Eyes on the prize: Driving greater profitability in online grocery during implementation & beyond

Online grocery sales may make up only a small part of the business today, but it’s growing fast (CAGR of 13.1% vs 1.3% for in-store sales), and this growth is critical to the future of grocery operators of all sizes. It is also a relatively new business model,and everyone in the grocery industry needs to learn more about the factors that make online more successful and how to drive profitability.

Barry Clogan, who currently serves as President of Retail Solutions at MyWebGrocer, is a great source for just that type of guidance.  He has extensive first-hand experience helping existing grocery retailers extend into the online grocery space in the both the US and Europe. Here, he talks with us about some of the key lessons and best practices he has learned as a result of that experience.

This Q&A is part of the Brick Meets Click Spotlight series. Special thanks to our sponsor MyWebGrocer (MWG).  

1. Looking back at your experience with Tesco, what did you learn about implementing ecommerce that is helpful today for US grocers?

Barry Clogan: We learned a lot about what works and what doesn’t work when it comes to implementation.  Across the eight countries where we were involved, we were successful in five, but struggled in the other three.

When and where we succeeded, it always came back to the culture of the organization and whether the organization could buy into the idea that ecommerce was an important part of the total business. Without solid commitment from top leadership, this kind of shift isn’t possible, because it requires getting people to let go of their traditional physical-store-only focus. Employees will actually resist the move into ecommerce if leadership isn’t fully committed.

To get buy-in from the different functions like operations, merchandising, and marketing, it is useful to focus on how customers are changing the way they grocery shop. From the customer’s point of view, it’s the total experience – physical AND virtual– so the different functions need to realize they all have a part to play in delivering that experience, regardless of which channel the customer is using.

Essentially, you are updating the idea of what the experience should be, and there’s a compelling business reason to make this shift: Customers who shop online also shop in the store, and those who do both spend more than customers who only shop the physical store.

2. What would you tell a successful brick-and-mortar leader about how to think about the online business?

First,I’d tell them that a mindset shift is required in terms of operations. For example,don’t think that your online grocery business is closed when your physical location is open. These two parts of your store offer different types of service and different levels of convenience.

Second,I’d tell them that it’s a mistake to look at profitability by channel. You need to think about customer profitability. The lifetime value of your customer is the fundamental driver of why you do ecommerce to start with, and you get higher loyalty from consumers who shop both channels.

Finally,you need to work to understand how your target customers are changing and design a solution that fits into their lives. What matters to your customers?convenience? fresh? meal kits? delivery? This is what should drive your offer.When we’ve struggled, it was because we didn’t get the proposition right.

3. What have you found to be the keys to high operational productivity in grocery ecommerce?

For brick and mortar retailers moving into ecommerce, the big thing to remember is that online grocery is still a relatively new and immature business model, so changes will be coming. To manage through these changes, it’s important to start out with a framework that gives you total picture of the operations involved.

When we help a retailer add ecommerce to their business, we think in terms of at three-year journey. This helps you recognize it’s a long-term effort. One thing is critical if you are going to systematically improve performance: You need to build a baseline operating model complete with costs that includes a balanced scorecard. The baseline model helps you identify the “size of the prize,” and the scorecard helps you prioritize and focus your improvement efforts.

Here are some of the things that baseline model needs to include in order to achieve high productivity.

• The right equipment to deliver against your offer. For example, an offer focused on fresh will need different equipment than an offer focused on the center store.
• A high level of shelf-edge service. This directly contributes to productivity. High availability of product means better online pick rates – and it also improves the experience for customers shopping the store.
• Strong plan-o-gram compliance. This makes it possible for order pickers to quickly and easily find the right product.
• A balanced scorecard. There are lots of numbers out there, and you need to make sure you’re looking at the right ones. Choose metrics and benchmark KPIs you can manage against in places where it’s important to drive improvement, like pick rates, drop rates, and basket sizes.

Having a baseline operating model is essential. Once these pieces are in place, you can drive improvement through training and then investment in technology.

4. What other ways have you found to improve the profitability of grocery ecommerce?

Better understanding the economics of customer acquisition is a big opportunity.There’s lots of poor practice in this area. For example, retailers often use a shotgun approach to promoting ecommerce by offering the same savings coupon to all consumers, but when you look at the results, this mainly attracts customers who want to save $10 or $15 on a grocery order. There’s a big difference between spending to attract new customers vs. building a loyal customer base.The only way to increase ecommerce profitability is to grow your base of loyal online shoppers.

Retailers also need to track usage and shopper engagement. Customers are 60% more likely to become regular online shoppers after their third order. So, use your data to identify which consumers are more likely to become loyal to online shopping and then go after them by nursing them through their first and second shop. Bottomline – if your loyal base is growing, you are succeeding.

