Bill Bishop and Keith Anderson: Q&A on challenges facing grocery

April 12, 2016; 00:16 am by Susan Lindsay, Executive Editor

Bill Bishop sat down with Keith Anderson, Profitero’s Vice President, Strategy & Insights, to talk about some of the trends in online grocery and challenges facing the industry. They discussed the vulnerabilities the industry faces, why some retailers are reluctant to switch gears, scale of business and how suppliers wrestle with new channels, prioritization, pricing, etc.

The entire 45-minute exchange is available on Profitero’s podcast series page (episode #3), or you can read an edited version here.

It's NOT about e-commerce replacing stores.

Keith Anderson:  How do you define e-commerce, and how do you think about its role in this broader digital transformation that you follow at Brick Meets Click?

Bill Bishop: The transactional part of e-commerce is basically ordering groceries online, and then having them delivered directly to your home or picking them up, but in many respects, the increasing use of digital by consumers is broadening the shopping experience well beyond the transactional component. I think that's where the action is today.

KA: We often support clients and customers who are trying to build a case internally for why and how to invest in digital capabilities broadly – not just e-commerce. To your point, the volume that's building in the e-commerce channel transactionally is growing, but today (and likely tomorrow) the influence that these digital touch points have over brick and mortar is transcendent. The name of your firm, Brick Meets Click, encapsulates that idea. It's not about e-commerce and abandoning stores altogether, it's about the intersection of digital and brick and mortar.

BB: I definitely feel that retailers who do not figure out how to operate in both the real and virtual worlds are going to be very vulnerable in the relatively near future. They're probably vulnerable right now, it's just not evident.

The greatest vulnerability 

KA: Can you expand just a bit on that vulnerability? Where do you see the competition intensifying? What should retailers do that they aren't doing? 

BB: I think the primary vulnerability for grocers is the way they connect with the consumer. From time immemorial, that vehicle has been print – primarily the print circular. Printing and distributing the circular runs between 60 and 80 percent of the total marketing spend of retailers. Everybody knows this spend is rapidly becoming less cost-effective, so how do they migrate that spending confidently to a digital platform?

Today the biggest players, certainly Walmart and Kroger, have done a very good job in that area; the medium-sized and smaller players are quite variable, but many smaller players haven't migrated very much at all.  

The greatest vulnerability is losing that share of attention, that connectivity, as more and more people go to the web and mobile for ideas, information on products, or digital coupons.

KA: Circulars are incredibly scalable, and they’ve driven store traffic and basket build for decades. Have you seen vehicles that seem poised as successors to circulars, or do retailers really need more of a toolkit to offset some of the declines in more traditional approaches?

BB: At this stage of the game, I think it's multiple tools in a kit, but relatively soon, I think we're going to see some online exchanges, online ad placement, or digital marketing that will be able to reach a scale that can match what circulars used to do.

It's not going to be the same, for sure. You can see these digital platforms being put together and once they’re operational, they will be able to target and track the placement and positioning of ads and promotions much more efficiently. I think the somewhat unnerving aspect of where we are today is that a significant number of retailers haven't even thought about what I just described, so they're a long way from learning best practices in that space.

Why is change so hard?

KA: How is it – or why is it – that so many retailers, and grocers in particular, have their heads in the sand?

BB: Well, that's probably one of the $64 thousand questions, but here's my thinking. First of all, these folks are skilled in logistics and they're skilled in customer service. They're not skilled in marketing generally, and they don't have that many technical skills. Now they’re exposed to an area of competition that they're just not prepared for. As a consequence, it’s easy to be in denial about it – and it's also easy to misread what's happening in the market.

In a meeting not long ago, somebody said to me, "Why are you telling us about this? I really don't think that the best retailers I follow are very interested in these topics. I'll be interested if I see Wegmans or Publix or HEB do something in this area." It was a great opening, because at that point I was able to identify and describe activities on the part of all three of those companies that showed they were active in this space.

