A new meaning for customer service?

Here's a customer service story with a twist in the tail (it concerns fish). 

The scene earlier today at my local Waitrose, which recently re-opened following a major renovation and expansion. I ask the young man behind the gleaming new, well-stocked fish service counter for some Cornish sardines. As he wraps them up and gives them to me I ask him what is the cheapest, most sustainable fish they sell at Waitrose. Now, this is of course a trick question, as the answer is ... Cornish sardines, but I just wanted to test his knowledge a bit, to see if there had been any investment in staff training to go with the new fixtures and fittings.

The young man says he doesn't know, so to give him a clue I explain that the cheapest fish tend also to be the most plentiful and hence sustainable, and caught locally rather than imported. Still a blank, so as another hint I ask where these sardines I've just bought (£1.85 for four, or £4.99/kg) come from. He says he has no idea.. Hmm. I remind him (gently) they are from, well, Cornwall and explain that sardines are shallow water fish that can only be caught by small local boats, rather than the huge vessels that suck the life out of deeper waters. As I'm at it, I throw in they are also extremely good for you (full of Omega 3 for a healthy heart and free of contaminants such as mercury), tasty and easy to cook - just grill as is or with some lemon, parsley and garlic. 

The young man says "thanks for that, good to know" as if he means it, which is nice. Now comes the interesting part: a lady who had come up behind me at the end of my tale (the tail-end? - sorry) asked me to repeat what I'd been saying about healthy, tasty, cheap and sustainable fish as this was exactly the advice she wanted. So I repeated what I'd told the young Waitrose "fishmonger". By that time several other people had come up and were also listening in. At which point I left them to it at the counter.

You could say this experience provides a new meaning for customer service - i.e., where the customer provides the service, instead of the retailer. Still, I think it's actually a really good indication of how food retailers could engage their customers so much more effectively, simply by teaching staff about what they are selling. 

How Amazon Fresh could change the game with click & collect

Amazon is reported to be developing a new drive-up store concept in Silicon Valley that will allow customers to order their groceries and other retail items online and pick them up at a dedicated facility. The first such "click and collect" site is believed to be located at Sunnyvale, California. According to documents submitted for planning permission it will offer "a blended customer shopping experience, as it leverages both an online shopping platform and the traditional brick and mortar experience." 

As usual with Amazon, reports of what it is about to do or launch next should be treated with caution, even if the original article (published in the Silicon Valley Business Journal on July 23) does seem particularly well informed. That said, it is much easier to see how Amazon could potentially disrupt grocery industry pricing with such a click and collect model than with home delivery, which has failed to make much of an impact so far. 

With the deployment of Kiva, the robotic picking system that Amazon bought in March 2012, the cost of picking orders at a large central facility, sending them to a network of relatively small drive-up store locations, and retrieving them (again using Kiva robots) for collection could be significantly less than what it costs to operate traditional brick and mortar supermarkets today, especially if one factors in the double-running costs associated with layering online fulfilment on top of legacy assets. This cost advantage, together with the elimination of the delivery subsidy, could allow Amazon to undercut regular supermarkets sufficiently on price to trigger a meaningful change in shopping habits. Or looked at another way, if it turns out that the price premium for home delivery to break even is too high to drive sufficient volume to make the model work, click and collect could offer an alternative model for Amazon Fresh to go mainstream. 

So, if Amazon does indeed open a pick-up facility at Sunnyvale as reported, it's a test that will be worth watching closely. 

What Wal-Mart's latest earnings downgrade means for the retail industry

Earlier this week Wal-Mart, still by far the world's largest retailer by sales if not by market value (it was recently overtaken by Amazon), announced disappointing second quarter results, with operating profit in the US down 8%. The full-year earnings outlook was cut by 7%. Wal-Mart's share price has fallen nearly 5% since the Q2 announcement, taking the year-to-date decline to 20%, compared to Amazon's 66% rise. Aside from currency headwinds and weakness in international markets, the two main factors behind Wal-Mart's falling earnings are higher labour costs, following management's decision to raise wages in February, and greater investment in e-commerce. 

