Grocers Increasingly Embracing Digital Transformation
People need food; people need stores to buy food. Sounds simple and easy, but it isn’t. Many grocers have struggled with challenges in recent years that range from price wars to shrinking margins, and from aggressive new players entering the marketplace to omnichannel shoppers demanding costly new conveniences.
Still, the basic principles remained clear for many years and cash registers kept ringing for fast followers who evolved with just the right speed to avoid letting competitors sprint too far ahead.
However, the pace of change lacked urgency, which was due to the belief that web-based revenue had minimal impact on the overall financial health of the enterprise. But Whole Foods + Amazon signaled the game had changed overnight and the digital transformation of grocery took on a new sense of urgency.
In the second annual Grocery Tech Trends Study, created in collaboration between RIS News and Progressive Grocer, changes in the grocery ecosystem are examined in detail and next steps identified as grocers rapidly shift to the next phase of their digital transformation.
Challenges and Opportunities
As noted, grocery is a fundamentally strong business model that serves a basic consumer need. As such, many of its biggest challenges are timeless issues. These include food safety (52 percent) and cybersecurity (52 percent), which head the list of challenges that grocers say are driving technology investments over the next 18 months. (See Figure 2.)
Also falling into this timeless category is the challenge of improving employee engagement, which was chosen by 46 percent of grocers, and a lack of senior-management vision (42 percent). The latter could explode into a major concern in the age of Amazon + Whole Foods.
The big anomaly on the list of challenges is global retailers entering the U.S. market, which was chosen by 50 percent of grocers. In fact, twice as many grocers chose this challenge over competition from Amazon (25 percent). Why?
No doubt, the aggressive entry of global retailers like Lidl and Aldi are disrupting the U.S. market and the threat is aimed directly at brick-and-mortar stores, which are the source of the vast bulk of sales and profits. Grocers clearly see this as more of an immediate existential threat than that of Amazon + Whole Foods, which is still largely viewed as a web-based power play. This may prove to be a false assumption.
Despite downplaying the immediate threat of Amazon, a huge majority of grocers (85 percent) clearly believe that developing their own digital capabilities should be placed at the top of their tech investment priority list. (See Figure 1.) Improving digital capabilities (i.e., online, mobile, omnichannel, etc.) actually outpolls investing in store upgrades and growth initiatives (65 percent), which is a grocer’s primary revenue source and can never be neglected without financial peril.
Two other important investment strategies cited by grocers are rolling out new payment alternatives (58 percent) and expanding into new products and services categories (56 percent).
If grocers are looking for a roadmap to shape their IT strategies, these four should top the list: improving digital capabilities, upgrading store capabilities, deploying new payment alternatives, and expanding into new products and services.
58 Solutions that make a difference
POS is the core of the store for grocery retailers (and other retail segments, too). It not only manages checkout and keeps a record of transactions, it also connects the information to dozens of other essential enterprise applications such as accounting, supply chain, merchandising, marketing, analytics and labor management.
Traditionally, POS hardware and software dominate the lion’s share of a grocer’s IT budget and this trend continues with 42 percent of retailers reporting they will start a major upgrade of their POS hardware and software within the next 12 months. (See Figure 3.)
However, this high level of activity is surpassed by the 47 percent of grocers who plan to invest in click-and-collect technology (in-store pickup of web orders) in the next 12 months. Click-and-collect is the ultimate blending of bricks and clicks and a pure expression of grocery’s rush toward digital transformation.
This high level of investment is one of the most significant takeaways in the study, because click-and-collect tech not only surpasses POS investment plans, but it also emerges as the top investment choice among all 58 technologies tracked in this study.
Another impressive number in the store systems category is the grocer’s focus on home delivery of web orders, which has a huge number reporting they have actually started a major upgrade (47 percent). Is omnichannel just a buzzword? Is digital transformation and the blending of brick-and-mortar with online shopping fake news? Not according to the large number of grocers who are investing in them.
Examining merchandise management plans, we see a more traditional approach emerging. For example, the top three merchandise management technologies planned for the next 12 months are trade promotion management (selected by 42 percent, replenishment (39 percent) and allocation (33 percent). Each of these has omnichannel crossover, but they are essentially the basic blocking and tackling of the retail business model. (See Figure 4.)
Part of the reason that many merchandise management technologies do not have high future investment numbers is that they have been the beneficiary of steady investments over time. For example, the following technologies show high numbers for being currently up to date: category management (54 percent), price management (42 percent) and new product or private label development (42 percent). Also, many others show heavy activity in the “started major upgrade” column, which means they will be up to date soon.
