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Supermarkets and Digitalization, Part 1

November 25, 2013


About a year and a half ago, Annie Gasparro and Timothy W. Martin wrote, “Americans still shop for groceries. They’re just not doing it so much at supermarkets.” To prove their point, they reported, “Supermarkets’ share of U.S. grocery sales fell to 51% in 2011, down from 66% in 2000, according to UBS.” Their definition of what constitutes a supermarket apparently doesn’t include any food purveyor that also sells lots of other merchandise as well. They explain, “One major cause: Big-box discounters including Wal-Mart Stores Inc. and Target Corp. are using food to reel shoppers into their stores, where they hope to tempt customers to buy more profitable housewares and clothing.” [“What’s Wrong With America’s Supermarkets?Wall Street Journal, 12 July 2012] That doesn’t mean that Walmart and Target don’t take their food business seriously. You just have to watch a little television to see how hard Walmart is working to win food shoppers.


In another article, written a year earlier than Gasparro’s and Martin’s, Kavita Kumar reported that it wasn’t just the big-box discounters that were counting on boosting sales by selling groceries. She noted that in addition to traditional grocery stores and big-box retailers, pharmacies (like CVS and Walgreens) and dollar stores (like Dollar Tree and Dollar General) were also selling food items. “From drug stores to gas stations,” they wrote, “all kinds of stores have been expanding food offerings in an effort to drive more foot traffic and sales. … The blurring of the lines between groceries and other retail channels has been going on for a while. … But the trend picked up velocity as financially pinched consumers continue to be wary of impulse and discretionary purchases. Why? Many retailers have found that food — the ultimate essential — is not only a good way to help increase overall sales, but it’s also a means to help sell nonfood products.” [“Retailers look toward groceries to goose sales,” Saint Louis Post-Dispatch, 22 August 2011]


UBS analyst Jason DeRise told Gasparro and Martin, “Supermarkets cannot continue to do the same things they did in 1990s and expect a different result than the one seen over the last 10 years.” Some supermarket chains have changed with the times. One such chain is Kroger. Gasparro and Martin note: “Part of Kroger’s success is built on culling insights from its shopper loyalty card data that has helped the chain move away from a one-size-fits-all approach, said Jim Hertel, a supermarket consultant with Willard Bishop LLC, based in Barrington, Ill. ‘You’ve got to be a lot more precise, by category, by section of the store, understanding the shopper behavior and who you are up against,’ Mr. Hertel said. Part of the calibration is knowing which products grocers can price higher than Wal-Mart and not lose customers.”


In a more recent article, Mark Hamstra reports, “Kroger Co. is embracing the growth of digital communications, but it draws important distinctions between the sharing of information online and use of the Internet to conduct e-commerce transactions.” [“Kroger Lets Customers Lead the Way in Digital World,” Supermarket News, 4 November 2013] David Dillon, Kroger’s Chairman and Chief Executive Officer, told Hamstra, “People sometimes use the words ‘digital’ and ‘e-commerce’ interchangeably, but they are not interchangeable. The digital world is more about communicating with customers — it’s sharing information, and moving data around. E-commerce is just a piece of the digital world.” What Dillon is saying is that digitalization helps provide consumers with a better shopping experience, not just a path to purchase. Hamstra indicates that Kroger interacts with consumers using its mobile app and through the distribution of digital coupons. “Kroger said about 9.7 million customers have established digital accounts with the company,” he reports, “and 2 million customers have downloaded the company’s mobile app in the last year. A total of 385 million digital offers have been downloaded.”


Naomi Mannino reports that supermarket chains believe “that the further a shopper walks into a store, the more likely it is that he or she will spend more money.” She goes on to note that studies have shown that shoppers don’t walk around grocery stores nearly as much as they think they do. In order to encourage them to do a bit more browsing, Mannino states that stores are encouraging the use of digital deals. [“Grocery stores use smartphone deals to spur sales,” Christian Science Monitor, 28 March 2013] She explains:

“According to a recent report published by the American Marketing Association, in-store coupons and deals sent to a consumer’s smartphone can encourage them to walk around more — and in turn, spend more. The AMA study, conducted by Professor Sam Hui of the NYU Stern School of Business, used radio frequency identification (RFID) tracking to conduct a field experiment examining consumers’ in-store travel and unplanned spending. Shoppers in the study were sent mobile promotions while shopping (which a regular consumer might receive through a location-based app like FourSquare or a store-specific app), and the group found that the ‘walking theory’ is true. The experiment showed that consumers, on average, spent $13.83 when they were sent a coupon that was for a product near their planned path, but a mobile coupon requiring shoppers to walk outside of their planned path increased unplanned spending to $21.29. In general, walking an additional 55 feet in a grocery store increases unplanned spending by about $1, while strategically promoting three different product categories via mobile promotion may increase unplanned spending by more than 16%.”

