Who Will Hold The Power?

Future Trends In The Grocery Sector

CEO Interview Series

Marc Poulin, former CEO of Sobeys, was interviewed by James Bacos, Retail & Consumer Goods Senior Partner, in a wide-ranging and freewheeling discussion about the current state of the retail grocery sector – and more importantly where it is headed.

James: Last we spoke, Marc, you had just completed “The Retail Revolution,” which sought to project what will happen in retail over the next decade. Have you seen your predictions and expectations come true? Given the benefit of hindsight, do you have any second thoughts? Or is there something you wish to dial back and say, “Perhaps I wasn't right” ?

Marc: My general feeling is that our premise is still valid, and that the retail world is moving in the direction we identified. But that (the retail revolution) is less on pace and is developing more slowly than I expected.

At the same time, we're seeing it happen. I can talk about the grocery field. Since the study, there have been commitments by various players towards building their own platforms. They may not have been implemented, but they're on the way. Kroger and Sobeys with Ocado are good examples. They're building the facilities right now and the launch of either one will probably be in spring 2020. Once you get a few big largescale players coming into the fray, we will see the acceleration we were talking about.

When you talk about elements or blockers, I think the biggest blocker is that some of the executives are not addressing it with the urgency they should. Another source of delay lies with economy and the consumer, both of which are pretty healthy in most markets. Because of that, grocery retailers may not feel the pressure as much since their traditional business is healthy.

But if we hit a recession, it's going to be interesting. People will feel the pressure then because the business will not be performing well. At the same time, you’ll lack the resources to do what needs to be done. I think the retailers who are not moving on that front or are moving slowly may get flat-footed.

James: Do you think there's a risk there will be a major shakeout in five years? Or do you think it will take ten years for that to happen?

Marc: I think it's more of a five-year span. Yes, there is a major risk. I'll give you an example: on the one hand, we see Kroger entering the state of Florida with one of their fulfillment centers, a market they're not in currently; on the other hand, we have incumbent grocers who have historically steered clear of the internet. 

It's going to be an interesting clash. There's no way that incumbents will be able to get the technology they will need to compete fast enough if they wait to see if the customer reacts favorably to the new offering. Plus, if the economy goes into a recession or slows down, which everybody expects, then it's going to hurt bad and it's going to hurt fast. A brick-and-mortar retailer does not need to lose a lot of sales to have its bottom line impacted significantly. It's always difficult to time the markets and to anticipate when these things will happen. Obviously, the jury is still out on whether the bets will pay off. But one thing we do know is that the technology keeps on moving and becoming more and more sophisticated.

James: North America, particularly the United States, remains a fragmented regional market. There are some players that are purely national, but many are not. Do you see a place in the market for regional players, or is scale plus technology going to be the ticket to success, and the smaller players won't be able to play?

Marc: What's going to save the regional players, in my mind, is that most of the e-commerce and online technology is going to be available to them as a service, either from technology players or big players who operate in another market and are willing to sell their technology. 

So, yes, the regional players will be able to compete. They won't have the same profitability as the ones who developed the technology but, on the basis of their brick-and-mortar strength, they’ll be able to remain in the game.

Instacart is an example of a technology that many players didn't have to develop. But it's something that a lot of grocers switch towards, at a relatively low cost. You see that model taking hold in other areas, too. We hear of many players who are developing analytics platforms that people can buy and put to work. To be honest, it's a good thing. A lot of those regional grocers don't have either the scale to do it on their own or the capabilities culturally to do so.

What's going to be interesting is the really small players who I believe will survive, as they may not need all that technology. The bigger regionals, on the other hand, may become too dependent on the technology providers if they don't do things on their own.

The key for any player will be to develop true competitive advantage with the way the retailer interacts with the customer, technology enabled or not.

James: My colleagues in China are of the opinion that the Alibabas and Amazons – or other technology providers of the world – are going to be the tail that wagged the dog. Ultimately, they'll be integrating into brick-and-mortar. Ownership and strategy will be led by technology, rather than purchasing, and it'll be a completely different world.

What do you think? Is that complete science fiction or will it happen?

Marc: I don't think it's complete science fiction. At the end of the day, whoever controls the relationship with the customer is where the value is going to come from.

In the brick-and-mortar world, value was created by the daily interactions in the store. But in the new world, even for brick-and-mortar retailers, value lies in the data and the ability to use that data to create a better shopping environment for the customer.

The physical fulfillment of that value is not as important as it used to be. It’s the data technology element that’s important. That's why the technology player will have a bigger hand in the customer relationship and be able to extract more value from it.

