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E-commerce And Grocery: This Time It’s Real

There’s nothing like massive disruption to accelerate a trend that was already occurring in the market.  In this instance, a global pandemic the likes we’ve never seen before has caused significant change in the retail landscape. While grocery stores have remained open and fared better than any other retail segment during the crisis, e-commerce grocery sales have also accelerated at an unprecedented level that has changed the game, likely irrevocably for supermarket retailers.  For many customers, it is easier (or safer) to purchase on-line for delivery or contactless pick-up.

At the same time, e-commerce for grocery has also had an awkward coming out party. While services such as Instacart are literally hiring hundreds of thousands of new employees, the surge in demand has revealed significant cracks in the system along with the difficulty of scaling the business. Wait times for getting a slot for an order have sometimes exceeded four or five days and order fulfillment rates have been abysmal as supermarkets wrestle with out-of-stocks driven by the massive surge in demand. So, while more consumers are turning to e-commerce, they are also seeing it at its worst.

As I’ve written several times before, there are multiple reasons why the grocery category has historically been well under-penetrated relative to other e-commerce categories. Multi-temperature products, awkwardly sized and shaped products, product and SKU proliferation, delivery challenges, combined with razor thin margins have kept e-commerce penetration to around 3-4%. However, this penetration has likely tripled in the past six weeks and we are probably around 10% penetration today. And while some of these gains may be given back in a return to normalcy, it is also likely that the new normal will feature a much higher e-commerce penetration rate along with continued growth. While 15% e-commerce penetration for grocery used to have a “best-case” scenario of happening by 2025, this is much more likely to happen and perhaps several years sooner.

But, and it’s a big but, profitability and an excellent customer experience remain elusive. In-store, in-aisle pick (the primary method for Instacart and Amazon Prime Now) will always be less efficient and have poorer in-stock conditions associated with it than fully automated centralized solutions (as represented by the Kroger/Ocado partnership). But, that model is expensive and time consuming to build and takes time to maximize efficiencies.

As I’ve discussed before, a number  of technology companies are deploying efforts to find a middle ground. Referred to as MFC’s (micro-fulfillment centers), they combine robotics and automation in a much smaller space. This allows them to be less costly to build, be located in a back room of an existing store or dark store which provides closer consumer access, either for delivery or pick-up. Takeoff Technologies, one of the leaders in the field, just published a white paper entitled “How to Win in Online Grocery” that discusses the trade-offs between price, variety and speed that retailers will need to balance to win. They argue that MFC’s optimize that relationship. Along with Takeoff, other technologies include Autostore, Alert Technologies, and Fabric. While all have pilots underway, expect an explosion in the use of this technology as grocers gear up for the new level of e-commerce sales.

At the same time, while delivery has been the dominant way to get groceries to the end consumer, the cost and complication will have limitations. Led by Walmart, we would also expect curbside, contactless pickup to grow significantly as customers and retailers adapt to new realities.

The ways that COVID-19 will impact the world of retail are just beginning to be felt. Long-term social distancing, restrictions on customer counts and a less comfortable shopping environment will hasten even further e-commerce adoption.


Walmart’s Glass Is More Than Half Full Heading Into The Holidays

Walmart’s performance in the third quarter should serve as a powerful reminder to the retail community that the world’s largest retailer remains a formidable competitor even as Amazon continues its assault on the rest of the market.

Comparable store sales were up 3.2% in the U.S. with a combination of traffic gains and higher transactions. Although comps marginally slowed year over year, this is now the fifth year of consecutive comp increases. Not bad for a mature retail company no longer being helped along by a fleet of younger stores.

Online comps were up 41% this quarter. The company attributes much of that growth to the grocery business. Online pick up is now available in over 3,000 locations and home delivery called Walmart Delivery Unlimited through about 1,400 locations. Walmart is attempting to match Amazon in both speed and price around home delivery.

