Thursday, November 2, 2017

How to Build a Supply Chain Champion Following Chicago Cubs Theo Epstein’s 5R Strategy

Theo Epstein’s approach to building a championship baseball team highlights five principles of supply chain design that we call the 5Rs, the 5Rs have enabled companies from Amazon to Zara to win on the world’s toughest playing field – today’s global marketplace. By Stanley E. Fawcett, A. Michael Knemeyer, Amydee M. Fawcett, and Sebastian Brockhaus……..

On November 2, 2016, the Chicago Cubs did the unthinkable:
They won the World Series after coming back from a 1-3 deficit to the Cleveland Indians.
For Cubs fans, the victory marked the end of a 108-year streak of competitive futility.
Although the Cubs game seven, extra-inning victory is inspirational, you may be wondering: “As a supply chain professional, why should I care?”
Answer: Because of Theo Epstein, the Cubs President of Baseball Operations, knows how to build a championship team, a task that is likely high on your to-do list.
Vitally, Epstein’s role in the Cubs turnaround wasn’t a fluke.
In 2004, Epstein, as Red Sox General Manager, helped Boston vanquish the Curse of the Bambino and end an 86-year title drought.
Deciphering how Theo Epstein took the Cubs, a perennial loser, to a World Series championship has been a hot topic in the sports world.
Based on our 20-plus years working with supply chain leaders, we argue that Theo Epstein’s job assembling a champion on the field is a model for the supply chain leader’s quest to build a winning supply chain.
Let’s take a closer look at how Epstein transformed the Cubs into champions.
His approach highlights five principles of supply chain design that we call the 5Rs (Figure 1). The 5Rs have enabled companies from Amazon to Zara to win on the world’s toughest playing field – today’s global marketplace.
Figure 1
The 5Rs of Supply Chain Excellence

Know the Rules and Break Them When Necessary

If you want to win on the baseball field – or in the marketplace – you need to know the rules of the game. The rules define not just your strategy and value-added capabilities, but also your team’s composition.
Rules, however, change and disrupt industries and dethrone champions. For proof, look no further than A&P, Compaq, and Pan Am. Thus, it’s not enough to know the rules; you also need to pay attention to how they are changing. Spotting inflection points before rivals – and responding effectively – can give you a competitive edge.
Andy Grove modeled this reality when he made the case for Intel to make the leap from RAM/DRAM to CPUs before the memory market crashed. Grove’s anticipation of a threat before it was widely discerned is a big reason you know the phrase “Intel Inside.”
Of course, sometimes the rules aren’t fair, which is a plus if they favor you and a travesty if they don’t. When you find your team disadvantaged, your job is to change the rules.
This is the scenario Billy Bean, general manager of the Oakland Athletics, faced in 2001. The A’s $40 million payroll couldn’t compete with the New York Yankees $115 million player budget. Not only did the Yankees beat the A’s in the divisional championship series but they signed the A’s Jason Giambi to a big-budget free agent contract.
To compete, Bean needed to build a different type of team. He stepped away from traditional approaches to player evaluation and embraced sabermetrics, a novel statistical approach that became known as “Moneyball.” His goal: Identify players undervalued by other teams. Bill Henry, the new owner of the Boston Red Sox, saw value in Bean’s approach and offered him the Sox’ GM job.
When Bean declined, Theo Epstein stepped in. He levered Boston’s big payroll with sabermetrics to assemble a team that won the World Series in 2004, followed by two more championships in 2007 and 2013.
Great companies do the same thing. They execute within the rules better than rivals, or they exploit opportunities to change the rules.
Search Amazon
Consider Amazon, the poster child for e-commerce. Launched in 1995 as the “Earth’s largest bookstore,” Amazon began life as a pure-play e-tailer, with no inventory or brick and mortar presence.
It acted as a broker, linking customers to publishers. Amazon went public in 1997 and immediately began to rewrite the rules of online retailing and expand its product line. At a time when other organizations were outsourcing fulfillment operations, Amazon invested in its own distribution network.
By 2016, Amazon operated 383 fulfillment centers worldwide, supporting sales of $136 billion. Amazon even began to build out an in-house network of trucks and planes to “own” the delivery experience all the way to the customer door.
Today, Amazon sports a market capitalization of $400 billion. Its allure is a willingness to push boundaries and redefines rules. Amazon made two-day “Prime” delivery an industry standard that customers were willing to subscribe to. Amazon also enabled eager consumers and intrigued investors to envision the day when drones, predictive shipping, and check-out free shopping will be common.
The result: Amazon is forecast to reach half a trillion in sales over the next decade. More amazing, Amazon achieved this unparalleled success without ever making a meaningful profit on operations. According to The Economist, 92% of Amazon’s value is due to profits that won’t be earned until after 2020. Amazon’s story stresses a point that you need to remember.
To build a winning team, you must change the competitive rules even as you execute the daylights out of existing rules. The remaining four Rs of supply chain design can help.