Unlike some food industry analysts, Hamstra reports that “Dillon said he remains convinced that while customers increasingly enjoy the convenience of such digital interactions, they overwhelmingly remain committed to shopping in their local bricks-and-mortar supermarkets — where they interact with their neighbors and store employees — for the bulk of their grocery-shopping needs.” Among those who aren’t so sure that supermarkets will survive is Brad Tuttle. He thinks that there is a possibility that “The Grocery Store May be on Its Death Bed.” [Time, 8 October 2013] Tuttle is not so sure that people are looking for interaction with their neighbors and store employees; he believes they prefer convenience to conversation. He explains:

“The need for the weekly 30-minute expedition browsing up and down the aisles of the supermarket is being eliminated. Instead, many shoppers are taking advantage of new services, in which they place an order online and hit a convenient pickup location to retrieve their groceries — often without ever having to leave the car. … At pickup stations, drivers sometimes don’t even have to leave their cars. That may be a bonus for customers with young kids in tow — they can stay securely buckled while dad’s order is deposited in the vehicle. The idea is that the weekly supermarket shopping excursion, which can be a time-consuming ordeal, is transformed into a pit stop that’s as quick as a trip to the gas station.”

Although the pick-up location may be a local brick-and-mortar supermarket, Tuttle reports that pick-up locations range from gas stations to mobile stations (e.g., the back of a truck) to large corporate centers and offices. That is why he argues that the eulogy for the traditional supermarket is being written. He explains:

“Giant offers pickup at 21 locations in Virginia and Maryland, and its sister brand, Stop & Shop, has been testing pickup in the Northeast. Relay Foods, a Peapod competitor, offers online delivery and ‘drop spot’ grocery services in Virginia and the Washington, D.C, area, and it wants to add prepared (i.e., cooked) foods into the mix. Large grocery sells like Safeway and Walmart also offer various grocery pickup services, as do smaller players like North Carolina’s Lowe’s Foods and Market District, with locations in Ohio and western Pennsylvania. (Beware: Each of these services is different; not all are free, and some require customers to go into stores for pickup rather than wait in the car.) Zach Buckner, founder of Relay Foods, told the Washington Post that the online model ‘is undoubtedly the future of grocery shopping.’ He even envisions a day when supermarkets will disappear, just like video stores before them. ‘Netflix, Apple iTunes and others have wiped the video store category off the map. The same thing is on its way for groceries.'”

I’m sure there will be detractors, like Dillon, who believe that most people still enjoy strolling the supermarket aisles and picking out their items (especially fresh foods) by themselves. Tuttle argues, however, that the trend is headed the other way. He concludes, “Overall, the trend is that shoppers can increasingly purchase whatever they want, wherever they want, and they can get it into their hands astonishingly quickly and conveniently — without ever having to resort to what we’ve traditionally thought of as ‘going shopping.'” Adam Bluestein reports that one company, MyWebGrocer, agrees with Tuttle and has entered the click and collect business in a big way. [“Beyond Webvan: MyWebGrocer Turns Supermarkets Virtual,” Bloomberg BusinessWeek, 17 January 2013] Bluestein reports:

“MyWebGrocer initially concentrated on selling to supermarkets software that allows shoppers to order online for pickup at their local stores. Participating stores report an average online order of $168, vs. about $30 for an average in-store purchase, the company says. It has since broadened its offerings to about a dozen software tools and services that include mobile apps and the distribution of digital coupons and circulars.”

The company’s founders, Rich, Brian, and Jerry Tarrant, told Bluestein that they entered the business with their eyes wide open, having watched an earlier online service, WebVan, fail spectacularly. Rich Tarrant, one of MyWebGrocer’s founders, told Bluestein:

“Webvan was a poster child for a bad Internet business model. In a low-margin business, where the products can be purchased within three miles by anyone in the United States, they decided to build warehouses and a whole distribution system with delivery trucks, labor, and everything else. But the 36,000 conveniently located grocery stores on every Main Street in America already had all that.”

Implementing a digitalization strategy does appear to be a smart move for most supermarket chains. ZOG Digital reported some more compelling evidence:

“In a recent study with AllRecipes.com, [eMarketer] found that more female smartphone owners are turning to their mobile devices while grocery shopping. 47% said it was because apps were easy to use in-store, while 36% said they use mobile apps to aid in their meal decisions. Before even leaving for the grocery store, shoppers consult social sites like Pinterest for inspiration. In fact, 3 out of 4 of the women surveyed said they tried new recipes based on those they found on Pinterest. 54% of all online consumers use social media to discover new foods and share food experiences.” [“Grocery Shopping Goes Digital,” 7 March 2013]

Although the focus of Tuttle’s article is on the so-called “click and collect model,” he does mention online shopping services that deliver groceries directly to a person’s home. That model will be the subject of the second part of this series.

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