The Candid Voice in Retail Technology: Objective Insights, Pragmatic Advice

2017 PROSPECTIVE VIEW

A Fresh Take On The Grocery Experience

Nikki Baird & Brian Kilcourse

September 2017

Sponsored by:

Prospective View: A Fresh Take On The Grocery Experience

1

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 are

less 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.

Introduction

The Grocery Industry Is Not Immune

The

‘Grocerants’

have arrived…

Prospective View: A Fresh Take On The Grocery Experience

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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 lifestyle.i They want to know who –

specifically – grew their food and they want to make sure that it is sustainably and

ethically grown.ii

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 2015.iii 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 2017.iv

Business Challenges

Millennials Keep Changing Everything

2.2 1.52012 2017to

Average number of

grocery shopping trips

has declined from

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 home.v

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 day vi

Prospective View: A Fresh Take On The Grocery Experience

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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 alone.vii 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

month.viii The number of startups and new business models around assembling

ingredients or preparing meals is mind-boggling.ix

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 online.x

Reconfiguring The Grocery Basket

Online

product

sales

40%

60%

Opposite

of how

purchases

play out in

stores

Non-food Food

Online ordering

plays a role, but it

is having a different

impact on grocery

than other verticals

Prospective View: A Fresh Take On The Grocery Experience

4

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

grocers.xi 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 family.xii

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.

Ingredients

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.

Meal kits

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.

The Opportunity For Grocery

The Pressure Is On

It's not about

filling a cart,

it's about

filling a life

Prospective View: A Fresh Take On The Grocery Experience

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Prepared meals

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.

“Grocerants”

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.

Prospective View: A Fresh Take On The Grocery Experience

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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.

How To Be Indispensable

Get the Master Data right. The product master data must

have a provision to handle information about not only finished

products, but also ingredients, including allergen information

and “rules of use” (i.e. does an ingredient go into another

ingredient? etc., similar to the notion of components, sub-

assemblies, assemblies, and finished products).

Prospective View: A Fresh Take On The Grocery Experience

7

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:

Technology Enablers

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.

The Ingredients Of An Effective

Fresh Item Management Solution

A perpetual Inventory management system

that can track not only available-to-sell items

but also ingredients, is important. Track &

trace (or “farm to fork”) information, for

example lot numbers, is essential.

1

2

3A recipe management capability is essential. Similar to old-

fashioned cook books, recipes should include ingredients,

substitution options, packaging and labor requirements, and

production rules. Because meals will be produced at scale,

production lead times for each recipe should be included. And

because each production location (whether it’s a kitchen at a

store or at a centralized facility) will have different throughput

capabilities, recipes must be managed per location, to codify

each location’s production capabilities and limitations. For each

recipe in each location, the solution must be able to calculate

the total cost of goods to ensure proper pricing of each item.

The solution must be able to produce demand-driven

forecasts by location, both for production

and replenishment. As with consumer packaged goods in

general, the forecast must consider each location’s perpetual

inventory to help ensure the right order quantities.

Prospective View: A Fresh Take On The Grocery Experience

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A Production Planning engine is needed to develop schedules

for each location. The Production planning engine should be

capable of time-phased production calculations, to better match

production to demand cycles. Furthermore, the planning system

should be able to integrate production planning for central and

local production schedules. The planning engine should be able

to run per-location simulations, so that on-site managers can

appropriately make corrections based on real-time conditions.

4

5

6Infuse the entire process with analytics, to track demand vs.

production (including overs, unders, and shrink/waste), enable

track & trace in the event of recalls, and to monitor cost-to-

serve vs. profits.

The Fresh Item Management solution should

integrate with the retailers’ B2B ordering system. 78

A tie-in to a consumer-facing order management capability

(preferably available to the consumer via a mobile app) is a must.

Such a capability should be integrated with other customer-facing

capabilities, such as online ordering for in-store pickup, preferred

item list management, loyalty, and even self-checkout and mobile

payment capabilities.

Retailers should develop the ability to

schedule the right labor according to

production/ service requirements. 9

Prospective View: A Fresh Take On The Grocery Experience

9

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,

Change The Game

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.

Prospective View

The Sponsor RSR Research

Retail Systems Research (“RSR”) is the only research

company run by retailers for the retail industry. RSR

provides insight into business and technology

challenges facing the extended retail industry, providing

thought leadership and advice on navigating these

challenges for specific companies and the industry at

large. We do this by:

• Identifying information that helps retailers and

their trading partners to build more efficient and

profitable businesses;

• Identifying industry issues that solutions

providers must address to be relevant in the

extended retail industry;

• Providing insight and analysis about a broad

spectrum of issues and trends in the Extended

Retail Industry.

Copyright© 2017 by Retail Systems Research LLC • All rights reserved.

No part of the contents of this document may be reproduced or transmitted in any form or by any means without the

permission of the publisher. Contact research@rsrresearch.com for more information.

i The Future of Grocery. Nielsen, Apr. 2015, Link accessed 15 Sep. 2017

ii "How Millennials Are Changing How We Shop for Food | National Peanut Board." National Peanut Board | National Peanut

Board, Link accessed 14 Sep. 2017

iii "Mark J. Perry on Twitter: "HISTORIC: For the First Time Ever, US Consumers Spent More on Food at Restaurants/bars in

Jan. Than at Grocery Stores Http://t.co/j3UpDnDG4Y"." Twitter, Link

iv "FMI | Food Marketing Institute | U.S. Grocery Shopper Trends." FMI | Food Marketing Institute | Food Marketing Institute, Link

v "Why Do Millennials Hate Groceries?" The Atlantic, Link

vi "Millennials' Next Disruption: Grocery Stores." Gallup.com, Link

vii "The Rise of the 'grocerant': How Millennials Impact Supermarket Growth." CNBC, Link

viii "How Millennials Are Changing the Grocery Store." Yahoo Finance - Business Finance, Stock Market, Quotes, News, Link

ix "Grocery News: How Grocery Stores Are Changing in 2017.com." Epicurious, Link

x The Future of Grocery. Nielsen, Apr. 2015, Link accessed 15 Sep. 2017

xi "How Millennials Are Changing the Grocery Store." Yahoo Finance - Business Finance, Stock Market, Quotes, News, Link

xii The Future of Grocery. Nielsen, Apr. 2015, Link accessed 15 Sep. 2017

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References