Assess Readiness; Your Own and That of Potential Partners

By winning the World Series, the Cubs proved their greatness. Nonetheless, you wouldn’t bet on the Cubs to win the Rugby World Cup. After all, the Cubs weren’t built to play rugby. Yet, many companies try to do the equivalent every day. They come to market with the wrong supply chain. How do smart managers get stuck in such a predicament? Two explanations persist.
Wrong focus. Great ideas spawn companies. But, source, make and deliver decisions are often an afterthought, following marketing, engineering or finance. No one asks whether, or how, SCM can confer a competitive edge. Market mediocrity is the result.
Poor scanning. Even cutting-edge supply chains can fall behind the obsolescence curve. You’ve read, for instance, about the woes of some high-profile brick-and-mortar retailers. As the Internet changed the rules of retail, they didn’t adapt. Now, they are dying. The readiness assessment is a key weapon in Theo Epstein’s arsenal. By conducting a two-step readiness assessment – the second R – you can avoid these losing outcomes.
Step 1 is an honest self-appraisal of the team’s current competencies. Simply put, ask: “Do we have the skills we need to play, and win, our industry’s competitive game?” If not, ask two questions:
1. Which skills are you missing?
2. What do the gaps look like?
By making capability gaps visible, you can prioritize your skill-acquisition efforts.
Step 2 is to assess potential partner competencies. Your job, like Epstein’s, is to close the gaps by building or buying the right capabilities.
Now, let’s take a peek into how Epstein leveraged the second R to turn the Cubs into champions.
The key to winning a baseball game is to score more runs than the other team. The emphasis on runs scored has always placed a premium on two player-evaluation metrics: Batting average and RBIs (runs batted in).
Sabermetrics argues you should set these metrics aside in favor of on-base percentage. After all, you can’t score unless you get on base, and it doesn’t matter whether you get on base via a hit or a walk. The logic of sabermetrics is simple: By using more-valid-but-less-used metrics, you can acquire the right skills at a lower price.
Of course, winning attracts benchmarking, and rivals quickly copied Epstein’s approach. Epstein’s response: Keep refining the readiness-assessment process.
Neuroscouting. Neuroscouting uses a computer simulation to make the connection between a player’s cognitive function (recognizing a pitch) and motor skills (swinging a bat). A player who picks up a pitch five feet out of the pitcher’s hand will get on base more frequently than a player who doesn’t read the pitch until 20 feet or 30 feet out. Neuroscouting helped Epstein identify Mookie Betts as a top prospect in the 2011 draft. Betts is now a rising star.
Wins above replacement (WAR). Epstein has grown fond of WAR, a metric that estimates how many wins a player contributes to above a replacement player at the same position. Going into the 2016 season, WAR indicated that the Cubs excelled in starting pitching, first base, and third base. But, right field was identified as a liability. To fill the gap, Epstein acquired Jason Heyward in free agency.
Predictive analytics. Epstein is now experimenting with simulations to predict how a given team composition will fare in each game throughout the season. Inputs can be quite detailed and include things like ballpark where the game is played, time of day and pitcher-versus-batter matchups.
Beyond closing capability gaps, readiness assessment serves another purpose. In 2011, as Epstein’s tenure with the team began, Cubs owner Tom Ricketts asked when the Cubs would be ready to compete for a championship.
Epstein’s response: The Cubs would get worse before things could get better. Building a strong farm system and young talent meant that the Cub faithful would need to be patient. Epstein’s plan, however, leveraged the “rules” of the collective bargaining agreement, one that allocated larger draft budgets to losing teams. Losing early to win later enabled the Cubs to acquire players like Kris Bryant and Kyle Schwarber, who were key contributors to the 2016 championship run.
The readiness assessment is a pivotal part of Zara’s story. Zara, like Amazon, is a rule breaker; its fast-fashion business model is truly game-changing. So too are the supply chain capabilities needed to make fast-fashion work. Compare the Zara way to Gap’s approach (see Table 1).
Table 1
Zara Has Built Unique Capabilities to Change the Rules
The backstory: Amancio Ortega, Zara’s founder, got his start in the apparel industry as a 14-year old errand boy. A decade later, Ortega began developing his own designs, reproducing popular styles, but with his own twists. He soon realized that if he could bring trendy designs to market quickly and inexpensively he could wow consumers. Ortega simply needed to convert the concept into capabilities. Readiness assessment provided Ortega the insight needed to build the capabilities that would fuel Zara’s fast-fashion strategy. Let’s highlight two points here.
Infrastructure. Capabilities derive from infrastructure. For instance, Zara brings its 30,000 distinct designs from concept to rack in only 14-24 days (a 10X advantage over rivals). To reliably hit this target, Zara sources over 50% of all items from local subcontractors in Spain (over 75% in Europe) and preps all product to be rack ready in its 400,000 square meter DC called the Cube. Zara’s infrastructure links supply to demand.
Decision processes. At Zara, decision makers evaluate every investment based on how it will enhance Zara’s capabilities. For instance, Xan Salgado Badas, Zara’s head of IT, stuck with an outdated, DOS-based point of sales system (POS) for years because newer systems didn’t offer any strategic capability upgrade. Yet, when Zara figured out how to use RFID to gain insight into fashion trends and hasten replenishment, it rolled out the technology at a scale and speed that startled rivals (in 2016, Zara bought 500 million RFID chips, 16% of that year’s total RFID sales).
Being fast and driving trends pays serious dividends. Customers visit Zara stores 17 times a year, compared to three times to five times for rivals. That’s because they know if a trendy new outfit sells out, it may not be back. In effect, Zara has turned customers into treasure hunters, transforming stockouts into a sales pitch.
Along the way, Zara became the world’s largest fashion retailer and Amancio Ortega the world’s second richest person. But, Zara’s team also knows that readiness assessment and capability development must be a lifestyle, not an event. If Zara isn’t always getting better, a rival like BooHoo or ASOS might make Zara’s version of fast-fashion obsolete. Just like the Cubs and Zara, you are only as good as you are ready.

