Are you in the business of selling groceries or feeding families?” That is the question Mark Essex, Strategy Group, KPMG in the UK, would like every supermarket to ask itself. The answer, he suggests, could lead them to reconsider their business model.
“If our large food retailers changed their business model to one focused much more on the consumers’ needs, they could achieve more profitable, sustainable long-term customer relationships,” says Essex. “In the UK, the current farm to store or farm to doorstep value chain is dominated by the top five (Tesco, Sainsbury’s, Asda, Morrisons and the Co-op) which have 77 percent of the market.
They have improved the variety of our diets, stimulating our senses with a fantastic amount of choice. We have never had so much access to what we want, when we want it. 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 discarding uneaten produce they bought on promotion but didn’t need. That waste is funded by consumers, in the price they pay.”
The boom in online delivery in some markets, notably the UK where it accounts for 6 percent of grocery sales, marks a step change in convenience, but Essex thinks supermarkets could take this further. “Consider how much work the shopper has to do to feed the family. They have assessed the needs of the family based on social diaries, specific requirements – such as dinner parties and packed lunches – decided how many meals will be needed, consulted with the rest of the family and decided roughly what to make. They have checked their inventory of fresh and dry items including those things they don’t purchase very frequently. After considering the meals, the recipes and the food needed versus the inventory available, they prepare a list.
“By the time they have evaluated the offers, decided what to order from whom and how much to pay, this could add up to two hours a week, more than 100 hours a year, on a spend of perhaps US$10,000 a year,” says Essex.
Looked at this way, the process sounds absurdly protracted, complex and labor intensive, especially when most shoppers buy many of the same goods week after week. And that’s why, he says: “It doesn’t have to be this way. What if supermarkets did some of this work? What if my family paid the supermarket US$750 a month to feed us? Much of the supply could be planned in advance, with weekly tweaks to suit particular needs. 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.”
In this brave new world, Essex says, grocers could turn some of their expensive out-of-town real estate into food showrooms that work like car dealerships. They could add some theatre to the experience – Hy-Vee, the American employee-owned supermarket chain helps shoppers find the nearest store with a chef in residence – and offer goods for the discerning shopper that are hard to market online. If they like the look of a specialty cheese, they could have it factored into next week’s meal plan by clicking the QR code.
And if we immerse ourselves in this reality, we find other opportunities to improve the experience. If grocers enjoy a deeper relationship with the customer, they won’t need as much disposable packaging. Milk and eggs could be delivered in re-usable containers or already packed in the refrigerator shelf: the whole shelf is switched on delivery. Fresh vegetables are taken straight from the wholesale container into the store cupboard. This is good for the environment, reduces costs and gets rid of the work required to dispose of that waste.
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. Yet Essex is convinced it would be worth it: “It’s a shared investment. 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 20 years, at $10,000 a year, that’s $200,000. The customer investment should be on a par with that made by your luxury car dealer.”
This model would not work for every product, every supermarket or every shopper. Some customers would not want to cede that much control. Others are happy to nip into a store on their way home from the office – for example, 40 percent of Waitrose’s sales in London come after 5pm. Yet, the model could work for a portion of the weekly shop – do shoppers really need to reconsider, on a weekly basis, what brand of frozen peas they prefer? And, as Essex says: “If families were willing to subscribe to their grocers, as they do to their entertainment suppliers, the supermarkets would really own the farm to plate chain.”
Essex’s vision is radical, possibly too radical for many, but there is absolutely no doubt that the time has come for supermarkets to think the unthinkable. As Madeleine Chenette, Executive National Director of Strategy Advisory Services at KPMG in Canada, says: “The need for supermarkets to examine their traditional business models, given the many challenges they face, is common to all developed markets, and is as urgent in North America as it is in Europe.”
Austerity-busting growth in the major grocery markets has come to a halt. The threats are coming at traditional supermarkets from all sides. Discounters have wooed budget-conscious consumers – in the UK, where they have been especially aggressive, they took US$2.8 billion in sales off the competition in 2014. Digital disruptors such as online delivery specialists Ocado and Peapod have found a profitable niche.
Online aggregators such as Instacart, FreshDirect and AmazonFresh are in expansive mode. And then there are the fresh ‘recipe box to the door’ providers such as HelloFresh, which now has subscribers in seven European countries, Australia, Canada and the US. On top of all this, the Millennial generation loves eating out – and government statistics show that America now spends roughly as much in restaurants and bars as it does on groceries.
