Surviving the Brave New World of Food Retailing A Roadmap to Relevance for the Future for Food Retailers Foreword Relevance or Extinction: Survival of Only the Fittest

DISRUPTIVE FORCES ARE FOREVER CHANGING THE WORLD OF RETAIL. Today’s shoppers—armed with new technologies Keep in mind that every company is at a differ- and shifting personal needs and aspirations—are ent point in this journey and everyone is moving seeking entirely new solutions from the stores at a different speed. But the Council believes ev- they shop. As a result, traditional strengths, such eryone must be on this journey or risk becoming as location or product variety, are declining in irrelevant with the shoppers of tomorrow. This importance, while the value of experiences and report can support you in this vital effort. connections is rising. The very definitions of convenience and value are evolving. Through the years, reports from the Coca-Cola Retailing Research Council have identified spe- cific challenges facing the industry and offered equally specific solutions or approaches. The Council members chose this very different topic because today’s challenges are so very different from those of the past. The Council members strongly believe this re- port will serve as a clarion call on the enormity and impact these emerging challenges will have on every company. In addition, the report lays out some of the difficult decisions companies need to make to maintain relevance with the consumer of the near future. No report of this nature can possibly identify the specific challenges for each and every company, but we believe this document can provide suf- ficient examples of this new landscape and be a catalyst for discussion and action inside any company. Readers can use this material—includ- ing a self-diagnostic tool—to determine how to best reorient each company for this new era.

2 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Table of Contents

1. VISION 2025 A scenario for how consumers will shop for food in the future

2. INDUSTRY IMPACTS OUTLOOK What this means to today’s traditional food retailers A. Loss of monopoly on location and exclusivity: As consumers’ food retail options continue to expand, retailers who operate under the traditional food retailing models will lose share B. Demand for online grocery options continues to increase: Consumers expect retailers to do the heavy lifting and make it easier for consumers to find, select, purchase and transfer products from the store shelf to the kitchen shelf C. The next-generation food experience pushes beyond the physical store: Consumers view “food” less as a commodity and mere sustenance and more as a holistic experience

3. INDUSTRY RESPONSE IMPERATIVES What success will look like and what winners should be doing now A. Ensure relevance in the consumer’s journey: Understand current customers, identify target customers and reposition competitive strategies accordingly to attract and retain them, e.g., store formats, value proposition and cost models B. Embrace digital engagement: Move quickly on e-commerce and build digital capabilities and efficiencies that pervade the entire consumer journey C. Stretch the boundaries of the consumer journey: Shift from being a functional, self-serve destination for food products to delivering the “right” food solution at the “right” place at the “right” time

4. CALL TO ACTION What does my company need to do to be ready for the future? A. The path toward maintaining relevance in the future: Ensuring continued relevance to the consumer will require retailers to possess and develop various capabilities that may evolve at different stages of maturity B. Assessing whether my company is poised to compete in the future: Food retailers can begin by conducting a self-assessment of their current capabilities and determining their progress toward maintaining relevance

3 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Executive Summary

The pace of change is accelerating in food retail ency of e-commerce, food retailing is being just as it has in other sectors. challenged most aggressively from the outside. The pace of change that is disrupting food New consumer preferences are being satisfied retail is exponential—rather than linear—and by new entrants and factors that are eroding reflects a combination of mind-blowing tech- the control of the shopping journey that super- nological innovation, shifting consumer prefer- markets once enjoyed, including: ences and an increasingly networked global »» New competitors for share of stomach, who population. The confluence of these change are intercepting the traditional supermarket factors has had dramatic impacts on other destination consumer. Examples include industries in the past: The introduction of ATMs Whole Foods, Trader Joe’s, Aldi, drug stores forced the banking industry to question the role and even restaurants, which, for the first of the bank branch, the introduction of the VCR time, captured more consumer spend than had the film industry wondering if movie the- grocery stores in 2015 (Commerce aters would survive and the introduction of the Department, April 2015). mobile phone made the telecommunications »» New intermediaries, who are inserting them- industry realize that landline telephones are a selves into the shopping experience thing of the past. And today, the introduction of between the consumer and the supermarket online and mobile commerce has both consum- aisle through demand generation, innovative ers and retailers questioning the role and future marketing and home delivery models. of the traditional retail store. Examples include Blue Apron, Plated, The fate of other once-dominant retail formats Amazon and Ocado. —including shopping malls, video, music and »» Market disintermediation, where consumers book stores, and big-box retailers—now threat- are more directly engaged with individual ens to befall the traditional supermarket. The brands and local or niche players. Examples days when the grocer could take for granted include Kellogg’s, Instacart, Harry’s shaving that the consumer’s entire weekly “shopping systems and local farmers markets. list” would get checked off as she navigated the aisles are long gone. Today, it’s not just where HOW WILL FOOD RETAILERS STAY the shopping list might get fulfilled that has RELEVANT? changed. It is the very idea of when, how and The key to surviving and thriving in this brave where the wants and needs for food originate. new world of food retailing is embracing and How we get our food connects to any number excelling in what we call the Third Dimension. of lifestyle factors; is influenced or controlled While efficiency and scale are important, it is by any number of players competing for share not enough for food retailers to look to verti- of mind, wallet and stomach; and can be filled cal integration in the value chain or to expand through any number of retail touchpoints. horizontally into diversified formats and chan- Just as the decline of big-box retailing was first nels. The third dimension is the consumer’s signaled by the limitless choice and transpar- journey, a journey that starts well before—and

4 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING stretches far beyond—the moment of placing a grocery item into a shopping cart. It includes the lifestyle triggers, preferences and priorities that precede and influence the eventual shop- ping list; the realities of work routines and home logistics; and the changing social context of how meals are prepared, shared and enjoyed. The forces that today are disrupting the conven- tional grocery model show up all along this third axis, from menu and diet influencers through alternative delivery and dining preferences. Successful food retailers of the future must develop strategies and operational capabilities all along this third dimension to ensure their continued relevance to the consumer.

FOOD RETAILING’S THIRD DIMENSION

VERTICAL INTEGRATION Y DIMENSION

HORIZONTAL EXPANSION X DIMENSION

CONSUMER JOURNEY “Third Dimension” Z DIMENSION

5 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING 1. Vision 2025 A scenario for how the consumer of the future will shop for food

The shopping journey for all consumers in 2025 won’t be discrete. It will likely span multiple retail- ers, formats and channels and leverage new technologies and touchpoints. In nine short years, the exponential change in technology, consumer preferences and food commerce alternatives will fundamentally transform the food shopping experience. While food retailers will continue to serve an endless array of consumer segments of the market- place—from the family that has two working parents to the single mom to the empty-nester—the following scenario provides a view into what the future shopping experience may hold for the Gardners—a fictional family of four—in the not too distant future, representing a significant change from today’s customer journey.

MEET THE GARDNERS Jessica and Dave Gardner maintain a double- Dave Gardner is a 40-year-old senior HR ex- income household and live in the suburbs of ecutive at a large hotel chain, headquartered Washington, DC, with two children: seven- in Washington, DC. Dave’s daily commute year-old Billy, four-year old Emily and a five- is 40 minutes each way. He is at the office year-old black Lab, Max. by 9 a.m. and home by 7:30 p.m. and rarely travels. Dave’s one passion is cooking. He Jessica Gardner is a 37-year-old computer likes to make big meals for his family and sales manager. Her job requires overnight friends—whether it is an elaborate brunch travel one or two days a week. The rest of the or a casual grilling or a romantic five-course week, Jessica works out of her home office. dinner for his wife. Dave prefers to cook Jessica likes her work arrangement because from scratch. He is very proud of his “gour- it gives her flexibility to attend her children’s met” kitchen—he has the latest gadgets and after-school activities. But Jessica’s hectic, enjoys his online subscription to Epicurious, “always-on-the-go” schedule does require which he peruses regularly for new and that she is always “plugged in.” Jessica’s mo- interesting recipes and cooking tips. When bile phone keeps her connected to her work cooking meals, Dave tries to cater as best colleagues, customers and, most importantly, he can to the fickle tastes of their three kids. her family. Jessica is an avid Facebook user. Billy is a growing boy and has a voracious She works out regularly and is very conscious appetite. Emily is a picky eater, loves her of her diet. She tries to eat organic, natural “sweets” and has a gluten allergy. And Max foods and is very label conscious. will eat dog food but prefers “people” food.

6 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Jessica and Dave split the shopping chores. preloaded in her profile at the time of enroll- Jessica is responsible for keeping the pantry ment. For items Jessica would like to review stocked with the family’s nonperishables, clean- prior to order submission, Jessica receives a ing supplies, and health and beauty needs. Most text alert that notifies her that an order needs of the time, Jessica does all of her shopping to be placed. Additionally, Jessica receives (i.e., food, clothing, etc.) online, whether via her alerts and email notifications when her “go-to” computer, iPad or mobile phone. Dave will typi- items are on sale or if there are special promo- cally do the food shopping when he is planning tions (e.g., extra points) for new items Jessica a meal. He is very particular about the ingredi- might like to try in place of her favorites. Jes- ents he uses. To avoid too much takeout or fast- sica usually has her orders delivered at 11 a.m. food during the week, on Saturday, before Dave on days she knows she will be home to accept does his food shopping, Jessica and Dave will delivery. She enjoys the convenience of having plan out the week’s dinners. Dave will cook and large, bulky items such as paper towels, toilet freeze some of these meals on Sunday. paper, garbage bags, cleaning supplies and heavy bottled water delivered to her doorstep, JESSICA’S SHOPPING JOURNEY IN 2025 eliminating the need for loading and unloading When Jessica sets out to do her grocery shop- the car and making several trips carrying the ping each week, it is never at a set time. Jessica items into the house. does her shopping for nonperishables between work meetings on her computer, on the side- DAVE’S SHOPPING JOURNEY IN 2025 lines watching Billy’s soccer match on her iPad Dave uses a combination of online purveyors or by speaking instructions into her mobile and specialty brick-and-mortar establishments phone while driving carpool in the car. Jessica to purchase perishable foods. There are some very rarely visits a brick-and-mortar store. She items, like dairy and meats, which he trusts his is enrolled in a subscription service for a num- online purveyors to provide. He has “tagged” ber of consumables—detergent, toilet paper these items in his “smart” fridge, a networked and peanut butter. At the time of enrollment, device that identifies items that are running low Jessica indicated her price threshold for certain and uploads a replenishment order to a “shop- goods, the brands she likes, and her preferred ping list mediator” service. When enrolling in delivery day and time. As a member of the this service, Dave preselected a list of preferred service, Jessica receives 1 point for every $1 she retailers. This service then enables Dave to spends. Points can then be redeemed for cash aggregate his weekly shopping list and then back or price-off discounts. This cloud-based allocate items to the retailers offering the best service leverages a basic replenishment algo- pricing and specials that week to minimize the rithm to maintain Jessica’s perpetual inventory total shopping bill. and order parameters, which she accesses by Typically, on Thursday evenings, Dave plans out scanning the product, which is automatically the meals for the weekend. His “go-to” recipe . recognized by the app in her mobile device ingredients are already loaded into an online Each time she scans, her inventory is updated. shopping list. He simply checks those recipes She is able to automate the order process so he has selected for the upcoming weekend and that when her inventory is low, an order is auto- the ingredients are added to his online shop- matically placed, paid for using the credit card ping list that already contains replenishment on file and delivered according to the criteria items. While watching a few of Gourmet maga-