Assemble the Right Players; Build or Buy Needed Competencies

Redefining rules and assessing readiness are tough tasks. But, the outputs – a capability-development matrix and a talent-acquisition map – are critical to devising a winning game plan.
Bringing all of the right pieces together and molding them into a champion is equally daunting. Emotional fortitude is needed. Executives like Theo Epstein, however, embrace the team-building challenge. Team ego results when you holistically progress through the remaining 3Rs – right players, right roles and right relationships. Let’s explore how Epstein brings these Rs together.
Through experience or intuition, Epstein knows the best players aren’t always the right players. Many so-called super teams never hoist the Commissioner’s Trophy at season’s end. So, what type of player does Epstein look for?
Talent is critical, but even more so, Epstein seeks a mix of athleticism and positional skill backed up by EQ and a team-first mindset. After all, when a crisis arises – and it will during the course of a 162-game regular season – team ego decides whether the team steps up or collapses.
The better question is, perhaps, how does Epstein put the right mix of skills on the field? Like you, Epstein has two options. He can build competencies or he can buy them. To field a consistent contender, he must do both exceptionally well. Figure 2 depicts Epstein’s method.
Figure 2
Assembling the Right Players
Phase 1: Long game. The core of an Epstein team emerges from the draft. Young talent like Javier Baez (2011) and Kris Bryant (2013) is identified and developed. The process takes time, but it provides a big bang for the buck. Baez and Bryant both made pivotal contributions to the Cubs’ World Series run. Of note, when Epstein arrived in 2011, he began to trade valuable players that didn’t fit his vision and culture, giving the Cubs more draft picks.
Phase 2: Close key gaps. Epstein opportunistically closes key skill gaps by acquiring proven talent via free agency or a well-timed trade. Consider Jake Arrieta, a starting pitcher acquired from the Baltimore Orioles just before the 2013 trading deadline. Arrieta won the 2015 NL Cy Young Award and was the ace of the Cubs’ 2016 pitching staff.
Phase 3: Win now. By July 25, 2016, the Cubs had the best record in MLB. But, by Epstein’s estimation, the Cubs still lacked a critical piece: a hard-throwing lefty closer. To bring Aroldis Chapman, the hardest thrower in baseball (105-MPH fastball), to Chicago, Epstein traded four up-and-coming prospects – a steep price Epstein was willing to pay to win it all in 2016.
One more point: Epstein knows that the concept of right “players” extends beyond the playing field. To help make things click, Epstein brought on Joe Maddon, former manager of the Tampa Bay Rays. Maddon’s keen sense of strategy and a sabermetrics-driven willingness to tweak the batting order and defensive alignment helped position the Cubs to win a league-leading 103 games.
Simply summarized, getting ready to compete means bringing the right players on board, whether drafting undervalued prospects, signing free agents, making pivotal trades or signing a manager whose true talents are being underutilized.
Apple has shown an uncanny ability to bring the right players together to develop and deliver hit products and services. Figure 3 shows how Apple uses Epstein’s playbook.
Figure3
Apple’s Path to Developing the HomePod
Phase 1 – Long Game: At the turn of the millennium, Apple began to invest in what has become the source of its success – software. The iTunes Music Store, paired with iOS, set in place the foundation for Apple’s ecosystem, which consists of over one billion active devices worldwide and includes services such as App Store, Apple Pay, Apple Music and iCloud. Apple touches its owners’ lives every day – and in an increasing variety of ways.
Phase 2 – Close key gaps: By buying Siri in 2010, Apple forged into both the search and mobile “assistant” markets. More recently, in 2014, Apple acquired Beats Electronics, quickly integrating Beats Music into its own streaming service, Apple Music. Pundits, nevertheless, questioned Beat’s $3 billion price tag. But, Apple appeared to have a compelling goal: To close gaps that powered Google Android’s foray into Apple’s turf.
Phase 3 – Win now: In August 2016, Apple quietly acquired Turi, an artificial intelligence startup, for $200 million. Less than a year later, on June 5, 2017, Apple introduced HomePod, a device designed to “reinvent music in our homes.” The Beats acquisition now made sense. But, that’s not all. HomePod is a home assistant – Apple’s answer to Amazon’s Echo and Google Home. Turi’s machine learning makes Siri smarter, giving Apple the win-now capability needed for HomePod to become the central nervous system for the IoT-enabled home, a nascent market with fantastic growth potential.
Apple is seldom first to market, but the design, user-friendly interface and massive ecosystem that support Apple products and services make it a game changer. The result: Apple’s market capitalization hit $800 billion in 2017 – 2X Amazon’s. Consider two facts: Despite owning only 30% of the mobile operating system market, Apple earned 90% of the industry’s 2015 profits. And Apple earns developer loyalty by delivering 75% more revenue vis-à-vis Google Play, making App Store the go-to place for the latest and greatest apps. Bringing the right players to the game has made Apple a perennial industry champion.

