Walmart and Kroger on Amazon’s Turf
Every article or keynote today talks about digital disruption, perfect storms, tsunamis and transform-or-die. We also published our own view on how the food & beverage market is changing rapidly and how food retail will be the first victim that will need to ‘become future-proof’.
However, with the looming threat of Amazon, digital players and hundreds of startups – the big traditional retailers in the US are striking back with carefully planned strategies. Walmart and Kroger in particular have defined a strategic framework in which to operate for the years to come. With a clear vision of the future and a growing data-driven market knowledge, they are making smart moves to kick Amazon’s ass. Kroger and Walmart are winning back online dominance as well as the hearts of the consumers, right on Amazon’s turf.
Walmart & Kroger: The Blueprint
1. FROM DATA TO INSIGHTS AND PRIVATE LABELS
Amazon is notorious for leveraging its huge amount of transactional data to gain market insights and grow its private labels. In less than 3 years, they have dethroned Duracell as the market leader in the battery market. After building a strong base of private fashion brands, Amazon is now venturing into consumer goods and it is quickly snatching away market share in high margin, high volume products like bottled water, snacks, baby care products, vitamin supplements and paper towels. Amazon Launchpad is a platform where startups can showcase and test their new products, which is an ideal breeding ground for new products in the food market. And no surprise, again Amazon has all the data.
Recognising this huge opportunity and strategic necessity, Kroger, Target and Walmart have started to invest heavily into the R&D and marketing of their private brands as well.
To the dismay of the large branded manufacturers like Unilever, Kellogg’s and Nestlé, these private label initiatives are a big success and growing at a rapid pace. Carrefour recently even started testing private-label-only supermarkets, a bold statement that up to now does not bother the shopper too much.
In under 3 years, Amazon has dethroned Duracell as the market leader in the battery market.
The most important prerequisite for success is a working data-engine, consisting of a strong data-team and a clear data-gathering strategy. Apart from the growing private labels, being data-enabled as a retailer facilitates several quick wins:
- Personalised offerings & marketing
- Smart localised pricing and promotions
- Optimizing product assortment and smart shelves
- Improve the shopping experience by predictive analysis of the busiest times of the day
- Real-time insights into market trends and consumer behaviour
- Optimise process efficiency and logistics throughout the supply chain
- Better insights in shop locations and future high potential areas
- Reducing churn and trading up light users
2. (FREE) HOME DELIVERY IS A NO-BRAINER
Amazon’s strongest differentiators today are frictionless, free home delivery and very competitive consumer price levels. Picnic (The Netherlands) and Ocado (United Kingdom) are already proving that “the online supermarket” can be a sustainable and profitable business model. In the war for the highest customer perceived value, the following universal rules of competition still apply:
- “The First Mover Advantage”: the first player to claim a proposition has a considerable head start.
- “Fast Follower & Performance Leader”: in rapidly changing categories, it is not necessary to be the first mover. As long as you quickly become the best in class and maintain that level.
- “Deny Your Competitor Any Form Of Differentiation”: if a competitor is not able to differentiate himself from the existing offering, he has outlived his relevance
Taking this in mind, and considering that the adoption of online grocery shopping is growing in the double digits every year, there really is no excuse for supermarkets not to invest heavily in free home delivery and to be the absolute best in class. Online groceries in the US are estimated to grow from 3% of sales currently to 12% by 2025, or $120 billion, reflecting compound annual growth of 28%. Walmart is taking the lead in the US, and is expected to overtake Amazon in the online grocery business this year. Kroger and Target are successfully catching up, having an expected market share of 7% and 2% respectively by 2025.
Investing in the right upcoming technologies could be key to roll out home delivery on a big scale. These include autonomous delivery vehicles, which Kroger is testing actively, and smart analytics for optimised delivery routes, a technique that Picnic has mastered.
Consumers want ultra-convenient home delivery and they want it now.