Another wayto increase profitability is to increase the size of the basket by promoting greater participation when online shopping.You do this by encouraging more impulse purchases and by shifting themix of purchases towards higher margin products.  Retailers do this all the time in their stores, now they just need to use the same skills online.

Ecommerce generates a lot of data that retailers can use to make the shopping experience better for their customers.  Mining this data helps retailers understand where and when people are shopping with them and how they are using their services.It’s a way to identify opportunities to solve problems for customers and to make their lives easier.  The challenge is to use as much of this information as possible.

5. Looking ahead, what changes in the user experience do you expect?  

I think the biggest changes will be in improving convenience. This is a straight forward idea with a lot of up-side.  Sometimes online shopping is more difficult than it needs to be. Making it more convenient may involve making search easier and/or reducing the number of pages that need to be visited to complete the trip.

Also, it will involve doing more work for shoppers, like curating lists of products by attributes that are important to individuals. These added conveniences are solutions to consumer problems and that’s a wide open window of opportunity.

Many consumers have already shifted to mobile for managing their lives, so this is another place where we expect changes in user experience.  We think getting this right means keeping it simple – in other words, not overpopulating the mobile device. Limit mobile features to only those that have an impact on shopping behavior.  If it doesn’t move that needle, it probably doesn’t belong.

6. Do you see any big changes in the marketplace where MyWebGrocer is in a good position to help grocery retailers respond?

Two big changes definitely have our attention, and we’re ready to help retailers in both areas.

First, a big step change in the economics of online grocery is coming in the next several months for some of the largest grocery retailers. These involve new technology in the form of robotics, and a new maturity of the online model. For example, Ohio-based Kroger recently announced a partnership with Ocado to ramp up its delivery business with the construction of robotically automated warehouses, a direct response to Amazon’s Whole Foods purchase.

These changes will create challenging questions for many regional grocers: Do they move quickly to automate, do they decide that they can’t compete and pull back from ecommerce, or do they keep moving forward, but follow their own strategy?

We’ll be encouraging our customers to take the third approach. Regional chains don’t need to rush to buy robotics, they need to get their baseline model in order.We will be helping them adjust baseline operating models and roadmaps to layout what to do next and identify when they’ll be ready to invest in automation technology.

Second, big changes are also coming is the adoption of dynamic pricing; i.e., faster price changes driven by shifts in demand and competition.  Pure-play online retailers have been doing dynamic pricing for some time, but most brick and mortar retailers still change prices on a slower cadence – typically weekly for promotions and less frequently for regular shelf prices.

We expect pricing practices to change quickly as grocers compete more directly with pure-play online retailers (moving into the physical market).  As this unfolds, personalized dynamic pricing will play a much larger role – one that allows a retailer to sell to each customer at prices that the customer is willing to pay.  This is a new ball game, and we are ready to equip our customers to win.

7. How are CPG brands looking at ecommerce and what does this mean for grocery retailers?

CPG brands are certainly interested in targeting their marketing messages to consumers who are now spending so much time online.  They also want and need grocers to grow their online business since brick and mortar retailing is still their main marketing channel.

At the same time, CPGs have concerns about their future in an increasingly digital world. Some are experiencing rapid sales growth with key pure-play online retailers, and others see online sales increase faster in some of their categories than others. This has them thinking about which marketing channels to concentrate on in the future.  Grocery will be impacted, one way or another, by their decisions.

Moving forward, these shifting dynamics make it even more important for grocery retailers to develop digital assets that serve their customers, and at the same time, attract brand support. With our suite of retail and brand solutions, we are uniquely positioned to enable grocery retailers to digitally extend and amplify shopper marketing programs to drive both in-store and online sales.

The result is a win-win, where we help grocery retailers and brands work together to attract, engage, transact with,and ultimately retain the modern omni-channel shopper.

About Barry Clogan

As President of Retail Solutions, Barry oversees the development and implementation of MWG’s grocery retail solutions. Prior to this role, Barry led a team focused on helping grocers navigate the challenges of launching online grocery services,guiding companies as they formulate and execute a multi-channel strategy.

Before joining MWG, Barry spent five years at Tesco, where he led the ambitious online grocery rollout across eight countries. Already established as the world’s most successful online food retailer through its UK business, Barry is credited with driving their international expansion and contributing to the significant growth it has seen in its online business.

ditor's note:   Thanks to the team at MyWebGrocer for sponsoring this Spotlight blog interview, in which our questions are designed to show how retailers can benefit from using new technologies to meet the needs of today’s shopper and drive profitability.