Nice idea, shame about the execution

I recently came across a really nice idea in the expanded wine section of a refurbished Edeka (German supermarket) store. Next to some of the more expensive wines there was a huge red button for calling a customer service representative. It was too tempting, so I gave it a try. Within a minute someone arrived and asked how he could help. Excellent. I asked for some advice on what wine he though might be best with the (meaty, slightly spicy) meal I was having tonight, preferably a German wine as I wanted to try something local. He said unfortunately he couldn't help me as he didn't know much about wines... The wine expert wasn't in today. Did he know when he might be available? Sorry, no. Hum. 

Nice idea, shame about the execution. I wonder how that customer service assistant felt about admitting he couldn't help me. Probably too busy running back and forth from his regular duties to really care. However, I wonder how he might have felt if he had been given at least some basic training, not necessarily to expert level, but just enough helpful tips to please someone who knew absolutely nothing about German wine. Pretty chuffed I'd imagine. (Don't worry about me, I went for my regular high tannin/high alcohol inky Languedoc red and was happy enough. I'd even go back to that store just for the fun of pressing the big red HELP button.)

How supermarkets could take the lead in improving public health

As UK celebrity chef and child food education campaigner Jamie Oliver describes in this TED talk, the leading cause of death in the US and most other Western countries - heart disease - is largely preventable through changes in diet and lifestyle. The same goes for obesity, which is linked to cardiovascular disease as well as diabetes and cancer and has risen consistently over the past 60 years to reach epidemic proportions, despite (or some would argue at least partly because of) the rise of low-fat diets. It seems crazy when you think about it - if they wanted to, people could live longer, better quality lives, without the need for costly medication. So why don't they? 

There are two reasons for this strange situation. Of course, there's the natural human tendency to prioritise short-term pleasure ahead of potential negative longer-term consequences. However, when the latter are made clear enough, people do react, as shown by the sharp fall in the number of regular smokers in the developed world over the past 60 years. This leads to the second reason, which is (as Jamie Oliver demonstrates in his video) a deplorable lack of understanding among the general public as to what food is or isn't good for you. This isn't so surprising given the confusing and often contradictory advice not just in the media but also from health and nutrition experts and government bodies, which is sometimes based on flawed studies or outdated science. 

Jamie Oliver's solution is to teach kids about food at school, so they grow up knowing how to choose and prepare simple, tasty, healthy meals. Although this is an admirable goal that should be achievable, why limit such education to children? Supermarkets could and should take more responsibility for educating their customers about the products they are selling. This would not only improve the lives of customers, but also those whose jobs are currently limited to boring, relatively unrewarding jobs such as restocking shelves and working at the checkout. Given the potential to reduce ever-growing healthcare costs through better education at the point of sale, supermarkets should also be able to ask for government funding to support investment in training staff to help customers help themselves to eat more healthily. 

What a revolutionary, crazy idea - that staff in stores should know more about what they are selling than their customers! Actually, what is really crazy is that food, which can have such a major impact on the quality of our lives, is virtually the only retail sector where this is not yet the case. 

Aiming high

As a legendary football manager used to say "Aim for the sky, and you'll reach the ceiling. Aim for the ceiling and you'll stay on the floor."  For food retailers, the importance of making the effort to lift one's thoughts above day-to-day operational issues is greater than it's ever been. We've said it many times before but as we go into 2015, with the combined profits of the UK's publicly-listed food retailers forecast to be down by around 50% compared to a year ago, it's worth reiterating: you can't escape a tsunami of change by continuing to take small, incremental steps in the same direction as before.

Our New Year's To-Do wish-list for food retailers struggling with a structural shift away from large, out-of-town stores to convenience, limited range discount and online channels:

1. Aim high, really high, think Big. When considering a new idea, instead of asking "who's done this before?", try asking "why haven't we thought of/done this before?".

2. Test small, fail fast, test again. 

3. Take a more holistic view of online. Instead of treating digital as a completely separate unit (which is still the norm for most retailers we've met), consider the impact that the growth of online will have on your store business, and what can be done to preserve the latter's profitability. The fact that for the market as a whole the shift online adds costs and complexity but not sales is probably the most important strategic conundrum that food retailers will have to face up to over the next few years. All the more reason to refer back to points 1 & 2 above.          

