Retail Strategy And Learning How To ‘Think Big’

Retail Strategy And Learning How To ‘Think Big’

Prior to Covid-19, most retailers were operating with the same business models that they had used for years. When Covid-19 hit, many retailers were identified as being nonessential, resulting in their stores being shut down for long periods of time. The only retailers allowed to remain open were those deemed essential — grocery stores and pharmacies, for example.

Being listed as a nonessential retailer resulted in lost sales and furloughing thousands of employees. As 2020 progressed, retailers focused on implementing strategies for social distancing and increased cleaning practices inside their stores. Many consumers avoided shopping in nonessential retail stores that sold apparel, shoes and other items found in department stores, and instead focused on essential items like groceries and food. 

As retailers enter 2021, essential and nonessential retailers will be faced with the need to evaluate their strategies. This is easier said than done for most retailers. Nonessential retailers will need an actionable vision that will set them apart from their competitors while attracting customers to shop in their stores. These same retailers will also have to determine if stores are strategic to their operating models or if moving to an online model is the better strategy.

An unknown for retailers is what will happen in the year ahead. Will Americans embrace getting vaccinated and will Covid-19 be in the rearview mirror by the end of 2021? Or do we have more hurdles ahead with the virus?

Retailers can’t operate based on assumptions. They must operate based on the needs of their customers and company. What’s certain is that the strategies used by retailers in 2021 must be an improvement over the strategies used in 2020.

The Science Of Strategy

In my consulting practice, most retailers that contract my services are focused on improving the strategy they were using to compete in the market. I enjoy working with retailers, but on the topic of strategy, I find it necessary to spend an exorbitant amount of time understanding who within a company came up with the current strategy and their motivation for doing so.

I continue to be amazed at the number of CEOs and other senior executives that identify the strategies they want to use based on “gut feel” vs. science. In some cases, retailers operate without a strategy.

To simplify the understanding of strategy, I leverage several methodologies that I learned from Capgemini and Deloitte. In addition, I utilize game theory, which is referred to as the science of strategy. When used correctly, game theory is ideal for comparing and analyzing what strategies will achieve the desired outcome for a retailer.

What I like most about game theory is that it provides an opportunity for executives to better understand the impacts of their decisions on their companies and, most often overlooked, their competitors.

For example, I’ve worked with retailers that prefer to minimize markdowns on the products they sell in their retail stores. However, increased competition reduced sales leading to a rash decision to markdown items by as much as 25%. Executives believed the decision would increase the number of customers in the stores to take advantage of the bargains.

The opposite happened. Customers chose to bypass the retailer altogether and instead go shopping at everyday low-price leaders or discounters that carried similar products. Reducing prices by only 25% failed to attract bargain hunters because those shoppers could find bigger savings elsewhere.

Strategy is among the most difficult challenges faced by retailers, and it’s about to become even more difficult.

Learning How To Think Big

When I worked at Amazon, leading the expansion of AmazonFresh and Pantry, a phrase we used frequently in the company was “think big.” Jeff Bezos challenged everyone who worked for Amazon to come up with ideas that would delight customers and, in turn, create an increased advantage for the company.

Thinking big was part of the culture at Amazon.

Most retailers, however, don’t think big and it’s not part of their culture.

A technique I use to teach retailers to think big is to review a series of examples that question the status quo within retail. These examples showcase the value of questioning the status quo and challenging a company’s culture to embrace big ideas and change. Each contains the name of a well-known retailer (or another company) along with a recommendation to acquire a company, merge with a company or make some other type of “big move”:

• Amazon acquires Target, Kohl’s or Shopify.

• Shopify acquires Instacart.

• Kroger and Target merge.

• Facebook acquires Instacart or Target.

• Walmart acquires TikTok or Instacart.

• FedEx and Walmart partner and acquire Shopify.

• Tesla acquires Jeep.

• Instacart opens automated micro-fulfillment centers and becomes an online grocery retailer.

• Google acquires eBay, Instacart or Shopify.

Game theory comes in when challenging and discussing the value of each example and identifying which recommendation would generate the best results.