7 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING zine’s YouTube cooking demonstrations, he product and delivery preferences by monitoring sees a new recipe he wants to try. He uploads his shopping behavior (i.e., brand preferences the recipe ingredients to the online shopping he is actually buying and price tolerance, basket list as well. He checks the pantry and removes items, basket size and frequency, product pair- any staple ingredients from the list that he al- ings, etc.). ready has (e.g., olive oil, balsamic vinegar). With his mobile device in hand, Dave is able On Saturday morning, Dave will make a trip to to walk through the store, scanning and bag- one of his preferred retailers with whom an on- ging the items he is purchasing. As Dave strolls line order has been placed to pick up the order. down the condiments aisle, he receives a He likes to go in person to the multicategory, promotion alert for 20 cents off a new brand specialty brick-and-mortar store to personally of peanut butter. Yet, when he scans the jar, he select fresh produce and unique ingredients. receives an “ingredient” alert that it contains For Dave, physically visiting the store is fun. gluten. Dave puts the peanut butter back on He likes to browse, watch cooking demos and the shelf—happy that he did not have to pull taste-test new products before actually leaving out his reading glasses to examine the label the store. His favorite store is a cross between himself. A cooking demo inspires Dave to try a a farmers market and the village center of new recipe and add the pre-portioned ingredi- yesteryear. The store leases its real estate to ents to his cart. For one item—a jar of Spanish different purveyors. Along the perimeter is a olives—Dave is able to do some price compari- cheese shop; a butcher; a fishmonger; a baker; sons on Amazon and finds it 20% cheaper on a “caterer” who offers prepared and semi- Amazon. With the click of a button, he uploads prepared foods and frozen meals; a farm stand the Amazon price to the “shopping cart” on with dairy, eggs, fruits and vegetables; a coffee the app and the price is automatically lowered bar; an ice cream stand; a brick-oven pizza to the competing Amazon price because the shop; a deli; a sushi bar; and a wine shop with a store’s promise is to always and immediately bar. The center store has tables and chairs and match the lowest price. Dave finishes scanning a display table that is used for cooking demos, all items in his basket and receives an extra 20% book signings and community meetings and off a package of cookies he is trying for the which can be rented for private parties. first time. Dave picks up his preordered items Dave gets a notification on his mobile phone and, as he exits the store, beacons trigger the that the items he had preordered are ready for transaction and a mobile payment is made and immediate pickup, but Dave usually finds other validated with a quick facial recognition. items to buy. When Dave arrives at the store, he On Saturday afternoon, Dave begins to prepare pulls out his mobile phone and, with one click, Saturday evening’s meal and he realizes that opens the store’s mobile app, which includes he does not have enough panko breadcrumbs. his loyalty card number and a curated, dynamic Dave quickly places an Instacart order to get list of products and brands that Dave regularly the breadcrumbs from his favorite mass retailer, purchases. When Dave initially enrolled in the then, on impulse, adds some homemade gua- store’s loyalty program, he indicated brand camole and chips from his favorite ethnic food preferences and special needs. For example, store to the same order. The order arrives 90 for his daughter, Emily, Dave must find gluten- minutes later by Uber-auto, Uber’s new driver- free food products. The loyalty software engine less vehicle service. continuously updates and enhances Dave’s

8 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING HOW WILL VISION 2025 EVOLVE? the emerging retail models of the future while Extrapolating from current consumer trends legacy models that have been around for de- and using today’s leading innovations as sign- cades still persist. From this vantage point, we posts, we can identify some of the key charac- can contrast what was with what will be. teristics of what food shopping will be like in 2025. The food shopping experience in 2025 WHAT’S OLD IS NEW AGAIN will be: Some of the ways this future is starting to manifest itself would have seemed like science »» Omniformat and omnichannel fiction not too long ago. Consider the following »» Lifestyle driven seemingly futuristic capabilities that are already »» Personalized here today: »» Digitally integrated end to end »» Talking robots on the kitchen counter, Food retailing is already in a period of rapid refrigerators placing food orders, store transition, where consumers are embracing

IN THE OLD WORLD … IN TODAY’S WORLD … IN 2025 …

Food shopping meant going into Food comes from the grocery Food shopping will not be a the village center or Main Street store, and most people have discrete journey. It will be disin- to buy meats at the butcher, fish one primary store at which termediated into myriad touch- at the fishmonger, bread from the they shop for nearly all their points and events where consum- baker, cheese from the cheese- needs on a regular cycle. ers will have an almost limitless maker and produce from the choice in where, when, how and farmer’s stand. why they fulfill their wants and needs for food.

The butcher, baker, fishmonger Pushing a cart down the aisle is Consumers will engage—in a and shopkeeper at the dry goods an impersonal experience. The highly personalized manner—with store knew every customer on a only engagement outside the food retailers using any number first-name basis, and the custom- store is the weekly print flyer of digital devices and touchpoints ers knew them. or occasional television ad. before, during and after the shopping trip.

Consumers had a routine of The shopping journey is more The shopping journey will begin shopping weekly—or even ad hoc and starts with the more fluidly from lifestyle trig- daily—to replenish the pantry or shopping list—as consumers gers, including integrated moni- pick up fresh ingredients for the recognize their need to restock toring and management of health evening’s meal. the pantry or grab a precooked and wellness, diet and fitness, and meal for the evening dinner. ordering will become increasingly seamless.

The art of meal planning was Tuesday is taco night, because Consumers will be inspired by a about creating a dining master- it’s easy and can largely be variety of meal and menu options, piece for the entire week and made quickly from ingredients with easy-to-prepare “recipes” transforming the leftovers from a on hand. Time to plan, prepare serving as the starting point with robust roast beef dinner into and enjoy a great homemade quality, authenticity, creativity and sandwiches, stews, etc. meal is scarce. spontaneity all driving shopping decisions.

Milk and eggs were delivered The consumer manages all of New seamless, flexible and imme- daily by the milkman. the logistics of the shopping diate delivery options will become trip, including picking, loading, the norm, making it easier than shipping, unloading and put- ever to have grocery items deliv- ting away. ered to the home.

9 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING fixtures sensing and reacting to the supermarket or grocer who had the advantage consumer’s presence, and digitally of key location, offered one-stop shopping and integrated buttons that reorder products by could count on the entire customer experience a single touch occurring within the four walls of the store. This »» Wearable technology sensing nutritional model thrived in an environment where the needs, recipes tailored to medical condition customer made routine visits to the store—at or diet objectives, transparency of least weekly—to fill the itemson their shopping ingredients, and traceability of its source for list and stock their pantry. all food items Changing consumer preferences and expecta- »» Drones and driverless delivery vehicles tions—fueled by the digital revolution—are turn- arriving with meal components within ing this model on its head. Since the turn of the minutes of ordering, ready to be assembled, century, the consumer has been introduced to prepared and served multiple waves of digital disruption—including But through another lens, some elements of e-commerce, mobile, social, augmented reality consumer expectations hearken back to old and artificial intelligence—which have already food retail models that seemed to be obsolete: begun to transform the food shopping experi- ence, and we anticipate that those trends will »» The milkman’s daily delivery of milk and eggs continue. As a result, the shopping experience of tomorrow will be much more dynamic, real »» Buying directly from the farmer at the market or ordering a side of beef to fill the time, lifestyle driven, digitally integrated and family freezer highly personalized. »» Home delivery from the local grocer TECHNOLOGICAL EVOLUTION WILL »» Discovering new recipes and cooking meals CONTINUE TO DISRUPT THE INDUSTRY at home with fresh ingredients IN MANY WAYS THE FUNDAMENTALS OF THE The exponential changes in technology have RETAIL-CUSTOMER RELATIONSHIP and will continue to serve as a disruptor to the ARE CHANGING food retailing industry. In the area of technolo- On the surface, the core tenets of retail remain gy-fueled change, Moore’s law (smaller, faster, cheaper computers) and Metcalfe’s law (the true; customers buy something they desire value of a network increases exponentially with from someone they trust. Changing consumer behaviors and preferences coupled with the the number of connected nodes) have com- rapid acceleration of digital innovations, how- bined to fuel exponential, rather than linear, ever, are disrupting both sides of this equation. changes. From online and mobile commerce to social For an increasingly tech-enabled food shop- media, consumers have been increasingly ping experience, the questions are, Which exposed to new options for fulfilling their food technologies will be most impactful, and how wants and needs, resulting in a shift of both quickly will they become widely adopted? The consumer desires and the retailers they trust. description of the fictional Gardner family’s shopping behavior in 2025 provides a scenario Yesterday’s food shopping experience was for how the exponential changes in technol- fairly predictable—and dominated by the local ogy, consumer preferences and food commerce

10 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING THE FOOD SHOPPING EXPERIENCE IS BEING DISRUPTED

YESTERDAY Something they desire was SUNDAY FRIDAY MONDAY often driven by a need for replenishment. Someone they trust was dominated by the local SUNDAY FRIDAY MONDAY supermarket that had what YESTERDAY they needed. Dave: “We’re out of pickles!” Jessica: “I hope there’s noth- Jessica: “I finally picked up The journey could take days Jessica: “Add it to the list!” ing we forgot on the list!” those pickles that you like.” or weeks, depending on the next big trip to the store. The YESTERDAY RETAILER INFLUENCE retailer’s influence was limited Dave: “We’re8:00 out AM of pickles!” Jessica: “I NOONhope there’s noth- Jessica: 6:00“I finally PM picked up to the customer’s time within Jessica: “Add it to the list!” ing we forgot on the list!” those pickles that you like.” the store.

RETAILER INFLUENCE TOMORROW Something they desire is 8:00 AM NOON 6:00 PM driven by impulse cravings TOMORROW in the moment they occur. Alexa: “I heard your request, Dave: “Honey, we’re going to Jessica: “This is fantastic, and Someone they trust is being I’ll add it to your order.” have a great dinner tonight!” I can’t wait to tell my friends.” transitioned to a diverse set of digital disruptors. TOMORROW RETAILER INFLUENCE

The journey is measured in Alexa: “I heard your request, Dave: “Honey, we’re going to Jessica: “This is fantastic, and hours or days and is driven I’ll add it to your order.” have a great dinner tonight!” I can’t wait to tell my friends.” by customer preferences. The retailer’s influence expands to RETAILER INFLUENCE every hour of every day and to every touchpoint.

alternatives may transform the food shopping »» Theme #1: Computing Power, Speed and experience not just in the distant future but Connectivity: Moore’s and Metcalfe’s laws potentially in nine short years. will march on in beautiful harmony, digitizing These predictions are based on two major and empowering the physical world for the themes that have a long track record of dis- foreseeable future. In terms of computing rupting the retail industry—plus a few wildcard power, it is estimated that by 2020, $1,000 is trends that could further impact the food all that will be required to purchase the retailing industry: computing power and speed equivalent to that of the human brain for processing visual

