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Supply Chain News: Dramatic Changes in Grocery Sector Resulting from Virus Crisis

 

The New Normal ls Changing Grocery Sector Online Timeline by Three to Five Years, Alix Partners Says

April 28 2020
SCDigest Editorial Staff
     

There were already major changes going on in the grocery sector before the virus crisis emerged rapidly, bringing new, perhaps permanent changes in consumer behavior that in many cases simply greatly accelerated trends that were already in motion

It all means that grocers must rapidly adapt business models and supply chain processes to survive and thrive, according to a new report from the consultants at Alix Partners.

Supply Chain Digest Says...

 

Because circumstances have forced rapid ecommerce scaling, it is imperative that digital capabilities be at full throttle now, Alix says, noting that insource/outsource decisions will be key.


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Of course, changes in the grocery sector will likely also have major ramifications for food and consumer packaged goods manufacturers as well.

Nearly all US grocery stores have remained open during the crisis, but the report notes that customers are preferring to stay home and take advantage of home delivery and curbside pickup in unprecedented numbers.

In fact, Alix says some grocers are seeing digital sales more than double across click-and-collect and delivery channels. That's the good news. The bad news, the report says, is that this change can have a negative impact on operating income.

"Based on history, we expect a significant portion of digital growth to stick and become permanent once the restrictions are lifted," the Alix report says, adding that "The current crisis is forcing customers to try something new. Many will like it and will not snap back into past behaviors."

Perhaps surprisingly, Alix says more than 40% of those who have bought groceries online in this period are new to ecommerce grocery shopping, while experienced online grocery buyers are upping their share of spend going to online, Alix's own survey data says.

The report also says the results in the crisis thus far are dispelling two grocery sector myths. The first is that grocery delivery is a niche offering only for dense, urban areas.

Alix notes that even before COVID-19, some of the country's largest operators were making rapid ecommerce progress in their core suburban markets.

The second and more interesting myth is that low ecommerce margins in grocery are acceptable because it represents incremental business.

"Rather, grocers are fighting to keep their existing share as customers' expectations change and baskets shift from traditional in-store trips to online," Alix notes.


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The report notes another axiom of the grocery sector -that customers are unwilling to pay more for delivery and click-and-collect options - will be tested in the medium term.

"Many customers have been willing to pay extra for services they view as necessary from a safety standpoint in this time of crisis. However, this willingness may decrease over time and even potentially disappear," Alix notes.

The issue of online profitability is ascending as the volume of grocery ecommerce grows rapidly in the crisis. Alix says that currently, grocery delivery is margin-neutral or even negative in some cases, while click-and-collect options hold only slightly higher margins. That situation is because of these channels' implicit higher cost structures, requiring additional labor, third-party service fees, and capital expenses that come with creating new warehouses or "micro-fulfillment" technologies in store, and processes to cater to these fulfillment requirements.

Analysis from Alix suggests that a permanent overall online penetration of between 7.5% and 20% would result in an individual retailer's current operating income being reduced by 0.75 to 2.75 prcentage points if the retailer is unable to charge the customer extra fee for the service. That in a sector historically known for low margins.

Pushing customers to click-and-collect options can deliver significantly better operating income than a more delivery-heavy mix, Alix says.

"This is the magnitude of the change grocers are going to have to deal with," Alix says.

To navigate these turbulent times, Alix has several recommendations for grocers:


Make bold capability decisions: Because circumstances have forced rapid ecommerce scaling, it is imperative that digital capabilities be at full throttle now, Alix says, noting that insource/outsource decisions will be key.

Codify learnings from the current crush: Alix recommends grocers track how the shift to digital channels affected profit and loss while isolating the effects of the demand bump. "Determine what is incremental to your business and what has simply shifted online to the detriment of in-store shopping," Alix adds.

Choose customer incentives carefully: Alix says that grocers should pay attention to how their channel mix and profitability evolve as the industry settles into a new normal. However, Alix warns grocers not to incentivize customers into actions unprofitable for the business. For example, if click-and-collect purchases deliver higher profitability than delivery, make them efficient and attractive for customers.

Experiment with store real estate: Alix says grocers should evaluate how their current real estate footprint can increase the ability to fulfill delivery orders and use store space they already have to facilitate ecommerce logistics - especially in stores that are oversized for the market.

Partner with wholesalers: Alix also notes that wholesalers have a once-in-a-generation opportunity to help their independent and regional customers by offering turnkey ecommerce solutions.

The virus crisis is forcing grocery retailers to accelerate their digital channel development timeline by three to five years, Alix concludes.

It ends by noting that "Lessons from the last several weeks of shifting buying behaviors will helpgrocers adapt faster and more effectively - delivering a better customer experience, mitigating the risk of operating income losses, and taking share from competitors that don't evolve as quickly."


Any reaction to the analysis by Alix Partners? Let us know your thoughts at the Feedback section below.


 
 

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