The size of your retail business doesn’t matter. This exercise is helpful to understand the impact that big strategic moves can have on your company. By applying game theory, you can learn how to answer the who, what, when, where and why of each recommendation.

After this exercise, thinking strategically about the moves your company can make becomes easier — at least that’s what I’ve found in my work with my clients.

2021 is going to be another difficult year for many retailers. Learning how to think big is a must. The future of many companies will depend on it.

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How Grocery Retailers Can ‘Win The Porch’ For Online Grocery Delivery

How Grocery Retailers Can ‘Win The Porch’ For Online Grocery Delivery

According to Oracle’s latest grocery industry survey, 61% of consumers said they had ordered groceries online during the pandemic, with 41% now shopping online for their groceries more than in the store. Ninety-two percent of respondents also said they would likely continue shopping for their groceries online. 

The survey provided an interesting insight into the delivery and pickup preferences of customers who order their groceries online, with 3 out of 4 indicating they had their groceries delivered to their homes, 16% picking up their groceries inside the store and 11% opting for curbside. 

Covid-19 has made unattended delivery (no human contact with a delivery driver) a necessity, and this expectation is not going to change. Post pandemic, I believe there will be an even stronger demand for unattended delivery fulfillment as people begin to spend more time out of their homes again while continuing to order their groceries online. 

The Problem With Online Grocery Delivery

Online grocery ordering and delivery is becoming more strategic to grocery retailers.

In my role as a strategy consultant to some of the largest grocery retailers in the world, I’ve witnessed the growth of online grocery fulfillment. I’ve also seen the problems associated with this growth. For example, in my opinion, the worst business model ever created is online grocery ordering and fulfillment in its current format. Grocery retailers can lose up to $25 on every online order they fulfill. I’ve previously written about the costs associated with fulfilling online orders and how introducing micro-fulfillment will greatly reduce the costs and complexity associated with online grocery ordering and delivery. 

The best way for me to describe the process for delivering groceries to customers is that it is broken and getting worse. Grocery retailers are experts at running their stores, but most do a poor job of optimizing the logistics required to make deliveries. Out of fear of losing business to grocery retailers that offer online grocery ordering and delivery, most grocery retailers are offering the service.

However, instead of applying the science of supply chain management to increase the density of orders in specific regions to add more orders per delivery vehicle, retailers are embracing increased volume. This has resulted in the need for more associates to pick and fulfill orders along with an increased number of delivery drivers and vehicles. Because of a shortage of associates and delivery drivers, many grocery retailers are unable to fulfill orders to meet the delivery windows for their customers. 

To make matters worse, groceries are perishable. It is impractical, unsanitary and unsafe to deliver groceries to a home only to leave the groceries outside. However, the increased volume is making it difficult for grocery retailers to deliver all the groceries ordered online to their customers. Several grocery retailers recently contacted me to solve this problem: Even if they make deliveries between 6 a.m. and midnight, they are still unable to make all the required deliveries. Consumers are then abandoning grocery retailers that can’t deliver during the selected time window. 

The inability to keep up with the demand for grocery delivery has resulted in many retailers contracting third-party delivery companies. The problem with these companies is that they do not reflect the image or brand of the store. The use of third-party delivery services lacks accountability. 

Contract day workers answer an alert to fulfill a delivery for one of the many delivery service companies. There is no dress code, no company standard and no way to monitor or enforce accountability. I am frequently contacted by customers reporting an incident with a third-party delivery driver. The most common complaints I hear are that delivery drivers steal groceries, eat some of the food that was ordered or refuse to deliver the groceries to the customer without being tipped upfront. Less common but more serious complaints are of delivery drivers who have shown up high or drunk or have threatened customers. 

In order to not lose a sale, many grocers are willing to risk compromising delivery integrity. I hold senior executives at grocery retailers accountable for the breakdown of common courtesy and respect related to online grocery delivery. 

The Solution 

After researching online grocery deliveries globally for over two years, I believe several solutions are available to improve the service and delight customers. 

