by Brian Kilcourse, Managing Partner, RSR Research
Consumers today, particularly the new generation of wage earners, demand that retailers not only sell them products at a good price, but deliver an experience. Learn how consumer expectations and demand are changing the world of grocery.
The grocery industry is not immune to digital disruption. If the industry doubted it before, they certainly do not after Amazon’s purchase of Whole Foods. Disruption is coming to grocery retailing. In fact, it’s already here.
Two major developments serve as the foundation of this disruption: the rise of the mobile, digitally-connected shopper, and the arrival of Millennials.
While many pieces of this disruption, such as consumers’ move to online purchases of traditional grocery staples like toiletries and household supplies, are relatively independent of generation or age, there are some particular behavioral shifts that are unique to Millennials, and these are bringing unique pressures to grocery retailing.
Millennials, on average, care more about the food they eat. They want it to be ethically and sustainably sourced. They want it to be “healthy”. And increasingly, they areless likely to look to a traditional grocery store to get it.
The industry is already responding to these trends, with everything from a new emphasis on fresh, to opening restaurants and breweries within their stores. The “grocerants” have arrived. However, grocers’ ability to easily support these hybrid food retailing models have not necessarily kept pace. In an environment where bakery might have to be moved back from a locally central distribution to directly within the store, or where the deli counter faces expansion into a range of semi-prepared, boxed, or fully prepared and served meals, the technology-
to support these emerging formats is at least as important as the format itself.
This spotlight on the future of fresh within the grocery experience takes a closer look at the technology requirements of these emerging formats. It first lays out the trends driving the need for these new formats, and then takes a look at the technology implications of those trends.
As Millennials age, they seem to have a lasting impact on every retail vertical they touch. On the one hand, it would seem as though they leave a wasteland in their wake. Teen fashion retail is still reeling from the behavior shifts and new demands of Millennial shoppers. Some retailers, like Wet Seal, never made it out the other side. Others, like Abercrombie & Fitch and Hollister, had to make significant shifts to strategy and to the entirety of their offering, from products to store environments, to corporate responsibility. But the brands that survived the onslaught are stronger, better companies as a result.
Many Millennials are now starting families of their own. They’re moving out of dorm rooms and parents’ basements into their own homes, getting married, having children. This evolution puts them squarely on the doorstep of grocery retailing, along with the same behavior shifts and demands that disrupted teen fashion.
In the context of food, Millennials’ demands take some specific forms. Most importantly, they want to know more about the food they eat. They want to know that the food they eat is healthy. They have a mistrust of packaged or processed foods, and seek natural, fresh, “beneficial” foods that promote a healthy lifestyle1. They want
to know who – specifically – grew their food and they want to make sure that it is sustainably and ethically grown2.
But while they feel much of the same time pressures as other demographic groups, they are less willing to compromise food quality for saving time on preparing food. Millennials want the best of both worlds – they want “healthy” food, without having to take a lot of time to prepare it. Much has been made of the statistic that adults in the United States are spending more on eating out than on groceries for the first time ever, beginning in 20153. It hasn’t escaped the industry’s notice that the average number of grocery shopping trips has declined from 2.2 trips per week on average in 2012, to 1.5 trips per week in 20174.
Grocery still accounts for the majority of Millennial food spending, and The Atlantic reports that the shifts aren’t so much a move toward more restaurant spending, so much as a move away from traditional grocery shopping and food at home5. Nonetheless, Gallup estimates that these trends have resulted in an average daily drop in grocery spend of $13 per day per Millennial, from 2008 to 2015, and that this amounts to a spending shortfall over those years of $949 million per day6.
1 The Future of Grocery, Nielsen, Apr. 2015. | 2 How Millennials Are Changing How We Shop for Food, National Peanut Board. |3 Mark J. Perry: HISTORIC: For the First Time Ever, US Consumers Spent More on Food at Restaurants/bars in Jan. Than at Grocery Stores, Twitter | 4 US Grocery Shopper Trends, Food Marketing Institute. | 5 Why Do Millennials Hate Groceries?, The Atlantic | 6 Millennials’ Next Disruption: Grocery Stores, Gallup.com
All is not lost for grocers. The combination of wanting healthy items with minimal processing – along with Millennials’ legendary price sensitivity – provides the perfect opportunity for grocers to step up to meet Millennials’ needs. In fact, since 2008, in-store dining and prepared foods has grown 30% for grocers, accounting for $10 billion in sales in 2015 alone7. Millennials themselves seem to express a desire for a range of options, from assembling ingredients themselves (though often looking for unique angles or experiences related to those ingredients), to buying meal kits, to buying semi-prepared meals that just need heating at home, to buying fully prepared meals, even to the point of consuming the meal on premise.
Meal kits or “boxed” meal ingredients have seen an amazing growth over the last few years. Blue Apron reports that it now delivers more than eight million boxed meals each month8. The number of startups and new business models around assembling ingredients or preparing meals is mind-boggling9
This is the opposite of how purchases play out in stores
Online ordering plays a role, but it is having a different impact on grocery than it has had in other verticals. The rise of digital is here and growing. According to Nielsen, globally, one quarter of consumers surveyed (a panel of 30,000 respondents) report they are already ordering groceries online for home delivery, and over half – 55% – are willing to do this in the future.