11 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING DISRUPTION IS THE NORM images. In terms of connectivity, there are Disruption, in general, is a fact of life. For roughly 3 billion people already globally businesses in the 2000s, technological connected with internet access—a number innovations with a “digital” component that is estimated to grow to over 5 billion by are viewed as an overarching disruptor 2020. In addition, an additional 10 billion to to all industries, food retailing included. 12 billion “things” are connected today—a However, as mentioned earlier, advances number that is expected to grow to over 30 in technology have been and will always billion by 2020 and continue to grow be a major driver of disruption in how exponentially to over a trillion in the consumers behave and businesses oper- subsequent decade. ate. It is the way in which businesses react »» Theme #2: Insights and Artificial and adapt that defines the winners and Intelligence: With billions of connected losers. For example, with the birth of the people and devices creating and sharing VCR, many predicted the death of movie data, future business models will compete theaters, a fate derailed by changes to on the ability to turn this data into insights the theater experience improving the and these insights into value. Insights will audio, visual and even the seating and allow retailers to know more about their dining experience. Record companies customers than they ever have before. By found ways to evolve and stay relevant as 2025 retailers will know what their custom- the vinyl record morphed into 8-tracks, ers (and potential customers) are doing in cassettes, CDs and, now, MP3 players. their store, near their store, on their website, The emergence of digital imaging had on social media, at events, at home, at work, a negative ripple effect on the camera in their car and more, building a far more industry—behemoths such as Polaroid, precise model of how they decide what, how Kodak and Fotomat are now names of the and when to make food-related purchases at past. But some retailers identified ways the individual customer level. to fill voids and capitalize—CVS, Walmart Artificial Intelligence (AI) will be the engine and Target now have kiosks that produce to take the increasingly granular data and photo prints. Publishers of newspapers turn it into actionable insights. Consumers and magazines are still in the process of are already seeing the potential power of AI determining how to adapt to a paperless in applications like Siri, and it is making its world. And ATMs introduced in the ’70s way into their homes in devices like Ama- were heralded by the banking industry as zon’s Echo and Google’s Nest Thermostat. a way to reduce labor and cash manage- By 2025 AI will be facilitating many of the ment costs. But these self-service instru- elements of food purchasing within the con- ments, along with the ability to conduct text of dietary constraints, household tastes, many banking activities online, have preferred purchasing options—whether in- eliminated the need for most consumers store or online—and decision timing. to visit branches at all. Now the bank- ing industry must determine how they »» Technology “Wildcards”: Technology will can create personal relationships with not evolve in a vacuum and there are a customers outside of the four walls of number of potential technology inventions— the brick-and-mortar branch, originally a or “wildcards”—that would further disrupt hallmark of banking.

12 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING the simple evolution of current models for both supply and demand. 3D-Printed Food—As additive manufact- uring, commonly referred to as 3D printing, gains in sophistication, it is increasingly likely that it will make inroads in the local- ized production of food, and the potential impact on current production and distri- bution models could be significant. Autonomous Drone Delivery—With Amazon’s recent announcements and intent to develop drones for delivery and the rapidly increas- ing capabilities of drones, there is significant potential for disruption in the economics and models for the delivery of food to consumers. A world of autonomous drones could change the economics around cost and speed of delivery, optimal store locations, and consumer behaviors and the concept of convenience. Sensors—The sophistication of what sensors can do—coupled with declining costs— means that consumers could live in a world where their food can literally “speak to them,” alerting them of expiration dates, allergy risks or dietary warnings. While many of these technology trends and “wildcards” may seem the material of science fiction, current progress in each of these areas suggests that these, or elements of these, will be part of the reality of life in 2025 and beyond. While the specific speed of advancement and the speed of adoption are unclear as we look forward from 2016 (exponential versus linear), it is clear that these have the potential for mas- sive disruption for food retailers.

13 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING 2. Industry Impacts Outlook What this means to today’s traditional food retailers

When we look at the forces threatening the The forces impacting traditional food retailers supermarket as we know it today, we see a today are thoroughly undoing these elements steady loss of the control and dominance that of control. Exclusivity in meeting the consum- the supermarket model once wielded. In the er’s food shopping needs is being eaten away last century, the dry grocer absorbed the green on all sides by every imaginable retail format grocer, the butcher and the home delivery and channel. As many other big-box formats services of milk, eggs and bread into a single have found, consumers are losing patience with box. As a result, the supermarket evolved from shopping the traditional large-footprint “gro- a counter service to a self-service all-in-one cery,” whose value proposition is based exclu- model and became the dominant center of the sively on having a large selection of products in food shopping journey, with some key charac- the center store. And in the increasingly con- teristics, including: nected, networked and social world that con- sumers now inhabit, the shopping experience »» Location and exclusivity—The supermarket often had the advantage of key location and goes far beyond the four walls of the store— had everything the consumer needed, further decreasing the food retailer’s ability to creating a deterrent for shopping for food orchestrate and influence the overall customer anywhere else. experience. These new realities of the food shopping »» Consumers did the heavy lifting, experience are here—as evidenced in a recent literally—With stores laid out like ware- houses, the consumer handled the logistics Kurt Salmon study which revealed that over of finding, picking, loading and unloading 67% of respondents already use the internet for their own products no fewer than seven grocery shopping research and 25% are already times from store shelf to kitchen shelf ordering grocery products online. (shelf-cart-checkout-cart-car-kitchen- We expect that the once-dominant value cupboard). proposition of the traditional supermarket will be impacted significantly by these forces. »» Controlled experience—With the exception of the weekly print circular, the supermarket Impact 1 controlled every aspect of the predominant- LOSS OF MONOPOLY ON LOCATION ly store-centric customer experience. From AND EXCLUSIVITY signage and product merchandising to As consumers’ food retail options continue to customer service and the music piped in expand, retailers who operate under the tradi- overhead, the entire customer experience tional food retailing models will lose share happened within the store.

14 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING The fight for share of stomach is heating up convenience. These disruptive forces will likely as more challengers enter the fray. From mass continue, as food-related startups continue to merchants to boutique restaurants and from generate significant interest and funding, as curated assortments to meal subscription ser- demonstrated by the $5.7B in funding across vices, the consumer has more options than ever 275 deals in 2015 alone, according to Forbes to fulfill their food shopping needs. (“Taking a Bite Out of the Food Industry: Start- ups Change the Game,” July 20, 2016). Traditionally, food shopping was dominated by the grocery store with the best location and The digital revolution has presented consumers best assortment, quality and value. This domi- with far more choices today than ever before nant position has been fragmented over time, in terms of where and how they shop for their with the introduction of low-price discounters food needs; emerging offerings include on- such as Walmart and Aldi and club stores like line ordering, home delivery and new business Costco and Sam’s Club. The fragmentation has models such as Blue Apron and Plated that continued with c-stores, dollar stores and drug are delivering to consumers ready-to-cook stores all investing in food offerings. Many of gourmet meal “kits.” As a result, the traditional these new entrants are not seeking to match grocer is losing control; their unique com- the supermarket’s comprehensive assortment, petitive advantage of location is slowly losing but are instead poaching around the edges traction. The industry consolidation journey of the shopping list through low prices and that supermarkets have been on for the past

NUMBER OF SUPERMARKETS SHOPPED (PERCENTAGE OF RESPONDENTS)

6+ 11%

5 9%

4 17%

86% 3 25%

2 23%

1 14%

Representative Population

15 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING century—from the dry grocer, green grocer, and hensive assortment. Convenience—originally a meats and dairy to banking and pharmacy—is hallmark of one-stop shopping—has different suddenly being unwound and reversed. meanings to today’s consumer. Some view convenience as “proximity” (“I go to the store Already over half of food shopping has been that is on my way home”) and others view it diverted from traditional supermarkets to other as “speed” (“I’ll stop at the drug store for milk players: because I can get in and out quickly”), while yet »» Fifty-five percent of their food spending is others see it as “accessibility” (“I tend to buy not in conventional grocery stores (Kurt lots of things online because I can shop with Salmon survey, April 2016). just one click on Amazon”). Our study confirms »» Supermarkets/grocers now have a 45% this challenge for supermarkets/grocers: market share, representing an overall decline »» Only 40% of respondents concentrate their over the last 10 years, according to a 2015 food purchases in one primary store today, Euromonitor study. and when asked to consider all of the stores One-stop shopping is a weak value proposi- shopped for supermarket products in the tion. Price and quality are bigger drivers of previous month, the number of loyal consumer behavior than is having a compre- one-store shoppers falls to 14% (Kurt Salmon survey).

CHANNELS TYPICALLY SHOPPED FOR FOOD PRODUCTS (PERCENTAGE OF RESPONDENTS SHOPPING IN EACH CHANNEL)

79% Perishables

Nonperishables

65%

56% 54%

41% 38% 37% 38% 33% 28%

16% 16% 13% 13% 12%

4%

Conventional Mass Store Club Store Natural/ Convenience Dollar Drug Online Supermarket Specialty Store Store Store Store

BRICKS-AND-MOTARS ONLINE

16 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING »» Twenty-one percent of respondents do not select, purchase and transfer products from the shop conventional supermarkets for store shelf to the kitchen shelf perishables. As consumers are shopping The demand for online grocery is there. As con- multiple channels for food, the conventional sumers become more and more accustomed supermarket is increasingly falling out of the to pervasive connectivity in their day-to-day consideration set. life—through smartphones, networked homes »» Forty-four percent of consumers do not and digital assistants—they will both expect even include a traditional grocery store in and embrace a digitally integrated in-store and their consideration set for nonperishable out-of-store shopping experience. Our research grocery purchases (Kurt Salmon survey). shows that 40% of consumers shop regularly The dry grocery categories that were the on their mobile devices today, and grocery is original anchor for supermarkets almost one of the top five categories shopped. a century ago are today the most likely Even though food is the laggard when it comes product purchases shoppers are migrating to e-commerce, and its penetration is still under to other formats. 2% of revenue, there is plenty of latent demand This trend is even further magnified by the gen- for online grocery: eral lifestyle shift in preference from packaged »» Fourteen percent of our survey respondents food toward fresh—putting additional pressure report some online grocery shopping on the productivity of the center store versus (although 40% of respondents use Amazon the perimeter. Prime). Shrinking stores demand new cost structures. »» Twice as many shop for apparel on mobile As food retail footprints continue to shrink as for food. thanks to the declining relevance of the center store, traditional grocers are faced with over- »» Over 50% of our survey respondents feel sized real estate and new overhead implica- same-day delivery is very important for tions. grocery—more than for any other category. »» According to Planet Retail, small-box stores »» Thirty-two percent of our survey are some of the fastest-growing banners, respondents bought something with their sales projected to hit combined grocery-related online. annual growth rates of 17.8% for Dollar Amazon will change everything. Even though General Market, 14% for 7-Eleven and 9.4% full assortment grocery commands a large for Aldi between 2013 and 2018. share of food e-commerce dollars currently, »» So it’s no surprise that the average store size Amazon and other nontraditional players are is expected to shrink from 25,500 square getting more than 80% of the trips (brick feet in 2013 to 23,900 square feet by 2018. meets click). And Amazon’s investments make it clear the company is going hard after the dol- Impact 2 lar share too. DEMAND FOR ONLINE GROCERY »» Amazon is currently capturing about half OPTIONS CONTINUES TO INCREASE of the 2% of grocery spending online. But Consumers will expect retailers to do the heavy Amazon is investing heavily to change con- lifting and make it easier for consumers to find, sumers’ food shopping habits:

17 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING • Prime Now The economics ain’t pretty. The higher cost of • Amazon Fresh meeting the consumer’s “I want it now” expec- • Dash tation is draining profit and mindshare from • Subscribe and Save traditional retail grocery, and while the omni- • Private-label food and consumables channel consumer is more profitable, every • Echo retailer can’t gain share at once. There will be casualties. In the U.K., for example, where online »» Amazon Prime Now data (Cowen & Company survey of 1,250 Prime Now users) grocery penetration has already reached 5% and continues to grow, traditional retailers are • Twenty-five percent of Prime members losing 3% to 5% in margin on every order (Kurt (46 million) have used Prime Now Salmon U.K. study), erasing over £300 million in • Prime Now is available in 24 metro areas gross margin from U.K. retail grocery. equals 34% of population For food retailers, the fight for margin dollars • Thirty-six percent of product currently comes from local (non-Amazon) stores may be just beginning. While many point to Amazon’s seeming willingness to operate at a • Fifty percent of consumers who have bought grocery online bought from loss as being unsustainable—even while it spoils Amazon/Fresh/Pantry consumers and raises their expectations—they may be missing the point of the industry eco- • Amazon Prime members spend 2 to 2.5 times what non-members spend on nomics. Amazon may be making fundamental Amazon infrastructure investments to support a five-

SHARE OF FOOD PRODUCT SPEND BY CHANNEL (PERCENTAGE OF TOTAL SPEND)

Convenience Store 2% 3% Online 3% Drug Store 4% Dollar Store 6% Natural/Specialty Store 10% Club Store

27% Mass Store

45% Conventional Supermarkets

Representative Population

18 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING year compounded growth rate of 25% versus a In order to combat and reverse the potential grocery industry growth rate that is less than margin contraction, food retailers will need to 5%, according to the USDA. While Amazon is create a differentiated customer experience investing for growth, typical grocers are fo- that creates and nurtures an emotional connec- cused on protecting an already slim margin. tion with their consumers. By doing so, food From a margin perspective, food retailers have retailers will be able to change the perception historically operated at gross margins that are of grocery from just a commodity to a food ex- closer to 24% rather than the retail industry’s perience that the consumer can’t imagine living average of 40%, according to CSIMarket. The without. Like the brand halo effect that benefits difference for food retailers, however, has been companies like Apple, food retailers who estab- the ability to make up for that on volume, as lish a unique emotional connection with their they turn inventory on average nearly 20 times consumer can enjoy higher margins and intense a year—more than double the turns for a typical consumer loyalty. retailer, according to CSIMarket. Multiple indus- Impact 3 try factors are challenging this formula, which THE NEXT-GENERATION FOOD threatens to further squeeze traditional grocers. EXPERIENCE PUSHES BEYOND THE From the revenue side of the equation, shifting PHYSICAL STORE consumer preferences threaten both traffic and Consumers view “food” less as a commodity basket size metrics for grocers as consumers or mere sustenance and more as a holistic decrease their reliance on a single supermarket; experience splinter their spend for unique, local and niche products; seek convenient and ready-to-eat The food shopping journey is increasingly meals; and increasingly purchase for them- a lifestyle choice, not a chore. From staying selves rather than an entire household. All of gluten-free to eating only locally sourced these factors contribute to a potential decline organics, consumers want the holistic grocery in store traffic volume as well as basket size, experience to be an extension of the life they which would erode the grocers’ economic ad- lead or aspire to online, offline and throughout vantages in volume and inventory turns. their customer journey. From the cost side of the equation, rising Traditionally, the food shopping journey was food prices, an increasing focus on fresh—and primarily a shopping trip to replenish the “stuff” therefore greater exposure to perishability—and we needed for our everyday lives, and the large a shift to online ordering and home delivery mass-marketed brands were what everyone all potentially increase the cost of goods sold. wanted—and bought. As an industry, food retailers have been late Today and tomorrow, the world of food is to invest in e-commerce capabilities and must much more experiential and is an extension—or now make investments just to catch up to definition—of the “lifestyle” we live. Consumer mainstream retail capabilities. Click and collect eating habits and food shopping habits have and home delivery services also add costs to changed. Consumers are savvy and well- the transaction that could contribute to eroding informed, increasingly seeking out more niche margins if the costs aren’t passed through to products from local producers, with flavors or the consumer in some fashion. dietary products that help them live a more

19 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING individualistic—or personalized—life around creativity drivers, and emotional connectivity. food. Power has shifted to the consumer in The external influence doesn’t stop there; our terms of both knowledge and control. survey revealed that consumers are beginning to desire digital integration of their grocery »» At least 39% of our survey respondents selected one or more of the following food journey. characteristics as very important (natural, »» Eighteen percent wanted to be able to place non-GMO, organic, gluten-free and a deli order before entering the store. lactose-free). »» Sixteen percent wanted their shopping list »» A significant percentage of respondents sent to them ahead of time. identified food characteristics as a key factor »» Twenty-two percent wanted to be able to when satisfying their unique dietary needs. order out-of-stock items in-store for home Technology is the great equalizer in the indus- delivery. try. The digital convergence of health, fitness, It’s all about personalizing the engagement diet and connectivity erodes the traditional with the consumer. In today’s always-connect- advantage held by supermarkets. Consumers ed world, the consumer expects a personalized, are increasingly being influenced by multiple consumer-centric experience and a robust and sources to change their shopping habits. This well-orchestrated portfolio of shopping, pur- influence is coming from many sources, includ- chasing and delivery models that meet his or ing health and wellness drivers, inspiration and her specific needs.

IMPORTANCE OF FOOD SATISFYING UNIQUE DIETARY NEEDS (PERCENTAGE OF RESPONDENTS SELECTING 8, 9 OR 10)

31%

24%

19%

13% 12%

Natural Non-GMO Organic Gluten-Free Lactose-Free

% of Grocery 54% 47% 39% 45% 40% Basket

20 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Consumers want food retailers to provide »» Eighty-two percent of consumers do seamless engagement whether they shop in- not mind sharing personal data for a store or on the retailer’s website. "clear" reward (e.g., points, miles, discount coupons, etc.). »» Specifically, 42% of consumers expect a retailer to offer the same products across all »» Sixty-seven percent of respondents enrolled channels, and 45% expect to find the same in a retailer’s loyalty program expect to weekly promotions no matter which channel receive "personalized" promotions, they shop. incentives and offers that are tied to their shopping behavior. »» As the digitally engaged consumer continues to grow more accustomed to Consumers want the meal, not the category. sharing data with retailers as they download Consumers want to interact with the store's and enable the retailer’s mobile app, log on assortment in the way they would a restaurant to a retailer’s website and utilize their menu and expect the retailer to be a curator branded loyalty programs, they will expect of meal solutions. This trend in the growth in to be recognized and rewarded for doing restaurant spending, which surpassed grocery this (e.g., personalized promotions, spending in 2015, was noted by Bloomberg customized offers and tailored pricing). when the Commerce Department released the numbers. »» Our study revealed that 74% of our survey respondents do not mind sharing their The journey doesn’t stop at checkout. For personal data if they get something in many consumers, it is in the preparation, cook- return.

PASS THE MENU, PLEASE SPENDING ON DINING OUT HAS OVERTAKEN GROCERY STORE PURCHASES FOR THE FIRST TIME EVER

21 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING ing, consumption and sharing of food—not its »» And yet only 30% of consumers are actually purchase—where the true value of the food able to “cook with some premade experience lies. ingredients.” Most food retailers consider the ring of the It is this basic shift in thinking that is redefining cash register to be the end of the shopping the food shopping experience of tomorrow. Take journey. In fact, the real moment of truth is just Blue Apron, for example. They have taken care beginning. For many consumers, the true value of all of the initial parts of the journey for the of the experience is in the preparing, cooking, consumer. They’ve created a fresh and flavorful consuming and sharing of food with others. recipe, selected and measured the ingredients, packaged them, and provided full-color step- »» Our study shows that 84% of consumers prefer to “cook from scratch” or “cook with by-step instructions—all purchased by the click some premade ingredients” for their typical of a mouse or tap of an app. Social media has weekday dinner. replaced the Betty Crocker cookbook as a new foodie culture thrives on Yelp!, online food hacks, »» Perhaps even more insightful is that 44% Pinterest recipes and YouTube cooking schools— prefer to “cook with some premade all of which provide great sources for the wan- ingredients,” more than any other category. nabe chef and tomorrow’s food consumer.

PREFERENCE AND SHARE OF MEAL PREPARATION BY EATING OCCASION

8% 10% Heat Frozen Meal 5% 7% 3% Order Ready-to-Eat Takeout 6% Buy Fully Prepared Foods

Cook with Some Premade Ingredients 44% 30% Cook from Scratch

47% 40%

Preferred Meal Prep for Share of Meal Prep for Weekday Dinner Weekday Dinner

22 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING WHO CONTROLS THE SHOPPING LIST? The battle for influence is invading the services such as shopping list shopping list, as both new entrants and management and grocery ordering. established players race to develop new »» Google Home: Google introduced Google methods for engaging the consumer earlier Home—a voice-activated home product in the shopping journey. By doing so, these that can provide answers, stream music players aim to steal market share by inter- and manage everyday tasks such as cepting consumer demand before the cus- ordering groceries. tomer even considers a trip to the grocery store. Examples of these market disruptors »» Facebook Messenger Chatbots: include: Facebook debuted Messenger chatbots— an artificial intelligence and natural »» Amazon Echo: Amazon Echo is a language platform that allows retailers to voice-controlled home appliance that deliver automated customer support, can play music, read the news and e-commerce and interactive experiences weather, and order groceries. directly in the Messenger app. »» Amazon Dash is a Amazon Dash: »» Samsung Family Hub Refrigerator: A proprietary Wi-Fi–connected in-home Wi-Fi–enabled and camera-equipped device for ordering—or reordering—a fridge takes a photo every time the door consumer’s favorite branded product at is closed, providing an updated view of the literal touch of button. what’s there and what’s missing—from »» Apple Siri: Apple recently opened up any device anywhere. It then connects to Siri—its voice-controlled intelligent the family’s favorite local grocery store to assistant—to third parties, allowing place an order. retailers to enable voice-controlled

23 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING 3. Industry Response Imperatives What success will look like and what winners should be doing now

What do the industry impacts outlined in the previous section mean for food retailers? It is all about building relevance across the third dimension—the consumer journey.

VISION 2025 IMPACTS TODAY’S INDUSTRY RESPONSE IMPERATIVES

LOSS OF MONOPOLY ON Ensure relevance in the consumer’s journey: LOCATION AND EXCLUSIVITY Understand current customers, identify target As consumers’ food retail options customers and reposition competitive strate- continue to expand, retailers who gies accordingly to attract and retain them, operate under the traditional food adapting value propositions, store formats and retailing models will lose share. business models

DEMAND FOR ONLINE GROCERY OPTIONS CONTINUES TO INCREASE Consumers will expect retailers to do Embrace digital engagement: Move quickly the heavy lifting and make it easier for on e-commerce and build digital capabilities and consumers to find, select, purchase eciencies that pervade the entire consumer journey and transfer products from the store shelf to the kitchen shelf.

THE NEXT-GENERATION FOOD EXPERIENCE PUSHES BEYOND THE Stretch the boundaries of the consumer journey: PHYSICAL STORE Shift from being a functional, self-serve destination Consumers view “food” less as a com- for food products to delivering the “right” food modity or mere sustenance and more solution at the “right” place at the “right” time as a holistic experience.