The first thing that has to occur is that grocery retailers need to understand that whoever wins the porch will win the battle for attracting and retaining customers. Retailers have to be willing to introduce technology to eliminate the current constraints associated with grocery delivery and provide customers with better service. 

Based on my research, I recommend that grocery retailers consider seeking temperature and climate-controlled container solutions that can be secured to a porch, garage, home or office, enabling customers’ completely unattended receipt of their order. Consider what items you’re fulfilling for customers — chilled and frozen products, medications, dry foods and so on —when selecting the appropriate solution. 

Grocery retailers should also explore installing temperature-controlled lockers in high-density locations to allow for mass delivery of groceries. Customers can pick up their groceries at their leisure. Retailers can also install this type of system at their stores. 

Retailers must raise the bar when it comes to last-mile delivery. Leveraging mobile retail or introducing the use of grocery delivery carts should become the norm. And finally, retailers should rethink their use of third-party delivery companies. Retailers should own the customer relationship, from online ordering to delivery, and insist on integrity at all times.

Grocery retailers that introduce these strategies and technologies into their businesses will help to protect the integrity of their delivery models, increase the customer experience and accelerate the growth of online ordering.

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How Social Commerce And Online Auctions Are Set To Revolutionize Retail

How Social Commerce And Online Auctions Are Set To Revolutionize Retail

Retail is one of the oldest industries still operating. Throughout history, individuals have had a desire to buy for fun and a need to buy out of necessity. Retail is also an industry that is constantly changing. The arrival of Amazon has ushered in the growth of e-commerce, and consumers are increasingly shifting their preferences to ordering products online vs. shopping inside retail stores.

Based on what I’m seeing, I believe retail is about to undergo further changes as a result of the growth of social commerce, where buyers form a group in order to receive discounts from suppliers. Complementing social commerce is the growing trend of using online auctions to find the lowest bidders to fulfill orders for apparel, shoes and other merchandise.

Much of my academic research during three master’s degree programs was focused on retail, auctions and supply chain management. Since 2015, I have conducted research on one of the largest social commerce platforms, China-based Pinduoduo. In addition, I have provided consulting to retailers interested in social commerce and online auctions. (I do not mention these retailers in this article.)

Auction-Driven Social Commerce

Pinduoduo has taken China’s retail industry by storm. The platform reportedly had 585.2 million active buyers in 2019, surpassing JD.com’s 362 million and catching up to Alibaba, which reported 712 million users (in the 12 months leading up to September 30, 2019). I believe this can be credited to Pinduoduo’s executive team’s focus on efficiently receiving, fulfilling and shipping orders to customers.

To accelerate growth, products on Pinduoduo list two prices: one for individual purchases and a price for team purchases. Team purchases encourage consumers to convince as many friends and family members as possible to buy the same products together. The more products that are purchased, the lower the price for each product sold.

The model from Pinduoduo differs significantly from a warehouse club like Costco or Sam’s Club, which already sells a product in bulk. Convincing friends and family members to buy the same product in bulk doesn’t decrease the price.

I believe this is what’s missing in the current commerce model — duplicating the social experience online where friends and family buy together and have fun together. Further, I anticipate a move toward an online bidding model, whereby more than one seller can bid on selling their products to a group of consumers. This model has the potential to explode in popularity for several reasons.

First, the Nobel Prize for economics was recently awarded to two Stanford University professors for their work related to online auctions. The award has generated interest from retailers (several of them my clients) who wish to learn how to leverage auctions within their retail ecosystems.

Second, at nearly $800 billion, the grocery industry remains one of the most important industries operating today. Consumers purchase groceries more than any other commodity on an annual basis.

However, according to many economists and analysts, grocery retailers are examples of monopolies due to the fact they control all pricing power over the products sold in their stores. Walmart, for example, reportedly controls over 50% of the grocery market in many areas within the U.S.

In addition, the growth of online grocery ordering and delivery has uncovered a weakness in the current model: Every online grocery order is treated as a separate order. No attempt is made to combine orders to sell in bulk to reduce prices.

