According to research, Americans purchased more than $680 billion in groceries in 2019. In a word, the grocery industry is big business. To meet the demand for groceries in the U.S., retailers operate over 38,000 grocery stores, with Walmart and Kroger among the largest chains. An interesting dynamic within the grocery industry is the low margins associated with selling groceries. Grocery retailers are also challenged by the growth of online grocery ordering and delivery. Due to COVID-19, grocers experienced a significant increase in orders. That’s the good news. The bad news is that grocers lost money on every online order they fulfilled.
For an industry as critical as grocery retailing, it’s surprising how many grocers continue to operate using a business model that has changed very little over the last 100 years.
The time has come for grocery retailers to transform. The question is how.
Don’t Improve; Reimagine
The biggest challenge facing grocery retailers when it comes to transforming their companies is having the courage to make the decision to begin the process. In my experience providing consulting to the leading grocery retailers globally, including the largest grocery retailer in the world, Kroger, most grocery retailers have a low tolerance for risk.
Unlike Amazon, where “think big” and “invent and simplify” are part of the company’s leadership principles, most grocery retailers are focused on making incremental changes that provide minimal value. This “less is better” approach has created an environment where, frankly, most grocery stores look alike, and grocers have a similar operating model and customer experience.
The exception to this, of course, is Amazon. Although the company has the least amount of experience in selling groceries, Amazon has taken the approach that, in order to excel at grocery retail, innovation is a must-have. This includes creating new technology like Amazon Go and building stores with unique formats.
A recognized expert in business and the grocery industry is Louis Borders, founder of Borders bookstores and Webvan, the first heavily automated online grocery retailer, which ceased operations in 2001. Borders has emerged with a new online grocery company, Home Delivery Service.
I spoke with Borders about the current state of the grocery industry, and he stated something similar to what I have written and spoken about in the past. Instead of improving their stores or making incremental changes, grocery retailers should question everything about their business models and store operations.
In other words, don’t just try to improve; reimagine the company.
A Methodology For Change
On a scale not seen since the first industrial revolution, businesses across multiple industries are going through disruptive changes. It is a fact that businesses must adapt and operate under a set of rules and expectations that are constantly in motion.
To survive and thrive, companies should invest the time, money, and effort into designing and implementing a comprehensive and continuous business transformation, envisioning a growth strategy for the next decade and beyond.
The question is how.
My recommendation is to break down the journey into three programs that can be managed simultaneously:
1. What is the burning platform for the present? (What are the biggest pain points in the business?)
2. What will take place in our industry next? (Will it be technology, new ways to serve customers, new channels, etc.?)
3. Ten years from now, where can we be as a company? (How can we reimagine and crush all assumptions?)
Although challenging, when transformations are deployed successfully, they afford an opportunity for companies to grow, increase their competitive advantage and create a culture that focuses on shaping their future rather than reacting to events within their industry.
Specific to grocery retailers, I recommend that they focus their efforts on greatly reducing the costs associated with online grocery fulfillment and delivery, and designing new store formats that accelerate sales of the highest margin products in their stores.
I believe the best way for grocery retailers to reduce online grocery fulfillment costs is by leveraging technology to engineer new processes. For example, it is common knowledge within the grocery industry that retailers lose between $6 and $11 or more on every online order they fulfill. It is expensive and complex to assign pickers to roam aisles to fulfill online orders (labor costs), prepare and stage the orders for delivery (materials and labor costs), and then deliver the orders (delivery costs).
A much better process for grocery retailers to utilize is investing in micro-fulfillment centers to automate fulfilling orders, which I’ve previously written about. Additionally, leveraging technology related to actual deliveries can help retain greater revenue. For example, the company Tortoise is piloting the use of an electric delivery cart capable of carrying 100 pounds of groceries to make deliveries within three miles of a store.
Grocery retailers should also explore ways to create a new channel for meeting the demand for groceries. One such method is to contract a company that utilizes vans (and eventually autonomous vehicles) to provide consumers with a new way to shop. For instance, instead of ordering groceries online, retailers can stock Robomart vans with groceries, and consumers can use an app on their phones (like how Uber operates) and “hail a store.” I expect the mobile retail concept to continue to grow and generate excitement.
(Full disclosure: I am an advisor for Tortoise and Robomart, as well as many other technology companies that offer products and services to grocery retailers.)
Grocers should also think differently about their stores. Instead of maintaining their current store formats, retailers could create new store formats clearly marked based on how consumers eat: breakfast, lunch, dinner, snacks. Simplify the process of shopping with your layout.
Don’t improve; reimagine.