24 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Let’s examine each of these imperatives Understanding the “why” requires in-depth with an eye to how current retailers need to exploration of the entire journey of current successfully approach these challenges. and future consumers—including the various attributes that drive shopping and buying Imperative 1 behavior at each touchpoint. Unfortunately, for ENSURE RELEVANCE IN THE most food retailers, existing consumer insights CONSUMER’S JOURNEY consist of transactional data that provides a Understand current customers, identify target clear understanding of “what” the consumer customers and reposition competitive strate- purchased, but is often blind to “why” they did gies accordingly to attract and retain them, or did not make the purchase. Deeper under- adapting value propositions, store formats and standing should include the overall needs, mo- business models tivators, behaviors and choices that drive each How do traditional food retailers, who have stage of the journey. dominated the industry based on best location, As witnessed over time, consumers’ needs and sought-after assortment, quality and value, motivators—such as speed and impulse, one- remain relevant as the barriers to entry for stop shopping, healthy choices, value and qual- nontraditional competitors are collapsing? The ity—are relatively finite. Yet the ways in which answer lies in a core tenet that is the founda- these needs and behaviors manifest them- tion of success for most food retailers: Know selves in consumers are constantly changing. your consumer better than anyone else does. Some consumers, for instance, who previously frequented the neighborhood supermarket be- Food retailers must take a consumer- cause it was nearby and provided a “one-stop” centric approach to strategic planning shopping experience, may now be satisfying Food retailers should start by developing deep this need for convenience by shopping online insights from their current customer base to and having purchases delivered to their homes. understand key customer segments; identify Successful food retailers must understand and which segments are growing, stagnant or adapt to those changes in rapid fashion. shrinking; and determine how each segment impacts the bottom line (e.g., revenue genera- For example, startups like Blue Apron, Hello tors versus revenue destroyers). Fresh and Plated are making it easier for con- sumers to prepare restaurant-quality meals Analysis of demographic spend, population at home with fresh ingredients and without shifts and competitor activity, however, must stepping foot into a physical store. These not solely define the future state nor determine companies identified a demand in the market, which segments to prioritize for investments previously unmet by traditional supermarkets in the future. To inform and shape the future and grocers, and established value proposi- vision, census data, economic indicators and tions to zero in on this current consumer need. balance sheets must be supplemented with a Additionally, their business models have been full understanding and appreciation for why, tailored to deliver on their unique value propo- where and how consumers shop, buy, cook sitions. As a result, they have created new and dine. Only then can a retailer identify products and services, reinventing the grocery which customers to target in the future and shopping experience in the process. By effec- determine the appropriate operating model for tively cutting out the middleman, they rede- serving them.

25 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING fined the grocery supply chain to make them- petitors, they are not exploiting this data nor selves the trusted source of fresh and unique adequately capturing it. grocery products and services. Progressive retailers are using advanced RETAILERS’ RESPONSE: To remain relevant, analytics tools and techniques to harness big retailers must be routinely and proactively data—such as proprietary historical customer addressing consumer needs and motivators. data and data generated from real-time en- Retailers can establish ongoing, personal, gagement—to create a robust, though one- real-time engagement and proactively influ- dimensional, picture of “how” consumers are ence the consumer at the point of interaction behaving. To arrive at a 360-degree view of by efficiently and continuously managing and the customer, they then overlay the “why” (i.e., synthesizing the vast amount of consumer data consumer needs and motivators of behaviors) that is generated throughout the multichannel garnered through traditional primary consum- consumer journey into actionable insights. er-facing research methodologies.

Become masters of understanding RETAILERS’ RESPONSE: Forward-thinking consumers via data and analytics retailers recognize that consumers’ needs, Traditional food retailers in 2016 have a larger motivators and behaviors are always changing customer base than these new entrants and and, therefore, systematically integrate tradi- are potentially sitting on a treasure trove of tional research with big data analytics to ensure data about their customers and their consumer that they maintain an evolving understanding of journeys. Yet, unlike their nontraditional com- consumers.

EXAMPLES OF CONSUMER BEHAVIORS

Consumer Consumer Consumer drives Consumer uses Consumer Consumer browses site, buys online to store, texts product and lands on makes another reads product and opts for when arrives and indicates satisfac- website, logs purchase in to account info & reviews store pickup picks up purchase tion via survey

Consumer Journey

BEFORE DURING AFTER ACQUIRE ENGAGE RETAIN

Retailers’ Responses

Develop Identify trigger Design best Fulfill oer via Measure Loop back with customer profile oer kiosk at pickup another oer

Customer Real-time Promotion scoring & Clickstream Dynamic localized response Next purchase segmentation analytics pricing oers analysis analysis

POTENTIAL RETAILER ACTIONS SUPPORTED BY ANALYTICS

26 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING As a result, food retailers will need to reevalu- CVS recognized early on the power of ate their overall analytics and business intelli- their customer data. Through sophisti- gence platform to ensure that they can provide cated use of data, CVS has masterfully the right insights to the right people at the evolved its ExtraCare loyalty program into right time. Retailers of tomorrow must estab- an enabler of a consistent, personalized lish the data infrastructure necessary to influ- customer experience, providing additional ence the consumer journey. As omnichannel perceived value. Rather than a reactionary, engagement becomes the norm, retailers will “cookie-cutter” loyalty program, CVS has continue to be inundated with data. To support created a robust platform that proactively and facilitate unfettered access to this data, and seamlessly delivers personalized of- the successful retailer will have engineered a fers before, during and after the consumer holistic analytics ecosystem and infrastructure journey. CVS intelligently engages Extra- that allow iterative discovery, prototyping and Care members, using past purchases to mass syndication. inform appropriately timed offers and con- tent via emails and mobile alerts. Bounce- Leverage design thinking to create the back offers often include target thresholds food shopping experience of the future rather than a straight percentage off (e.g., Armed with newfound knowledge and insights $3 off a shampoo purchase of $15 versus of consumers, food retailers will need to evolve simply 20% off) with a hurdle set high design-thinking methods to continuously em- enough to encourage larger basket size. pathize, ideate and create the food shopping Unredeemed offers are often escalated if experience of the future. not redeemed (e.g., an unredeemed 20% The concept of design thinking is straightfor- off offer may be followed by one for 30% ward. It involves developing deep empathy with a few weeks later). This is an effective at- the consumer to help identify and clarify those tempt to drive continued engagement. problems that need solving (e.g., customers hate checkout lines). These problem state- ments are then used to create potential ideas food retailers are increasingly experimenting for how to solve them (e.g., self-checkout). with self-checkout options that could bypass Each idea is evaluated and refined until those the checkout lane altogether—from today’s most promising are crafted into physical proto- self-checkout registers to the emerging mobile- types and concept designs (e.g., self-checkout centric scan-and-go solutions. Food retailers prototype). These concept designs may then will need to further embrace the concept of be tested in the market to evaluate, refine and continuous ideation to improve the consumer improve them before they are implemented experience throughout the consumer journey. more broadly (e.g., a mobile checkout test). Another example of design thinking is tack- Food retailers are already using consumer ling the challenge of “center store” relevance. insights to drive design-thinking concepts— Grocers like Central Market (owned by H-E-B) whether they realize it or not. For decades, have redefined the product selection, pricing, long checkout lines have been the bane of the margins and relevance of center store by spe- retail experience and retailers have used those cializing in high-quality, hard-to-find gourmet complaints (or “consumer insights”) to con- foods. In fact, staple categories like cleaning sider and create better alternatives. As a result, supplies have a very small selection with only

27 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING one or two offerings predominantly focused on Amazon initially sold only books. And not “green” or private brands. Noticeably absent just some books, but such a broad assort- are any national powerhouse brands. Most ment that no physical retail location could locations also have a full-service kitchen and contain them. The selling of every book offer cooking and wine classes in their culinary from “A to Z” is in fact why Jeff Bezos school as well as catering services. The chain named his startup Amazon—with a line in has nine locations, all in Texas, and because the logo that connects the A and Z. Obvi- of these and other design-thinking strategies, ously, Amazon has since extended its “A Central Market has garnered numerous awards, to Z” value proposition well beyond books including “Outstanding Specialty Food Retail- such that Amazon is sure to have almost er” from Specialty Food Magazine. any item a consumer may be seeking. RETAILERS’ RESPONSE: Food retailers should At the same time Amazon established its embrace the concept of design thinking to “A to Z” value proposition, it also pursued continuously innovate their businesses to better other value propositions, namely competi- meet and anticipate changing consumer needs, tive pricing and fast and easy fulfillment. desires and preferences. This must include the The latter, in particular, evolved from willingness and permission to continuously test, Amazon’s one-click checkout in 2000 to fail and learn, which requires executive-level Amazon Prime in 2005 to Amazon Dash sponsorship. and Amazon Echo/Alexa in 2015.

Fluid value propositions need flexible Amazon’s success as the largest U.S. operating models e-commerce retailer (albeit with modest profitability) is in large part due to this Consumers have multiple needs that may slot simultaneous pursuit of multiple universal them into different consumer segments as their value propositions (e.g., assortment, price, life stages change. And the needs of consumer speed) and (r)evolutionary improvements segments are always evolving as influencers, on the delivery of these value proposi- such as emerging technology, impact how we tions over time. live our lives. Yet value propositions must con- tinuously cater to a specific customer experi- ence that aligns with the reasons a customer would choose to travel—or navigate online—to thinking. Yet a constantly evolving value propo- a specific food retailer’s store. As a result, suc- sition requires a nimble, adaptable operating cess through customer centricity inherently re- model that can support and effectively deliver quires simultaneous deployment of potentially on those value propositions. multiple value propositions as well as the rapid Food retailers should be asking themselves if evolution of the means of effective delivery on their current operating models can support an those value propositions. evolving value proposition. For example, some Only through continuous refinement of these traditional grocers may have expanded their value propositions can retailers ensure that footprint and increased square footage over they are meaningful and relevant to the seg- time to serve the needs of “one-stop-shop” ments they wish to attract and retain. To do consumers. But now they are seeing a shift in this, food retailers should be acting on the their consumers’ needs (e.g., curated meals, insights derived from customer data and design prepared foods, etc.). Those retailers who are

28 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING able to refine and adapt their value proposi- in more meaningful ways than ever before. New tions to address these new needs will thrive. digital and mobile capabilities will potentially They may do this by repurposing space used open new markets, create new business models for goods no longer in demand or by creating and increase traffic, conversion and basket size. seating areas where customers can eat a pre- In another respect, this explosion of new digital pared meal, observe a cooking demonstration, touchpoints and capabilities also presents an meet after work for a beer, etc. By doing so, the unprecedented competitive threat and chal- brick-and-mortar store becomes a destination lenge for food retailers to guide, manage and for more than just buying groceries. influence a consumer experience in an environ- RETAILERS’ RESPONSE: Retailers must take a ment that is increasingly diverse and changing. portfolio approach to selection and delivery on This growing digital opportunity—and increas- value propositions. Future success may require ing challenge of complexity—creates a paradox retailers to be able to simultaneously serve mul- that food retailers must effectively navigate tiple segments that have different needs. There- by responding to multiple cascading waves of fore, five- to 10-year roadmaps should include digital disruption. plans for investing in and delivering on multiple value propositions via flexible operating models The first wave includes online commerce, as that allow for “test and learn” and rapid invest- grocers seek to add e-commerce capabilities ment or divestment. to their portfolio and compete with online pure plays such as Amazon Fresh, Ocado and Pea- Imperative 2 pod. North American food retailers should look EMBRACE DIGITAL ENGAGEMENT to the U.K. as a blueprint for the future of online Move quickly on e-commerce and build digital shopping, where online sales have approached capabilities and efficiencies that pervade the 5% of total sales. In Canada and the United entire consumer journey States, online grocery sales account for only 1% to 3% of total sales, respectively, according to a Food retailers must adapt to the great report by BMO Capital Markets. U.S. consumers digital disruption are more than ready for online food commerce; Consumers’ increasing demand for online op- a 2014 Kurt Salmon study revealed that 67% of tions means that retailers must consider how consumers surveyed had searched for grocery they will build or enhance their existing digital product information online, and 25% had pur- platforms. To determine what digital capabili- chased grocery-related products online. ties are required, it is important to understand RETAILERS’ RESPONSE: Food retailers will how the digital disruption evolved. need to build a robust set of e-commerce capa- Digital disruption continues to come in waves, bilities to rapidly catch up to retailers who have and the disruption that has hit the general retail been growing their capabilities for many years. industry is now impacting food retailers as well. This will include designing a more immersive In one respect, this digital and mobile revolu- and interactive online shopping experience, tion represents one of the greatest opportuni- creating and managing a rich portfolio of digital ties the retail industry has ever experienced. assets, integrating the “shopping cart” across Its promise includes the ability to connect to multiple devices, optimizing for mobile, and more customers on a more personal level and streamlining the overall checkout process.