Results and guidance suggest a healthy Holiday season as impacts to date from tariffs have not materialized and U.S. consumer confidence remains strong. If there are any warning signs on the horizon, they would be in the following areas:

  • Sam’s Club’s performance was comparatively weak, with comparable store sales only rising 0.6% in the latest quarter. As Sam’s former CEO takes the helm at Walmart, his replacement has just been named. Kathryn McLay. She was most recently Executive Vice President at the 700 unit Walmart Neighborhood Market and was Senior VP of Supply Chain prior to that.
  • There is a growing cost associated with rising e-commerce sales. The company is locked in a war with Amazon, who raised the stakes last week by eliminating the fees associated with Amazon Fresh for Prime members. Walmart acknowledged that they need to grow (higher margin) general merchandise sales to drive increased profitability.
  • The loss of Greg Foran as Walmart U.S. CEO has yet to be felt and the tensions between the e-commerce and brick and mortar divisions continue. For a company of Walmart’s size, driving innovation and profitability will be a core challenge.

Even picking holes in the performance, it is hard to bet against Walmart. They are navigating a treacherous retail environment as well as anyone and providing a roadmap for other retailers. Walmart was first out of the gate for earnings. It is still too early to read whether their success translates to the rest of retail and the U.S. economy, but they have set a high bar for others to hurdle.


Robots Are Coming To Grocery Fulfillment: Can They Drive Profitability?

As I’ve written several times before, there are multiple reasons why the grocery category is well under-penetrated relative to other e-commerce categories. Multi-temperature products, awkwardly sized and shaped products, product and SKU proliferation, delivery challenges, combined with razor-thin margins have kept e-commerce penetration today to under 3%. However, there are multiple efforts underway to change this, from massive investments in buy online, pickup in-store infrastructure (Walmart), third party, on-demand fulfillment (Instacart) along with a host of new investments in sophisticated robotics and AI from a variety of start-ups and established companies. These efforts are all designed to address the fundamental challenge of reducing costs/increasing efficiency to make grocery e-commerce more profitable, or frankly, profitable at all.

Three new developments in robotics are all working on the profitability equation for grocery e-commerce. Commonsense Robotics, Takeoff Technologies and Kroger/Ocado are approaching this issue from different but equally fascinating angles. All are implementing automation and robotics in different ways, but they are designed to address one of the key fundamental cost challenges—picking groceries. The other, of course, is delivery, which also is seeing advancements through route management, autonomous delivery and naturally, not delivering at all (pick-up).

As Scott DeGraeve, COO and Co-founder of Locai Solutions explains, “Robotics in e-grocery are aimed at making a step function change in labor costs and throughput time. As customer penetration grows, more and more retailers are feeling the effects in their busier stores of the challenges of the in-store pick”.  While the efficient way into e-commerce is through utilizing existing in-store infrastructure, it is not likely the long-term solution.  DeGraeve cites congestion in the aisles, higher out of stocks, and issues with labor productivity as key issues, with “stores designed to sell products, not provide for an efficient 40+ item order pick”.

But, are robots truly the answer? Three notable efforts are designed to address this.

Takeoff Technologies, creator of the world’s first automated micro-fulfillment centers (MFC’s) recently announced a partnership with Wakefern Food Corp., the largest retailer-owned grocery cooperative in the U.S. Takeoff is an eGrocery solution that leverages automation on a hyper-local scale. Orders are placed online through established retailers and Takeoff’s automated technology fulfills the order using robots in the MFC’s. These centers are significantly smaller and less capital intense than full scale solutions, which could allow faster deployment and centers closer to the end consumer. The first such center will open in Clifton, NJ and work with Wakefern’s ShopRite from Home platform. It promises orders of up to 60 items being fulfilled in minutes.

CommonSense Robotics, an Israeli start-up, is also focusing on micro-fulfillment centers. Their twist—the first underground and automated grocery delivery center that will make one-hour deliveries for grocers while utilizing existing space and can also be placed closer to the consumer in denser urban markets. Their new micro-fulfillment center will be in downtown Tel Aviv, located in the parking garage of the city’s oldest skyscraper, Shalom Meir Tower, and will only take up 18,000 square feet of triangular space.

