Finding data in the grocery aisle
Traditional grocery stores need to embrace customer data to stay competitive in omni-channel.
Over $700 billion are spent on groceries annually in the US1. But only a negligible number of those purchases utilize new capabilities in data to improve their operations and customer experience. Grocery retailers should be concerned. While generating billions in sales, major grocery chains operate at razor thin profit margins, often 1%-2% of sales. While nearly every other retail sector embraces ecommerce, customer data, and personalization, the grocery business remains relatively under-invested in digital technology. But consumers will look to have those same purchasing and buying experiences in the grocery business as well, and grocery chains will need to prepare for a changing supply chain. Along with figuring out their strategic position in the chain, they will need to embrace data to better forecast inventory across an omni-channel shopping experience.
The Kroger Company, the nation’s largest grocery retailer, operates 2,778 stores and sold $115 billion of groceries to Americans in 2016. But Wal-Mart and Amazon-Whole Foods have their sights set on the $700 billion grocery industry and come equipped with better technology and modern commerce approaches. Not only are these ecommerce leaders able to sell food online and deliver it right to a consumer’s home, but they are gaining massive advantages in customer data that physical retail locations alone don’t have and therefore can’t use for inventory forecasting or SKU optimization. Delivery method aside, the data collected on consumer purchasing can lead to advantages in pricing, supply chain, and cross-selling that simply allows data-enabled businesses to outperform their competitors. Not only does Kroger stand to lose market share, but it will face a difficult battle to remain profitable if more data-driven competitors are able to operate more efficiently and price lower.
Just last month, Kroger unveiled big plans to leverage technology better in stores. Along with advanced ordering and in-store pickup, Kroger is developing technology within the store to change the buying experience. Currently, the grocery chain is testing mobile app and shelving integrations that allow customers to more easily locate items 2. Kroger hopes to have self-checkout available in most stores, along with digital coupons that can be accessed while the customer shops2. These require massive capital expenditures, including Wifi investments across all stores.
Outside of the consumer shopping experience, Kroger is using data to adjust category assortments at its stores. In 2016, the company revamped its category assortment in 6% of its stores using new data analytics, and it anticipates making these changes to 20%-30% of stores starting in 20182. Looking further out, Kroger is hoping to use image and sensor data to understand in-store customer traffic and optimize employee staffing 3. For example, by monitoring foot traffic within the store, Kroger can alert a pharmacist to go to the customer counter only when customers are present and can better staff delis based on typical customer wait times.
But incremental changes to the in-store shopping experience aren’t enough. While Kroger invests in mobile apps and in-store Wifi, they are under-investing in the omni-channel capabilities that will enable them to efficiently meet changing consumer demands. With a mix of online ordering and in-store purchasing, how will Kroger manage inventories between what goes on the shelves and what is kept separately for direct delivery? If more ordering moves online, how will Kroger promote items that previously garnered sales through strategic placement at the end of an aisle or alongside the cash register? Kroger needs to decide its strategic position in the changing landscape. If they intend to sell online directly to the customer, they should invest in their ecommerce platform and decide how best to distribute items without sending them through the retail store. If they intend to remain solely in physical retail, they should develop partnerships to handle last-mile delivery.
For longer term health of the business, Kroger should develop plans to better collect customer data. More tech-savvy competitors will someday be able to answer questions like “how many pounds of beef will we sell on the day of a thunderstorm?” or “what days does Joe come in and what does he buy?” These not only personalize the shopping experience, but allow stores to manage their perishable inventory and shelf space to reduce wastage and bring down costs.
In an industry still largely dominated by physical retail, how can Kroger go about better understanding their customers’ buying habits and collecting customer data?
While most grocery shopping still happens in stores, ecommerce has the potential to disrupt a large portion of the industry in only a few years. How should Kroger position itself in the supply chain so as to not become a shrinking middle layer?
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Student comments on Finding data in the grocery aisle
Thanks for the interesting take on the future of grocery! You raised an interesting point on how Kroger (and other traditional grocers) will need to change their strategy of physical store footprint and distribution in order to meet the changing demands of consumers. I’m curious to know what you think this might look like – i.e., maintaining same stores as today with more e-commerce offering or closing stores to favor non-customer facing distribution centers? I could certainly see a pivot to smaller store locations in urban areas with a streamlined SKU count and in-store / mobile capabilities of having items sent to the front of store for pickup or shipment direct to home.
Another supply chain related question in my mind is how both traditional and online grocers will approach fresh products (e.g., fruits and veg) in the future. This is a high selling category for grocers that draws people into stores because people like to inspect before purchase. However it’s also a category that experiences higher waste due to the perishability. I’d be curious to see how stores can use data to address their approach to this category specifically.
Right now, I think the biggest gap in grocery retail is how the existing data gets used. For example, Kroger has their shopper data from loyalty cards, called 84.59, that should be able to answer questions like “when does Joe shop and what does he buy.” However, much of what major retailers do is sell that data back to manufacturers, who then use it to try to influence Kroger’s merchandisers or to inform their own innovation pipelines. The possibility that you point to is a much more extensive integration with the supply chain where individual customer data is not just retrospective on past behavior but is also predictive of future behavior. Such predictive analysis seems particularly relevant in the context of a push to ecommerce, as a retailer such as Kroger may be able to push personalized recommendations for delivery and begin performing the necessary supply chain actions before the customer even makes the purchase. Moreover, such anticipation could allow Kroger to significantly reduce its inventory and its overall footprint, which would help margins that are likely to remain under pressure from lower store traffic.
Great article Joe! I think Alex Robinson raises a good point about the end use of the data collected. Going up against Amazon is no easy task, as they know how to leverage data better than almost anyone. To that point, I think it is important to note that Kroger’s 84.51 subsidiary purchased a predictive analytics firm with extensive retail and grocery experience last year.  Adding this core competency will better prepare Kroger as they move further into e-commerce. They will be better prepared to match inventories with demand as consumer purchasing patterns online differ from traditional brick-and-mortar trends.
Even if Kroger does aggressively pursue an e-commerce strategy, I agree with your proposal that they should develop partnerships to solve the last-mile delivery problem. Leveraging ride-sharing platforms to make grocery deliveries would create value for all stakeholders: convenience for customers, income for delivery drivers, and more structure around online order pick-up times for grocery stores. Currently, the logistics of scaling online pick-up or delivery of groceries from a traditional retail location is a daunting task. Kroger will have to solve this problem if they intend to go down the e-commerce path, and last-mile delivery solutions could be beneficial in this regard.
 Diana Sheehan, “Bridging logistics and loyalty.” Kantar. August 8, 2016. https://us.kantar.com/business/retail/2016/kroger-and-analytics/. Accessed November 2017.
Joe, love the article and topic. It feels overall that Kroger is late to the game on the digitization of grocery. However, I think this may be the case for Kroger and most retailers because of the high capital required to be a retail-tech company that is unavailable to the Krogers and Aholds of the world. It makes me question if Kroger can ever transition to be like Amazon if they don’t have the capital to invest heavily in grocery delivery. While I think optimizing the in-store experience with data is critical, it’s not enough to not to survive against the supply chain disruption of grocery delivery.
The additional reason I’m skeptical of traditional retailers gaining benefits of digitization quickly is due to their manufacturers. For instance, in assortment, as Kroger uses data to decide which skus to delete, manufacturers will severely lobby to maintain their skus by dropping the price, giving trade, and in-store promotion. Too, as Kroger seeks custom experiences that most likely fit my needs, manufacturers will pay to make sure they are part of that custom experience even if they are not the best fit. The short is, I think retailers can still be bought and efficiency using data is a long road.