29 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING The second wave of digital disruption includes In addition to significant investments in mobile applications intended to extend the acquiring MapMyFitness, MyFitnessPal digital experience and enhance customer and Endomondo, Under Armour intro- engagement; examples include mobile applica- duced a portfolio of internet-enabled tions from Target, which support mobile shop- devices in 2016 called HealthBox, a ping lists, inventory visibility and in-store guid- Bluetooth-enabled scale, heart rate ance; Walmart, which allows customers to scan monitor and wrist band that tracks steps, a product to get detailed information, price distance, resting heart rate and sleep. To comparisons and inventory availability; and help consumers achieve their health and Kroger, which combines shopping lists, digital fitness goals, Under Armour is essentially offers, pharmacy refills and points for fuel in a creating the world’s largest digital health single app. Food retailers should expect to see and fitness community, and, by doing exponential growth in mobile capabilities such so, Under Armour sells more shirts and as digital wallets, portable shopping carts, and shoes. Food retailers should take notice. mobile ordering and checkout that will trans- form both the mobile and in-store experience. RETAILERS’ RESPONSE: Food retailers will media, according to global research compiled need to take a mobile-first approach to digi- by Smart Insights. The opportunities for social tal, optimizing their e-commerce offerings for media include the ability to connect to more mobile, developing a comprehensive mobile customers on a more personal level and in more engagement strategy, curating rich and interac- meaningful ways than ever before. New and tive mobile content, and continuously adapting emerging social media capabilities will provide and integrating emerging mobile capabilities new channels of commerce. such as mobile payments, mobile messaging RETAILERS’ RESPONSE: Food retailers must and geolocation capabilities. reevaluate their digital marketing and social en- The third wave of digital disruption will include gagement strategies and seamlessly integrate social networking and social commerce. While social media (i.e., traditional social and emerg- the emergence of e-commerce and m-com- ing messaging platforms) into online, mobile merce has been well-documented, it is the po- and store channels. These new social commerce tential shift to social commerce that represents capabilities will need to engage and conduct the next great potential opportunity for today’s commerce in those social channels where their retailers. The explosion of social media tech- consumers are increasingly spending time and nologies—such as social platforms (Facebook, money. Twitter, Google), sharing sites (Pinterest, Insta- The fourth wave of digital disruption will gram, YouTube), localization sites (Foursquare, include the Internet of Things (IoT) and con- Shopkick, Nextdoor) and messaging platforms sumer wearables—such as the Apple Watch, (WhatsApp, Snapchat, WeChat)—has created Samsung Gear and Fitbit—which provide a vast ecosystem of digital networks where heightened levels of personalization about consumers increasingly spend time to live, love, health, fitness and diet needs. Under Armour share and shop. Social media adoption has be- has already capitalized on these disruptions come pervasive among internet users, as over by assembling an ecosystem of digital prod- 67% of all online users are also active on social ucts and wearable sensors to help its sports-

30 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING wear customers track, manage and achieve in-store shopping experience—from interactive their personal health and fitness goals. By cooking shows to dietary and health tracking— doing so, Under Armour seeks to expand its and embracing and integrating digital-enabled influence across the consumer’s journey—or devices such as RFID, beacons, sensors, meters “third dimension”—by becoming an indispens- and digital apps into a digitally connected food able resource across a broad set of customer retailing ecosystem. touchpoints. In addition, Amazon has intro- The fifth wave will include artificial intelligence duced an entire catalog of Dash Buttons, which —or bots—that will become an integral part are Wi-Fi–connected devices that reorder the of consumers’ lives. Already consumers are consumers’ favorite products with the press of familiar with chatbots—computer programs de- a button. signed to simulate and structure conversation RETAILERS’ RESPONSE: Food retailers will with users. Apple’s Siri and Amazon’s Alexa are need to transform their customer experience increasingly finding their way into consumers’ model to include a broad set of digital touch- homes. Facebook entered the fray by announc- points that significantly extend beyond the ing its latest Messenger platform that includes

THE CONNECTED FOOD SHOPPING EXPERIENCE

DIGITAL DISPLAYS Product Information MOBILE CAMERA Cross/Up Selling Image Recognition Digital Marketing Augmented Reality Endless Aisle Social Sharing MOBILE CHECKOUT Associate Assistance Bar Code/QR Mobile Payment Scanning Mobile Checkout Gamification Mobile Ordering Mobile Coupons Loyalty Rewards

MOBILE Shopping List Management Mobile Ordering DURING Inventory Finder SOCIAL Wayfinding Social Sharing Product Discovery Social Engagement Subscription Management Social Discovery Social Commerce Digital Marketing

VIRTUAL ASSISTANTS Chatbots Artificial Intelligence B E Auto-Reordering R Product Recommendations F E O T R F VIDEO E A Food & Cooking Shows Interactive Video (YouTube) Video Messaging Video Marketing WEARABLES Product Placement Health Management Diet Management Fitness Management Notifications MESSAGING Geolocation ONLINE Social Networking eCommerce/Ordering Messaging Account Management Chatbots Subscription Management Digital Merchandising Digital Marketing Order History

31 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING chatbots. Google joined in with Google Home, to embrace this future with a comprehensive and other messaging platforms have or will strategy for continuously engaging consumers soon follow suit. All of these innovations repre- before, during and after the grocery shopping sent an entirely new communication ecosystem journey. that will present another opportunity—and RETAILERS’ RESPONSE: Food retailers must challenge—for retailers. Grocery chatbots, for develop a comprehensive digital experience example, could continuously learn consumer strategy that encompasses all digital channels preferences to help them pick out and order and capabilities and that enables a seamless groceries for the day or week ahead. digital experience before, during and after the RETAILERS’ RESPONSE: Food retailers must grocery shopping trip. first develop a clear understanding of which BEFORE: Digital capabilities may include the digital channels align best with their target con- ability to leverage prior order history and shop- sumers and then establish a chatbot strategy ping behavior to better understand who the for those channels that continuously tests and consumer is and predict future needs, enable innovates chatbot capabilities and seamlessly the consumer to quickly and easily build a digi- integrates those capabilities across all channels tal shopping list tied to the grocer’s available and functional areas. product catalog, produce expert food content Food retailers must create a connected to inspire meal planning, and expose local food shopping experience inventory to provide near real-time visibility to The increasingly and always-connected con- product availability. sumer will expect to find consistency in prod- DURING: Digital capabilities may include the ucts, offers, promotions and experiences across ability to personalize the shopping experience all channels whether they are shopping in a based on individual preferences and needs; physical store, online or via the mobile phone. recognize and reward consumers in-store Retailers must build digital capabilities to sup- through integrated online, mobile, and in-store port and deliver new content (such as interac- ordering and shopping; offer flexible fulfillment tive recipes, videos and “food hacks”), products models including buy online, pick up in store, (such as curated meal “kits” and products/ locker pickup and home delivery; and engage solutions tailored to individual dietary or health consumers via in-store digital engagement such needs) and services (such as subscription mod- as interactive displays, consumer and associate els, food chatbots and home delivery) more mobile devices, beacons and scan-and-go self- seamlessly across all channels and touchpoints. checkout. This will mean that food retailers will need to AFTER: Digital capabilities may include the invest in more robust creative design, content ability to derive actionable insights from the management and visual merchandising capa- shopping journey and order history; utilize bilities across online, mobile, social and in-store predictive analytics; offer automated replenish- digital platforms. Technologies such as consum- ment, personalized digital marketing, loyalty VIP er mobile, beacons and in-store digital displays rewards, and social media sharing and engage- are already creating an entirely new platform ment; and proactively engage the consumer and and opportunity for digital engagement with encourage repeat purchases. the customer. Leading food retailers will need

32 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Imperative 3 The comprehensive digital food retailing STRETCH THE BOUNDARIES OF THE ecosystem may take many forms, but CONSUMER JOURNEY digital technologies that are readily avail- Shift from being a functional, self-serve destina- able today could provide a glimpse of tion for food products to delivering the “right” the future. Through an individual’s work- food solution at the “right” place at the “right” day, for example, a smart watch or health time monitor evaluates the caloric intake, level of physical activity and key nutri- Once food retailers are successfully leveraging ent levels of an individual and recom- consumer insights to develop a deep empathy mends a personalized and well-balanced for their consumers’ wants, needs and prefer- meal for dinner. For example, at lunch ences and are translating those insights into a time, Jessica Gardner may ask Siri, “Siri, broad digital ecosystem of products, services, what should I have for lunch today?” and virtual and physical touchpoints, they must Siri responds, “You have consumed 450 effectively deliver and fulfill on the promise of calories so far today; it appears that your their value propositions. iron and vitamin D levels are down, and Grocery fulfillment breaks free I see you did not meet your step goals We are well on the way toward a future where today. I’d recommend your favorite spin- consumer desires will be satisfied by everyone ach and citrus salad and cheese or milk through channels that enable the customer to before dinner.” Furthermore, the digital access products everywhere based on their ecosystem may connect directly to the own set of factors around convenience, cost local grocery store for ordering. “Siri, and experience. The winners will be those who would you order my favorite spinach and develop a level of trust with their customer— citrus salad for pickup at my local store trust that the retailer understands their needs, in an hour?” And Siri responds, “I have protects their privacy and has developed a completed the order. According to traf- portfolio of goods and services that meets fic, you will arrive at the grocery store in those needs. approximately 20 minutes.” Jessica texts her local store with her ETA. She arrives This battle for consumer trust will not be at the store, parks in the “Pickups Only” waged exclusively inside the four walls of the parking spot and is handed her order retail store as it was in the past, where physical when she walks in the door. enhancements, such as food courts, extensive prepared foods and décor makeovers kept the grocer one step ahead of the competition. To be sure, an inviting in-store experience will re- e-commerce and brick-and-mortar capabilities. main a strong price of entry but a decreasingly Retailers must translate their strategy for gain- important element of an ever more multifac- ing the trust, and meeting the desires of their eted scorecard defining future success. customer, into the right combination of fulfill- Winning consumers’ trust and satisfying their ment mechanisms enabling: desires will mandate development and per- »» Click and collect—Consumers order fection of seamless, flexible and increasingly merchandise online for pickup at the store immediate “delivery” options combining digital, of their choice with retailers leveraging a