Watch out - these two factors are set to become an increasing issue for all mainstream retailers in the US and Europe.

Donald Trump aside, there is increasing support for higher minimum wages in the US, with Los Angeles having raised its level from $9 in February this year to $20 by 2020 and New York tabling a rise for fast-food workers from $8.75 to $15 by 2018 at the city level and by mid-2021 statewide. In July, the UK's Tory government announced the introduction of a new national living wage of £7.20 an hour, rising to £9 in 2020, compared to the current minimum wage level of £6.50. In Germany too, employers are bracing for real wage hikes after decades of stagnation despite productivity improvements.

Although retailers tend to pay their front-line staff slightly more than the minimum wage, it is very likely there will be a knock-on effect. Higher labour costs will inevitably reduce profits, unless offset by increased productivity. While a pay rise is always appreciated, it is unlikely to be sufficient per se to drive a sufficient increase in sales per employee, especially if companies give in to the temptation to try to increase productivity by cutting labour hours or staff numbers. 

Meanwhile, it is an unfortunate fact of life for many general merchandise retailers and all mainstream grocers that e-commerce adds more incremental cost and complexity than sales. The problem for grocers is exacerbated by dis-economies of scale in order fulfillment, which to avoid congestion above a certain threshold (around 10% of store sales in the UK) has to be moved out of stores to dedicated picking centres. This adds incremental capex and opex and deleverages stores' fixed costs.  

In light of the above, it is time for retailers to think about new ways of improving productivity. The old way - reducing input (people, hours) in the hope of maintaining output (sales) - has reached its limit and will only serve to further narrow any competitive edge mainstream grocers have against limited assortment discounters and the movement online. It is however also possible to increase productivity by raising input so as to drive an even greater rise in sales. The best way to do this in increased investment in training - for proof look only to Wegmans, Trader Joes or Costco.

At Strategic Food Retail we have devised a program to teach all customer-facing staff the basics of how to choose, use and preserve food. This will stimulate, empower and engage staff and customers alike, thus more than justifying higher wages and transforming grocers into value-added service providers instead of resellers of commodities.  

A little knowledge ... can go a long way

Driving back from the country recently I decided to stop at a garden centre to get some plants to enliven the small fish tank in which we keep a couple of fat but rather bored-looking goldfish. I was glad to discover there was a dedicated aquatic centre, containing an impressive selection of live plants, fish, tanks and other paraphernalia. Feeling somewhat lost amidst such variety, I asked the young man behind the counter for some help. Having asked how big my tank was, what sort of fish lived there, and whether we already had plants (only fake plastic ones), he pointed me to suitable options and fished out the plants I liked.

So far so good yet unremarkable. He then mentioned, in response to my question regarding maintenance, that having live rather than plastic plants in a fish tank actually made it easier to keep clean, as the former absorb micro-organisms that give rise to the green algae that turn the water murky and stick to the sides of the tank. Given how much time we spend changing the water and scrubbing off the algae, this was extremely welcome news. This simple, natural solution had not appeared in any of my internet searches on how to keep my tank clean.  My feeling of gratefulness towards the employee who had given me such a useful tip made me feel like hanging around and finding out more about keeping fish. After a ten minute guided tour with this young man, I had learned all sorts of interesting facts about plain and tropical fish, as well as how different types of coral grow and how fish fit into their eco-system. The end result is that I now intend to go back there to buy a small tropical fish tank with live coral which looks absolutely gorgeous especially when illuminated, worth several hundred pounds. This is purely due to the knowledge the employee imparted to me - at no point did he try to sell me anything. I trust him to give me the best advice for my new purchase. 

Soon after this experience I went on holiday at a friend's house by the sea in France. There were two other couples staying there, neither of whom I had met before. Over our first dinner together the question naturally came up as to what I do for a living. I said I worked with supermarkets and that I had devised a program to teach all customer-facing staff about the basics of food, so they could become stimulated, engaged and empowered service providers instead of being treated and hence acting like robots selling commodities. I suggested that a few tips on how to choose, use and store food could go a long way, and gave my usual example, which is that most people don't realise that extra virgin olive oil, while great for putting on salads, should not generally be used for cooking as it burns easily, destroying its nutrient value and creating potentially carcinogenic by-products.

