Recent research cited by Symphony Retail indicates that even as demand for fresh and freshly prepared food rises, retailers are generally unaware that demand for “center store” items will likely fall at the same time. This should be good common sense, of course. Families aren’t eating more, they’re just eating differently. But retailers are not quantifying it.
On the one hand, the shift to fresh is good for retailers, as fresh products tend to provide higher margins than canned and other packaged foods. On the other hand, it begs for a more holistic view of the entire store, across all merchandise categories. As we look at demand, that vision has to cross the traditional barriers of perimeter vs. center-aisle products. This shouldn’t be new, but it is, and it’s very important. Retailers need the ability to quantify the impact of demand shifts in fresh across the store.
Consider this: at this time of year, avocados generally cost around $1 per fruit in the US. Personally, I most recently paid $2.50 for a single avocado! This has happened several times, and while initially I just bemoaned the loss of my wonderful avocado tree to Hurricane Irma, I’ve also starting asking myself, “Do I really want to pay over $3.00 for a breakfast of avocado toast?” In other words, oatmeal is starting to look pretty good to me again. Of course, these price hikes are the result of tariffs and the US’s political situation in general.
Politics aside and regardless of the reason (weather can also have a dramatic impact on the price of fresh items), these on-again-off-again trade wars have created tremendous cost volatility. As these costs are passed along to consumers, we can expect to see real and sudden swings in demand.
The operative question here is straightforward: Can grocery retailers use data to help understand the rise and fall of various categories in a holistic way, or will siloed organizations and systems result in out-of-stocks in one area and overstocks in other areas? While we can debate which one is worse: out of stocks or overstocks it’s clear that these situations create working capital loss and dissatisfied customers.
In this volatile environment, it’s imperative to have the most visibility possible into real-time conditions, both within and outside the enterprise and across all categories in the store. And with that visibility, it’s important to be predictive. Perhaps the first time avocadoes rise in price and oatmeal demand rises (for example), it’s understandable that a retailer might be surprised. But installed technology should be able to anticipate future events…tying products together that might not ordinarily be thought of by the same person, or even acknowledged in a single system.
It’s clear that this is an excellent application for machine learning and artificial intelligence. In fact, according to one of Symphony Retail’s case studies, a leading retailer had a 20% forecast error, a number that had not budged for years. But when that same retailer applied an AI-based demand forecasting system with machine learning, that error rate was reduced to 5% – a 75% improvement, and a forecast accuracy rate that would be the envy of most retailers across all segments. RSR’s own research has consistently highlighted that forecast errors are a significant operational challenge. This variance became particularly pronounced during the Great Recession, and has not abated, despite a decade of decent economic growth and low unemployment.
It’s clear that new tools are needed to look at the store as a whole. It’s also clear that fresh will continue to be a high profile, high margin opportunity for grocers in the coming years. But we cannot expect straight-line growth and straight-line reductions in center store. Instead, retailers must respond in near-real-time based on external events. If they don’t, at best, they’re leaving money on the table (or in the trash). At worst, they’re creating irritable customers who may well look elsewhere for the items they want.
Once our external environment becomes less volatile, we can assume that the center aisle will again be subsumed by fresh. Then it will be time to look at new opportunities to improve the customer experience in center store. Retailers can take the opportunity to become more experiential there and offer recipes, promotions and other experiences that bring customers back and create sales lift, and move beyond trade-offs.