However, Amazon’s recent purchase of the Whole Foods brick-and-mortar chain signaled those days were over. While it is true that other digital disruptions had occurred before, the shock of Amazon’s blockbuster deal to acquire a national supermarket chain tore a hole in the fabric of the universe that grocers once felt they knew.
Fortunately, the impact of the omnichannel shopper had been exerting a growing influence in grocery for several years and many had already begun making a digital transformation of their legacy customer-facing and back-end business practices.
Supply chain systems are so critical to grocers that most technologies have high numbers for being up to date or they are currently being upgraded. (See Figure 5.) The one big exception is fulfillment, where 40 percent of grocers say they will begin a major upgrade within the next 12 months.
Fulfillment, especially omnichannel fulfillment, is a critical component of click-and-collect services and home delivery of web orders, both of which show strong investment this year. To fulfill web purchases and ensure customer satisfaction, IT systems need to be able to manage individual orders accurately, reliably and profitably. Most grocers cannot accomplish this with the technology they currently have in place.
The strongest analytic investment areas uncovered in the study are for price optimization (39 percent), in-store shopper tracking (38 percent), market basket analysis (37 percent) and, interestingly, machine learning/artificial intelligence (34 percent).
Grocers are rightfully skeptical of investing in technology for technology’s sake, but it is clear that if one out of three are making plans to invest in machine learning and artificial intelligence within the year, then these technologies are not just buzzwords or fake news.
In the area of labor and workforce technologies, the highest investments are going into real-time store employee monitoring (34 percent), employee engagement (31 percent), and recruitment and onboarding (27 percent). Employee engagement (both managing and monitoring) has become a major concern for grocers who want to ensure shoppers have satisfying experiences in stores that lead to more sales, loyalty and return visits. (See Figure 7.)
The final pieces of the IT investment puzzle are web and digital technologies. (See Figure 8.) Retailers who want to keep pace with fast-moving marketplace trends should note the top investment areas are remarketing (39 percent), content management (33 percent), social media marketing (29 percent) and digital coupons (29 percent).
The second tier of investments also posted strong numbers, such as product catalog management (27 percent), ecommerce platforms (25 percent), chatbots (25 percent) and customer reviews and ratings (25 percent).
As noted, this section of the study tracks buying intentions for 58 separate technology solutions and combined, they produce a comprehensive picture of IT prioritization plans that grocers can benchmark themselves against.
If the goal is to keep up with leaders in the marketplace, then grocers should focus on the top five (out of 58) investment priorities: click-and-collect (47 percent), POS hardware (42 percent), POS software (42 percent), trade promotion management (42 percent) and fulfillment (40 percent). A strong secondary list of investment priorities includes replenishment (39 percent), price optimization (39 percent), remarketing (39 percent) and in-store shopper-tracking analytics (38 percent).
Despite being hit by a tsunami of marketplace disruption, grocers enjoy a slight advantage — they have seen it happen first in other retail segments such as apparel (where a bubble has burst) and department stores (where everyone is struggling, with a few exceptions).
Also, website or digital shopping is still a relatively small part of overall revenue for grocers — 44 percent say it is less than 10 percent of sales (See Figure 9.) Although small, it is a growing segment and smart grocers realize they need to stake out their claims today.
As noted earlier, there are five technology solutions (among the 58 tracked in the study) that grocers are heavily investing in (and another four in the second tier). Still, it is far from clear how the winning playbook for digital transformation will take shape.
In the rush to become omni-everything, grocers are carrying the load themselves and absorbing higher costs. For example, nearly three-quarters (74 percent) say they manage their own click-and-collect services and 62 percent manage their own home delivery. In addition, 56 percent manage their own dedicated fulfillment centers and locations. (See Figure 10.)
As digital transformation matures, will retailers continue doing everything themselves, or will they shift to third-party services like Instacart (26 percent), click-and-drive-through centers (12 percent), or dark fulfillment stores that are not open to the public (10 percent)? These numbers appear small today, but they could significantly grow as an ecosystem of service suppliers springs up to fill a needed gap.
At the heart of today’s digital transformation is an attempt by grocers to successfully blend the benefits of brick-and-mortar stores (immediate gratification) with web-based shopping (24/7 and clickable convenience).
In part, this shift has been driven by Amazon, which has emerged as a dominant player in grocery, retail and the overall economy. However, grocers are resilient and even though Amazon has many resources at its disposal, there are still many opportunities where grocers can compete and win. These doors of opportunity are still open for grocers who pick their digital transformation battles wisely and move at the speed of retail to seize them.