consumers’ habits have never been more volatile as people embrace foodie fads, and this brings a complex supply chain challenge. “People are broadening out their habits; they won’t buy the same thing every week,” he says. “You need to be agile and that’s anathematic to the supply chain. It’s really hard to be cost effective.”
“For individuals in supply chain, agility and responsiveness are essential,” agrees Alex Edge, supply chain insight manager at global food and grocery experts IGD. “Going forward, the routes to market will need to continue to be dynamic and flexible according to shopper habits, allowing businesses the chance to flex their offer as needed without driving significant costs into their supply chains.”
Subscription services is one way of doing this. “What if my family paid the supermarket £500 a month to feed us? Much of the supply could be planned in advance, with weekly tweaks to suit particular needs,” suggests Essex. “The supermarkets could then provide tailored food – or meal kits – for my family, according to our nutritional, ethical or environmental priorities. They could tie up with a takeaway business and send Saturday’s food hot – or deliver a dinner party kit with matched wines.”
To make this system work, the retailer would need to invest in getting to know the customer in granular detail – and use that data to help the customer. It’s a level of personal information many would be reluctant to give up, yet Essex is convinced it would be worth it. “It’s a shared investment,” he says. “Once I’ve subscribed, as long as my food supplier performs, how likely am I to switch providers? In the UK, we only change our banks every 17 years. If I stay with my grocer for say 40 years, at £10,000 a year, that’s £400,000. The customer investment should be on a par with that made by your local BMW dealer.”
The paradox of choice
One way of improving supermarket performance is to carry a smaller – but better – selection of products. “The multiples need to know their authoritative range of products,” says Martin. “If the rule of thumb is that 1,400 stock-keeping units (SKUs) cover 80% of a food shopping trip, does it make sense to have 3,500 SKUs in your store? Reducing complexity – and complexity is always costly – can help you compete.”
Some retailers are already making such moves. In 2015, Tesco announced plans to remove one-third of the 90,000 products on its shelves. It had 228 kinds of air freshener: does anyone need that much choice? Consultancy Kantar Retail estimates that British households only buy 400 products per year, and 41 in their weekly shop. Reducing stock could also have the halo effect of encouraging shoppers to buy more private label items, on which grocers make more profit.
On the manufacturing side of things, the key is to get as close as possible to the point of customer demand, says Edge. “This shortens the lag between demand being created and decisions being made further upstream in the supply chain.”
This can be addressed via RFID implants and vendor-managed inventory, he adds. “Where notification of a high-selling promotion is received through an implant, it allows the manufacturer to make decisions on stock much earlier in the supply chain, and this can help keep costs low.”
Embracing robotics and automation is another way for supermarkets to reduce operating costs. “There has been significant investment in automated picking by manufacturing and retailers in recent years,” Edge says. Ocado’s scalable smart platform involves armies of robots picking customer order items, carts whizzing around miles of conveyor belt to pick them up on the most efficient routes, planned by software. This is claimed to cut picking time from two hours to 15 minutes, and has been significant in helping boost profits by 21.8% year-on-year.
Edge expects to see “further supply chain synchronisation between trading partners”, enabled by advances in technology. “Web-browser-based systems will become commonplace,” he predicts, “allowing instant visibility of inventory, sales and production across the whole supply chain. This will allow faster, more informed decisions to be made.”
Cost-saving measures behind the scenes can allow supermarkets to invest in more innovative ways to get goods to consumers. Tesco has online fulfilment centres around the M25, for example. Swedish supermarket ICA Lindvallen has partnered with Volvo to offer in-car delivery, where groceries can be delivered to a customer’s car boot. “We’re even seeing trials of home deliveries where drivers can scan their handheld device over a customer’s door and put the products away into the fridge, freezer or cupboards,” Edge says.
Drive-through supermarkets – modelled like a petrol station with rotating shelves – have also been tried in the US by Walmart and Amazon, but these require a lot of physical space and investment. One reason that local convenience stores will survive is because, according to Nielsen’s new Global Retail-Growth Strategies Survey, people still judge products and location as the most important factors in where they shop. Click and collect is so popular with consumers (they make up half of the transactions in the UK) because they see value in the convenience of going somewhere they were going anyway, rather than sitting at home waiting for the delivery to arrive (or not).
When it comes to the in-store experience however, supermarkets need to remember ‘it’s the sizzle that sells the sausage’, and that grocers are still not making the most of the opportunities that exist to wow the customer. Supermarkets need to be edgier, more exciting places of discovery, offering consumers events such as tasting sessions and expert advice, says IDG CEO Joanne Denney-Finch. Those that don’t, she warns, are in danger of being marginalised.
The Italians already offer such a model. Last December the country’s largest supermarket chain Coop opened its ‘supermarket of the future’ in Milan, with produce displayed on tables and automatically restocked from underneath. On hand are experts to offer advice, while screens use recognition sensors to offer relevant information such as nutrition, allergens and supply chain history. A wall of monitors shows cooking suggestions. The system’s designer, Carlo Ratti, hopes functional items, such as toilet paper, will be ordered online while the stores concentrate on experience items to promote informed consumption.
And there are signs of UK retailers following suit. Waitrose is hoping to make some stores destinations for eating and enjoying an evening out, offering supper clubs with meals made by top-notch chefs using goods available in store. The idea was trialled this year at its store in Haywards Heath, Sussex. “We want to make our stores a food destination in the evenings as well as in the day,” says Waitrose Cookery Schools’ manager Karen Himsworth. “We realise a supermarket might not spring to mind when people are thinking about dining out in the evening, but we want that to change.”
This speaks to a suggestion in a Nielsen study that grocers become “the social centres of communities, where neighbours can feed their bodies with nourishing food, their souls with good conversation and their wallets with great deals”.
The need for agility, the ability to test and switch direction, must be ably supported by supply chains that are truly responsive and collaborative. We’re moving from a scenario where there was one successful business model to one where there are many. What will separate the winners from the losers won’t be technology or demographics but a mix of convenience, value and experience, according to KPMG’s Martin.
An unnamed supermarket CEO agrees: “My start point is build a business model that’s flexible enough to cope with whatever consumers may choose to do in the future.” And the future starts here.
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Why you should worry about Amazon
E-commerce giant Amazon has its sights set on supermarkets. Its Amazon Fresh grocery delivery programme is linked to its Amazon Prime subscription service. Users pay a monthly fee to access cheaper prices, with a range of leading brands including Coca-Cola, Kellogg’s and Warburtons. Consumers can get next-day delivery and hourly delivery slots.
The online retailer is also experimenting with bricks and mortar, albeit with some hold-ups. It debuted a drive-through supermarket with no checkouts, no aisles and no cash. Customers order food online for collection, paying via an app. Amazon’s first grocery stores have opened in Seattle. The concept’s simple: have the consumer be their own delivery man, picking up the order they made via Amazon Fresh.
Amazon Go – with no checkouts but automatic scanning of items which are charged to Prime accounts – is also planning a two-tier warehouse system, with just six human staff and an army of robots. This is predicted to increase profits in operating margins to 20%, compared to the present level of just 1.7%.