Not all of these challengers will succeed but they will intensify the battle for market share. So how should supermarkets respond? Paul Martin, Managing Director of Insights, KPMG in the UK, says a completely fresh start is required. “This isn’t something you can resolve by throwing a lot of digital technology at it, nor can they go on trying to be everything to everybody. The biggest step they need to make is to stop being product-centric and put the consumer at the very heart of their business model.”
KPMG’s research has identified three key factors that drive shoppers: value, convenience and experience.
Value-driven consumers want the lowest possible price – though they are becoming savvier about the different offers they encounter – but they can be driven by values: social, environmental or reflecting their view of their social status. To satisfy these shoppers, grocers will need to be transparent about their supply chain and source products ethically.
Convenience spans the small format store nearby that offers a limited choice, the weekly online shop for home delivery and Essex’s ambitious scenario of an entertainment services-style subscription model.
For shoppers who are driven by experience, it’s about how they feel when they visit a store or buy online. As Martin says: “Shoppers enjoy going to Waitrose stores and because of that they’re prepared to spend more.” If they can’t park, get stuck in interminable checkout queues, find the staff disagreeable or discover the product they wanted is out of stock, they’re very unlikely to return. The challenge for those who get it right in-store is to apply that to what they do online.
These distinctions sound simple enough but shoppers can be driven by one, two or all of these factors at different times. And sometimes these drivers interact in unexpected ways. For example, Texan supermarket H-E-B uses the fish-on-ice strategy perfected by Whole Foods to create an aura of freshness in its stores, but it keeps the in-store experience simple and bombards shoppers with coupons and free offers. This defiantly old-school approach resonates with its audience – it consistently scores well on the Market Force consultancy’s Delight Index of American supermarkets.
“To be successful, grocers have to be very good at serving one of those three drivers,” says Martin. “And they need to be realistic about it, there’s no point trying to convince customers you’re the cheapest if you’re not – and can never be. The analogy I like to draw is with aviation. A typical budget airline will have its planes in the air 14 hours a day, compared to eight hours a day for a traditional airline.
You don’t need a Nobel Prize in Economics to understand why traditional airlines find it so hard to compete on cost. What you don’t want to be is stuck in the middle of the market, where you are not exceptional at anything.”
Each grocer will have its own answer to the eternal question: what value proposition will you deliver to the customer? A grocer might excel at one driver but look to strengthen its offering elsewhere. So, for example, discounters, having made inroads into the UK market, are now moving upmarket, investing millions in stores that offer self-checkout, wider aisles and bakeries, deluxe food and revamped wine departments as they strengthen their pitch to the British middle-class.
Whatever strategy they choose, supermarkets need to be ready to re-examine the industry’s traditional practices. The race to open large hypermarket estates, so characteristic of the 1970s and 1980s, is now over and Martin estimates that, in the UK, leases permitting, up to 30-40 percent of these outlets could be disposed of in the next few years. Some properties could be repurposed to offer a different kind of experience and goods or become distribution fulfilment centers but even if they do, they will own a lot less square footage of retail space than they do today.
The right product selection can make the difference. “The multiples need to know their authoritative range of products,” says Martin. “If the rule of thumb is that 1,400 SKUs cover 80 percent of a food shopping trip, does it make sense to have 3,500 SKUs in your store? Understanding your authoritative range of products could reduce complexity – and complexity is always costly – and help you compete.”
There are signs that such a reappraisal is underway: last year, Tesco announced plans to cut one third of its 90,000 products. In the quest for market share, the supermarket had ended up offering 228 varieties of air freshener. Choice can be a virtue but consultancy Kantar Retail estimates that British households only buy 400 products a year and 41 in their weekly shop. As Chenette says, reducing the range of SKUs could be part of a strategy to encourage shoppers to buy private label goods, on which grocers make better margins.
Convenience is a trend that harks back to the past and points towards a digital future. “For a lot of people, it’s about a return to the experience we had in Britain in the 1950s, where you went to the corner shop and the owner knew your name and what products you bought,” says Martin. Yet for some consumers, convenience could also be ordering groceries on a smartphone during their commute home via a virtual online grocery store.
The one area where rethinking the traditional model is particularly perplexing is online shopping. In the race for convenience, many British grocers have ended up offering a proposition – delivery to the door – on which making money is a challenge. “You need at least US$140 per order to make a profit on home delivery in the UK. The average order size is nearer US$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 pay – but it only reported its first pre-tax profit last year, driven by a 30 percent surge in new customers, and its pre-tax margin was just 7.5 percent.
In France, supermarkets have outsourced home delivery to the consumer by focusing on ‘click and drive’, enjoying substantially higher margins on each transaction. In the UK, where the shopper has grown accustomed to home delivery, it will be hard for grocers to change their model to ‘click and drive’. And in most developed markets, grocers will feel obliged to offer both in certain locations.