Put Players in the Right Roles; Shift As Needed

Getting the right players is just one step in the team-building process. Jim Collins described what comes next: “Get the right people on the bus, the wrong people off the bus, and the right people in the right seats.” Matching players to roles is critical. Yet, the way most companies do this won’t deliver a true – i.e., inimitable – competitive edge.
To be a supply chain champion, you have to think differently about how to mix and match key capabilities. With Epstein at the helm, the Cubs tinker incessantly with player roles. That’s one reason Epstein hired Maddon: His teams led the league in distinct batting lineups and in-game positional shifts every year from 2006 to 2014.
The goal: Tweak the lineup to improve the Cubs’ chance to win any given game. Imagine sending your catcher out to pitch. Maddon did just that, inserting David Ross to pitch against the Milwaukee Brewers. Ross had never pitched in the MLB, but he recorded a perfect inning. Maddon’s penchant for moving players around led the Cubs to acquire Ben Zobrist. Maddon called Zobrist a “super-U,” someone who can play multiple positions.
In fact, during his career, Zobrist has played every position except pitcher and catcher. Proactive role shifting made the Cubs improbable season possible.
Best Buy
In 2015, many pundits had already written Best Buy’s obituary, claiming the electronics retailer couldn’t survive Amazon’s assault and consumers’ affinity for “showrooming.”
Yet, Best Buy did survive, showing how role shifting can create a competitive edge even against Amazon.
How did Best Buy do it? Consider three pivot points that enabled Best Buy to become an experienced retailer.
Reduced costs. To contest showrooming, Best Buy began matching prices. To reduce costs and make price matching economically viable, Best Buy deepened collaborative relationships with suppliers, especially in the areas of merchandising, forecasting and replenishment.
Repurposed bricks. For brick-and-mortar retailers, Amazon’s onslaught turned what once was an asset into a liability. Yet by shipping online orders direct from local stores and encouraging in-store pickup of online orders, Best Buy can deliver with Amazon-like speed, turning its 1,600 physical stores back into an asset.
Reimagined roles. Clicks and mortar wasn’t Best Buy’s only proactive role shift. Best Buy invited top suppliers like Samsung, Apple, LG, Microsoft, Sony and Google to set up shops within its cavernous stores. Best Buy charges rent and benefits from high-margin sales of high-end appliances and electronics.
What’s in it for suppliers? The opportunity to create immersive customer experiences without the cost of owning stores. Google Guides, full-time Google staff, offer tutorials and tech classes, helping customers discover, play and have fun. Samsung Experience shops are located in every Best Buy store.
The result of role shifting: In 2017, Best Buy shares surged to an all-time high. However, as the Cubs know from first-hand experience, some role shifts backfire. Boeing discovered this the hard way with the launch of its vaunted 787 Dreamliner. Poorly conceived and managed shifts cost Boeing five years in first-mover advantage and, by some estimates, $20 billion in design, production and launch costs.
To avoid such misfires, you really do need to do the work entailed by all five Rs. Despite the risks, as Table 2 highlights, game changers from rivals’ strategic moves to disruptive technologies dictate that you begin to experiment with proactive role shifting.
Table 2
Forces Driving Role Shifting

Cultivate the Right Relationships; Build Identity and Trust

Having the right players in the right roles does guarantee that your team looks good on paper. Sadly, looking good on paper is no guarantee your team will win once the game begins. What separates paper tigers from competitive champions, both on the sporting field and in the boardroom? Champions possess chemistry; that is, a common vision backed by a willingness to work together to achieve strategic goals – even if someone has to play a less visible role.
Critically, chemistry derives from trust. To fully sense the value of trust, consider this key fact from the auto industry: The most trusted automakers are also the most profitable. Your takeaway: Ultimate success requires that you invest in a culture of trust.
Theo Epstein is a culture guy. Organizational culture, after all, endures beyond the departure of talent. So, what are the core tenets of an Epstein-inspired culture? For starters, Epstein believes people perform best, especially under pressure, when they are part of something bigger than themselves. He also believes that environment matters. That’s why the Cubs’ new $300 million stadium renovation included a round clubhouse – 60 feet, 6 inches in diameter (the exact distance from the pitcher’s mound to home plate). Epstein wanted to promote collaboration by putting everyone within eyesight of each other and encouraging serendipitous conversations. The space eliminated hierarchy, engendering camaraderie and team identity. David Ross, the Cubs catcher, described the design as, “a subliminal message they’re sending.”
Beyond facilities, Epstein cultivates “lever points”other people who help drive the culture. Epstein then steps back and lets them do some heavy lifting. Joe Maddon, the Cubs manager, is an ideal lever for an Epstein-built team. “Try not to suck,” a key Maddonism, communicates big-time expectations without big-time pressure. Madden helped nurture the Cubs culture: Trust each other; do the right things consistently, including stretching for better results; have fun, but hold each other accountable; expect greatness. Epstein and Maddon know that if you build the right culture, that comes crunch time, someone will step up.
And that’s exactly what happened in game seven of the World Series. After digging out of a 1-3 deficit and building a commanding three-run lead going into the bottom of the 8th inning, the Cubs did the unimaginable – they gave up the lead and gave away the momentum. The 103 wins didn’t matter anymore; the dream was slipping away. Then, it began to rain – and culture took over. As the grounds crew came on the field, the Cubs exited toward the locker room.
Jason Heyward impulsively called his teammates into a weight room for a player’s only meeting. Never the outspoken leader, and struggling at the plate throughout the playoffs, Heyward reminded his teammates just who the Cubs were. David Ross recounted Heyward’s message: “He just said: ‘We’re the best team in baseball for a reason. Continue to play our game, support one another. These are your brothers here, fight for your brothers, lift them up, continue to stay positive. We’ve been doing this all year so continue to be us.’”
What would’ve happened if Heyward hadn’t spoken up? The Cubs may still have won. But, Epstein knows that you leave less to chance when you invest in the right culture.
Honda
Honda is a Cubs type of culture warrior.
More reliant on suppliers than rival carmakers, Honda’s buyer-supplier culture is truly unique, even a little quirky. Honda treats strategic suppliers as an extension of Honda itself.
Simply put, Honda invests in supply partners as if it is buying their capacity and capabilities, not just their parts. By the way, 90% of Honda’s spend is with strategic partners.
To help these partners succeed, Honda sends engineering teams to work on-site at suppliers for three months – and as long as 24 months – at no cost to the supplier.
The goal: Help suppliers optimize manufacturing and business processes. A typical best practices (BP) improvement initiative improves quality by 30% and labor productivity by 50%. More importantly, under Honda’s coaching, suppliers develop critical skills. Honda, in turn, gains stronger supply partners. Cost savings are shared 50/50 with the supplier.
Honda’s investments aren’t limited to BP projects. Honda expects supply partners to participate in corporate training, senior-leader business reviews and new product and target costing programs.
You may be wondering why Honda invests so much in its suppliers instead of switching to more capable suppliers. Honda’s response: Other suppliers would have similar problems. The nuanced answer, however, runs deeper.
Like Epstein, Honda is playing the long game, building a trusted team that can compete the “Honda Way.” Identity is critical.
One result: Honda is the most trusted carmaker among suppliers. Almost 40 years after launching U.S. operations, nearly all of Honda’s original supply team remains intact. The trust also shows up in Honda’s profitability.
Despite Toyota’s superior scale – producing twice as many cars per year – Honda has consistently delivered higher profit margins.
General Motors
Now, let’s go back to the early 1990s. J. Ignacio Lopez, General Motor’s purchasing czar, tore up supplier contracts, putting everything out to bid.
By saving $4 billion dollars, Lopez saved GM from bankruptcy. But, Lopez alienated suppliers, solidifying a culture of mistrust.
Over a decade later, supplier resentment still ran hot. Suppliers scored GM a 114 on the 2005 Supplier Working Relations Index(the lowest score ever – 300 points behind Toyota’s 415).
The real cost: Suppliers were holding back on GM, dedicating their best engineers and sharing their latest technology with more trusted partners like Honda and Toyota.
The rise of autonomous vehicles, however, forced GM in 2015 to acknowledge an existential threat, that its future depended on supplier innovation.
Compelled to change, GM began offering longer-term contracts to urge suppliers to more openly share their best ideas. Two years later, GM’s 2017 WRI score reached its all-time high of 290, lagging behind only Toyota and Honda.