Finally, Kroger’s partnership with Ocado is an example of automated fulfillment centers at scale. Kroger has announced that they plan to build as many as 20 automated grocery warehouses with a capital cost of up to $55 million for the land and equipment. UK based Ocado is clearly a leader in the space and is perhaps the only company (certainly a public one) that has shown grocery e-commerce profitability at scale. Kroger has announced the development of the 355,000 square foot Monroe, Ohio fulfillment center known as “shed” in spring 2021. These centers are also powered by sophisticated technology and advanced robotics and Ocado is perhaps furthest along in streamlining every aspect of the process (order, pick and delivery). The disadvantage of these centers is capital cost, time to build and time to achieve economies of scale.

From in-store pick, dark stores, semi-automated fulfillment, micro fulfillment centers to full scale automated warehouses, the rush is on to figure out a way to lower costs of grocery fulfillment. As always, there will not be a one size fits all solution for the right way to approach the problem. The best retailers will have flexibility in their solutions (urban vs. suburban, delivery vs. pick-up, immediacy vs. scheduled) that ultimately meet consumers, at a profit.

Neil Stern for Forbes


Grocery Outlet IPO: Why The T.J. Maxx Of Grocery Stores Appeals To Investors

Grocery Outlet, the extreme value grocery chain you have likely never heard of, made its debut as a public company today and provided insight into the discount grocery business.

While ALDI and Lidl receive endless news coverage, Grocery Outlet has flown somewhat under the radar. The primarily West Coast chain operates 320 stores and quietly generates approximately $2.3 billion in revenue. Its IPO is expected to raise more than $350 million, with the proceeds used to reduce debt and help propel the chain’s growth strategy.

With the strong initial response, Grocery Outlet will likely not stay under the radar for long.

For those unfamiliar with Grocery Outlet, the stores are a similar size to an ALDI or a Trader Joe’s at around 15,000 or 20,000 square feet. However, the footprint is where the similarities end because Grocery Outlet approaches the market very differently. Grocery Outlet offers name-brand products at huge cost savings that are promoted as 40% to 70% lower than conventional grocery retailers. The cornerstone of the chain’s business is its ever-changing “WOW!” deals.

These “WOW!” deals are accomplished through opportunistic purchasing from suppliers and vendors. When name-brand suppliers make changes in packaging, overproduction, food that is close to the “use-by date,” etc., Grocery Outlet is there to take the merchandise off their hands at a fraction of the cost. Thus, enabling huge discounts that then become part of the chain’s mystique and allure. These opportunistic buys have allowed Grocery Outlet to offer consumers value while also recording higher than industry standard gross margins.

Another aspect that is unique to Grocery Outlet is its store operations. The stores are operated as a licensing agreement with Independent Operators (IOs) who are responsible for local marketing, hiring/firing, assortment decisions, and all things within their store. These managers are typically husband-wife couples or families living in town. These store managers decide approximately 75% of the assortment that show up in their stores and split the gross profit margin on the store 50-50. This incentivizes top-line sales and margins while still allowing for highly localized assortments. But this model also allows for the possibility of inconsistent branding and experience from store to store.

With the filing of the IPO, it’s clear that Grocery Outlet’s aspirations are to expand beyond its West Coast roots. Management believes that there is opportunity for at least a few hundred more stores in current states and up to 4,800 locations nationally in the long-term. This type of expansion means more direct competition with other discounters such as ALDI, which is more heavily located in the Midwest and the East coast. This move towards more rapid expansion could impact the company’s supply of opportunistic buying, the Independent Operator structure, and the brand’s current strategy to generate brand awareness.

In speaking with Grocery Outlet’s CEO Eric Lindberg and vice chairman MacGregor Read, their belief is that the access and supply of opportunistic purchases is not at risk of going away anytime soon. According to MacGregor, we could “triple or quadruple the store base and still maintain a semblance of the same mix.” Additionally, Lindberg even mentioned that “as we’ve gotten larger, we’ve actually gotten more access to supply.” This is a promising sign for Grocery Outlet and its new shareholders.

Ultimately, Grocery Outlet’s value proposition as an extreme value retailer of name brands is unique in the landscape. Grocery Outlet doesn’t have all the bells and whistles. It doesn’t offer e-commerce or plan to, and it doesn’t plan on developing its own private label brands anytime soon. This is a chain that focuses and delivers on one thing—value. The factors that have made it successful show no signs of abating: increases in wealth disparity, treasure/deal hunting behavior, price sensitivity and others.

