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Grocery Thought Piece - Bryan

The supermarket was dying. Long live the supermarket.

  • 28 July 2020 / By Bryan Frank / By Brad Koszuta / By Caroline Mackenzie
  • Business Strategy

When The Great Atlantic & Pacific Tea Company, once the world’s largest retailer, declared bankruptcy in 2015 after nearly 150 years in business, it signalled a new wave of disruption in the grocery industry. In the five years since that prophetic announcement, grocery chains have endured an aggressive assault on their business. Consumers have increasingly shifted spending from traditional grocery stores to fast-casual restaurants, convenience stores, meal kit providers like Blue Apron, specialty marketplaces like Thrive Marketplace, e-commerce pure players like Fresh Direct, and premium grocers with a focus on high-quality prepared foods like Whole Foods Market. Additionally, Amazon (Prime Now and Amazon Fresh), Instacart, and Shipt (purchased by Target) have applied increased pressure on legacy grocery chains to offer high-touch delivery services, often at significant cost.

In a surprising turn of events, the eruption of COVID-19 in the US has changed the game. With restaurants under lockdown and e-commerce and delivery networks stretched beyond capacity, traditional supermarkets have witnessed record traffic and reclaimed share with a sudden increase in demand. But strained supply chains have magnified the operational challenges and razor-thin margins that plague grocers and inhibit innovation. In this brief moment of competitive advantage, grocers should move decisively to re-establish relationships with consumers and recapture business for the longer-term.

Here’s our playbook for that move:

1. Assortment: Free-up space for fast-moving, prepared foods

Don’t let America’s latest obsession with baking bread fool you; most Americans would prefer to avoid cooking. From stocked-out shelves of pasta and jarred sauces to empty freezer cases, the evidence is substantial: American consumers want high-quality, convenient, prepared or semi-prepared foods. Some food retailers have done this exceptionally well. Regional grocer Wegmans has spawned obsessive fans with prepared foods and store-brand goods. Specialty player Trader Joe’s has perfected a tight assortment of premium prepared and frozen foods at prices that generate long checkout lines. Whole Foods Market, now part of Amazon, has set a new standard with stores that function as veritable gastronomic extravaganzas, featuring self-serve hot and cold bars, reach-ins full of packaged and prepared foods, and a selection of meal kits.

Grocers have long recognized that converting low-margin raw ingredients into high-margin prepared foods and meal kits drives incremental value. Still, large national chains have largely struggled to transform their offerings and store layouts to do so. To grab share and keep it, grocers must either develop proprietary capabilities or establish productive partnerships to offer consumers rapid, one-stop shopping for prepared foods and kits. These offerings must be varied and high-quality, competitively priced for value, and easy to shop. In the post-COVID world, where self-serve food bars present both a health risk, grocers should shift offerings to pre-portioned packages in various sizes, which will speed transactions for in-store shoppers, and ease fulfillment for curbside and delivery by a growing army of couriers.

2. Merchandising: Test-and-learn rather than pay-to-play

For years, supermarket chains have quietly relied on slotting allowances and paid placement programs to cushion earnings, charging brands hefty fees for the privilege of gaining shelf access or end-of-aisle placement. These fees generate real value, but they inhibit the evolution of more successful merchandising strategies. Consider Amazon’s forays into physical retail, where the company has created the most advanced, data-driven merchandising strategies in the industry. Aided by cameras, sensors, sophisticated software, and automated payments, Amazon Go stores offer customers a curated selection of best-selling products in an easy, frictionless shopping environment. Grocers may not enjoy the vast financial and technological resources of Amazon, but they should not ignore the test-and-learn approach to merchandising and customer-focused experience that Amazon has perfected.

The ongoing COVID crisis presents an unprecedented opportunity for food retailers to develop these capabilities by running a series of small, rapid experiments of new shopping experiences, while carefully observing customer journeys. We expect that such research will shed light on limitations and drawbacks of the typical supermarket layout: a perimeter of fresh and frozen foods surrounding center aisles of processed foods. As time-starved customers focus less on product discovery and more on efficiency, they lose the patience to navigate labyrinthian store flows to pluck staples like milk and eggs from coolers at the back of the store. If grocers don’t respond to customer preferences, they risk losing even more share to convenience stores. To combat competition and please customers, we recommend developing a flexible approach to the front-of-store experience, with human-scaled design and merchandising around customer shopping patterns.

Consider regional northeast retailer Price Chopper, which has reimagined the supermarket experience with its Market32 brand. These spacious stores eliminate visual clutter and de-emphasize the long center aisles of the store, with a focus instead on boutique-like collections of product categories. This approach reduces SKU proliferation, improves storytelling, and amplifies the effectiveness of any paid promotional programs. Customer feedback has been overwhelmingly positive and Price Chopper, a closely-held firm, continues to experiment and adapt the Market32 brand to customer needs.

3. Fulfillment: Redesign flows and processes for multiple stakeholders and channels, including in-store shopping, curbside pickup, and delivery

No supermarket--rural, suburban, urban--can escape the increasing complexity of getting goods to customers. Incumbents like PeaPod, behemoths like Amazon and Walmart, well-funded industry upstarts like Instacart, and new services like Postmates’ “Essentials and Convenience” offerings are all raising the bar for grocery pickup and delivery. To meet increased customer expectations for convenience and maintain profitability, many grocers must develop the flexibility to operate as micro-fulfillment centers (MFCs); as front-of-store experiences transform to better serve customers shopping in-store, food retailers must also optimize back-of-store, pick-and-pack operations for rapid order fulfillment, whether for curbside pickup by shoppers or delivery by couriers. This generally requires a comprehensive review of store real estate and processes, with a focus on serving various distinct customer use cases.

Successful management of multiple fulfillment channels may include highly-ordered pick-up zones at the front of stores (with dedicated customer service); two-way texting or app-based chat with customers; alternative checkout procedures (real-time item scanning) for staff shoppers; RFID tracking of orders; drive-up lanes dedicated for serving curbside shoppers; and delivery dispatching zones that are outside the view of in-store shoppers.

Summary

Developing a playbook to effectively compete against the many forces disrupting traditional supermarkets requires a methodical approach to revising assortments, re-envisioning merchandising, re-allocating real estate, and redesigning processes. For in-store shoppers, place high-margin packs of pre-packaged, prepared foods in dedicated areas at the front of stores to please time-starved customers. Reduce friction in checkout by integrating loyalty and payments into an experience that more closely resembles Amazon Go than it does today’s cumbersome self-checkout. For curbside pick-up and delivery, commit space, rethink processes, and implement technologies necessary to enable rapid fulfillment, while avoiding channel conflict between customers browsing aisles and staff busily moving around the store to fulfill orders.

For more information or to discuss opportunities for your business, contact Kin + Carta Advise.

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