The Journey Continues

The Cubs faithful view Epstein as a miracle worker. In truth, Epstein simply embraced core tenets supply chain champions put to work every day as they design and manage world-class value-creation teams. What then is your key takeaway?
Epstein succeeded by executing each R as part of an integrated 5Rs strategy.
In Epstein’s words:
“Acquiring the talent is only half the battle. The other half of the Cubs’ rebuilding required the organization to establish a winning culture. This meant devising a ‘Cubs Way.’”
In our experience, putting all five pieces of a 5Rs strategy together is quite a feat. Even supply chain champions struggle to implement all five Rs.
But, Maddon offers a word of advice: “The process is fearless.”
If you continue to work the process, the 5Rs will help you break whatever supply chain curse you’re facing.
About the Authors
Stanley E. Fawcett, Ph.D., is the Goddard Professor of global supply chain management at the Goddard School of Business at Weber State University. He can be reached at stan.e.fawcett@gmail.com.
A. Michael Knemeyer, Ph.D., is a professor of logistics at Fisher College of Business at The Ohio State University. He can be reached at knemeyer.4@osu.edu.
Amydee M. Fawcett, Ph.D., is an assistant professor of supply chain management at the Goddard School of Business and Weber State University. She can be reached at amydeefawcett@weber.edu.
Sebastian Brockhaus, Ph.D., is an assistant professor of supply chain management at the Boler School of Business at John Carroll University. He can be reached at sbrockhaus@jcu.edu.
Image Credit: Dan Vasconcellos
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Wednesday, November 1, 2017

RIP the supermarket ‘big shop’ – why we ditched the trolley for the basket

A new report says that people are more likely to buy meals on the way home from work or even visit twice a day to pick up ‘a few bits’
trolley
 Lidl and often … tastes have changed in how often we visit the supermarket. Photograph: Alamy
Name: The Big Shop.
Age: As old as the supermarket. So, about 60 years in the UK.
Appearance: Large. Weekly.
Oh, I love the big shop! An overflowing trolleyful of goods gathered for the 21 meals ahead! Good times! Then you, my friend, are part of a dying breed.
What? The big weekly shop is over. O-V-A-H.
What? How? Why? Can nobody afford to eat any more? Or have we all lost our appetites because of Trump’s face? Take it up with the annual Waitrose Food & Drink Report (which covers all supermarkets, before you ask).
I was going to ask. I know you were. So don’t. According to the report, customers are increasingly developing the habit of shopping little and often.
How little? How often? Apparently, one in 10 people buy what they are going to eat that night on the way home from work.
This is astonishing to me. Then brace yourself: two out of three Britons go to the supermarket more than once a day.
This is, indeed, even more astonishing. As the report puts it: “People treat supermarkets like giant walk-in fridges.”
Why is this happening? Partly as a result of people trying to cut down on food waste.
If you plan properly, there is no waste. I have a spreadsheet. I have a lot of spreadsheets. And I am retired. That explains how you can manage to be so organised. Those still in employment are better off grabbing something on the way home.
So, who are the people going twice a day? God knows. Retired people without spreadsheets, who forget stuff and have to go back? Students who don’t even draw up a list? Trolley and strip‑lighting fetishists? Parents of toddlers soothed only by the sight of small conveyor belts? Tinned rice-pudding addicts?
The trolley fetishists should be worried. Demand for them must be dwindling faster than the supply of pork chops in the clearance chiller. Indeed. A few years ago, the average supermarket opened with 200 big and 150 shallow trollies. Now, it is about 70 and 250, respectively. Liminal times, my friend. Liminal times.
Do say: “Pass me a basket – Sainsbury’s Taste the Difference Kashmiri chicken korma tonight!”
Don’t say: “No more trollies? But what will we fill our canals with now?”

