The Future Supermarket Jens Torchalla

Tanja Ebner The Future Supermarket Jens Torchalla

HOW DIGITAL OPERATIONS WILL ENABLE A WINNING CUSTOMER EXPERIENCE, AT MUCH LOWER COST

The move to online shopping has dominated retail trends for many years. Lately, successful e-commerce merchants – from Amazon in the United States to JD.com in China – are increasingly opening or buying physical supermarkets. However, online retailers want to transfer some of their digital efficiency to their new brick-and-mortar stores, so they are experimenting with new forms of automation. That raises an important question for supermarkets: How many people will be needed to operate the stores of the future? At the Amazon Go concept store, shoppers first register and can then remove items from shelves and leave without going through a checkout process; the payment is automatically deducted via smartphone. Checkout is not the only store operation that can be automated, though. Overall, a high degree of digitization could reduce the labor hours needed to run a future supermarket by around 40 percent. THE ROLE OF Our publication “Retail’s Revolution” shows STORES IN AN OMNI- how physical stores will play an important CHANNEL WORLD role even in a world of rapidly growing online sales. However, given the convenience of As shopping migrates online, brick- online shopping, if physical stores are to and- mortar stores will need to respond, survive – let alone thrive – they will need to in particular by turning shopping from a give customers new reasons to visit them. transaction into a pleasurable lifestyle activity.

Exhibit 1: Stores have a clear role to play in retail’s future…

...but successful store will need to play more specialized roles than they do today

KEY SUCCESS FACTORS IN THE FUTURE DISCOUNTS MODELS • Ruthlessly eﬃcient operating model VALUE “I want to pay as little as I can” • Own-label sourcing and rigorous quality control

CONVENIENCE STORE • A well-curated assortment that serves the most common “I need it now” customer needs out of limited shelf space • Broad store network in high-traﬃc areas CONVENIENCE CLICK-AND-COLLECT PICK-UP POINT • A strong online assortment covering most additional “I need it today, on my schedule” customer needs – that can be rapidly delivered to store • Broad store network in high traﬃc areas EXPERIENCE • Well-trained, highly-engaged workforce “I want to enjoy shopping” • Innovative and exciting store designs

MANUFACTURER BOUTIQUE • Strong general brand recognition EXPERIENCE “I want access to the newest and best products • Unique product oﬀering from the brands I trust”

OMNICHANNEL SHOWROOM • Dynamic environment to support in-store consumer trials “I want to experience the products for myself • Commercial terms with manufacturers that can support and get advice if I need it” showroom economics SOCIAL INTERACTION • Well-trained, highly engaged workforce SOCIAL ENGAGEMENT “To me, shopping also means meeting people” • Well-located stores that support social shopping occasions with communal spaces or events SERVICE CENTER • Expert employees with access to spare parts and AFTERCARE AND TRUST “I want support if the product breaks” replacement products

Source: Oliver Wyman analysis

72 We think that people are likely to remain could recognize their consumption patterns. Supermarkets could create a virtual version an essential feature of stores because of As they sample products in-store, they will flip of the center store, where customers scan their role in creating social engagement through recipes on a tablet or smartphone items on a wall of barcodes to add to their and an enjoyable experience. Well-trained, and make online orders for home delivery or virtual baskets. They would then pick up knowledgeable service staff members are for picking up as they leave the store. the items later or have them delivered. The the best way for grocers to connect with their products themselves will mostly remain in customers and give them a memorable and MANUAL TASKS NEED the backroom storage areas, simplifying the differentiated experience. TO BE AUTOMATED picking process. To smooth the flow of goods through their Some stores have already introduced FOOTFALL FROM stock rooms, stores will need more effective automatically updated electronic price tags EXPERIENCE AND picking systems. Depending on lead times for display shelves, saving the bother of SOCIAL ENGAGEMENT and customers’ use of digital shopping lists, swapping paper tags. some orders will be picked in centralized The supermarket of the future will need The electronic tags can also facilitate warehouses in different locations. These to inspire customers and improve their dynamic pricing, to discount overstocked overall experience. Upgrades could include products or those about to reach expiry items will then be combined with products superior fresh-food offerings, food courts, date, for example. In the future, customers’ that shoppers add in the supermarket, gastronomic areas, and cooking classes. smartphones may display personalized providing a seamless experience across Each of these features will need to be prices. This would allow supermarkets to every shopping channel. combined with expert advice; this will be make tailor-made offers that take into account Stores’ forecasting and ordering labor-intensive and, therefore, expensive. a customer’s profile, shopping history, and decisions will be fully automated, using To fund this investment, stores will need to current location in the store. Interaction with machine- learning algorithms and real- deploy modern automation technologies customers will become highly individual, both time out-of-stock alerts. Smart tools and that free up staff from routine operations. in stores and online. algorithms will help to plan just the right These freed up hours can then be invested level of convenience food production. At the in activities that add greater value for THE CENTER STORE food court, employees will use standardized the customer. GOES VIRTUAL meal kits to maintain high levels of product While the most visible changes to consistency and operational efficiency. supermarkets will be these new customer- Floor space for the new features can be facing features, digital tools will transform freed up by shrinking the space currently JD.com aims to launch one million stores allocated to canned and packaged products. operations in less obvious ways. Before across China over the next five years. Detergent, washing-up liquid, and paper customers arrive in a store, they will have Alibaba aims to turn six million convenience assembled their shopping lists using online towels form part of “chore” shopping and stores into smart service centers. apps informed by artificial intelligence, which provide little to attract consumers to a store.