33 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING combination of in-store and out-of-store Click and collect resources to support the service promise of Click and collect models can be characterized this expanding fulfillment method. based on whether the customer order fulfillment »» Home delivery—Consumers order merchan- activities happen inside an active store or in a dise for delivery to their home at a time they location specifically designed to support fulfill- determine and at an expedient cost. ment activities. Store-based click and collect has been the preferred mechanism for initial pilot- »» Delivery to “point of convenience”—Many ing, as the existing infrastructure of an operat- retailers are expanding the concept of click ing store provides several advantages, including and collect to include options for customers ready availability of a wide range of inventory as to retrieve merchandise at a much wider well as an existing workforce that can be lever- variety of pickup locations. aged to support fulfillment activities. Food retailers who have not begun to con- Store-based click and collect programs are sider how they will connect with the consumer further differentiated into those where the cus- through these three evolving fulfillment meth- tomer retrieves their filled order inside the store ods will fall behind. They will risk others steal- versus those where a store associate delivers ing basket share from a consumer who has the order to the customer’s car. While a good historically valued their in-store experience. vehicle for initial launch, store-based click and

FULFILLMENT COST BASED ON VOLUME

$0.40

Cook with Some Premade Ingredients $0.35

$0.30

Fulfillment Cost per Unit Fulfillment Cost $0.25

$0.20 175 350 700 Orders per Store per Week

Current State Daytime Batch Split Shift Batch Dark Store

34 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING collect programs do present challenges for • Off-hours processing, where orders with even the most experienced retailers, especially sufficient lead time can be fulfilled and as scale increases. Specifically: staged before store hours, reducing congestion »» Inventory availability—Many retailers lack the kind of sophisticated perpetual As volumes grow, in-store limitations impact inventory systems and processes necessary the profitability as well as the availability of to confidently predict availability for a the click and collect model, leading retailers to customer’s click and collect order. And click consider other options which remove the fulfill- and collect raises the bar on the need to ment activity from the stores. Several models very accurately ensure that the in-store have emerged for supporting click and collect assortment matches what is being offered activities outside the store, including: through the click and collect online order Dark store—This option typically converts management platform. an underperforming store to the purpose of »» Space—Many retailers are already providing dedicated support for click and challenged by small backrooms and collect activities. Because the dark store pressure to increase the productivity of the does not need to be merchandised in the selling floor. Click and collect requires same way that an active store does, stor- dedication of the space needed to enable age becomes denser, enabling expanded the staging of customer orders and the assortments and greater depth of inventory. management of order fulfillment and And, because a customer will not be shop- settlement activities. ping the aisles, merchandise can be “slot- ted” more efficiently, promoting increased »» Productivity—Store-based click and collect fulfillment suffers from productivity issues fulfillment productivity. In fact, many are related to store layout and order size. With supporting dark store operations by using a typical 25- to 50-line order, it is difficult a warehouse management system to create to assign multiple orders to a “picker” who efficient SKU layout and productive fulfill- must then traverse the whole footprint of ment. The dark store can serve as a loca- the store to complete the order. As volume tion where customers come to retrieve their grows, the flood of pickers in the aisles can orders. The dark store can also be used as impact the perception of service for in-store a central location for fulfilling click and col- shoppers while also impacting shelf avail- lect orders for shuttling to nearby stores for ability. Retailers experienced with in-store customer pickup. click and collect are applying engineering Fulfillment hubs—Similar, but more efficient principles taken from their supply chain than a dark store, a fulfillment hub operates operations to drive significant improve- much like a larger distribution facility, ments: providing the added efficiency of purpose- designed product flow supported by more • Multi-order dispatching based on custom- ized pick carts and “smart” order routing sophisticated material handling and ware- house management solutions. • Zone-based picking, where the content for multiple orders in a single zone (e.g., To support saleable click and collect activities, produce, frozen, meat) is brought to a there are many techniques retailers can deploy. “consolidation” area for final assembly In more remote areas where stores are widely

35 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING separated, individual stores will likely continue GPS to provide an accurate arrival time. The to support click and collect, while in higher-den- retailer is then waiting with the delivery in hand sity areas, dark stores and hubs will proliferate. when the customer arrives. The convenience of click and collect for the RETAILERS’ RESPONSE: Click and collect must customer comes at a cost for the retailer. And be a part of every retailer’s future customer while relatively new and just starting to grow experience strategy. Initial pilots should focus in the United States, the broader and longer on a small number of stores and should be experience in markets like the U.K. is instruc- supported within the store. With experience, tive for retailers implementing click and collect retailers will scale their click and collect service operations. Retailers can expect a 3% to 5% by enabling alternate fulfillment locations and margin hit associated with the added handling by providing more efficient and cost-effective and cost associated with maintaining their click operations while supporting flexible support of and collect infrastructure. Initially, store-based customer pickup requirements. click and collect programs will impact margin more heavily, with the efficiencies associated Home delivery with dark store or hub operations reducing the While most grocery retailers have wisely pri- impact over time. oritized piloting and rollout of click and collect services as their first omnichannel fulfillment The good news is that click and collect pro- play, environmental factors are conspiring to grams appear to drive an increase in overall suggest that a home delivery strategy should basket size, with retailers being rewarded with not be too far behind. Home delivery actually incremental business that at least partially off- predates click and collect by many years and sets the impact on margin. One large regional yet, because of some visible failures such as grocer has seen a 20% to 25% gain in overall Webvan and HomeRuns and the added chal- basket size for customers routinely using click lenge of managing “final mile” logistics, it has and collect services. These customers appear not been widely adopted by traditional grocers. to be using click and collect as a way to “out- source” the shopping for many of the center Times have certainly changed. Amazon’s ag- store commodities, allowing them to spend gressive launch and expansion of a wide range more time interacting with the more personal of home delivery options is bringing this service experiences around the perimeter of the store. to markets where most retailers will feel threat- ened by the potential loss of basket share. But Critical to click and collect and other fulfillment Amazon is hardly alone. A wide variety of play- vehicles is a robust infrastructure that ensures ers are creating a marketplace that enables all that the retailer makes good on the delivery retailers to create their own best version of a promise. For example, to seamlessly deploy home delivery strategy. click and collect, many retailers utilize mobile apps to allow for real-time, two-way contact Retailers must at a minimum begin the process with customers. This may manifest itself as fol- of exploring what role home delivery will play lows: The customer places the order online, the in their overall strategic plans. There are three retailer sends a text message when the order is strategic options for supporting home deliv- ready for pickup and then the customer texts ery operations dependent upon who picks the the retailer that he or she is on the way using order and who handles final-mile delivery:

36 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING HOME delivery volume from multiple sources, ORDER ORDER DELIVERY EXAMPLE PICKING DELIVERY generating an efficient load that is OPTION associated with a tight delivery geography. Insourced Retailer Retailer Peapod The selection of the delivery partner Hybrid Retailer Partner OnTrac and becomes extremely important, as the retailer Dynamex w/ Google is giving up the direct contact with the Express customer, introducing the risk that the Outsourced Partner Partner Instacart retailer’s brand promise can be negatively impacted. »» Insourced—Most grocers will find that they Google launched a full-service delivery lack the unit volume and delivery market service with its own fleet in San Francisco density required to support productive in 2013 and has since tweaked its business home delivery. In the best case, a retailer strategy and delivery model. Google Express may find that certain relatively tight will partner with delivery services such as geographic markets with a high con- OnTrac and Dynamex, focusing on delivery centration of customer volume have the of dry goods groceries (not perishables) so characteristics to support home delivery. that it can scale nationally. By eliminating its Rural markets with highly dispersed own fleet, Google will cut costs as it customers will not likely make sense for continues to generate revenue by collecting home delivery supported entirely by the fees per delivery or membership. With an retailer. Where home delivery may make ever-increasing set of delivery choices sense, the challenge of meeting multiple, (Deliv, Uber and others), retailers will benefit relatively tight delivery windows during a from the competition for their volume but day as well as the natural peaks in home will need to be increasingly aware of the delivery volume across the week would drive need for partners committed to representing the need for a large, underutilized delivery their brand well. fleet that would be difficult to financially justify. Peapod’s success in supporting »» Outsourced—Instacart is representative of integrated home delivery fulfillment has the method for supporting home delivery come from carefully choosing markets that with all picking and delivery activities drive delivery efficiency which, in turn, controlled by a third party. One version of justifies investment in distribution capacity. this model has the third party acting on its While the economics of insourced home own, merely shopping a retailer’s store as delivery are difficult to justify, this method the “personal butler” of the customer and ensures the best control of the brand delivering the completed order to the home. experience across the entire transaction. There is little risk to the retailer’s brand image, as the third party is acting on its own »» Hybrid—In this option, the retailer handles behalf, selecting merchandise from the the order picking, with a third party retailer’s assortment. Another version of this executing final-mile delivery. The order option is represented by the Sprouts/ picking can be done from a retailer’s Amazon arrangement, where Amazon will distribution center or from the same infra- be providing all of the fulfillment and structure that supports click and collect delivery services for Sprouts in exchange for operations. The third party consolidates

37 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING the opportunity to represent the powerful tomers who choose not to come to the flagship Sprouts brand in the marketplace. This store for pickup. Giant Eagle has been an early option represents the fastest route to pioneer in this space, enabling pickups at their market but also creates the maximum more local GetGo convenience stores. Walmart distance between a customer and the has also tackled this emerging concept through essence of the retail brand. the use of their drive-through pickup locations, Once established, retailers should consider how providing more local service to customers to leverage home delivery to provide an experi- selecting a click and collect option. Another ence that is truly representative of the brand model is a dark store drive-through model— and that goes beyond the mere delivery of ba- such as Kansas City–based Zoomin Market— sic groceries to the door. Tapping into the Blue where customers order online and pick up at a Apron model, retailers could extend their brand dedicated drive-through location. position to offer home delivery of meal solu- The extension of this concept will likely give tions on an event or even a subscription basis. birth to partnerships across retailers in shared As consumer expectations increase surround- geographies where forward-deployed pickup ing the speed and visibility of e-commerce capacity can be shared across the click and transactions, retailers will need to develop pro- collect volume of multiple players. In addition, cesses and solutions similar to those deployed there will likely be new companies created to by Domino’s Pizza, which enable a customer to handle the aggregation of click and collect track a pizza from oven to the front door. volumes in tight geographical areas, relieving retailers of having to invest in their own capac- RETAILERS’ RESPONSE: It’s clear that grocery home delivery is here to stay and that all retail- ity while leveraging the aggregated volumes to ers must have an appropriate strategy for com- provide efficient, cost-effective service of the batting the threat of competitors like Amazon. click and collect business. One such startup, But unlike click and collect, where capability OLAM (On Line curbside pickup At Malls), is will largely be developed and deployed in- gaining traction providing mall-to-car delivery house, home delivery is likely to involve partner- of click and collect orders from multiple retail- ships with final-mile solutions spreading the risk ers at a single mall location. This exciting and reducing the price of entry. Retailers should concept provides tremendous efficiencies to be aggressively evaluating the pros and cons of labor-strapped, mall-based retailers while offer- the various options available to them, execut- ing a unique convenience to a customer who ing controlled pilots in promising geographies can now have their aggregated click and collect to learn the mechanics of this very different purchases from multiple sources delivered right customer service option. to the parking lot. RETAILERS’ RESPONSE: Food retailers will Delivery to “point of convenience” need to identify the economics and value prop- Your future plans must account for customers osition of adding nodes to their retail supply wanting to be able to retrieve products ordered chain that enable consumers to receive grocer- from multiple retailers at a time of their choos- ies at their preferred point of convenience. ing and at a location most convenient for them. Each option will likely have its own unique set At a minimum, this will include making other of challenges and opportunities that will need nodes in your own retail chain available for cus- to be evaluated and optimized—from third-

