Features, Grocery and Food

The Grocery/CPG Business Wakes Up to A New Reality

“It’s cheese-moving time.”

Both the figurative and literal meanings of those words spoken by Groceryshop CEO and founder Anil Aggarwal could not have been truer as he kicked off the very first-of-its-kind conference for the grocery and consumer packaged goods industry last week in Las Vegas. Borrowing from the famous “Who Moved My Cheese” book by Spencer Johnson to the more than 2,200 retailers, suppliers, brands and businesses on hand for the four-day event, Aggarwal referenced the fundamental and all-encompassing change going on in the industry. “The grocery and CPG business is moving from a period of disruption to what is quickly becoming the New Normal. This is the same thing that occurred in the general merchandise field.”

Aggarwal should know since Groceryshop is modeled after, and spun out of his enormously successful Shoptalk event, that in just a few short years has become the most important go-to conference for that industry. For grocery, which lags general merchandise in its digital transformation by what most people will admit is a period of three to five years, Groceryshop was an opportunity to bring together all the players up and down the literal food chain to explore reinvention.

And not a minute too soon. Nina Barton, president of Global Growth for Kraft Heinz, put the giant supplier’s efforts in digital into context. “We don’t see this as Kraft Heinz getting into a new business: This is the business.” The radical reordering of the food and packaged goods business is really only in its first stages. “There’s another 10 years of disruption ahead for this industry,” predicts Narayan Iyengar, senior vice president of digital and ecommerce for Albertsons Companies.

After more than 180 speakers and presentations to some 900 companies from 28 countries there was a wide – and sometimes wild-variety of topics, predictions and tangents explored over the four days, but certain themes held true throughout. The Robin Report identified 10 major takeaways plus an industry-specific white board’s worth of numbers and terms worth noting. Our shopping cart was overflowing.

1. The Tipping Point
There was almost universal agreement that Amazon’s 2017 purchase of Whole Foods marked a seminal moment in the history of the industry and served as both wake-up call and inspiration for many of the changes and developments the business is experiencing today. “Last year everything changed,” said Apoorva Mehta, founder and CEO of Instacart, the e-commerce facilitator. “Online went from being an afterthought to a thing in grocery. This was the tipping point.” And while neither Amazon nor Whole Foods were on the program or visibly apparent at Groceryshop, both were certainly very top-of-mind. Just as in general merchandising, Amazon is both feared and admired and a continuing presence in most company’s business strategies.

2. No Longer Either/Or
The grocery business is quickly learning a lesson that took general merchandising many years to understand – and then react to. It is no longer a choice of being in e-commerce or in-store, but to truly be successful in the CPG business, retailers and suppliers alike are adapting techniques from each platform and applying them to the other. A great example was given by Geoffrey McFarlane, co-founder and CEO of Winc, which started out as a direct-to-consumer seller of wine, something that has proven more difficult to sustain across the entire grocery spectrum. “We moved into retail distribution,” he said, after realizing online subscription was limiting the size of the company’s overall business. “Now we use subscriptions for testing and discovery, but use wholesale for volume.” Many retail leaders echoed that hybrid business models combining online and e-commerce were going to be the most effective at growing sales in the years ahead. The ultimate integration is the click-and-pick model that combines the best of both worlds, and which is viewed as among the most promising models to emerge from the initial years of the digital transformation process.

3. Partnerships Rather Than Acquisitions
Another basic tenet of the industry under review is the “only way to grow is to buy up competitors and allied businesses.” While there is still much M&A activity – real and speculative – more companies are turning to partnership models to be successful. “We’re seeing many more partnerships versus true mergers and acquisitions,” said Joe Feldman, senior managing director for Telsey Advisory Group. The poster child for this strategy is undoubtedly Kroger, which has entered into numerous partnerships over the past two years seeking to augment its basic in-store business. Yael Cosset, chief digital officer for the giant pure grocery chain, the largest pure-play grocer in the country, outlined a number of the hook-ups it has put into place. First is Ocado, the large British online-only seller that will be helping Kroger in its e-commerce efforts. Ocado also has a partnership with Alibaba in China to help its penetration into that marketplace. Kroger is also acquiring. Earlier this year it bought Home Chef to gain entry into the meal kit segment of the business. Cosset said that Kroger will do $5 billion online by the end of the year, representing around 4 percent of overall sales. The business continues to grow by double digits, he added.

4. Mid-Sized Players Will Struggle to Stay Competitive
As happens with increasing frequency in American business these days, mid-sized players continue to struggle with the cost of doing business and staying competitive with the largest companies. The cost of technology is making that even more difficult. “The problem for mid-sized companies is that they don’t have the working capital to invest in their businesses,” said Feldman of Telsey. “The fact of the matter is that we’ve seen the largest number of bankruptcies in retail in the past 20 years come out of the grocery segment.” Simeon Gutman, executive director for Morgan Stanley, said, “The top six retailers represented 75 percent of the overall growth in the grocery and CPG business last year. That process is going to speed up.”