As usual, this gave rise to gasps of surprise and shock-horror, since like most of the people to whom I've told this (including senior supermarket executives), my new friends relied on olive oil, notably the extra virgin kind (i.e., that which is extracted naturally, without being treated with heat or chemicals) to fry their onions etc., thinking this was the healthiest way to cook. The next question of course was what should they use instead, to which I gave my standard answer: clarified butter, aka ghee, which is what many chefs use. Not only does it resist high heat, it also tastes great and can be stored almost indefinitely at room temperature. (It is also likely healthier than most vegetable oils, which oxidise easily and often contain too much inflammatory Omega 6, whereas recent meta-studies have shown there is actually no link between saturated fat intake and heart disease - RIP Ancel Keys and his mis-guided cohorts.) 

This prompted great interest, amongst the adults as well as their teenage children, and led to a brief demonstration of how to make clarified butter - i.e., pop a wad of butter in a pan, simmer on low heat for 10-15 minutes, scoop/drain off the white solids (lactose) that rise to the surface et voilà, you're left with nice clear, nutty-smelling butter oil.  

So far so good, yet not so remarkable. The kicker to this tale came a few days later, when I heard that the daughters of one of the couples I had met had then gone to stay with their grandmother and started criticising her when they saw she was cooking with extra virgin olive oil. "Didn't she know that's bad as it burns easily?" they tutted, no doubt somewhat smugly. She answered she had indeed heard that but didn't know what else to use. So they told her about clarified butter and showed her how to make it. 

If a couple of simple tips such as these inspire young girls to tell their grandmother how to if not suck then at least fry eggs, and move me to drive an hour back to where I got the advice on how to keep my fish tank clean naturally in order to buy a coral tank worth hundreds of pounds, just think how far a little knowledge could go if shared amongst the ranks of those working in supermarkets today. 

The crucial difference between selling food and non-food online - the 4 Cs

For brick and mortar retailers of general merchandise, selling online has the potential to add more incremental gross profit than costs. The opposite holds true for grocery retailers. Until the latter face up to this unfortunate fact and start looking for new ways of doing business, the growth of online will only increase pressure on margins. 

It's worth breaking down the variety of obvious and somewhat less obvious factors that make selling groceries online so much more challenging than general merchandise (GM). These can be listed under the "Four Cs" heading.  

• Cost. Starting with the obvious, it's pretty clear that picking and delivering a single customer order consisting of 40-50 grocery items of varying size, weight and handling and temperature storage requirements with a total sales value of around £100/$150 is always going to be a whole lot more complicated and costly than fulfilling an order consisting of one or two GM items with the same total value and on average higher gross margin. To make matters worse, there are dis-economies of scale in online grocery fulfillment, as once sales get to a certain level (c10% of a store's sales in the UK), picking has to be moved out of stores to dedicated warehouses, implying new capex and de-leverage of stores' fixed and semi-fixed costs. 
• Cannibalisation. Moving to the slightly less obvious, the relatively high sales value and gross profit per item means that most GM categories can be shipped to quite distant locations using existing third party distribution networks (i.e., postal service or courier companies) in a way that is economic for both the retailer and customer. This enables retailers to significantly expand their catchment area without adding new stores, and to leverage any advantages they have in price or range to gain incremental share. Multi-channel grocers on the other hand are far more restricted to their local catchment areas as a result of the much lower sales value/gross margin per average order weight/volume. This naturally results in higher levels of cannibalisation for grocers. 
• Concentration. At the national and especially regional level, the grocery market tends to be much more concentrated than for the majority of GM categories. For example, in the UK the top four supermarket chains account for nearly three-quarters of the market. This means that even for those with scale advantages, the potential for market share gains via the online channel is limited. 
• Competition. Though grocers tend to have lower margins and more importantly lower return on capital than GM retailers, it's not necessarily fair to say that grocery is more competitive than GM - levels of competition tend to vary according to regions and cycles. Nor have pure etailers such as Amazon proven as disruptive in grocery as they have in GM, so far. However, the crucial difference is that Amazon does not need to make money from selling groceries per se. The main purpose of Amazon Fresh is to help sell more stuff to more people more regularly and hence lower the cost of delivery by bringing it in-house and increasing drop densities. Meanwhile Google, in its battle to regain product search supremacy from Amazon, is willing to subsidise fulfillment costs for grocery items, hence driving up the cost of doing business online for those not willing to team up with it. At the same time, the space race is moving online and service fees falling as a result of brick and mortar food retailers' natural urge to grab or defend share wherever they can (however unprofitable or dilutive to margins.) These three factors will continue to put pressure on the fees grocers can charge to recoup the high cost of fulfilling online orders.