“This option is very attractive to shoppers who just want to simplify their life,” says Chenette, “but this model is difficult to make money on. The key is to find different ways of using the network – maybe with other partners – or introducing pricing options at peak times.” Under Essex’s subscription model, in which the shopper might change their grocer no more than every 20 years, home delivery makes more sense as a customer investment.
The traditional grocers’ greatest asset as they look to build a sustainable business model may be the very bricks and mortar stores that, only a few years ago, were being written off as obsolete burdens that were expensive to maintain. The evidence for a revolution in consumers’ shopping habits, a fashionable narrative in the UK, is conflicting.
Research by Kantar Retail doesn’t support the conventional narrative that Britons are shopping more frequently, buying smaller baskets, running to convenience stores, scouring different shops for value and have abandoned the weekly shop to “buy like the Germans”, as one analyst put it. Their study suggests that in 2014, Britons made 221 trips to the supermarket a year – the same number as in 2010. What has changed is that their top-up shopping accounts for a slightly higher share (61.2 percent) of overall spend than in 2010.
What isn’t different, even in Germany, where shoppers make 20 percent fewer trips to the supermarket than in 2001 but still visit them 217 times a year, is that grocers have hundreds of opportunities to sell to consumers.
For shoppers, an experience that makes them want to come back can mean anything from spending less than an hour in-store, browsing over a sumptuous delicatessen or being able to make their purchase through their tablet. Colorado supermarket chain King Soopers has made the family shop less arduous by offering car-shaped carts fitted with videos to entertain children.
Yet are grocers making the most of these two hundred and something opportunities to wow the customer? Essex isn’t convinced, saying: “They need to remember it’s the sizzle that sells the sausage.”
For some grocers, these visits could be their chance to sell on quality to discerning customers. The in-store ambience is crucial to this approach – which is why so many grocers have experimented with using fresh food scents to titillate shoppers’ taste buds.
A 2014 report by consultancy Canstar Blue suggested Essex may have a point. The survey of 2,500 Australian shoppers found that 62 percent were unhappy with the length of checkout queues, more than half were annoyed to find a product out of stock and 38 percent were irritated by self-service machine errors. These findings, echoed to varying degrees in other developed markets, do suggest that too many grocers are alienating shoppers rather than wowing them. For Chenette, one obvious remedy stands out: “Companies need to change their mindsets and invest in their in-store staff, educate them and create learning platforms so they can continue to enhance the customer experience.” Some grocers have such programs in place, but many have not seen this as a priority. Warehouse giant Costco shows what can be done – cutting costs on almost every aspect of its operation means there’s not much sizzle in its warehouses but it has committed to “maintaining compensation levels that are better than the industry average” to reduce churn, satisfy employees and improve the shopping experience. A typical Costco cashier is paid around US$49,000 a year and generates US$610,000 in revenue in that time.
With the right investment in staff, Chenette says, grocers can look to a more sophisticated sell. “The shopper isn’t loyal to one grocer – they’re going to different stores for different things – but one way to own the customer, is for grocers to reinvent themselves so they’re selling solutions not products – so, to take an obvious example, presenting a recipe to a shopper and telling them they can buy everything to make that in-store.”
If grocers could, as Nielsen has suggested, position their stores “as the social centers of communities, where neighbors can feed their bodies with nourishing food, their souls with good conversation and their wallets with great deals”, they would find it easier to build customer loyalty. They could also make more money – selling in-store is generally more profitable than delivering to the door. With the right business model, a willingness to innovate, and a clear sense of where their investment will be most effective, grocers can build a sustainable business.
Chenette suggests that grocers might decide that it makes sense for them to own the supply chain “because it will help minimize their risk and because the source of their production is an increasing concern for many consumers.” Equally, they might decide to collaborate more closely with partners in their supply chain – or, as Essex suggested, with interesting companies from outside the industry. As he says: “If the focus is on ‘well-being food’ which lengthens your lifespan, a grocer could tie up with a drugstore or a life insurance company.” They might even want to acquire some of the disruptive competitors trying to win market share off them.
The future looks considerably more complicated for traditional supermarkets than the past. Moving to a new business model won’t be easy but it is achievable. As Martin says: “Grocers may come at this from a different starting point but they have one thing in common. We are moving from a scenario where there was one successful business model to one where there are many models.
“What separates the winners from the losers won’t be technology – though that can help grocers power the solution – or traditional demographics but the mix of convenience, value and experience that satisfies the customers they’re aiming to serve.”