WINNING AT E-GROCERY MEANS MANAGING CUSTOMERS, NOT PRODUCTS

The Covid-19 pandemic has produced a spectacular growth of e-commerce. This was most visible in grocery, where e-commerce had been lagging behind other retail sectors. The share of e-grocery in total grocery sales jumped from 3.4% in 2019 to 10.2% - essentially compressing a 5-year growth trend into a single year (Source: Mercatus). No one thinks this acceleration of e-grocery will reverse itself after the pandemic—if fact, the share of e-grocery is expected to double from 10% to 20% in the next four years. In-store shopping has its advantages and isn’t going away, but it’s no longer the normal outlet for many people.

Grocery retailers have been scrambling to adapt. One of the biggest challenges with e-grocery is that it adds fulfillment costs and complexity. The retailer suddenly needs to take on new activities: assembling shopping baskets and somehow delivering them to the customer, all while maintaining product quality and freshness. In other words, the “path-to-purchase” has been replaced with the “path-to-purchase-to-fulfillment.”

So how can retailers overcome the profitability challenge posed by e-grocery?

Efforts in the past year have been focused on supply chain efficiency. Kroger, Albertsons, Walmart and Target are investing aggressively in automated fulfillment systems.

By contrast, little attention has been paid so far on the demand side. In this area, retailers are poorly set up to face the new realities of e-grocery. Why? Because they are organized to manage and grow product categories as separate business units. This is the legacy of the category management revolution of the 80’s and early 90’s—before loyalty programs had come to retail and well before online shopping even existed.

Category management makes sense when you don’t know who’s buying your product and what else people are buying. When you don’t have data on the customer, you must look at the business at the level you know: the level of products.

Problems arise when you try to apply this model to e-grocery. A lot of product categories, especially if they are perishable, become unprofitable once you add all the extra fulfillment costs. Should the retailer therefore not offer these categories online?

If the same retailer were to look at the business by customers instead of products, it might notice that the customer who buys perishables online has a large average basket, buys a lot of high margin products and is a high spender overall. In other words, this is a very valuable customer—a customer the retailer cannot afford to lose.

If the retailer were to look at everything this customer buys, it might decide to make some tradeoffs: For example, it might accept to lose money on produce and raise prices (or cut promotions) on prepared meals where it knows the customer isn’t price sensitive. In other words, the retailer would optimize the value proposition it delivers to the customer in order to optimize the value it derives from the customer. Makes sense, doesn’t it?

In reality, few retailers actually do this. Why? Because the category management structure views categories in isolation and doesn’t provide the right tools and incentives to make tradeoffs at the customer level. And yet, in the new retail environment, such tradeoffs are essential.

Investments in supply chain efficiency can create a temporary advantage, but when the dust settles, these kinds of investments always benefit retailers with the smallest assortment or the largest scale. Customer competency, on the other hand, is available to any retailer regardless of size, and it provides a more lasting competitive advantage.

Grocery is in a transition phase where new customer habits are being formed. Never have shoppers been as willing to experiment as now. In the future, it is still unclear what aspects of the experience will be most important. Is it seamless click & collect? Fast delivery? Freshness and quality? Our guess is “all of the above,” because it depends on the customer. Customer competency means to stop asking what “the customer” wants and start asking what “this customer” wants. To win at the e-grocery game, retailers will need to understand their customers and tailor their “paths-to-purchase-to-fulfillment” to the needs of different segments.

Ultimately, we believe that retailers must learn how to manage customers as tightly as they manage products. Just as they have a category management process, they also need a customer management process for driving company-wide execution towards a common plan; one that starts with customer understanding and ends with a determination, for every customer, of what products to offer, through which channels, at what price and with what promotions.