5. Voice Assist is the New Mobile
Perhaps the newest technology to come into play in grocery is voice assisted retailing, thanks to the exploding number of hardware and software options being rolled out by the majors, including Amazon, Google and Apple. “Conversational assistance is a paradigm shift, said Lara Antognoli, director of shopping partnerships for Google. “It’s going to be like mobile was 11 years ago.” She said it was important to look at the entire structure of voice, including devices both with and without screens to understand how this will change the business. “Retailers are going to need to figure this out.” Will Hall, chief creative officer for RAIN, an agency that specializes in voice services agreed, “This will be the year of voice, which will end up being every bit as important as SEO and apps have been in the shopping process.” He also agreed that it’s not just about devices like Alexa and its competitors. “You must think of this as an entire ecosystem, not just devices.” He predicts Amazon and Google will each control about 35 percent of the voice market, with Apple taking only 10 percent and the rest divided among smaller players. And voice will only get more important in the years ahead, said Matt Kelleher, managing director for Morrisons, the British grocery chain. “Right now, voice only accounts for about one percent of sales at Morrisons,” he said, but “when you can pay with voice that will be the tipping point. It’s not going to be next year but it’s going to be pretty soon.”

6. Online Is Not Just About Price Anymore
In the beginning, shoppers viewed online as a way to save money but that’s no longer the case. “The value equation used to just be about price,” said Chieh Huang, CEO for Boxed, the online commodities sellers. “But now it’s about price, convenience and brand,” he said indicating that the ability to deliver the right products quickly is just as important as any price savings. “The number-one reason shoppers use grocery apps is to save time,” agreed Tom Ward, vice president of digital operations for Walmart. “Everything we hear from customers is that they want to save time.”

7. Pet Segment Is Even Stronger Than Overall Grocery
The pet food and products segment has proven to be more robust and stronger than the people-food category. This is particularly remarkable considering that pet was one of the biggest flameouts of the original dot.com bust of the late 1990s and early 2000s. “The Pets.com sock puppet was the poster child of the dot.com bust,” said Larry Cheng, managing director for Volition Capital, which was one of the owners of Chewy.com before it was sold to PetSmart last year. The pet market, however, changed a lot since then, he said. “Chewy is different than Pets.com because of the premium pet food craze. The high-end food suppliers viewed us a pet specialty operation and that allowed us to be able to sell those products.” Cheng believes that Chewy will be a bigger business than PetSmart within the next two years, which of course raises the obvious question: “We shouldn’t have sold Chewy when we did because we’ve could have gotten more for it today.”

8. The Glow Is Absolutely Off Meal Kits
The product segment within CPG that seems to have had the fastest arc in terms of its expectations – and realistic results – is meal kits. Hyped as the next greatest thing, a number of players entered the business with one brand, Blue Apron, going public earlier this year in a triumphant launch. That didn’t last long and today meal kit companies – public and private – are struggling to find their place within the food hierarchy. Some have partnered up or been sold to larger grocers while others are still trying the independent route. For many, the best solution has been to place their products within physical grocery stores rather than rely on subscription-based online models. “One of the things that meal kit distributors has discovered is that the truth is that they only work for certain people,” said Josh Hix, co-founder and CEO of Plated, which was acquired by Albertsons last year. While it started online, Hix said, “We always thought retail would be part of the business.”

9. Some Unexpected Side Effects
A number of unanticipated results of digital conversion was the subject of discussion. One of the most prominent, according to Susan Stacey, senior vice president for research company Gfk, is the diminished role of impulse sales due to digital innovations. “The shift to e-commerce disrupted the traditional impulse market, while retail innovations like AmazonGo and curb pick-up have eliminated impulse.

10. Two Holy Grails: Hema and Ocado
There are two current businesses that capture the industry’s imagination: Hema on the physical hybrid side and Ocado on the pure digital side. Each serves as a vivid reminder that the U.S. trails both Asia and Europe in online market penetration. The gap is narrowing, but few predict America will catch-up anytime soon. Jing Wang, business intelligence manager for Alibaba Group, which owns Hema, said the Chinese grocery retailer which has 60 stores in 14 cities in China relies very much on a “digital-first” strategy. All transactions in the store are done on customer’s mobile devices. However, 60 percent of the business at Hema (which means hippopotamus in Chinese) is done online and the store promotes 30-minute delivery in the Shanghai and Beijing markets. The stores do $682 in sales per square foot and “most stores are profitable or on track to be profitable in their first year and a half,” she said. Sales of grocery in China are three times what they are in the U.S., she said, adding that will double over the near term. Ocado, based in the U.K., is the largest pure online grocery retailer in the country and might be the largest in the world, with $2 billion in annual sales, according to CEO Luke Jensen. Founded 18 years ago, the company has been profitable for the past seven. “There are several myths about the online grocery business to debunk,” he said. “The first is that nobody makes money selling food online. We do. The second is that nobody buys fresh food online. Fresh food represents 48 percent of Ocado’s business. “The third is that online grocery is only for millennials and not for the mass market. Ocado’s highest market penetration is with families.” Ocado uses giant distribution centers that are highly automated to fulfill its orders promising fast deliveries at competitive prices. “We have a compelling proposition.” Nonetheless he admits the challenges for the entire grocery and CPG field in transitioning to the digital world., “The grocery market is more complex than any other fulfillment business out there.”

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