Frédéric Thomas-Dupuis: How has COVID-19 affected your businesses and how did customers’ needs evolve during this time?
Steve Henig: Honestly, I don’t think anybody could have imagined the far-reaching implications of the virus—how people shop, how they feel about safety and crowds, and their embrace of all things digital. We’ve certainly seen an uptake in many product categories that allow people to meet their family’s needs. And that’s had a huge impact on us.
Our ability to deliver the same products has changed: We’ve had to close our hot prepared food bars, place produce inside bags, package our bread rolls when we previously would not have done something like that. So there’s been a widespread impact on the supply chain in the US as a result of mismatched demand. Consumer packaged goods have been under a lot of pressure to deliver what the customer wants.
That’s the 30,000-feet, bird’s-eye view.
What has stunned everyone is the consumer's embrace of all things digital.
What’s been happening and what has stunned everyone is the consumer's embrace of all things digital, something that under the impact of the pandemic has accelerated by about three years. All retailers have had to move faster in their embrace of digital, whether it’s e-commerce, the look and feel of mobile applications or desktop. That is something that must take place internally: moving that sensibility throughout the organization in a meaningful way so that everyone understands the importance of digital. We thought we had more time to implement the digital move, but reality has taught us differently. That’s the challenge for us as an organization: How do you accelerate digital engagement across our entire enterprise?
To your point, whenever I think about digital and e-commerce, there are three barriers that come to mind: First, there is the digital interface of the e-commerce site; second, there is the picking and packing part where automation may be appropriate; and finally, the third piece is fulfillment-- pickup and delivery. Do you feel that COVID-19 has accelerated any one of these or all three of them?
Due to unprecedented consumer demand, retailers all across the US and the globe are reporting increases of online orders on the magnitude of 80 percent, 100 percent, and as high as 200 percent, depending on who you speak with. Just to be able to meet that demand and to make yourself available to your customers with delivery time slots or pickup slots in real-time has put an enormous amount of pressure on all of us.
And so for us, our goal is to expand our e-commerce offerings in a more meaningful way: more slots, more stores. We've opened up more e-commerce sites in the past quarter than we have in the past two years and we continue to open more.
But e-commerce in its current format can’t continue, and companies will need to embrace automation in different ways. Also, automation means different things to different people: To some, it means full-blown centralized fulfillment centers; others focus on micro-fulfillment centers; and to others, it means direct-to-customer. That said, all retailers are going to have to accelerate their comfort zone and embrace automation to meet strong customer demand. Because without automation, it won’t be possible to meet the customers’ expectations to have their products in hand in just a few hours. And when you get above double-digit e-commerce penetration in your building, it starts to become very disruptive to your brick-and-mortar customers because item picking is taking place in the stores as customers are going down those aisles and trying to shop.
Wakefern is a cooperative group of supermarket brands, consisting of more than 50 members who own and operate more than 350 stores throughout the Northeast. In theory, the members could act as an impediment to online sales, arguing that e-commerce might pull sales out of their stores. However, I think the way Wakefern is structured actually enables members to be competitive. Do you do share that view?
I have absolutely no concern about our structure. What is powerful about our members is that all 50 of them are owner-operators and they’re very entrepreneurial. Many have seen the future around automation. Our structure is not an inhibitor – in fact I think it’s one of the key drivers of our success. Our members embrace innovation – including automation.
A core characteristic of your business is that your members own their stores. How did that structure help Wakefern respond to COVID-19?
When it’s your own business, when it serves the community you live in and friends of yours are coming into the store – that is a deep level of engagement. And so our members took their role of protecting their associates and customers very seriously.
What was the division of labor between Wakefern and the members during COVID-19? Was it more about headquarters providing support in areas that were cross-member challenges, such as sourcing PPE?
Our structure is that we oversee distribution, logistics, marketing, and procurement. That’s where the power of the cooperative structure comes into play. Wakefern is at its finest in a crisis and came together to procure as much PPE, chicken, toilet paper – whatever was needed so that our members could operate at the highest level in serving customers.
Let’s go back to the issue of e-commerce. As we shift to online and digital, what’s your view on whether customers prefer direct delivery or click-and-collect? How do you think that might evolve?
It’s a fascinating topic and potentially one that a lot is riding on. I think delivery to home for groceries makes a lot of sense where you have Zip Code density—urban areas in other words. In many of the rural areas, success may hinge on retailers’ support of click-and-collect. Remember, most of America remains a car-centered society, with people driving to and from their destinations. So for rural areas, we’ll see click-and-collect, while in urban areas, it will be more direct delivery. For our members, it will be a confluence of the two.
Let’s assume that we achieve double-digit e-commerce penetration levels. Do you think the delivery in urban centers will be fulfilled from a warehouse, whereas click-and-collect will done from a store? And will click-and-collect take a centralized approach too, with picking for orders being fulfilled from an MFC [modified fulfillment center] and dropped off to stores? In that case, obviously, there are implications for fulfillment time.
That’s a complex question – the jury’s still out on it. To answer, I have to step back and ask myself as the retailer/grocer what’s the range of time that I’d like to start with, what can I realistically support, and then to your point, what’s the lead time that I need.
It goes back to what the customer wants, what's your line of sight on costs, and what experience you want to deliver to the customer.