Feedback welcome

Thanks to everyone who has taken an interest in my blogs this year. Since I started posting in March 2014, I've had over a thousand visits and several thousand page views. I would however like to take this opportunity to encourage readers to let me know what they think of my ideas. The good, the bad and the ugly - all feedback is welcome and a potentially useful source of debate.  Special thanks to Bill Bishop, Chief Architect of leading US online grocery think tank BrickMeetsClick, for being the only one to post comments on my site so far..!

Wishing you all the best for 2015. 

Marc de Speville

Why downsizing is not the solution to the online cannibalisation conundrum

Two recent reports, one from consultants Oliver Wyman in the US and another from investment analysts at Goldman Sachs in the UK, have suggested that the growth of online food shopping should lead to the closure of 20-30% of existing stores. They argue such a reduction in food retail capacity would allow the fittest to thrive and set the stage for an eventual profit recovery. I think this reasoning significantly underestimates how tough the transition to a smaller store estate will be and how long it will take. The “last man standing wins” theory, which used to apply when Wal-Mart came into new markets with its Supercenters in the 1980s and 1990s, is unlikely to work so cleanly for the online channel shift, for three reasons.

1) It assumes retailers as a group will act rationally to close the necessary amount of space, instead of holding on for as long as they can in the hope the other guy will bow out first. After all, if 10-20% of your customers have moved online, closing a store still means you will be giving up the other 80-90% to the competition! Food retailers hate giving up market share and will go to considerably uneconomic lengths to try to win it, as shown by the space race in the UK over the last decade, which is now moving online - despite this channel being even less profitable than stores.

2) The stores that suffer the most from the online shift may be some of the most profitable – i.e., those serving higher income customer segments. Another reason to hold off closing them.

3) Closing outlets that are marginally profitable or even loss-making has a negative impact on a company's profits due to deleverage of central costs such as logistics, marketing and admin. New income streams from alternative use of property that is owned could help offset this, but would require a major easing of existing re-zoning laws to be meaningful. 

The standard strategy for dealing with tougher competition - squeeze out more cost savings to reinvest in price, quality and "service" - is not going to be nearly sufficient to solve this dilemma. So, while a reduction in overall food retail space (especially the larger out-of-town stores) is no doubt desirable and indeed inevitable as weaker operators fail, the transition could be much more drawn-out and messy than most seem to expect, unless the bosses of the major players are willing to try to reinvent the model instead of continuing to tinker with it.

Why the Google vs Amazon battle matters for grocers

Google chairman Eric Schmidt recently said "Many people think our main competitor is Bing or Yahoo. But really our biggest search competitor is Amazon." In particular, Google lags Amazon in product search, where it lacks the customer purchasing data that retailers such as Amazon can collect. This explains why Google has been investing a reported $500m to drive its Express shopping service this year and has been busy signing up major retailers such as Office Depot, Target, Toys R Us, Raleys, Costco and Whole Foods, as well as smaller players in the Los Angeles and San Francisco area. It recently introduced a $4.99 same day delivery charge, along with a minimum order value of only $15 and a $90/year subscription for free delivery (compared to Amazon Prime's $99 sub fee). So far Google Express only offers non-perishable items, but there are reports it is looking to offer fresh food as well in partnership with supermarkets, with a mooted $7.99 delivery charge, waived for orders above $150 in value. 

Joining forces with Google Express could be a relatively low-cost way for brick and mortar grocers to test the market for fresh food delivery, as Google's cut of the revenues - estimated to be in the mid-single digit percentage range - is still less than what it is likely to cost food retailers to pick, pack and deliver the goods themselves. In other words, there may be an opportunity to piggy-back on the subsidy that Google is paying to achieve its strategic objective of creating a same day delivery service and hence product search portal to rival that of Amazon. The downsides of such a model being a) little or no control over the quality and continuity of the service offered; b) limited scalability (as long as the products are picked in-store); and ceding control of customer data to a (not just any) third party.  