I believe the current grocery model can easily be disrupted. For example, a third party with an online platform for ordering groceries could enter the market with the promise of reducing grocery prices to their lowest possible level through the use of an online auction.

Instead of treating every online order as a separate transaction, a third party would be able to bundle hundreds of thousands of online orders and, on a daily basis, conduct a bid whereby brands, grocery retailers and wholesalers bid to fulfill the online orders at the lowest cost. (I wrote more about this topic earlier this year.)

Removing pricing power from grocery retailers has the potential to drive significant growth to a third party that perfects the use of social commerce and an online auction for selling groceries.

When To Use An Auction Model

Virtually all retailers can use an online auction and social commerce in their business, assuming they have a platform with the required technology. However, there are risks that must be taken into account. For example, retailers must understand what their costs are, and they must have a cutoff price that they won’t exceed, lest they rob themselves of margin and eliminate any chance of making a profit.

Also, retailers must have a supply chain capable of managing inventory and shipping bulk orders to many locations. Partnering with the right inventory optimization software can provide the needed algorithms to manage and optimize inventory.

It should be noted: I don’t recommend the use of social commerce or online auctions for high-value products that require a long time to make. I evaluated an online auction model for a company that manufactures extremely complex and expensive (over $1 million in some cases) CT scans and other intricate medical equipment. Using an auction would prevent the company from personalizing its process for making the machines and showing how its “hands-on” approach provided value above and beyond price.

Retailers must evolve or they will surely die. The status quo is no longer acceptable, and I strongly recommend all retailers in the U.S. to crush it.

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How Retailers Can Select The Optimal Micro-Fulfillment Solution

How Retailers Can Select The Optimal Micro-Fulfillment Solution

Micro-fulfillment, as a solution for automating online grocery fulfillment and fulfillment of other retail products closer to customers, is growing in popularity among retailers. Amazon, Walmart, H-E-B, Ahold Delhaize and FreshDirect are just a few of the retailers that have embraced the use of micro-fulfillment technology.

However, for every retailer that has made the decision to enter into an agreement with a micro-fulfillment company to install its technology, there are dozens of retailers still stuck on answering the questions: How do we choose the right solution? How do we know what’s best for us?

Strategy First

A mistake that I continue to see made by certain retailers is that they select a micro-fulfillment solution without first having a micro-fulfillment strategy. Bad idea.

I have personally provided consulting to several retailers that selected and installed micro-fulfillment solutions only to discover that no value of any kind was derived in doing so. I was contracted to assess the current state of their operations and identify the optimal future-state strategy, and in each case, the failure on the part of the retailers to identify the optimal strategy created a situation whereby the micro-fulfillment technology provided no value. The situation could have easily been avoided by following an effective methodology and by working with a consulting company.

Precision Distribution Consulting (PDC) is one of the few consulting firms skilled in analyzing the value of micro-fulfillment solutions to a retailer and then identifying the optimal strategy for introducing micro-fulfillment solutions into the retailer’s ecosystem of stores. Kearney, Capgemini, Accenture and Deloitte also provide consulting services related to micro-fulfillment, as do McKinsey, The Boston Consulting Group and Bain & Company. (I do not have business relationships with these companies, but I am a former consultant for Capgemini and Deloitte).

The methodologies utilized by these consulting companies vary, but some critical elements include:

• Assessing each micro-fulfillment solution and selecting the best solution based on the requirements of the retailer.

• Building a current-state supply chain and logistics network model.

• Conducting scenario analysis to evaluate the impact of introducing micro-fulfillment technology into the retail network.

• Assessing changes required to manage inventory replenishment to each micro-fulfillment solution.

• Performing a “what if?” analysis to identify the total number of micro-fulfillment centers and automated dark stores a retailer should install within its retail ecosystem.

• Identifying the optimal future-state supply chain model to maximize the value of each micro-fulfillment center within the network.

• Building a business case outlining savings across labor and increased productivity to justify the investment in micro-fulfillment.