3. RETAILERS MUST BECOME SERVICE PROVIDERS
Amazon and big retailers are going the extra mile to get even closer to the consumer. For them, the retail value stream doesn’t end at the purchase. It is expanding its expertise to last mile logistics and in-home technology. Earlier this year, Amazon bought 20,000 delivery vans with the ambition of building their own delivery fleet, a smack in the face for its current logistics partners. Not only will the tech giant soon be able to handle all of its own deliveries, they will also become a delivery partner for third parties. Amazon Key technology moves Amazon technologies literally to consumers’ homes. It allows for couriers to enter your home by opening an electronic lock after which they can place your delivery into your living room (or fridge in case of groceries). Amazon’s non-retail offering is growing to an impressive portfolio of media, entertainment, subscriptions, home-electronics and cloud services, adding up to a total estimated value of $780 for Amazon Prime members.
Not only will Amazon soon be able to handle all of its own deliveries, they will also become a delivery partner for third parties.
Big retail is reacting by providing their own new services. Apart from home delivery, they are investing in Hellofresh-clones and prepared meals. Digital services like convenient shopping apps are also part of the arsenal of big retail in order to capture the consumer’s mind with new unburdening services. Kroger launched a mobile app called OptUp, which helps shoppers eat healthier and allows them to scan products in the aisle in order to find better-for-you alternatives. Shoppable recipes that drop all necessary ingredients into your shopping list are another quick win that grocers are implementing in order to provide their shoppers with inspiration and one-click convenience. Other new on-site services being tested include yoga and zumba classes, peppermint foot scrubs, culinary schools, bike repair stations, and many others. Everyone is searching for the maximum added value for the consumer.
4. RETAILERS MUST BECOME MEDIA COMPANIES
Amazon has claimed ownership of our consumption decision making by becoming the number 1 search engine for products. In 2018, Amazon surpassed Google as the biggest product search engine. How Amazon’s voice assistant Alexa will further shift this balance, remains speculation. Amazon’s new advertising division has grown to a $2 billion business, and it has invested in Tastemade, a big digital food and lifestyle network.
In order to survive, retailers must acquire the ambition to become media companies as well, especially in light of the crucial importance of data. Kroger and Walmart already grew their own third party advertising platforms. Ahold Delhaize and Albertsons followed in their footsteps and launched their own marketing platforms as well, opening it up to A-brand manufacturers and CPG supplier so that they can engage their consumers in targeted advertising. In terms of content creation, some grocers are taking the lead like Walmart, that partnered with BuzzFeed’s Tasty app. Walmart wants to sell kitchen appliances and food via the platform’s video content. Dutch lowest-price retailer Jumbo made a big move and acquired Smulweb.nl, The Netherlands’ biggest food recipe website. This big switch in market activity requires an ambitious commitment from the organisation’s top level, a considerable investment in assets & skills, and a huge mindset change.
In order to survive, retailers must acquire the ambition to become media companies as well, especially in light of the crucial importance of data.
5. NEW REVENUE STREAMS
As the brutal competition in the grocery market is intensifying and margins are shrinking to a zero-sum game, players are looking to new revenue streams to stop the bleeding. Most of Amazon’s real profits are coming from Amazon Cloud Services (AWS) and its new advertising business.
Kroger openly announced their search for new revenue streams at their 2018 investor conference, as they acknowledge that it’s the only way to sustainably fuel profit growth in the future. Building complementary businesses and making strategic partnerships is the name of the game. What this would look like in concrete terms for Kroger remains unclear, but it will surely include its advertising business and the delivery of complementary services to its grocery offering mentioned earlier.
Examples of successfully generated new revenue streams by retailers include the advertising business mentioned earlier, social selling and affiliate marketing via influencers, venturing into the restaurant business, selling fuel in gas stations near stores, offering new services like food boxes, selling through new channels and integrating vertically into the value chain by buying farming companies.
6. SMART PARTNERSHIPS ARE SMART SHORTCUTS
The past years, banks have already mastered the notion of buy or build. The idea that depending on the complexity of a project and the internal capabilities, organisations can decide to either build a digital product themselves, or to buy/partner with a tech-enabled corporate or startup to do it for them.
Big retailers have realised that clearly they are less digitally skilled than banks and they urgently need to find the right partnerships in order to accelerate their transformation efforts.
