With over $600 billion in sales during 2012, supermarkets are among the largest U.S. retail sectors. Supermarkets, convenience stores and other food retailers are going through a complex transition to adapt to the connected consumer. With razor-thin margins and consumer preference for in-store shopping, food retailers have procrastinated investments in modern data and digital technologies compared to other retail sectors. To counter growing competitive threats of Amazon, Walmart and others, we believe this industry is ripe for big data and ecommerce software. Bill Bishop, Chief Architect of Brick Meets Click (BMC) and Chairman of food retailing consulting firm Willard Bishop said “we are now moving into the era where precise retail execution makes the difference between winning and losing. This precision will be driven in large measure by high speed analysis of big data.”
How will technology change the competitive landscape? Will Amazon turn supermarkets into showrooms? Can established food retailers implement sophisticated category management tools to compete smarter? Will new services like buy-online pickup in-store or same-day delivery be enough to improve the digital experience and create meaningful revenue?
Amazon – Economies of Scare
In early June, Amazon announced that it would expand AmazonFresh grocery deliveries to Los Angeles from its single location in Seattle. AmazonFresh offers same-day delivery for more than 500,000 items, including fresh grocery and local products. Consumers are able to shop, save lists and find recipes conveniently from web or mobile apps. This model could pose a major threat to established brick and mortar players as Amazon can leverage its massive economies of scale. We expect Amazon may use food retail, like many of their other products, as a loss leader to drive volume. Willard Bishop estimated that Walmart has a 17% price advantage over most traditional grocers and is testing several delivery versions. Amazon likely has even more of a price benefit. For AmazonFresh, the delivery cost is free for orders over $35 and $7.99 for purchases under $35. Willard Bishop estimates that AmazonFresh has an average same-day delivery fee of $12-$13 in highly populated areas.
Big data and ecommerce technology can be a meaningful differentiator for groceries. BMC’s 2nd Big Data Survey, published in March 2013 found that 64% of retail professionals were working on a big data project compared to 20% a year ago. We believe the modern supermarket needs a big data foundation that includes predictive analytics tools and unified API infrastructure that can enable retailers to build, test and deploy services seamlessly. Below are some of the most valuable areas to enhance the user experience and extract new insights with data.
Data API infrastructure – availability for product, inventory, customer, coupon, order and other data to be accessible on-demand. This is the foundation for deploying all digital applications and analytics.
Engagement – BMC found that 76% of respondents create the most value from strengthening shopper engagement. We break this down into mobility, personalization and localization.
Mobility –The Food Marketing Institute’s (FMI) Future Connect partners reported that consumers use smartphones to compare prices in-store (38%), review products (32%), search for coupons (24%), purchase products (22%) and scan barcodes for prices or information (22%). Soon, these coupons will integrate with digital wallets to be redeemed electronically at checkout.
Personalization – 69% of BMC’s respondents said their focus is marketing to individuals vs. segments.
Localization – creating mobile ads, digital circulars and emails that are specific to individual store-level prices and offers.
Category management – analyzing and optimizing pricing and assortment for discrete groups of products in order to maximize total store cash flow
Real-time intelligence – 43% of BMC’s respondents believe supporting faster fact-based decisions was the most important use case for big data. This is also the basis for inventory optimization which represents a great opportunity to create value on the supply side.
According to BMC, the most valuable sources for the above data included point-of-sale transactions (51%), in-store sensors (18%), shopper feedback (10%), and automated product recognition (8%), among others.
The predictions for food retail ecommerce vary significantly. Booz and Company reported a reasonable estimate for online grocery retail would reach ~10% by 2025 compared to 8% today. Nielsen forecast online retail would reach 13% by 2017.
Regardless, a couple common themes should help propel ecommerce growth, including:
Pick-up in-store – reserve and/or purchase products online and pick-up in-store
Same-day delivery – accept orders online and deliver to the customers’ home on the same day
Barriers to Big Data Adoption
The most concerning issue with food retailers and big data is human capital. In the BMC survey, 58% of respondents were concerned they were not using available data, 57% admitted they lacked the capability to implement insights and 50% lacked specialized experience. Clearly this barrier creates a huge opportunity for technology experts and consultants who can reduce or eliminate the human capital gap.
The low-margin nature of this industry could impair broad adoption. 38% of BMC respondents had no budget to invest in big data software and services. By the time many small-to-mid-sized food retailers realize competitors are taking meaningful market share, it may be too late.
The complex aspect of supermarket ecommerce is logistics. The marginal cost of pick-up and delivery almost entirely offset the profitability of the order. Even with pick-up in-store, execution must be flawless. Historically, many supermarkets have added surcharges to online orders to offset this cost. The ability for groceries to train employees, plan store layouts, and manage what is available online vs. in-store to minimize out-of-stock orders will be crucial to success.
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