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Let’s Get 'Phygital'

Basket Economics: Omnichannel influence will change store environments, as it also changed shoppers

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Except in those cases when I make up fake words myself, I’m typically not comfortable using them, but I ought to apologize in advance: You’re probably going to hear the word “phygital” fairly frequently this year.

Indeed, the buzzword, describing the effects on physical environments as they adapt to the omnichannel world, came up in Kantar Retail’s freshly published 2018 retail predictions.

In that report, Bryan Gildenberg, Kantar’s chief knowledge officer, predicts that this year will largely be defined by a move among brick-and-mortar retailers to reinvent their physical spaces to reflect the transformative influence of the digital world on shopping and shoppers. This “wide-angle refresh” is more than just making space available to accommodate the expected increased utilization of the local store as an e-commerce warehouse and picking center; it involves rebalancing the entire store to better prepare to serve the changes consumers have undergone as a result of their worlds having taken a new trajectory in the digital age. That will affect everything from amounts and kinds of products in them, to the size and skills of the staff who work in them.

To a degree, “phygitalization” (I think I just did make that up) is something of a thread stitching together any number of events big and small, positive and negative, that are shaping the industry today. Albertsons, for example, noted recently that it anticipated a 30% decrease in competitive openings this year. That’s pretty significant, and can be explained by part by companies such as Kroger joining Walmart in new-store austerity. Investment that at one time might have been going toward constructing new sites—in Walmart’s case, hundreds and hundreds a year—instead is being used to address what’s going on inside the ones they already have.

Kroger in particular is making a huge bet this year on what it calls “redefining the customer experience” as an element of its Restock plan. The Restock initiative, announced in October, acknowledges that the company’s previous strategies are no longer relevant in the changed world and even its enviable accomplishments—for example, driving consecutive quarterly comp growth for 12 years, many of which were in excess of 5%—masked the fact that it hadn’t been keeping as close an eye on costs as it probably should have been, and was falling behind competitors in spite of its growth. Walmart, for example, wasn’t driving great comps, but was busy behind the scenes out-investing Kroger in digital and in-store service innovations.

With Restock, Kroger got the message. The Cincinnati-based company said it would boost the percentage of its fleet seeing changes inside from about 5% to 10% in a typical year to 20% to 30% over the next three years. Kroger said it would utilize its proprietary data to execute a “macro space optimization” of those stores that will likely result in a quarter of its categories decreasing in size; the integration of previously segregated natural and organic foods; the expansion of space devoted to growing categories, such as snacks and prepared foods; and the addition of technologies to help the store become more efficient and behave like the digital world it inhabits—such as the Scan, Bag, Go program headed to around 400 Kroger stores this year.

It’s ambitious, and can be risky if all those changes disrupt stores enough to rattle consumers. But it's probably going to be a necessity in a world where, according to Gildenberg’s description, growth in 2018 is coming from "uncomfortable places," with equally uncomfortable words to describe them.

The Basket Economics blog scans, weighs, prices and bags issues affecting food retailing and food retailers, by WGB’s Executive Editor Jon Springer. Tips and comments welcome at jspringer@winsightgrocery.com or on Twitter (@_JonSpringer).

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