It took time for GM retailers to respond to the disruption online caused to their businesses and many of those that were too slow didn't survive. However, as with natural selection, those that responded most effectively to change are now starting to thrive. Though it is likely to take longer to become fully evident, the structural challenges facing food retailers from the growth of online are even greater than that faced by the GM players. Hence the need to start thinking outside the box now - by the time the wave hits it could be too late.  

How Ocado ups the stakes in the online grocery prisoner's dilemma

For the last year or so Ocado has been marketing its "Smart Platform” as a turnkey solution for food retailers outside the UK looking to jump-start their e-commerce activities. CEO Tim Steiner has told investors they expect to be able to announce a couple of deals with international grocers by the end of 2015.

On the plus side, Ocado's proprietary web interface and order fulfillment technology delivers an excellent end-to-end service; Ocado and Morrison (their only client so far) are both top-rated for customer satisfaction, comfortably ahead of multi-channel competitors such as Tesco. On the other hand, Ocado's solution is expensive – they need other retailers to help finance their heavy R&D budget. Furthermore, one has to consider the strategic risk of outsourcing what is rapidly becoming a key capability (serving customers online) to a company whose CEO preaches the terminal decline of brick and mortar retailers as a result of online cannibalisation, and which could eventually be acquired by the likes of Amazon.

What is certain is that the option to go with Ocado makes the game of prisoner’s dilemma for brick and mortar grocers in Europe and the US that much more risky. Say no to Ocado, and you risk letting a competitor leapfrog ahead of you and steal your high spending customers. Say yes, then you trigger an online space race where first mover advantage is likely to prove temporary and which for the market overall adds only cost not sales. To extricate themselves from this dilemma, the players will need to look for new solutions outside the prison that is rising around them. 

Reinvention requires vision rather than focus

If there's a market that's ripe for reinvention, it's UK food retail. Profits for the major operators are down by between 25% and 100% (in the case of market "leader" Tesco) in the last two years. This is mainly due to the growth of hard discounters, which still has a considerable way to run to match penetration levels in Europe. The shift to online ordering with home delivery, which now accounts for over 5% of UK grocery sales, has also started to impact profitability, with average service fees falling from £6 five years ago to £2 today as the space race shifts online. However, industry executives are too busy thinking how to stem the advance of the discounters to think about the implication of the growth of online. Unfortunately, this represents a much greater existential threat to their business than the growth of the likes of Aldi and Lidl.  

For brick and mortar grocers, far more than for retailers of general merchandise, online adds considerable cost but usually little in the way of incremental sales. There are dis-economies of scale in fulfilment, as picking has to be taken out of stores to dedicated warehouses (aka cost centres) once online represents c10% of a store's sales. This implies significant deleverage of the grocer's fixed store costs. If nothing else changes, if/when home delivery reaches 15% of the UK market, sector profits will mechanically be around 40% lower than today's (already depressed) level. Closing stores might help, but is likely to be a messy, drawn out affair - what retailer wants to be the first to give up the other 85% of its sales to competitors?

When the going gets tough, most business leaders tend to batten down the hatches and become less rather than more open to new ideas.  Like fighters, their vision narrows - just when it should be expanding to see the bigger picture. This tendency to look inwards instead of outwards helps explain why so few incumbent companies manage to adapt successfully to major changes in their industry. Reinvention usually happens from outside, not within - Apple's legendary revival being a rare exception. 