I think a lot of people are like this. They are just not comfortable, and they fear this will cause customers to go into the store less. They've made such an investment in the store (and most of their differentiation is there), that that's just something they don't want to do. They’ve set up the world so that they can control it, but you really can't. I think we've got a fair amount of hangover of that type today, but it is changing. 2015 was a big year of change and more is coming in 2016.

Why support e-commerce?

KA: You mentioned this question of self-determination of destiny, and there’s a similar mentality at work on the CPG/supplier side. One of the most common questions about online grocery or e-commerce is how incremental is it? There's huge resistance to allocating resources to any strategy or tactic that might shift volume from a mature profitable channel (like the store) to this emerging channel. So people ask, why would we ever support it if it's not going to grow the size of the pie?

The answer some of the more forward-looking brands have arrived at is this: because it's not optional,  it's happening, it has happened – so manage what you can manage and control what you can control, but this change is not really an elective. And, if you don't go there, others will.

We've seen this play out over the last five years, and we highlight all the time: Look at the best-selling products at online retailers like Amazon. Sometimes the big market-leading brands are the ones at the top of the list, but just as often it's an emerging brand that people wouldn't identify as a number one or two in the category. The reason is those brands are on offense. They've seen the potential. They don't necessarily have a lot to lose, and they're all in.

It's an interesting dynamic. On the grocery retail side, a lot of folks who have been around long enough to remember Webvan and cosmo.com and some of the web 1.0 flame-outs say, "Well, you know, this has been tried and it doesn't work." They disregard all of the contextual changes that have taken place since then – like broadband internet, mobile, and Millennials who grew up with technology.

There's so much that's different today versus 15 years ago. I worry about the folks who say, simply because something was tried and didn't work in a radically different environment, it shouldn't be tried and won't work in the present environment.

BB: Well said, and I share that concern.

How well prepared are US grocers for new models?

KA: You mentioned that grocers are good at logistics and operations. I'd be curious to get your thoughts on how that translates to some of these emerging models for online grocery. How prepared do you consider US grocers for models like click and collect, and how do you think about that model versus others that are emerging?

BB: Most of the grocery retailers that we work with are pretty well prepared for click and collect. I think the methodology of selecting orders is something that they're skilled at. The question then becomes, how do you optimize? How high is up when it comes to fulfillment?

The majority of people today doing in-store fulfillment are selecting 45, 55, maybe 60 items an hour. That's not really much more than a single order. When you get to highly efficient in-store selection, this could increase to 120, 130, 150, and if you were in a dedicated warehouse, you could select 200 items an hour. The question becomes, how do you optimize? How high is up when it comes to fulfillment?

We're seeing people move through a learning curve. They hit capacity at the store (probably above ten percent of sales), and they begin to move to the so-called dark store or depo pick-up configuration, where you can get higher selection productivity. I think that's a trajectory that's working really well.

The thing we haven’t seen yet is rapid growth in pick-up remote from the store. This usually involves some kind of automated product locker. There are thousands of them installed around the developed world in Europe and Canada, but in the U.S. we’re waiting for this infrastructure to build out. In addition to the grocers’ own property, potential sites include convenience stores, gas stations, and big box stores. The retailers that “host” them will also be driving someone else’s e-commerce traffic to their store and they are going to gain incremental sales.

Click and collect will be a very popular model because it helps with a common shopping occasion, but we're also going to see some other logistical efficiency options that will make a difference as well.

KA: You set up an important point, which is that as the business or volume scales, you need to start investing in infrastructure that optimizes for the specific model that you're trying to grow. It takes a leap of faith for some of these players to invest in new physical assets and training and everything required to be really efficient at operating these new models, but those that have done it have really taken share and driven incrementally. 

BB: I think it's a question of where we are in the life-cycle of certain types of retailing. I don't think there's any question that the supermarket as we know it is nearing the end of its life-cycle. Being born in the depression, it's 80+ years old, so it will be replaced by something. At one point, it looked like a combination store and then maybe the hyper-market was going to replace it. It's inevitable that something new will come along. To stay in this business, at minimum you've got to have something different to attract customers.