73 ORDERING AND REPLENISHMENT WAREHOUSE AND BACKROOM FRESH COUNTERS AND IN-STORE SERVICES orecasting errors will be reduced by machine learning The backroom will house the center store assortment An addition to today’s meat counter and fresh bakery, algorithms, making stock management much easier. enter and serve as a picking area. Some online orders will this area will be very important. A food court will offer store products will be bought online or from virtual shelves. be picked here for home delivery or instore pickup. expert advice, a place to socialie with baristaserved The stocking of perishables will be a higher priority. Shopfloor replenishment teams can be relocated here. coffee, and tastings of meals for home delivery or pickup. Potential reduction of labor hours: 50+% Potential increase of labor hours: 100+% Potential increase of labor hours: 40+%

SHELF MAINTENANCE Electronic shelf labels will enable automatic price updates and reduce effort especially for discounted products. Personalied prices seen on a smartphone may even replace unified shelf prices. But tasks such as fresh and uality controls will stay relevant. Potential reduction of labor hours: 50+%

CHECKOUT No lines, oneclick payment: The future store will offer a much better checkout experience than today. ost customers will use scanandgo systems, others selfcheckout terminals. Potential reduction of labor hours: 60+% THE WORKFORCE OF THE FUTURE Taking advantage of new tools and technology reuires staff to develop a new skill set. anagers need to leave their offices and engage with customers, as good restaurant owners do. Staff at new areas like the food court will reuire THE CUSTOMER OF THE FUTURE a customercentric mindset and a new training approach.

The future customer will want to shop ADMINISTRATION anywhere, anytime. A trip to a store will need good reasons. These could include services Smarter tools and automation will massively reduce such as recipe tastings and lunch in the store, backoffice work. Streamlining and digitiation will or a highly personalied offer and price. mean managers won’t have to work through long paper Shopping will need to be fun, hasslefree, lists and daily reports. The new checkout experience will and experienced through multiple channels. also minimie hassles such as cash management.

74 Potential reduction of labor hours: 60+% ORDERING AND REPLENISHMENT WAREHOUSE AND BACKROOM FRESH COUNTERS AND IN-STORE SERVICES orecasting errors will be reduced by machine learning The backroom will house the center store assortment An addition to today’s meat counter and fresh bakery, algorithms, making stock management much easier. enter and serve as a picking area. Some online orders will this area will be very important. A food court will offer store products will be bought online or from virtual shelves. be picked here for home delivery or instore pickup. expert advice, a place to socialie with baristaserved The stocking of perishables will be a higher priority. Shopfloor replenishment teams can be relocated here. coffee, and tastings of meals for home delivery or pickup. Potential reduction of labor hours: 50+% Potential increase of labor hours: 100+% Potential increase of labor hours: 40+%

Potential reduction of labor hours: 60+% 75 CHECKOUT WILL BE FUTURE STORES WILL BE Highly efficient digital operations will thus CUSTOMER-LED AND ABLE TO OPERATE WITH A enable supermarkets to create a superior SUPPORTED BY TECH 40 PERCENT REDUCTION customer environment that will be well placed to compete against online stores. Automation is already changing the IN LABOR HOURS supermarket checkout process. In the future, A number of these store upgrades will customers will expect no lines, no transaction be costly, but technology presents huge CONCLUSION time, and one-click cashless payments. opportunities to save money by simplifying The growing share of online grocery Amazon Go uses a combination of digital basic tasks, while also providing a better continues to draw much attention from both technologies to check which items each customer experience. We think retailers could the retail industry itself and broader coverage customer has taken from the store’s shelves. free up 20 percent of their labor using existing by the press and the analyst community. Even This kind of system will be too expensive for technology and by systematically optimizing as that share grows, physical grocery stores most supermarkets, at least for now. However, and simplifying day-to-day processes. are undergoing a quiet revolution of their scan-and-go systems that greatly simplify By adding the cost savings from massive own. Brick and mortar stores will continue the checkout process are gaining popularity automation and the transformation of to meet most of the demand for food for the among shoppers. Many retailers offer self- supermarket sections, such as the center foreseeable future. Retailers who invest in the checkout terminals, a number of which can store, the future store will be able to operate future supermarket now will find their stores be overseen by a single member of staff. with labor hours reduced by 40 percent likely to continue to thrive as an important part from their levels today. (See Exhibit 2.) of the omnichannel future.

Exhibit 3: O2O business contribution in majory grocery retailers

WAREHOUSE ORDERING AND SHELF IN STORE CHECKOUT ADMIN AND BACKROOM REPLENISHMENT MAINTENANCE PRODUCTION PROCESS PROCESSES

Today’s store Labor allocation in hours

Perishables

Service counters

Center store Future store Labor allocation in hours Checkout area

Cross-department

40% REDUCTION IN LABOR HOURS

DRIVERS OF CHANGE FOR LABOR HOUR DEMAND

WAREHOUSE ORDERING AND SHELF IN STORE CHECKOUT ADMIN AND BACKROOM REPLENISHMENT MAINTENANCE PRODUCTION PROCESS PROCESSES Robots to support Manual ordering fully Electronic shelf labels Emphasis on food Customers to take Smarter tools and backroom picking for replaced by automated, will reduce labor court experience more control of the automation will click and collect and sales-based ordering effort checkout process with massively reduce online delivery with better forecasts Areas for customers scan-and-go systems back-office work Personalized prices to socialize and be and self-checkout Home for center store Center store product seen on smartphones inspired by offerings terminals Store managers freed items (shop-floor restocking will be may replace uniform such as barista-served up to leave offices and shelves will be virtual) minimized thanks to shelf prices coffee and in-store Reduced number of engage with customers virtual shelves cooking classes cashiers needed, though still present to assist customers

1. Not all stores operate O2O 2. The online order # only accounts for c.5% in Yonghui Bravo Luban Rd. Store in Shanghai 3. A new format store located in Yangpu, Shanghai Source: Primary research, store visits, desktop research, Oliver Wyman analysis

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