Going public brings this type of business model to the forefront and highlights the next wave of competition major grocery chains will have to be wary of. If Grocery Outlet can defend its brand perception of value without significant margin degradation, then expect Grocery Outlet to continue its 15 straight years of sales growth.


Lidl Reshuffles U.S. Management Supervision: Move Suggesting Challenges Here In The U.S.

The spacious entry at Lidl. Photo by Neil Stern.

According to German trade press, Lidl announced a management change that will lead to new supervision in Germany of the U.S. market. Though local U.S. management disputes aspects of the store which pointed to “frighteningly weak” performance at some of the current 37 stores, it does seem to be a signal that conquering the U.S. may be a bit more difficult than first planned. From Tesco’s ill-fated Fresh & Easy effort to a long litany of other foreign chains that have failed to succeed, breaking into the U.S. market can be more difficult than it would appear.

I had a chance to visit one of the North Carolina units a few weeks back. After the much publicized initial burst of stores and very high consumer demand, I would characterize the store we visited as one of the under-performers. Traffic was light, in-store programs like sampling were being poorly executed and there was a general low energy level that signifies poor results.

More critically, there are some potential systemic problems that Lidl must address if they are to succeed in the U.S. market:

  • The stores, in my opinion, are way overbuilt. They are too large, too overly-engineered and too costly to operate. 11 full sized checkout lanes, as one example, adds costs to the box and seems overkill for demand.
  • The stores are too big. At 25,000 square feet, they are overly spacious and feel sterile, particularly with the dearth of customers during the visit. While Aldi and Trader Joe boxes feel tight (and perhaps a bit cramped at times), it lends to efficiency and a feeling of excitement.
  • There is too much reliance on non-foods. While this is a critical part of the European experience, U.S. consumers have far more choice in these categories, which were also merchandised with little flair. Perhaps when the Heidi Klum line launches, this will add some momentum, but the U.S. consumer may not appreciate this mix in the stores.

Lidl’s large non-foods area. Photo by Neil Stern.

There are some excellent moments as well. Leading with an in-store bakery adds a greater element on fresh, as does the expanded produce area. The wine section is well done, and prices on private label are very sharp.

However, when competing head to head against Aldi, I would give their more established German competitor the edge. The Aldi stores, particularly the newer and remodeled units, are better merchandised and better designed to sustain lower costs and prices.

Lidl is an enormously tough competitor. Well capitalized and easily capable of making course corrections, they are not to be taken lightly, despite some early miscues. The road to 500 or 1,000 or 1,500 stores, however, must begin with a store model that works. I don’t see that yet. It will be interesting to see if new corporate management makes any significant course corrections.

Neil Stern for Forbes


Kroger Just Sneezed-What Does It Mean For Supermarkets?

Kroger just announced its first quarter results. On the surface, they weren’t terrible, with same store sales dropping just 0.2%. The stock cratered, however, on a downbeat forecast that lowered full year earnings significantly from prior forecasts as the company suggests intensifying price competition and wage pressure will lead to tougher times ahead.

Despite this, Kroger remains one of the industry’s better performers and suggests full year comps will remain positive, even as its 13 quarter comp streak ends.  But, Kroger has clearly sneezed and it is likely that the entire industry is catching a cold.  Other publicly traded food retailers took stock hits as well.

It is an untimely coincidence that Kroger’s quarterly earnings came on the same day that German discounter Lidl opened its first 10 stores to great fanfare in the U.S., and the day before Amazon announced their purchase of Whole Foods.  Supermarket operators are facing an unprecedented series of events that are putting pressure on growth and profit:

  • After the news of Kroger pursuing a potential acquisition of Whole Foods, the stunning news of Amazon’s purchase of Whole Foods and how this will impact the industry overall is a show stopper. Kroger has become a major player in the natural and organic foods segment in recent years and that is about to change. Amazon’s impact will greatly increase its influence and importance in the food retail arena. Branding an on-line fresh service with Whole Foods brand and perishables know-how could be a game changer.
  • Intensifying competition from other channels, including the rise of discounters like Aldi and Lidl who are growing explosively at the same time the traditional channel is retrenching. Price pressure is intensifying.
  • Growth in e-commerce, which is stealing trips away from the center store. Grocery e-commerce has traditionally lagged well behind the rest of retail but efforts from Amazon, (Walmart) and others is driving a far greater rate of growth.
  • Deflation reached nearly a 50 year high, with downward pressure on meat and dairy products depressing dollar sales at supermarkets. While deflation shows some signs of moderating, there is still no natural inflationary help.