True to form, the UK's major food retailers have reacted to an unprecedented pace of change by doing more of what they already know how to do - cutting prices and costs, "slim-lining decision-making processes", reining in capex and "refocusing on the basics". There has been some musical chairs in management, with former Tesco executives now heading up Morrison, the smallest of the "Big Four". To its credit, Tesco brought in a (semi) outsider as CEO, former Unilever executive Dave Lewis, as well as a new UK CEO with a track record of successful turnarounds in non-food retail and an encouraging penchant for treating staff as assets to be nurtured rather than costs to be cut. 

With this in mind, the questions I would like to put up for discussion are:

1) What will it take for the management of UK food retailers to realise that this is an industry that requires true reinvention, rather than a narrow focus on what's gone before? The longer they wait, the tougher it will be to execute a meaningful change of course.

2) How relevant is this discussion for food retailers in Europe and the US, where the rapid growth of new online food hubs/aggregators/retailers suggests considerable pent-up demand, and the entry of fulfilment services such as Google Express is starting to lower the price of delivery?

The great delivery outsourcing debate

One big choice many types of retailers face today as they think through their approach to e-commerce is whether to initially outsource the “last mile” to a third party (e.g. Instacart, Google Express, etc.) or to take responsibility for delivery themselves.

For food retailers, the key is to have a strategic plan that takes into account the unusually high level of uncertainty regarding the future nature, pace and extent of the online grocery channel shift. What is clear today is that being unprepared could have major negative consequences.

Click and collect is clearly the most desirable model from the grocer's perspective, as it eliminates the last mile costs, complexity and "in-house vs outsource" debate. However, it is by no means clear that consumers prefer click and collect to home delivery. The latter is still the dominant mode in the UK, where online accounts for around 6% of grocery sales (15% in the the two weeks before Xmas 2014) and is still growing at 15% p.a. I don't think Amazon would be expanding its US Fresh delivery service progressively across the West and East coast if it hadn't detected a certain level of demand for the service, even if they are just using groceries as a way of increasing purchase frequency and reducing delivery costs by bringing it in-house with their own fleet of vans. Furthermore, the explosion of online food delivery start-ups in the US over the last couple of years suggests considerable pent-up demand.

The only country in Europe where click and collect is the dominant model is France, which is partly due to the prevalence of the hypermarket format which is increasingly seen as too time-consuming to get round. There also appears to have been an active effort by the market leaders to keep delivery prices high in order to keep demand low. However, contrary to initial hopes, this Drive model leads to very few impulse or fresh food purchases in store. The head of Leclerc, which is the click & collect market leader in France with a 50% share of "Drive" sales, has even admitted that he hopes this channel does not grow too much more.

As with most things, the extent of demand for grocery home delivery will be largely determined by the price and quality of the service offered. In the UK, the average delivery fee has fallen from £6 five years ago to £4 in 2012 to £2 in 2014, as the major retailers, as well as pure online specialist Ocado, battle for customers in this new channel. One hour delivery slots are now the norm.

No-one can tell how big the market for groceries ordered online and delivered to the home will eventually be. Some people used to think consumers would never order fresh food online; in the UK it turns out that fresh penetration online is similar to that in-store. However, once the online space race genie is out of the bag, it won't go back in. Meanwhile the growing presence of pure online operators may make it more difficult for this game of prisoner's dilemma to have a favourable outcome for store-based retailers. Amazon and Google both have strategic reasons for driving online grocery sales, together with the financial clout to subsidise (i.e., drive down) the price of delivery further.

All this leads to the conclusion that food retailers should plan for uncertainty and stay flexible. As long as the likes of Instacart, Google Express and Shipt are willing to bear some of the service cost subsidy, they can be a useful, relatively low cost way of testing the level of demand and price elasticity for home delivery vs click and collect, while signalling to competitors that you may want to co-operate rather than be the snitch in the game of prisoner's dilemma (i.e., aggressively chase online customers). However, give the variety of different players in this game, it would also be prudent to start building in-house fulfillment capability and analysing the pros & cons of various options (pick in store vs dedicated warehouse, manual vs automated including next generation robotic picking technology) under different volume scenarios.