The “demand chain management” moment for grocers

Advances in technology and supply chain innovation prompts grocers to become more efficient and capitalize on the “now” economy

BY DR. SYLVAIN CHARLEBOIS, Professor, Rowe School of Business, Dalhousie University

AMAZON is now worth 1 trillion dollars US. Apple, the only company with a higher market cap, reached that level after 38 years as a public company. Amazon did it in 21 years. It’s an outstanding story which points to the disruptive nature of retailing these days. For most retailers, keeping up with the competition has been getting more and more complicated for some time already. But ever since Amazon acquired Whole Foods last year, grocers are now wondering how they can cope with a company that operates under very different strategic rules.

Amazon is a financial oddity when it is compared to publicly-traded Canadian grocers. Earlier this year, Amazon reported earnings results with eye-popping sales of $51 billion in one quarter, up by nearly 43 per cent year over year. Its net profit, though, was barely $1.6 billion. Growth at Amazon comes through high spending. Its profit margin is one per cent. And the company has never paid a dividend, not once. Still, its stock price is over $2,000. These are numbers any grocer could only dream about.

Focus on the consumer

But Amazon’s success has not simply been down to pure luck. First, Amazon keeps a laser-like focus on its customers, with extreme prejudice. This is a literal starting point for the company. Amazon has embraced the principles of demand chain management, which has put an unquestionable emphasis on the value proposition for the end-user, the customer. The market dictates how the supply chain aligns with the needs and wants of the marketplace by sharing data. Indeed, this is achieved by democratizing data which enhances receptiveness to new ideas. The other factor which has made Amazon the powerhouse that we know it as today is how it executes anything. Delivery effectiveness, outsourcing inventory management and insourcing logistics—Amazon is an operational wizard. Even though 82 per cent of Amazon’s sales originate from third-party sellers, most orders are delivered within an hour, a day, or two days, thanks to its own logistics.

With the acquisition of Whole Foods, the execution was beyond impressive. The very day after the deal was approved, Whole Foods stores had artefacts showing Amazon was now part of the business. Its precious Prime program was also rolled out as if by magic. Compared to Amazon, grocers have been fairly conservative concerning the implementation of changes. It took several painful years for most grocers in the country to adopt new ERP systems, something that is already second nature to Amazon. Grocers are getting better at it, but increasing their revenues remains a challenge.

Convergence of offering

Granted, growth does not come easily in the grocery business, especially under current market conditions. The nexus between how grocers serve the public and the emergence of omnichannel warfare has indeed been attention-grabbing these days. It is all about the convergence of the many ways businesses can connect with the consumer. Going after the market is now equally as important as being ready to serve consumers willing to spend their money in-house. Grocers are just now branching in different directions: online delivery, click-and-collect, meal kits, grab-and-go, grocerants—anything and everything is on the table. Serving the public and keeping traditions, all the while embracing change, has not been easy for grocers.

Now, however, a growing number of leaders and influencers in the field have started to recognize the need to work with people beyond the borders of their own business. Supply chain alignment is key to innovating and reacting quickly to new threats, while creating opportunities as well. We have seen a few partnerships created recently, specifically between Sobeys and U.K.-based Ocado on ecommerce, Metro and Miss Fresh in meal kits, with more surely to come. The predominant belief these days is simply that a company either needs to catch up quickly to such strategic shifts or be eliminated.

Networks and supply chains are built on the basis of efficiently using data across the board. However, data science and the grocery business have not been in sync in recent years. Grocers have a lot of data, too much of it really, or too much for most to handle. Information exists but is rarely managed with the intent to share and solidify partnerships along the value chain. This is something that is slowly changing, but at a glacial pace.

Partnering for success

Better supply chain and logistical practices can help the industry in many ways. For example, private labelling is a major challenge which will affect the grocery industry for the next little while. Amazon is the hub for generating online demand and as the company leverages itself through its physical store presence, it becomes easier to introduce its own private label products. This is a significant threat for grocers everywhere, including Canada. By deploying a more aggressive private label strategy, grocers can increase margins, but most importantly, they can achieve better control of the supply chain by working with partners whose sole role is to support a brand they own. With more data science supporting an acute focus on supply management practices, we are expecting private labels to dominate over the next little while. In turn, of course, it helps keep prices lower for consumers, making a number of products more attractive.

GROCERS HAVE A LOT OF DATA, TOO MUCH OF IT REALLY, OR TOO MUCH FOR MOST TO HANDLE. INFORMATION EXISTS BUT IS RARELY MANAGED WITH THE INTENT TO SHARE AND SOLIDIFY PARTNERSHIPS ALONG THE VALUE CHAIN.

The use of artificial intelligence, or robotics, is also becoming a widespread reality. As grocers accept these technological advances as part of what they do, training and more investment in human capital is being neglected. This has to change.

For grocers in the current market, capitalizing on the “now” economy is critical. The younger generation won’t want to wait for changes in business model limitations. Consumers want convenience and will pay for it, most of the time. Amazon’s unique supply chain strategies and continuous technological innovations have changed the way supply chain management works in the grocery business. Before the acquisition of Whole Foods, some investments were being made and changes had become obvious. But grocers now realize that the impending advances in robotics, drones and other autonomous vehicles can only make Amazon stronger. This is the wake-up call the industry needed in order to assure its own survival.