38 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING party lockers and small-format c-store pickup Imperative 2 locations to dark store drive-through locations EMBRACE DIGITAL ENGAGEMENT or delivery to the consumer’s office or parked In an environment where consumers are car location. Food retailers will need to evalu- increasingly connected throughout the entire ate a portfolio of alternatives and determine food shopping journey, food retailers will need the right operating model for their brand, their a digital platform that continuously engages consumers and their market geography. consumers throughout their grocery shopping journey. SUMMARY—INDUSTRY RESPONSE IMPERATIVES Food retailers will need to invest in more robust The race to create a holistic ecosystem to creative design, content management and fulfill consumers’ goals visual merchandising capabilities across online, mobile, social and in-store digital platforms. In The traditional competitive advantage associ- addition, food retailers will need to continuous- ated with convenience, breadth and depth of ly reevaluate their online and offline assortment assortment, and discounting is evaporating. strategy to optimize the breadth and depth of To maintain relevance, food retailers will need category assortments offered in-store, online, to transform from a predominantly product- via mobile and on social media platforms. centric business model to more of a consumer- and goal-oriented business model. To enable Imperative 3 this transformation, a retailer’s operating model STRETCH THE BOUNDARIES OF THE should extend beyond the four walls of the CONSUMER JOURNEY physical store and manifest itself as an ecosys- Food retailers must begin exploring how al- tem that proactively engages the consumer at ternate delivery options can be leveraged as a all points across the “third dimension” of the powerful strategic tool, or they will risk perma- consumer journey. A solid understanding of nent damage to their brand. The key to success consumers’ needs, a fluid value proposition, lies in taking a very aggressive but measured a robust digital platform and flexible delivery approach, piloting the concepts of click and mechanisms should all be components of this collect and home delivery in highly select mar- ecosystem. kets and, in the process, discovering how these alternate customer connection points drive Imperative 1 incremental revenue. ENSURE RELEVANCE IN THE CONSUMER’S JOURNEY The technology is available to support these Food retailers will need to embed a practice of activities. Advanced analytics helps to harness routinely and proactively addressing consumer big data and derive actionable insights from needs and motivators. This begins with devel- proprietary historical customer data and data oping a deep understanding of “who” the con- generated from real-time engagement. E-com- sumer is, “how” they shop today, “what” their merce platforms, mobile apps, consumer wear- current needs and potential future desires are, ables and chatbots are being fully embraced and then establishing fluid value propositions by retailers in other industries to optimize that are aligned to achieving the consumer’s consumer engagement. Enhanced shelf inven- individual goals. tory management solutions and increasingly

39 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING sophisticated forecasting and replenishment solutions improve accuracy at the shelf, which is critical to enabling inventory to be commit- ted to click and collect orders. Web front-end and sophisticated order management systems are being deployed across store networks to provide the foundation supporting omnichannel alternatives. And warehouse management solu- tions and DC processes are being employed to support efficient and effective fulfillment processes.

40 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING 4. Call to Action What does my company need to do to be ready for the future?

THE ROADMAP 1. Ensuring Relevance in the Consumer’s The path toward maintaining relevance in Journey the future 2. Embracing Digital Engagement Ensuring continued relevance to the consumer 3. Stretching the Boundaries of the Consumer will require retailers to possess and develop Journey various capabilities that may evolve at different The transformation of food retailers’ capa- stages of maturity bilities along the third dimension will not be The pace of change is exponential—rather than achieved in one fell swoop, but rather through linear—and reflects a combination of mind- multiple stages of disruption: blowing technological innovation, shifting 1. Stage 1: In the initial stage of transforma- consumer preferences and an increasingly net- tion, food retailers will need to become worked global population. This confluence of masters of consumer insights, invest heavily rapidly changing technologies and shifting con- in foundational e-commerce and mobile sumer preferences is creating a perfect storm capabilities, and evaluate and optimize of disruption to the food retailing industry. initial click and collect operational models. Future success will be achieved by building rel- 2. Stage 2: In the second stage of transform- evance on the “third dimension”—the consumer ation, food retailers will need to leverage journey. The forces that today are disrupting design thinking to convert consumer in- the conventional grocery model show up all sights into innovative solutions, expand along this third dimension, from menu and diet social commerce and Internet of Things influencers through alternative delivery and (IoT) capabilities, and evaluate and test dining preferences. Those who thrive will es- home delivery alternatives. tablish corporate strategies, business practices 3. Stage 3: In the third stage of transform- and operational capabilities that address this ation, food retailers will continuously journey by understanding that it is no longer evaluate market factors and adopt fluid isolated to placing an item into a shopping cart value propositions, expand artificial intel- in a brick-and-mortar store. ligence and chatbot capabilities, build a In order to maintain relevance, food retailers more comprehensive ecosystem of capa- will need to develop a long-range roadmap that bilities, and seamlessly connect and engage provides a measured approach to continually consumers throughout the entire end-to- maturing capabilities across three key dimen- end consumer journey. sions, including:

41 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING ROADMAP TO RETAIL RELEVANCE

1 2 3 ENSURE EMBRACE STRETCH RELEVANCE DIGITAL BOUNDARIES

FLEXIBLE OPERATING MODEL

PORTFOLIO APPROACH CONNECTED FOOD EXPERIENCES SEAMLESS FULFILLMENT NETWORK CONSUMER-CENTRIC STRATEGY DIGITAL CAPABILITY INTEGRATION POINT OF CONVENIENCE CAPABILITY CONTINUOUS MARKET INSIGHTS AI & BOT CAPABILITIES DELIVERY ‘NODE’ STRATEGY STAGE 03 STAGE FLUID VALUE PROPOSITIONS NEW AI & BOT STRATEGIES DELIVERY ‘NODE’ ASSESSMENT [03] FLUID VALUE PROPS [03] CONNECTED EXPERIENCES [03] POINT OF CONVENIENCE

PERSONALIZED ENGAGEMENT TEST & LEARN CONTINUOUS FEEDBACK INTERNET DEVICE CAPABILITIES HOME DELIVERY OPTIMIZATION INNOVATION LAB/STORE INTERNET DEVICE (IoT) STRATEGIES HOME DELIVERY PARTNERSHIP(S)

STAGE 02 STAGE NEW CONSUMER METRICS NEW SOCIAL COMM. CAPABILITIES HOME DELIVERY STRATEGY DESIGN-THINKING APPROACH SOCIAL COMMERCE STRATEGIES HOME DELIVERY ASSESSMENT [02] INNOVATION MGMT. [02] SOCIAL & IoT [02] HOME DELIVERY

MOBILE LOYALTY & OFFER MGMT CONTINUOUS OPTIMIZATION CONNECTED EXPERIENCE VISION IN-STORE MOBILE ENGAGEMENT FULFILLMENT HUB CAPABILITIES ROBUST ANALYTICS MOBILE COMMERCE & PAYMENT DARK STORE STRATEGIES FORMAL EXPERIENCE MODELS OMNICHANNEL SHOPPING CART CLICK & COLLECT CAPABILITIES

STAGE 01 STAGE DEEP CONSUMER EMPATHY ENHANCED DIGITAL ASSETS CLICK & COLLECT STRATEGY ACTIONABLE CONSUMER INSIGHTS NEW ECOMM. EXPERIENCES SEAMLESS INVENTORY VISIBILITY [01] CONSUMER CENTRICITY [01] ECOMM & MOBILE [01] CLICK & COLLECT

42 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING SELF-DIAGNOSTIC thing. Each organization should carefully Assessing whether my company is poised pick the handful of areas where they want to compete in the future to excel. Food retailers can begin by conducting a self- 4. Take Action: Use the self-diagnostic as a assessment of their current capabilities and catalyst to take action in your organization. determining their progress toward maintaining Before you begin the self-assessment: relevance. Take time to reflect on your current business This self-diagnostic tool is designed to help you and its competitive position. What are your cur- assess your organization’s readiness to com- rent strengths and weaknesses? What external pete in the brave new world of food retailing. factors or trends could affect your competitive Information from this diagnostic can be used to position? guide your organization’s strategy and plans for addressing key gaps and identifying opportuni- ties for competitive advantage. The diagnostic model focuses on three key pil- lars defined in this report, including: 1) Ensur- ing Relevance, 2) Embracing Digital, and 3) Stretching the Boundaries of the Customer Experience. The set of capabilities under each pillar is intended to represent the key capabili- ties that will be required to compete in the future. For each capability area, score yourself based on how well you are currently perform- ing that capability based on a scale of 1 (barely) to 5 (completely). Suggestions for completing and using the self- diagnostic: 1. Provide an Honest Assessment: In order to get the most value out of the diagnostic, provide an honest assessment of your orga- nization’s current capabilities. 2. Get Broad Representation: Get multiple people from your organization to take the assessment; ideally this should include individuals from all levels of the organiza- tion, representing all key functional areas (stores, marketing, merchandising, finance, etc.). 3. Don’t Try to Solve Everything: Few organi- zations can—or should—be great at every-

43 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING Retail Relevance Self-Diagnostic

44 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING 45 | SURVIVING THE BRAVE NEW WORLD OF FOOD RETAILING ABOUT THE AUTHORS FROM KURT SALMON ABOUT THE COCA-COLA RETAILING RESEARCH

Robert Howard is a partner in Kurt Salmon’s Retail and Consumer COUNCIL OF NORTH AMERICA Goods Group and leads Kurt Salmon Digital. He brings 25+ years The Coca-Cola Retailing Research Council of North America of experience delivering personalized, engaging and seamless (www.ccrrc.org) conducts studies on issues that help retailers shopping experiences through innovative mobile, digital, social respond to the changing marketplace. The unique value of these and in-store technologies to help retailers prepare for what’s next. studies rests with the fact that retailers define the objective Jack Horst is a partner in Kurt Salmon’s Retail and Consumer and the scope of each project and “own” the process through Goods Group. He has 30+ years of experience helping the world’s the release of the study and dissemination to the broader retail largest retailers and suppliers in the design, implementation community. and optimization of their supply chain operations. Jack is a Rod Antolock Garry Senecal frequent contributor to FMI/GMA, having authored and presented The Kroger Company/ Loblaws numerous research initiatives over the years. Harris Teeter Mimi Song Michele Orndorff is a senior manager in Kurt Salmon’s Retail Jonathan Berger Superior Grocers and Consumer Goods Group. She has 20+ years of direct-to- The Consumer Goods Forum Judy Spires consumer marketing experience helping clients derive consumer Steven Goddard Kings Food Markets insights, build and implement their consumer engagement WinCo Foods Mike Vail strategies, develop and optimize loyalty strategies, and produce Steve Junqueiro Ahold Delhaize effective marketing communications. Save Mart Supermarkets Peter Whitsett Paul Schottmiller is a partner in Kurt Salmon’s Retail and Jay Marshall Meijer Inc. Consumer Goods Group and leads the Technology and Analytics Hy-Vee David Zallie Practice. He has more than 25 years of experience focused on Rich Niemann Somerset Stores, LLC digital technologies and analytics in the retail and consumer Niemann Foods (t/a ShopRite) products industry. He has leveraged his expertise to provide Armando Perez Jeff Zollpriester strategic counsel and advice to some of the world’s largest retail H-E-B Quality Foods IGA and consumer brands. Leslie Sarasin Food Marketing Institute

Michael Sansolo Research Director, CCRRC of North America

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