Store of the Future

By Dan Ochwat – 10/18/2017
So-Lo-Mo Central editor and regular Shopper Marketing contributor Dan Ochwat walked the P2PX exhibit hall discussing the future of retail as it relates to the exhibiting companies.

In the Year 2025 … What will retail look like? P2PX exhibitors offer their thoughts on NFC, Amazon and more to get your thinking started


A glimpse at China’s store of the future shows an unstaffed, self-driving, product-stocked pod offering 24-hour access by a mobile app called Moby. It’s the Moby Mart from Wheelys, as featured in Fast CompanyWired and Forbes.
The United Kingdom and France lead in online grocery and will continue to do so, per a McKinley podcast providing a look ahead.
Tokyo, not surprisingly, is already a playground to virtual reality shopping at retail and robot assistance.
Compared to the global retail marketplace, the United States has long offered a more temperate vision of the future. That’s not to say there aren’t companies playing in the aforementioned areas, but the U.S. tends to have a more practical focus.
Talking to companies who exhibited at the Path to Purchase Expo in September, we found there are things to be concerned with other than self-driving pods.
Amazon, for one. And developments such as Apple relinquishing to NFC. And the need for more engaging in-store experiences. Those all help paint a picture of the “store of the future,” per a selection of companies representing the full path to purchase whom we talked with at P2PX. Here’s a summary of our conversations:

3 TIER LOGIC

“With Amazon’s acquisition of Whole Foods, I believe that Amazon will solve the online grocery challenge and that by 2025 we might all be buying our groceries online with drone delivery,” says Jordan Kling, director of client services, 3 Tier Logic.
Kling wasn’t the only person at the show discussing the potential of Amazon and its turning Whole Foods into a natural produce fulfillment center. He does see e-commerce continuing to grow, but he doesn’t count out stores. “I don’t think that brick-and-mortar will disappear, and research has shown that consumers prefer to shop in-store for some categories such as clothing and perishables,” he says. “The key thing for brands is to best understand their consumers and their preferences, and why they buy, in order to build meaningful relationships and nurture loyalty through relevant messaging and offers.”
3 Tier Logic is an agency that helps brands leverage the mobile phone and has an artificial intelligence-based, automated retargeting technology that scrapes receipt basket data and identifies behavior to automatically send retargeted messages.

GREAT NORTHERN INSTORE

Ninety percent of purchases today still happen in stores, and unless that vastly changes in the next few years, don’t expect the retail landscape to change all that much, says Mike Schliesmann, senior vice president, business unit manager. “Retail consolidation and the growth of online” are the disruptors, but people will still visit stores and expect more when they’re there. Schliesmann’s store of the future is one with more shopper interaction and bigger brand experiences; if the retail footprint shrinks, that retail footprint will be sure to give shoppers a reason to be there.
“People will research on the internet, Amazon, anywhere else, but a lot of times it’s showrooming. People want to go in and touch, feel and see it. So you have to react differently to give that customer an experience and an opportunity to purchase,” he says.
In addition to a new high-speed digital print solution, Great Northern Instore is looking at video screens, product demonstrations and simpler interactions inside the store. The retail display and solutions provider also recently developed a mobile app called Instore Vision to offer clients store audits and field data.

EXPLORER RESEARCH

With a new 9,000-square-foot shopper lab that just opened in Chicago, Explorer Research expanded its behavioral research capabilities that include virtual reality with eye tracking. The company worked with Tobii to trick out its headset, and the lab will have a dedicated space to use this function. Coming from 15 years of studying shopper behavior, Explorer Research echoes that an increase in experiential stores will differentiate retail from the proliferation of online.
“By 2025, most retailers will have reinvented their space,” says Anne Stephenson, partner. “For grocery, that might mean reducing center of store space with more warehouse space in the back. Center store items will be ordered on screens and the rest of the store will be focused on experiences, with a focus on fresh and prepared foods.”
She expects to see more drive-through pickup locations and showrooms at retail, and physical stores will be increasingly linked to smartphones. “We may also see brand stores that communicate the brand’s value rather than sell products: community involvement, sharing customer stories and providing product and ordering information.”
Another trend she notices is “we are seeing a polarization in retail with stores catering to the very wealthy or lower income demographics,” citing Nordstrom and Walmart having success while mid-tier stores like Sears are “disappearing.”

WILD BLUE TECHNOLOGIES

The store of the future seemingly requires reimagining the physical space, and Wild Blue Technologies is an experiential design firm that has been reinventing category layouts for brands, designing pop-up shops, redesigning retail locations and more. The company added a virtual lab to test concepts, and when it comes to looking forward, Steve McLean, president, sees stores adhering to a more fully developed ecosystem of options that caters to the consumer.
“Retail will be ambient, engaging and converting throughout the day at nearly every touchpoint in our lives,” McLean says. “It will be seamlessly woven into our routines in a frictionless way, balancing the convenience of replenishment with the opportunity to surprise and delight.”
For McLean, the challenge will be designing an aligned ecosystem of experiences that include physical, digital and virtual experiences. “If you subscribe to the simple truth that people will spend their money where they spend their time, it helps to identify the strongest opportunities. Physical, digital and virtual retail are all platforms ripe with opportunity to reimagine and reinvent the experience.”