As a consultant, I’ve found determining the optimal strategy is the first step in every project that I lead. However, Covid-19, the growth of Amazon, changing consumer behavior away from stores to e-commerce and increased retail bankruptcies has resulted in many retail executives wanting to move fast into micro-fulfillment. I disagree with such an approach.

When confronted with an executive pushing to select and install a micro-fulfillment solution without first understanding the optimal strategy, I remind them of the exchange between Alice and the Cheshire Cat from Alice in Wonderland:

“Would you tell me, please, which way I ought to go from here?” asked Alice.

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where,” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

“… so long as I get somewhere,” Alice added.

“Oh, you’re sure to do that,” said the Cat. “If you only walk long enough.”

Without a strategy, retailers have movement within their supply chains and operations but nothing more. Many people are in motion installing the selected micro-fulfillment solution, but the movement gets them nowhere, and the micro-fulfillment solution adds no value.

Selecting The Optimal Micro-Fulfillment Solution 

Once a retailer has identified the optimal micro-fulfillment strategy to meet its needs, the next step in the process is evaluating the different micro-fulfillment solutions available on the market.

The company I work for, PULSE Integration, has a business relationship with the micro-fulfillment company AutoStore. However, the purpose of this section isn’t to discuss AutoStore; it is to provide an overview of the leading micro-fulfillment solutions on the market and the key questions to consider during the selection process.

Whenever a retailer enters into an agreement with any micro-fulfillment company, the entire micro-fulfillment industry wins. I believe José Vicente Aguerrevere, Max Pedró and Rafael Pieretti V, founders of the company Takeoff, deserve credit for creating the modern-day micro-fulfillment industry. Other leading micro-fulfillment companies include Alert Innovation, Attabotics, Exotec, Dematic, Fabric and Tompkins Robotics.

Innovation is becoming increasingly important in the micro-fulfillment industry. For example, Takeoff is transitioning from a micro-fulfillment company to a software company capable of licensing its technology platform to retailers and micro-fulfillment companies to run all front-end and back-end operations related to online grocery ordering, fulfillment and operations.

At a high level, micro-fulfillment solutions are designed to do one thing: automate the process of fulfilling online grocery and e-commerce orders. Micro-fulfillment solutions are either shuttle-based or cube-based. There are positives and negatives of each.

A micro-fulfillment center can be installed inside every store to fulfill the curbside and online orders for a single store only. Micro-fulfillment centers can also be installed inside select store locations to fulfill curbside and online orders for many stores — a hub-and-spoke model. Again, there are pros and cons of each.

Retailers must first identify which model they prefer because that will determine the number of micro-fulfillment centers required to meet the demand for groceries from their customers. The model determines the strategy. My advice to all retailers is to assign someone from within their company who is experienced in micro-fulfillment to fairly evaluate all micro-fulfillment options or to partner with a third party that can lead the process.

There is no one-size-fits-all approach when selecting a micro-fulfillment solution.

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A Look At The Micro-Fulfillment Model And The Future Of Grocery Retail

A Look At The Micro-Fulfillment Model And The Future Of Grocery Retail

In an effort to more cost-effectively fulfill online grocery orders for its customers, Amazon has opened a “dark store,” which is more of a warehouse than a store. Located in Brooklyn, New York, Amazon’s dark store will be a good test of the concept to determine how big of a role the stores will play as the company accelerates investment in the grocery ecosystem.

Amazon is confronted with many of the same challenges as its grocery competitors, like Walmart, Kroger, Albertsons and Ahold Delhaize. Among the challenges is how to meet the increasing demand for online grocery ordering and delivery.

On the surface, fulfilling online grocery orders appears to be a fairly simple and straightforward process. It’s not. Consumers purchase a wide variety of products, resulting in a mixture of small, medium and large orders, ranging from a few products to 50 or more items.

Prior to Covid-19, 4.3% of grocery sales were online. Online grocery sales currently account for 10.2% of all grocery sales. The increased volume of orders, when combined with the large variance of products that need to be picked to fulfill each individual order, has significantly increased costs and complexity.