I would say the technology player will get more and more control over the retailer, because that's where the value is being created. At the same time, huge players, such as Alibaba with Hema, will be tempted to use that power and deliver the brick-and-mortar experience themselves.

The key is: How do you create that relationship with the customer? That's where the value will reside. That's why I think the regionals will embrace those technology players. They will be successful if they can be creative in using the data to create more intimate relationships with their customers.

It's going to have to be in a very strategic relationship. For example, Kroger took shares in Ocado, which was smart, because you're going to get married for the long term with your technology partner. You'll have to find ways to influence the way your partner develops in the future.

James: You’ve said power lies with the person or the company that controls the customer relationship. That power is derived from driving satisfaction and loyalty. My own view is that I haven't seen much innovation in terms of driving satisfaction and loyalty. Analytics and looking at customer and card data have been around for a long time, but I have yet to see a dramatic change in the customer experience. What do you see as dramatic changes in the experience and the way customers shop over the next few years?

Marc: I think it's going to come. But you're right: Customer experience is the area where there hasn’t been much change.

In our model, we talked about three types of blockers or elements: fulfillment, delivery, and the interface, which is the customer interaction and everything else. Fulfillment is an area where we're seeing a lot more options. Delivery will move along on its own, based on technology and other developments.

The interface, however, hasn't really moved forward in many cases. Partly, it’s cultural. A lot of the technology-driven players are steered by engineers, not marketers. They don't yet understand how to bring value to the equation.

But it's there for the picking. The reality remains that online players keep improving on the experience front. Artificial intelligence capabilities are making it happen.

For example, there’s a firm based in Montreal that is focused on helping the pure e-commerce players by driving better use of the data and interfaces. Helped by artificial intelligence, they achieve pretty good results.

The brick-and-mortar retailers are slowly losing the race because the online retailers keep building their capabilities. Brick-and-mortar players are not investing enough of their resources and, at some point, it's going to be difficult to catch up.

James: Let’s switch gears. Up to now, we've been talking about the proverbial elephant in the room for brick-and-mortar grocery retailers: It's technology, disruption, and an aspect of their business that they don't know.

Sometimes, though, when you're looking at the elephant in the room, you may be missing a second elephant standing behind the first. That second elephant, it seems to me, is the trend around the sustainability of the business model in a fundamental sense: the fact that you’re bringing mangoes from Brazil every day to Canada. It’s the idea of a carbon footprint and the costs associated with the modern world that are now starting to be paid in the form of climate change.

My sense is that this is beginning to be important to the consumer. Certainly, that’s the case in Europe. But I'm wondering whether or not you think we might see a return to a different kind of grocery sale in North America. What’s happened over the past 20 years has been an explosion of availability: A generation ago you couldn’t simply walk into a retail grocer any day of the year and get a fresh mango. But if the mango you buy in a store comes with a label laying out its carbon footprint, will that have an influence over shopper behavior?

Marc: I see this trend moving in increments. You're talking about the mangoes. I haven't had the feeling that consumers are willing to give up the availability of the mango yet. 

I don't know if it was the case in your life, but my grandparents tell me that they had an orange once a year, at Christmas. It was a big thing for them. Will the world revert to that? I think you'll need more economic cues than just a good feeling about it.

That said, I don't think you can run the business the way you used to without taking those externalities into account and at least looking at how you can address it. The notion of food waste is becoming more important. People are more aware of these things. In that regard, there's going to be a lot of pressure on being efficient from a systems point of view.

The notion of being able to distinguish what’s important to which customer is going to be key. On the issue of climate change, you have segments of the population that are very passionate about it and very involved and segments who couldn't care less. 

In the past, the brick-and-mortar response to polarizing topics such as climate change was “Let’s create a concept around that”. There would be stores that would do things as usual, and there would be others that would be more like Whole Foods.

But, given the current data and technology capabilities, it doesn't have to be a concept. It just has to be a different offering to a different community and can actually be driven from a single infrastructure.

In that regard, again, the online players are more flexible than the brick and mortar guys. You could have an Amazon that speaks a different language to a more eco-sensitive customer than to a Donald Trump follower who may be indifferent to climate change.

To be able to speak a little bit differently to diverse groups of customers as a result of your knowledge of the customer is going to create opportunities for players that have that ability.

James: Marc, you've given us much to mull over. Thank you for taking the time to talk with us. We appreciate it.

Marc: It's always a pleasure.

Who Will Hold The Power?