Katherine Black is principal of consumer and retail strategy for KPMG LLP. Illustration by Olivier Balez
No matter where I’ve turned lately—industry conferences, newspapers, hallway chats—a common theme is how challenging the degree and pace of change is these days. Whether the conversation is about a major strategic shift under consideration or simply an individual trying to handle an ever-increasing workload, the challenges are real and felt by many.
In the grocery space, the shift to online is a big part of this conversation. After all, consumer appetite is growing for online grocery. According to KPMG’s annual 2018 Grocery Retail Consumer Perception Survey—which this year was rolled out to more than 2,000 grocery shoppers across the U.S. to understand their shopping behavior—48% of consumers do some or all of their grocery shopping online, and 59% plan to do so in the future.
The cost to get into the online game is significant. Whether it is the cost to add dark stores, distribution centers, picking capabilities, logistics or a digital supply chain, the investment can be substantial. Add the complexity of last-mile delivery in a catchment area that could be anywhere from three to 25 miles wide, and it’s not a particularly attractive proposition.
At the same time, given the extremely thin margins of the average U.S. grocery retailer, missing out on a market share shift could be a critical mistake. The profitability of a grocery retailer is highly dependent upon a stable and growing top line, and it doesn’t take a significant market share shift to wipe out a retailer’s profit margins.
So if it’s expensive for a retailer to get into online grocery and to stay out of it, how does one with already thin margins cope? There is no single cookie-cutter answer. However, we believe in three “must haves” to craft the right strategy.
1. Really get to know your customers
While not exactly a new insight, this is often overlooked and can lead to overinvesting in capabilities that won’t pay out. Our research shows that customers have very different attitudes toward online shopping. We have segmented buyers into four main buying profiles:
Online pioneers: This segment does the largest portion of its shopping online and plans to increase it in the future. On average, more than 40% of their grocery spend is online. These customers place the highest importance on product quality and assortment and are more interested in promotions than other segments.
Next-in-line adopters: This is the fastest-growing segment. These consumers dabble in online shopping but are not yet fully committed. They predominantly live in the suburbs and favor a mix of traditional grocery and warehouse clubs or big-box retailers.
Online dabblers: This segment shops online and plans to shop a bit more online in the future, but they have no plans for online to become the majority of their spend.
The in-store crowd: This segment prefers to shop in brick-and-mortar stores and shows no signs of shifting spend online. Unsurprisingly, this is typically an older consumer that is less tech-savvy and tends to be more price sensitive.
While age is highly correlated with the segment that customers are in, it would be a mistake to assume that all young consumers shop online and all older consumers shop in stores. Getting to know individual preferences is key.
2. Get local
Despite different behaviors in these segments, it’s important to note that almost all consumers still shop in stores for some portion of their shop. For many, the key will be to retain the in-store shop when consumers begin consolidating the brick-and-mortar stores they visit. The recipe for doing this will be unique to each customer and require different analytics than before. In addition to understanding an individual’s preferences for product, promotions and pricing, we see that it is also critical to understand from where they drive to reach your store, what their other options are along the way and how they cross-shop other locations to get the offer right.
We call this a customer-based value proposition, for which we use machine learning to identify the optimal offer in the marketplace along with when and how the customer chooses a store to inform the most engaging mix for a customer, store, region and category.
3. Make it happen
Understanding customers at a granular level and taking action on that understanding through personalization or localization will almost certainly require some investment. When it comes to funding this investment, we recommend starting with finding efficiencies in what operators are doing today. For instance, many retailers pride themselves on their promotional plan, and yet we routinely identify savings of anywhere from 5% to 15% in margin improvement to be captured in less than a year with clients. All too often, the plan for customers starts with what an operator can afford instead of determining what is required to win the customer and then figuring out how to afford it.
In summary, we have good evidence that the consumer is changing their behavior, and this will continue into the future. And yet, adapting the shopping experience and value proposition to attract customers is not easy and can get expensive. The right execution for a brand is dependent upon the unique customers the brand serves, but what is almost certain is that the earlier you get started in crafting this new formula, the better.
Katherine Black is principal, consumer and retail strategy, for KPMG LLP