Because when you move into a full CFC [centralized fulfillment center] model, you're going to sacrifice lead time, and you're also going to sacrifice the range of products in a traditional store. Companies are going to have to determine whether they're going to go to market with a CFC or MFC. There are benefits to each approach. But, again, it goes back to what the customer wants, what's your line of sight on costs, and what experience you want to deliver to the customer. At the moment, however, there isn’t a tight logistics model in the US to support direct-to-customer from CFC with margins to support it. So it’s a jump ball on that one – you have to start with the customer.
To your point on matter of range: A winning strategy has been for grocers to provide more differentiation. Do you see a shift in your marketing mix? Take ShopRite, which has moved toward a very broad and differentiated assortment. I would imagine that a CFC would skew towards a homogenized offering, with the range of grocery products being limited, and would have a hard time working with ShopRite’s differentiated offering.
That's right. Again, it goes back to what's the role of perishables in your building and how important is it to maintain that range. Plus, what do you do with local, because local is not going away. And so if you think range is going to be a key differentiator in your communities, then a CFC will be challenged in supporting that differentiation.
Will assortments, promotions, and pricing strategies need to be different in an e-commerce world?
Some adjustments will be needed to the marketing mix — digital allows for a level of personalization you could never achieve in a store. There will be a shift in how people shop and get information. There will be offers they receive online that they won’t get offline: Eliminate the waste to give the best offer to the customers who are most likely to receive the message.
The biggest challenge for the industry, it seems to me, is where we are today – that is, we still have the grocer’s flyer, and at the same time we have a number of customers using the app or website – and where we want to be tomorrow, which is much more engagement. This interim period makes it difficult to allocate capital – whether to fund the app, the website, or partnerships that can help with personalization. Is that something that is a challenge for the industry, or do you feel that is something that needs to be done incrementally over time?
This is something we discuss internally all the time. The world has become an “and world.” We didn't eliminate circulars, we didn't eliminate billboards, and we didn't eliminate network television. We just supplemented our approach with banner advertisements, email marketing, social media, and YouTube. So we've augmented the traditional mix with a vastly expanded marketing ecosystem.
Companies will have to be very smart about how they go about engaging their customers. I think it’s a continuum: Customers are going to move away from some of the traditional means of engagement. That's going to free up some capital for investing in the new digital as a means to interact with the customer. That said, I think companies are going to have to make investments in the short run, of maybe five to 10 years, to fund that journey so that they can stay connected to their customers.
I find that marketing generally sees where we are headed in the future. Merchandising, however, sees the same future but lacks the linkages to marketing so as to be effective in this brave new world. Do you see that as a challenge as well?
It’s a huge challenge. The digital ecosystem is complicated: There’s a staggering amount of complexity, vast oceans of customer data and preferences, and all of it overlaid with algorithms. It’s a level of complexity that makes it difficult for most organizations to wrap their heads around. That’s part of the reason why digital retailers have been able to move so quickly: they lack the burden of a legacy system – digital is all they know. Ultimately, however, merchants will understand and leverage digital, but it’s a big lift at the moment. Plus, there are so many offers and ideas that it’s a little overwhelming. ROI and technology are evolving every day.
Let’s talk about other players in your market. What do you think of discounters such as Aldi and Lidl? Does their future depend on digital? Or do their pricing strategies protect them from the incursion of digital? Are they formidable rivals or fringe competitors?
I would say that “digital” is a bad label for what we’re talking about. Digital for a long time meant e-commerce, but digital is really so much more broad-based than that.
I think the competition in the market is upping everyone’s game. What I would say is that “digital” is a bad label for what we’re talking about. Digital for a long time meant e-commerce, but digital is really so much more broad-based than that. Many retailers have very successfully leveraged social media to drive sales – they’re finding the right digital tools that resonate with their customers.
Big companies have the scale that allows them to look at AI, machine learning, and other innovations. I’m not claiming that the big companies have an advantage, but they have more access to funds to find the technology that unlocks some of the challenges.
What’s your take on quick-service restaurants? Are they a big competitor that the industry needs to take on?
I think so. When I think about QSR, I’m throwing in Applebees, Friday’s, and other restaurants like that into my definition—not just fast-food operators. Customers are looking for a quick meal and a way to get in and out, while feeding their family quickly –fast casual as well as quick service. What happens with the likes of Uber Eats or Door Dash, is more people dialing up service on their smartphones and getting quick delivery not only from a single food provider, but multiple ones.
Is e-commerce a competitive advantage for the grocery space?
It can be: I think there’s a fresh play here that can be very compelling to a customer. If you can have a fresh heat-and-eat meal without having to drive to it – that is delivered to your house and that can be enjoyed by your entire family after 15 minutes in the oven – then I think that is something that grocers can own.
Do you have a vision of the role of physical store in 10 years?
COVID-19 has complicated the trend that we see, but in the US there was a steady march toward e-commerce, home-meal replacement, meals away from home, and better and more refined unique perishables. Those will be the north stars for organizations for the next 10 years. But companies will need to think of how to enable e-commerce to become central to their organization and design layout. How do I create the best presentation for perishables? What are the best options for meal replacement? I’m confident that when the pandemic is in the rearview mirror, people will gravitate back to getting a prepared meal, rather than making it from scratch. Those are things that organizations will need to think about as they consider building stores.