AHALOGY

“There will be a battle for the list,” says Bob Gilbreath, co-founder and CEO of influencer marketing company Ahalogy. The shopper inside the store of the future will be driven less by price and promotion and more by loyalty and how that brand is making the shopper’s life easier, he says, adding that shoppers will have one or two stores with a list.
To Gilbreath, the biggest impact will occur during the pre-shop phase, where more native and content-driven ads will impact a shopper’s loyalty, such as recipes or new ideas. He says in 2025 shoppers will have little patience for digital ads that interrupt the experience, citing YouTube and Facebook pushing toward six-second video ads.
“We’re in a low growth, slow growth, no growth world in the United States and Europe, so now the challenge is, can you generate growth?” he says. “Growth is not going to come from another 50-cent off promotion or another meaningless line extension.”
Ahalogy opened up its Muse platform to brand, agency and retail clients, enabling them to identify trends happening among its influencer network. Rather than a “social listening” platform that tracks brand mentions, the platform seeks category trends. For example, “make ahead breakfast” is a growing trend, where moms are making oatmeal overnight in the crockpot or coffee cake to be ready in the morning.
He sees video as the next big thing, and says people will continue to use social apps like Pinterest, Instagram and Facebook to discover. The networks themselves are fighting for ad dollars from brands, but at the same time they are fighting for consumer attention. Interrupting ads and fake news stories, for example, is what will have consumers turn off the apps.

INCONTEXT SOLUTIONS

At the forefront of virtual and augmented reality technology as a more efficient way to test retail concepts for a few years now, InContext Solutions believes retail is at a turning point. “I think 2017 is going to be the year we look back on and say, ‘That’s when things started to really take a turn toward truly changing the long-running status quo that this industry has held onto for so long,” says Mark Hardy, CEO. He attributes a lot of that change to Amazon, whom he says “has thrown down the gauntlet for innovation,” and stores and brands are out to respond.
The response will come in the form of smaller stores with less inventory and more local distribution centers for faster deliveries, he says. He believes automation and AI will influence more alongside auto-replenishment, and that clothing stores will be using technology more than others to give shoppers accurate measurements and customized solutions.
“I think virtual commerce, or v-commerce, is heading in an interesting direction and is going to be a large component of the way people shop in the future,” Hardy says. “InContext is already preparing the technology that can support v-commerce capabilities, but it’s just a matter of waiting until the industry catches up.”

EYEVIEW

A specialist in video marketing, Eyeview offers a platform that leverages AI machine learning and consumer data to find the right consumers and personalize videos and messaging. Vice president of corporate marketing Julie Harnek acknowledges the big dark cloud of Amazon looming over stores in 2025, and she says everything depends on Amazon’s ability to deliver immediate and personal satisfaction. For example, if your child is sick, Walgreens is still easier.
With the acquisition of Whole Foods, Amazon poses two major threats to brick-and-mortar, according to Harnek. One is if Amazon solves same-day, instant gratification. The other is being able to leverage Whole Foods’ in-store buying data in combination with its search, browsing and online buying data. “Amazon can use its findings to improve its pricing and promotions in all the categories it covers.”
As for digital video, marketers have become frustrated with legacy ad serving platforms and traditional measurement. “One of the biggest advantages of emerging addressable TV options is how a campaign can work together across desktop, mobile and TV – working with one partner, which ultimately solves huge problems around scale, personalized creative and measurement.”

TPG REWARDS

With Apple’s iPhone 8 and iPhone X adapting near field communication (NFC) technology, the store of the future could involve a lot more phone-tapping signage in stores, according to John Galinos, president and CEO, TPG Rewards. Until these launches, only Samsung phones and the Android Pay function leveraged NFC.
In addition to being able to make displays in-store more personalized and interactive, NFC automatically gives the coordinates of the user’s phone, Galinos says, a key for data. He sees brands leveraging this technology to tap displays that can change content by time of day and change promotions. Content will change at home, too. If a package is scanned in-store, a promotion may be added to the phone. At home, a package is scanned and maybe a recipe finder appears mixing that product with ingredients already in the house, he says.
As a rewards company that witnessed an evolution from a physical toy in a cereal box to codes put on a box to receipt scanning and getting a digital reward texted, rewards can be truly frictionless in 2025 by putting offers directly on a user’s credit card, Galinos says. “With seamless rewards, there’s an issue: I have to ask the consumer for their credit card,” he says but adds that Millennials and younger generations will overcome this fear as they give credit cards to many apps already.

QUAD/GRAPHICS

Retail display firm Tempt In-Store Productions is a business unit of Quad/Graphics, which also owns an in-house integrated marketing agency called BlueSoHo that delivers mobile experiences that can be triggered by beacons, NFC technology, Snapchat codes and more. It’s a combination that enables the company to “make print work harder,” according to Mike Draver, senior vice president of sales for Tempt.
John Puterbaugh, managing director of mobile and digital, BlueSoHo, says, “We are using mobile to amplify and connect print (in-store displays, direct mail, inserts) together with digital engagement (social, web, email and messaging).”
As he looks five years out and more, the biggest change he sees is “we will stop pretending there is an online vs. an offline.” Draver agrees: “On a very basic level, no one should be waiting in line for anything, ever, as mobile and BOPUS [buy online, pick up in-store] or similar solutions evolve.”
Draver sees retail evolving further, such as how Nordstrom opened a store with no merchandise and Kohl’s teamed with Amazon for a common purpose around product returns.
Puterbaugh identifies a change of thinking, less focus on KPIs such as same-store and year-over-year sales and more toward “where a shopper is at a given point in time is often more important than who the shopper is.”
A dramatic change in in-store analytics and insights will support this, he says, with the convergence of the Internet of Things, smart products and rich-tracking data.

