Lessons from the Grocery Industry and the State of Retail Today
In the late 1980s, I was leading the technology efforts at a regional grocery chain when the alarms sounded. A Walmart Supercenter was opening south of us, near Kansas City. This was a threat like we had never experienced. Fearing for our very existence, our company chartered a motor coach and we made the journey from Omaha, Nebraska to the suburbs of Kansas City to see the scourge for ourselves. As scared as we were, we were safe for the moment, we were not yet competing directly with this category killer.
Fast forward a few years to 1995. Our worst fears were realized. No, it wasn't a Walmart Supercenter. Instead, we had the honor of having the first Super Target in the nation open across the street from our newest store. Although we rallied for the fight, we were asking the same question as everyone else. How is the independent grocer to survive in this new era of massive enterprises looking to extend their mandate? Surprisingly, when the Super Target opened, our business didn't decline, it increased...significantly. The Super Target drew more business to the area and we reaped the benefits.
Our company's singular experience notwithstanding, the grocery industry was stymied, many believing that the era of the independent grocery chain had passed. For sure, things were changing. The hyper-efficient supply chains of Walmart and Target upset the market dynamics permanently and put extreme pressure on margins, especially in the center store where there was little opportunity for product differentiation. Chains that refused to recognize the inevitable languished quickly. Others chose to face the challenge.
As the initial anxiety began to wane and the industry took a collective deep breath, the tone of the discussion changed. Gone was the panic. In its place came a more studied assessment of the situation, an articulation of potential defensive tactics and a framework for success in the new paradigm. Traditional grocers came to recognize that Walmart did some things well and other less so. In the near term, they would have to meet the threat head-on, lowering prices and increasing promotional activity. To survive, grocers would have to identify areas of their respective businesses where they could differentiate themselves from the behemoths.
When I entered the supermarket industry, we made our money in the center store, selling cans of peas at a good profit. We operated some perishable departments (e.g. deli, bakery and restaurants) at break-even or a loss. When I left, it was completely opposite. The center store became a low margin operation. We made our mark with the quality and variety of our fresh products and the customer service we provided.
We were the first in our market to launch a loyalty program, which allowed us to not only manage product categories, but also customer segments. We deployed systems to control costs, reduce inventory, automate the ordering of replenished product and tune our shelf assortments to the specific needs of our most loyal guests. The game had changed. Instead of fighting it, we not only adapted, we innovated.
Now, in 2017, we are experiencing what has been described as a "retail apocalypse." More than a few chains have declared bankruptcy and many others are struggling. At the National Retail Federation show in New York in January, I found the dialog oddly reminiscent of the conversations that had occurred when Walmart and Target entered the grocery space. Amazon was mentioned in much the same way and with disdain worthy of Voldemort in the Harry Potter films. Strangely missing, however, was any admission that we knew Amazon had been growing at an alarming rate for many years; we all should have seen this coming. Consumer shopping patterns and tastes were changing, especially in apparel. It was all there for us to see. Why some had chosen inaction, stubborn adherence to outmoded business models or incrementalism as a strategy will be debated for a long time.
There are lessons to be learned from what happened in the grocery industry years ago. History would suggest that retail is not going away, but it is changing dramatically. Retailers that want to not only survive but rather thrive in the new digital economy, in the post-Amazon world, will have to challenge every aspect of their business. Amazon, at its core, is a technology company but they are furiously working to get closer to the customer, building brick and mortar, opening stores and developing delivery methods (i.e. drones) to shorten the supply chain. Traditional retailers already have a local presence but need to focus on transforming their view of technology from a function to a capability. There is a vast difference between having a discrete and identifiable digital component to your business and becoming a digital enterprise.
Everyone in retail is pursuing the same omni-channel vision, a unified commerce model where the customer can engage the retailer at their convenience and have the same experience irrespective of channel. However, while the desired end-point may be similar, each retailer is starting from a different place. The transformations that many will have to undergo will be difficult. Achieving the agility and speed to market of the e-commerce leaders will require not only a significant investment in capital and human resources but also a commitment to changing the way a company goes to market. It will be an arduous journey, one not for the faint of heart, but achievable nevertheless.
Effecting a successful digital transformation will mandate setting aside the notion that it is a technological exercise. In some ways, technology has become the easy part. Instead, companies must challenge every aspect of their business without paying undue homage to their past, no matter how glorious. They must be willing to destroy what they have built so they may create something new, untethered to paradigms whose time has long since passed.