Taken together, I expect that supermarkets will continue to face tough times ahead as market share will continue to come under pressure. Kroger is taking the right steps to combat these pressures. They are aggressively expanding order on-line, pick-up in store, investing in pricing and CRM and working on labor efficiencies. All the right things strategically but will likely lead to short to intermediate term profit pressures.

Neil Stern for Forbes


Marsh Files Chapter 11: Storm Clouds On The Grocery Horizon

The underlying troubles that are resulting in 2017’s Retailmageddon are well documented, with the growing number of bankruptcies fueled by the growing impact of e-commerce and the general overcapacity of retail space.

Grocery, however, has long been considered immune from the e-commerce space and even the vagaries of economic downturns. No more. Historic deflation, a new round of price wars, and yes, the growing impact of e-commerce are taking a toll on what was once a highly resilient sector. Comparable store sales are anemic across almost every key grocery retailer and I’m starting to see a growing number of chains that might follow general retail down the bankruptcy trail.

To date, these potentially troubled retailers are regional stories. Central Grocers, a key wholesaler and retailer in the Chicago market, now faces a very uncertain future with planned store closures and independents scrambling to find new suppliers. Private equity owned Marsh, once a regional powerhouse in Indianapolis, is likely on its last legs unless it finds a buyer quickly.  They filed Chapter 11 today and are attempting to restructure. Southeastern Grocers, a large regional chain in the Southeast United States is closing 20 stores and citing significant competitive pressures—more upheaval may be coming.

Besides the obvious competitive pressures that might be cyclical in nature, there is evidence that these storm clouds might well turn into a tsunami. Younger consumers are shopping less at traditional supermarkets and alternative formats (dollar stores, club stores, discount formats) are all scheduled to grow at more than double the rate of conventional grocers. The biggest concern? E-commerce hasn’t even begun to disrupt food in the same manner as traditional retail. I would estimate that food e-commerce is probably around 2% today.  It is estimated to grow to perhaps 7% in the next five years.  While still substantially below general retail, it will further disrupt as players like Amazon make an aggressive play into food.

While supermarkets might ultimately prove to be more resilient than traditional retail, it’s clear that this segment is no longer immune.

Neil Stern for Forbes


Is Whole Foods In Play?

Whole Foods stock surged today on speculation that Albertsons might be preparing a takeover bid. This announcement comes on the heels of an activist investor, Janus Partners LLC acquiring an 8.3% stake in the company, suggesting that a possible sale could unlock investor value. 

Albertsons is owned by Cerberus Capital Management and has been the subject of speculation for multiple buyout rumors. Last month, I commented on the rumor that they might consider acquiring natural foods competitor Sprouts. This deal seems to be losing steam as the Whole Foods rumor heats up.  They have also been linked to multiple deals in the more conventional grocery space. For Albertson’s, it appears that a deal of sorts is imminent as the company seeks to regain the momentum it had after some very successful acquisitions a few years back. It has unsuccessfully attempted to float an IPO several times but its current sales trends, industry issues and high levels of debt have stalled that activity. As I suggested in the Sprouts article, an acquisition in this space makes sense for Albertsons and Cerberus as it puts them in a faster growing grocery segment.

The bigger question might be, what’s in it for Whole Foods?  The company, in order to turnaround a prolonged sales slump, has announced that it plans to be more aggressive on pricing, reduce costs and become a more direct competitor to conventional grocers. It is also working on its second wave of 365 store openings, which represent a potential growth avenue for the chain as it reduces the number of openings of the more capital intensive Whole Foods stores.

So, can Whole Foods complete the transformation on its own or would it be better served being part of a larger chain?  While it is questionable that there are significant synergies to be mined from having Whole Foods aligned with a conventional grocery chain, it might be advantageous to engineer a turnaround outside the public market eye. There are a number of moving parts and pieces to the Whole Foods model and it is likely that there will be a few speed bumps along the way.

