Grocery retailers have numerous challenges in the current landscape: they are dealing with pressure to deliver good value for money and a differentiated offer while also facing cost inflation, labor shortages, and wage increases — often all at the same time. On top of those issues, they need flexibility to address the growing uncertainty around the channel mix, inflation, and customer shopping preferences, as well as the emergence of new concepts, store features, and digitalization.
It’s imperative, then, that retailers find levers to drive down costs and reduce required labor hours in their stores. One of the most effective of these is taking an end-to-end view of retail operations with a focus on store processes, where they identify, assess, and prioritize efficiency levers across the full value chain from supplier to customer.
Our experience working with multiple retailers has shown that this approach can unlock labor productivity gains exceeding 10%. It is widely recognized as superior in terms of cost and customer orientation among advanced grocery retailers, who are increasingly looking to set up the right capabilities to support end-to-end processes. However, implementation is not easy, given legacy structures, budget realities, and established ways of working and sharing value pools. This article explores new strategies for achieving the potential benefits through aligning incentives across the head office and stores.
The superiority of end-to-end views in retail efficiency
Many multi-entity grocery retailers (for which the head office and stores have separate profit and loss statements, such as in cooperatives, independent retail, wholesale, or franchise models) still work in silos, where each stakeholder looks at its own respective operations to find efficiency levers and cost savings. This often results in efficiency drivers that are isolated for head office or wholesale operations (for example, logistic optimization, Selling, General, and Administrative cost reduction, or Goods Not For Resale programs) and for stores (store-by-store initiatives).
Thinking in silos loses sight of what the optimum setup for the retailer as a whole could be. More importantly, the approach often leads to higher overall costs to the system. For example, cost-reduction programs at head office might result in a lack of support for stores, causing large, amplifying effects.
An end-to-end approach to store operations breaks such silos. Stakeholders look outside their own scope of responsibilities and spheres of influence to achieve efficiency across the full value chain. Adopting this strategy requires collaboration across stakeholder groups, who must recognize and share the objective of optimizing value across the entire organization.
Unlocking multimillion euro gains through retail efficiency
Efficiency initiatives at head office can drive large downstream gains due to the repetition of the processes across many stores. For example, an efficiency gain of only a few seconds at checkout, in replenishment processes, or on a bake-off process can easily amount to millions in yearly savings for a big national grocery player. An example of how upstream efficiency initiatives can drive multi-fold benefits downstream — typically a handful of initiatives drive a large share of value:
Breaking barriers to unlock retail efficiency and profit sharing
Mobilizing support for investments into end-to-end initiatives is typically a key hurdle for multi-entity retailers. Internal politics, short time horizons, and a misalignment of the incentive structure cause inertia that prevents taking an end-to-end perspective and forces retailers to leave money on the table.
Profit sharing is a good approach to unlock the inertia. In multi-entity set-ups, head office has limited incentive to invest in initiatives that don’t give it a direct payout. This deprives stores of important efficiency opportunities. Exploring mechanisms whereby gains unlocked at store level partially flow back to head office is an effective way of aligning incentives. Not only does this ensure gains across the entire system, but it will also allow for overall improvements to the customer experience and customer value proposition. Transparency and trust are two key prerequisites for this to work — which is key to success for such a program.
Maximizing retail efficiency with quick wins and long-term solutions
A labor productivity increase of more than 10% is not unheard of with an end-to-end approach to store operations — and retailers can often activate up to half of these gains within a year, depending on store and initiative level. The early impact that quick wins unlock is a critical impulse for change and a core component to generate energy and momentum behind the end-to-end approach. Ultimately, for the full end-to-end system to operate sustainably in the long term, investment into a central capability, team, data model, and tooling is required. Once the full end-to-end system is in place, productivity gains can be reinvested into the customer value proposition through a focus on pricing, range, and promotions, or improvements to the logistics service levels.