INMAR

A data-driven digital promotions company that recently acquired Collective Bias to marry social engagement data with its transaction data, Inmar leverages a range of data and has had its hand in load-to-card coupons, rebates, healthcare prescriptions and more. Kris Beutel, marketing director, promotion network, says 2017 was a breakout in food retailing. “E-commerce for food and consumables has reached the tipping point. In record time, the industry has gone from ‘wait and see’ to strategically positioning digital commerce as a competitive advantage – one that requires integration with the in-store experience.”
And while she too nods toward the disruption of Amazon acquiring Whole Foods and shoppers demanding healthier options and transparency in food, she doesn’t see the keys of retailing changing – convenience, value, competitive pricing and a positive shopping experience. Retail, if anything, will be more sophisticated, starting with insights that understand behavior all along the path. Retailers and manufacturers will be more agile in consuming data and putting them into action. Lastly, companies will need to be agile in implementing test and learn.
“Winners will go through great lengths to incorporate agility and innovation into their corporate cultures,” Beutel says.

Study: Lack of access doesn’t deter shoppers from visiting large grocery stores

Lidl will open its first New Jersey store this month

Aldi and Lidl grow despite ignoring the internet

It hasn’t stopped the discount grocers from thriving
THE aisles are wide, the lights bright and shelves low. Most obviously, however, the apples shine and the broccoli beckons. For those used to the cramped, dimly lit Aldi stores of yore, all expense spared, the new supermarket in Herten, Germany, is almost shocking.
Opened in April this is the prototype for a vast new renovation and expansion programme across Europe, Britain and America. It is the discount giant’s big bet on the future of shopping, all the more daring as the money is going almost entirely on bricks and mortar. Defying the conventional wisdom that customers want both in-store and online shopping (“omnichannel” in the jargon) Aldi wants to conquer the retail world by ignoring the internet. As too, to a lesser extent, does its great German rival Lidl. Plenty of other grocers reckon this may be the miscalculation that eventually brings them down.
Founded in 1945 and 1973 respectively, Aldi (split into two legally separate companies, Aldi Nord and Aldi Süd) and Lidl have been eating up the competition, especially since the financial crash of 2008. In the cut-throat British market, Aldi (owned by Süd) increased its groceries share to 6.8%, from 6.2% just a year ago; Lidl’s jumped from 4.6% to 5.2% (see chart). At home in Germany, Aldi Nord’s market share has reached 12.9%, and Lidl’s 8.9%.
However, Aldi acknowledges that it must change to keep growing at this pace. Kay Rueschoff, Aldi Nord’s director of marketing, concedes that low prices, the discounters’ hallmark, are no longer enough. To lure middle-class shoppers, Aldi has to focus on quality, too—hence the shiny store in Herten. In all, Aldi Nord is spending €5.2bn ($6.1bn) on revamping its 4,800 stores in Europe (excluding Britain and Ireland) and opening hundreds of new ones. Besides ambient interiors, there is more fruit, veg and wine.
In Britain, Aldi Süd is unveiling about 70 new stores a year, often in impeccably middle-class areas that were once the preserve of posher British rivals such as Sainsbury’s. Aldi plans to open 900 swanky new stores in America, putting it third in the country by store count, behind Walmart and Kroger. (Lidl has just begun operating in America, and aims to have 100 stores within the year.)
Mr Rueschoff bristles at any suggestion that Aldi is changing too much. The new stores still sell only about 1,400 items, as opposed to the 50,000 or so on many rivals’ shelves, enabling big economies of scale. At Lidl, a new generation of senior managers last year began to upgrade their stores in a similar way. They resigned in February after their effort to expand Lidl’s small online offering was deemed too radical a departure from the discounter’s original, tight-fisted formula. But the idea that opening revamped stores as rapidly as possible is the best way to win market share, as well as make money, remains.
The discounters reason that whereas their conventional rivals, such as Sainsbury’s, might be able to win some customers online, they will not make much money out of it. Take Britain, one of the most advanced places in the world for e-commerce. Britons buy 7.3% of their groceries online, up from 6.7% a year ago, second only to South Koreans. Tesco, Sainsbury’s and others have spent hundreds of millions of pounds on sophisticated internet operations. Yet, as Bryan Roberts, an analyst at TCC Global, a consultancy, argues, these stores are merely “cannibalising themselves”, driving most of their shoppers from their most profitable channel (the store) to the least profitable (online).
Operating margins in the supermarket business are notoriously low, but even lower online, says Mr Roberts—about 3% versus 0.5% or less. Fleets of vans and drivers are expensive, but, argues Walter Blackwood, a consultant, supermarkets dare not charge cost price (or more) for the service as customers expect it to be virtually free. He attributes this in part to the baleful effect of the online behemoth Amazon, which does not seek to profit from the actual delivery of goods, thus creating the conviction that deliveries should be free. Customers expect the same from everybody else.
For the moment, Aldi’s decision to spend its money on physical stores is working. In less developed e-commerce markets, like America, they may have even more of an advantage. But the proportion of people shopping online can only go one way, so the strategy carries risks. Supermarkets are learning to make online sales more profitable, through “click and collect” schemes, for example, or raising the minimum transaction value for deliveries. A decisive clash of competing retail philosophies looms. To the victor, arugula. To the loser, turnips.