In the United States, evidence is emerging that this has the greatest impact on center store products. Online product sales are roughly 60% non-food (toiletries, household products, etc.) and 40% food, which is the exact opposite of how purchases play out in stores. The sticking point is fresh and immediate-use items, which are seeing a much slower shift to online10.
7 The Rise of the ‘grocerant’: How Millennials Impact Supermarket Growth, CNBC | 8 How Millennials Are Changing the Grocery Store, Yahoo Finance | 9 How Grocery Stores Are Changing in 2017.com, Epicurious | 10 The Future of Grocery. Nielsen, Apr. 2015
The advice for grocers is remarkably similar to other verticals still reeling from Millennials’ demands. But given food’s natural closeness to health and well-being, how that advice manifests into in-store action will be very different.
Millennials, in their pursuit of using their spending power to make the world a better place, demand experiences over products, and this is no different for grocers11. It’s not about filling a cart, it’s about filling a life. And, the grocery store has a unique opportunity to provide what Millennials want. Globally, consumers continue to believe that going to the grocery store is an enjoyable experience and even a fun day out for the family12. Nielsen’s research points out that grocery stores are home to powerful sensory experiences, from baking bread to the savory smells and displays in the deli section, to the delight found in unplanned discovery.
To take advantage of these strengths, grocery retailers need to focus on four key areas of service to meet Millennials needs. Each of these has implications for the capabilities retailers need in order to successfully provide these services.
Retailers need to provide significantly more information about products and the ingredients in them than they ever have before. This isn’t about country of origin or labeling items properly. This is about creating a connection to where the food came from and the people who grew and prepared it. It’s also not about dumping the entire database of everything the retailer tracks about a product into the consumer’s lap. Retailers need to curate and distill information about health benefits, ethical and sustainability considerations, as well as what makes an ingredient unique or special, and thus worth a price premium.
The transparency about ingredients needs to extend to service offerings that assemble those ingredients into recommended proportions and measurements to create a meal “out of the box”. This isn’t too far from recipe requirements for preparing food in the store, except scaled down drastically to meet the needs of 2-person or 4-person households.
From meal kits, it’s a small step to prepare meals that are refrigerated or frozen for later completion at home. The vast research into Millennials’ food habits reveals that they have an inherent belief that the grocery store is a trusted place for finding “healthy” and low-priced options that are not necessarily readily accessible at restaurants. Grocers have an opportunity to capitalize on that trust, provided they can continue their transparency practices related to individual products or ingredients into meal assembly and preparation.
If it is a small step from meal kits to prepared foods, it’s not much more from there to picking up a hot meal to eat in a community setting. Thus more grocery retailers are experimenting with “grocerants” – grocery stores with community spaces for consuming the food consumers buy.
The concept isn’t altogether new (for example, many grocers have had onsite delis for some time, while others have offered mini-coffee shops complete with tables and free WiFi to encourage shoppers to stay awhile), but it is definitely gaining traction. Several prominent U.S. grocers now feature grocerants, including Whole Foods, H-E-B, Wegman’s, and Hy-Vee. In April 2017, USA Today reported on the trend, noting that grocerants generated 2.4 billion visits and $10 billion in sales in 2016 by promoting restaurant-quality freshly prepared foods.
Consumers – particularly the new generation of wage earners – demand that retailers not only sell them products at a good price, but deliver an experience. To become indispensable to consumers, retailers need to de-commoditize their value proposition. But that is extremely difficult to accomplish for grocers in particular, since so much of the assortment usually includes products that a consumer can get anywhere.
But there is good news for fast-moving-consumer-goods (FMCG) retailers. Consumers’ upsurge in interest in home-delivered groceries and meals, meal kits, food trucks and grocerants speaks to their desire to spend less time shopping for food and more time enjoying it. And their interest in farmer’s markets, locally produced foods, and
specialty markets speaks to their desire for fresh, healthy, responsibly produced, organic, and delicious food.
Taken together, these two sets of consumer desires set up a golden opportunity for grocers – to become a destination not just for food, but for a good meal.
Most importantly, a successful in-store experience around that good meal creates a significant barrier to compete for those low-cost providers (like Amazon) that would otherwise be able to steal business with low price and fast delivery – the common denominators of today’s highly competitive retail landscape.
Grocers are increasingly aware they need to change to meet changing consumer expectations. But what are the technical capabilities that a retailer must have in order to offer everything from basic shopping needs to an in-store grocerant experience? More good news for retailers: such technologies are commercially available today – “Fresh Item Management” solutions.
Fresh item management systems bear some surface resemblance to production planning systems used by manufacturers, but with the added complexity of dealing with perishable items and prepared foods. Here are some of the technical requirements for an effective and scalable Fresh Item management capability:
It’s essential for retailers in general and grocers in particular to understand is that consumers are experimenting to find better solutions to their lifestyle needs.
So the question simply is, are retailers experimenting too?
“Acquiring products” has been commoditized – that decision is now almost exclusively won by lowest cost and/or fastest delivery. The best way to win is to change the game: solve consumers’ problems in ways that become so ingrained in their lives that the barriers to compete are very high. The real challenge for grocers today is to make sure they are leading the change, rather than getting left behind.
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