The danger for the grocery industry as a whole is that this strategic battle between two highly cash-rich companies known for taking a long-term view on profitability could significantly drive down the cost and hence accelerate customer take-up of home delivery. This implies a double-whammy on brick and mortar profits due to the higher subsidy required to compete in this new channel, combined with greater cannibalisation of store sales and profits. (Remember that for the grocery market as a whole, the shift online only adds costs, not sales.)

It is possible that Amazon, whose profitability is starting to come under greater scrutiny by investors, may blink before Google and decide to put a limit on the delivery subsidy it is prepared to pay to drive its Fresh business. However, given the strategic importance of same day delivery of perishable and non-perishable goods, not just in the battle for highly lucrative advertising income but also in the determination of CEO Jeff Bezos to sell more stuff to more people at a lower cost, this limit is likely to be a lot lower than that implied by the current $6-$12 average service fee charged by those offering grocery home delivery in the US today. 

The good news is that next generation robotics technology could allow traditional food retailers to leapfrog Amazon Fresh and Google Express in terms of order fulfillment efficiency, while at the same time making much more effective use of their key assets - people and stores. 

Waking up to the elephant in the online grocery space

Last week at the World Retail Congress in Paris I heard for the first time ever a senior supermarket executive recognise publicly that the growth of online grocery shopping is not good for the industry. What's more, this admission came from Michel Edouard Leclerc, head of France's largest hypermarket chain that has been most aggressive in opening click and collect outlets (known as "Drive" in France) and now has a 40% of the EUR5bn online grocery market. Leclerc stated that once the initial benefits of first-mover advantage wear off and the competition responds, the online business becomes increasingly cannibalistic of store sales. Click and collect is only successful, he said, as long as it doesn't grow much more. Indeed, according to a study done in France last year by IRI, a leading market research firm, once "le Drive" accounts for around 8% of a store's sales, most of the incremental sales are taken from the store. 

This is obviously not what the CEOs, heads of e-commerce, and shareholders of major supermarket groups want to hear. It is more reassuring to look at research showing how customers who shop both online and in store at a particular chain spend two or three times more than those who use just one channel. However, this only works in the early growth phase and all it means is that each chain's most loyal customers are becoming even more loyal, but at the expense of each others' less loyal customers. It's a zero sum game: for the market as a whole, the online channel adds costs, but not sales.

These costs are obviously much higher for home delivery than for click and collect, which adds to the profit pressures already being felt from the rise of discounters in the UK, where home delivery already accounts for 5% of the total grocery market and the £3 average service fee represents a 10% margin subsidy on an average £100 order. This subsidy is likely to persist, or get even bigger, given retailers' desire to follow the customer and steal or defend market share, and the existence of pure online grocers such as Ocado, which could be more profitable than Tesco in a few years' time, and Amazon Fresh - whose main strategic purpose is to help Amazon sell more stuff to more people more regularly at a lower cost. 

So what to do? Some food retailers privately admit that e-commerce is uneconomic but that they have to provide the service because that's what an increasing number of customers want. In other words, the genie's out of the bottle and not going back in. At best, it can be temporarily contained, as in France. When questioned about the negative impact on profits, answers we've heard from supermarket executives in the US and UK vary from "It's not something we're really thinking about", "It's something the accountants will have to deal with", to "It will depend how it's presented to investors."

Unfortunately this problem will only get worse as more customers shop online and picking has to be moved out of existing stores into dedicated fulfillment centres, which further add to operating and capital costs. The only long-term solution we can see to the online cannibalisation conundrum is to: 

a) Invest in the next generation of automated technology to secure the lowest fulfillment costs; b) create a new bi-modal format combining the best of the online and in-store experience; and c) transform from manufacturers' agents into customer service providers that sell food.

The latter will require retailers to better SEE (Stimulate, Engage & Empower) their staff so they can better SEE customers. Investing more in staff when sales are stagnant or falling is not an easy sell. However, they - not stores - are a physical retailers' most valuable assets, and the most under-utilised today.