With deflationary trends taking the wind out of the grocery industry, I believe we will see a number of acquisitions as chains struggle to drive organic growth. If Whole Foods does come into play, I would expect other candidates to emerge as suitors, including Kroger, the other big consolidator in the space right now.

Neil Stern for Forbes


Eataly’s Secret Formula: Founder Oscar Farinetti Will Tell You It’s a Peach

We recently had the pleasure of hearing Eataly founder Oscar Farinetti share the secrets of the development of Eataly at the Latam Retail Congress held in Sao Paulo, Brazil.  It was one of the more inspiring retail stories we’ve heard in some time, and it perfectly exemplifies the passion for food and life that is evident in their stores.

It also comes on the heels of the opening of their 32nd store around the world, in the Westfield World Trade Center in New York. Additional US locations are scheduled for Boston later this year and Los Angeles in 2017. Farinetti resists calling Eataly a chain, with each individual store reflecting the character of the country and neighborhood. While the original New York Flatiron store features nearly a 50/50 mix of market and foodservice, the World Trade Center location will likely lean more heavily on foodservice, reflecting the clientele of the area.

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Oscar Farinetti Speaking About Eataly

Oscar Farinetti Speaking About Eataly

Farinetti’s passion is evident when he speaks of the origins and aspirations of Eataly. As the headline discloses, his strategy can be condensed down to the image of a peach. At the core, is what he refers to as his “poetic target”. We would call it a mission statement. Farinetti’s aspirations were far greater than building a successful retail store. He wanted to provide employment for the country, celebrate Italy’s diversity and stem the decline of the country by focusing on the incredibly abundant assets around food and wine.  The core of all this, however, was about people and using Eataly to promote and celebrate people.

He then speaks to the many promises that Eataly wanted to deliver. As he describes each, the vision of what Eataly is about truly comes to life.  It’s about creating a wow, teaching customers and celebrating the beauty of the food. By tying product to the producer, it makes the experience more special.

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Eataly's Sixteen Promises

Eataly’s Sixteen Promises

The final product of Eataly is then very easy to imagine. Creating a unique fusion of market place, restaurant and education, seamlessly blended together.

By the way, Farinetti encourages copying just as he encourages taking photos of his presentation. Copying is a form of learning and form of flattery. What can’t be copied, however, is Farinetti’s passion. His zest for life, for reinvention, for celebration must be experienced. And it won’t be easily replicated. And this vibrancy resonates in the Eataly stores, from New York to Chicago to Sau Paulo to Milan and beyond.

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Eataly Milano

Eataly Milano



Disruptions in food retail: What’s next?

I had the privilege recently of speaking at Western Michigan University’s Food Marketing Conference. It was the 51st such event, which is remarkable in itself.

My topic was “Disruptions in Food Retail.” It was inspired by Supermarket News’ recent “Disruptors” issue, which featured 25 people who were doing precisely that in the food world. One of them, the CEO of Fetch Rewards, is just 22 years old, a reminder that some of the students in the Western Michigan audience could soon be disruptors themselves.

In my presentation, I essentially broke disruption into four buckets:

  • The consumer, with profound changes in societal composition driving the need and desire to change how they shop and how brands and retailers serve them.
  • Technology, which becomes an enabler to help make such changes happen. Technology disruption ranges from all of the modes of shopping (from e-commerce to digital tools) as well as the way we will gather and process information.
  • Competition from new directions, which includes new foodservice concepts to e-commerce disruptors to foreign entrants into the market.
  • Formats, where retailers are creating new ways to serve different shopping missions.

Not coincidentally, the remainder of the speakers and sessions at the conference dove deeper into many of these areas. There were breakout sessions on Millennials, Boomers, e-commerce, private brands, digital strategies and innovations in foodservice. All of these provided examples on both the disruptions themselves and what retailers and brands need to be doing to respond.

My closing slide spoke to culture and the need for companies to evolve and change as these trends change. It is relatively easy to spot a trend and certainly conferences like this help crystallize what those disruptions are likely to be. It is infinitely harder to respond and bring an organization along to react.

How is your company responding to disruption?

Neil Stern for Supermarket News