In grocery retail today, the business rationale behind the partnerships mainly:
- Kickstarting home delivery and logistics:
- Development of digital services and applications:
- Walmart partnered with Microsoft for the so-called Cloud Factory deal, where developers and engineers of both companies will work on building thousands of internal business apps.
- Capturing market share and international expansion:
7. A MIX OF BRICK-AND-MORTAR & E-COMMERCE IN THE FUTURE RETAIL ARCHITECTURE
Today, thousands of physical supermarkets are densely spread across the landscape in order to cover as much of the country as possible and deny market share from the competition. Traditional players are entangled in a ‘prisoner’s dilemma’ where even unprofitable supermarkets are built in order to defend territory. This competitive behaviour of the past decades resulted in a highly oversaturated market, filled with supermarkets that are not adapted for the future… Not in terms of layout and experience, nor in terms of store location. The layout of these classic supermarkets is fading in relevance both in terms of convenience and experience. Home delivery, meal boxes and food subscriptions are much more convenient than strolling around in the aisles of boring supermarkets. The real estate legacy is also posing a challenge for big retailers, as the business logic is changing and most stores are not placed in relevant locations for e-commerce distribution, ultra-convenience or experience selling.
THE RETAIL LANDSCAPE WILL RESET
Our recent retail study indicated that the whole retail architecture will fundamentally change. Three distinct functions will define the relevance of a physical location: convenience or experience or e-commerce. If you look at supermarkets today, they are hardly adapted to really fulfill any of these three big needs. Only the the retailers who will be able to anticipate this trend and prepare for the post-storefront era will be able to survive. The right investment in the right store concept on the right location is key to win.
Kroger announced a plan to divest and reinvest in the right store concepts on the right location, if they made all the right calls remains to be seen.
Convenience, experience or e-commerce: if you look at supermarkets today, they are hardly adapted to really fulfill any of these three big needs.
Amazon is the king of ultra convenience with their Amazon Go stores where shoppers can walk in and out without having to wait in line at the cashier. And of course, the e-giant is again gathering all the data from this sensor-camera-big data goldmine.
Big retailers like Kroger and Walmart are scrambling to copy this technology as fast as possible. As it has already been proven that consumers highly value the concept and that stores using this technology are much more profitable. Planting this kind of store concepts in high-traffic urban areas is an expensive, but necessary first step for retailers to capture this need of the market.
As Amazon announced 2-hour delivery, the importance of fast, free home delivery is another key service that retailers will need to offer as soon as possible before the new players capture all the attention of the consumer.
Alibaba demonstrated with their revolutionary Hema Supermarkets that the future of retail is hybrid, a trend that hasn’t passed by Amazon unnoticed. The past year, Amazon has aggressively entered the physical retail space. With the acquisition of Whole Foods in 2017, Amazon has acquired 480 high-end stores in premium locations. In addition, the company is starting to build impressive experience-rich flagship stores in top locations, with the 4-star Amazon Store in downtown Manhattan (NY) as the latest addition. Retailers worldwide are testing experience & tasting store concepts, as well as restaurants adjacent to their shops where shoppers can eat, taste and be inspired. As shopping frequency goes up and consumers rush to the supermarket last-minute for dinner inspiration, there are many initiatives retailers can experiment with.
Online grocery shopping is skyrocketing and as a result the relevance and market share of online grocers and distribution centers will continue to rise as well. Big retailers are planting big automated distribution centers in order to quickly cover the market. Some players will most likely try to bridge the gap by converting some of their grocery stores into micro-fulfilment centers. Which of the two strategies will come out on top will depend on the efficiency and profitability.
Recap: What are the successful players doing?
- They become data-enabled and are betting heavily on their private labels
- They acknowledge that free home delivery is coming sooner than later
- They become service providers
- They become media companies
- They find new revenue streams
- They partner with startups and big tech to kickstart their transformation
- They understand that the retail landscape is shifting and they have a plan
About Francesco Cilurzo
Francesco is an experienced business consultant with a bio-engineering background. Throughout the years he built his international career building up experience in Project Management, Production Environments and HR. Within Duval Union Consulting he specializes in the food and beverage industry and retail.