The Costs And Complexity Challenges

Unlike other industries where economies of scale decrease the cost per unit with increasing scale (volume of orders), the cost to fulfill online orders remains constant when using a store’s staff or third-party labor to fulfill an order. Based on my own research, and research from consulting firms that specialize in analyzing the grocery industry, the cost to pick, prepare and deliver an online grocery order is between $10 and $25, with most deliveries averaging $11 to $12.

If a grocery retailer fulfills and delivers one order at a cost of $20, it can be expected that fulfilling 1,000 orders using the same process will still cost $20 per order. I have argued since 2013 that the worst business model in existence is online grocery ordering and delivery in its current form, due to the fact retailers that provide online grocery ordering and delivery can lose up to $25 on every order they fulfill.

The process for fulfilling or “picking” orders is primarily manual. Store associates or third-party labor receive a list of orders to pick with an itemized list of each product desired by the customer. Like a team of ants, pickers push carts up and down store aisles, frantically searching and pulling items off of shelves. Because online orders are received hourly, the process only stops when a store closes.

As retailers have increased the number of pickers to fulfill online orders, shoppers inside the stores are more likely to experience crowded aisles and an increase of out-of-stock items.

I believe Amazon and other grocery retailers likely understand that the current process for fulfilling online orders is broken and unsustainable. The dark store concept is designed to alleviate much of the difficulty and costs of fulfilling online orders, as customers are not allowed inside dark stores. Associates rapidly move throughout the dark store, fulfilling orders.

Based on my experience, and based on comments I’ve heard from retailers testing dark stores, dark stores help but do not solve the problem of costs and complexity.

The Case For The Micro-Fulfillment Model

Over my 20 years of working globally in supply chain management, logistics, e-commerce, fulfillment and last-mile delivery, I have maintained a focus on researching and mastering technology and strategy. My experience with Amazon, Kroger and leading retailers in Russia, the United Kingdom, India and China gives me a unique perspective on the grocery industry and where it is heading. Further, the company I currently work for as chief marketing officer offers micro-fulfillment and other fulfillment solutions for the industry. I do my best to share my knowledge of the grocery industry, including hosting webinars on micro-fulfillment.

When looking at what’s next in the industry, we can use the Texas-based grocery retailer H-E-B as an example. H-E-B recently announced that it has partnered with AutoStore to install its micro-fulfillment solutions across its retail ecosystem. This is not a pilot. This is an investment by H-E-B to transform its online fulfillment model from manual to automated. (Full disclosure: I advised executives from H-E-B in 2019 to select AutoStore.)

H-E-B has multiple options for how it can use the micro-fulfillment systems from AutoStore. The systems can be installed inside select H-E-B grocery stores, and/or the systems can be installed in dark stores to create automated dark stores for more efficiency. Using the AutoStore system to fulfill online and curbside pickup orders will allow H-E-B to reduce the cost to fulfill each order, plus increase the speed of picking and delivery to customers.

It’s important to understand that micro-fulfillment isn’t just technology that can be purchased and installed; it’s a strategy that can create a competitive advantage. Determining the optimal micro-fulfillment strategy includes identifying the total number of micro-fulfillment centers and/or dark stores that can be supported within your network, where they will be installed and how inventory will be managed.

Retailers that want to install micro-fulfillment centers inside their stores must be aware of the requirements for remodeling and the time needed to do so before the stores are fully operational. Retailers should also evaluate whether they want to expand their operations into different cities and states where they currently don’t operate. Micro-fulfillment can be leveraged to create an online presence in a state without owning and operating stores. Fulfillment is provided through strategically located micro-fulfillment centers.

Grocery retailers have a strategic imperative to consider the micro-fulfillment model since their stores and supply chains weren’t designed for e-commerce. In addition to dark stores, I anticipate that Amazon will open a micro-fulfillment center either inside one of its supermarkets or as a dark store to fulfill orders. The company may eventually install super micro-fulfillment centers for use inside Whole Foods stores. The way I see it, Amazon’s strategy will likely drive the industry.

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