Author Archives: rkochers

Price Hikes at Metro

Metro warns of price hikes as labour costs rise

Grocers could be forced to raise their prices next year as a result of Ontario’s plan to boost minimum wages, the head of Metro Inc. warns.

Montreal-based Metro will work hard to offset the rise in labour costs, but that may not be enough to prevent supermarkets from raising prices, chief executive officer Eric La Flèche said on Tuesday.

“Over time, if structural costs go up, that could have an inflationary impact,” Mr. La Flèche told a conference call to discuss Metro’s third-quarter results, which missed analysts’ profit targets by a small margin. “I’m not giving you guidance and more details. It’s an industry issue.”

Metro joins other retailers and industry groups in saying the minimum wage hike – there is one coming to Alberta as well – will be a “significant pressure.” Metro also is among retailers that are pushing to come up with ways to help counter the effects of the added labour expenses, including more automation, technology and cost-cutting initiatives.

Metro estimated the steeper Ontario minimum wage will cost it between about $45-million and $50-million in 2018. But the tab could be higher because the grocer’s estimate excludes a potential “cascading” effect of higher-paid employees also demanding more compensation, Mr. La Flèche said. “It’s something that will have to be addressed.”

Michael Van Aelst, retail analyst at TD Securities, said it is tough to imagine the grocery industry simply accepting lower returns that would flow from a “structural change” of minimum wage increases. But he said grocers have also seemed hesitant to pass along inflation of commodities and other goods to consumers in higher prices in an intensely competitive market.

The pressures add to an array of factors that have weighed on grocers and other retailers, including minimum-wage increases in both Ontario and Alberta (Metro does not operate in Alberta); generic drug reforms coming to Quebec and expected in other provinces; unseasonable weather; the threat of heightened e-commerce competition; and the potential for German grocery discounters to set up shop in Canada in the coming years.

Metro, which is often a top performer, already felt the heat in its third quarter, pointing to food deflation, tougher competition and a cool and rainy spring and early summer that dampened sales of barbecue and other seasonal items.

In the 16 weeks ended July 1, Metro’s profit rose to $183-million, or 78 cents a share, from $176.5-million, or 72 cents a share. Sales grew to $4.07-billion from $4.01-billion, but same-store sales, at stores open a year or more, slipped 0.2 per cent.

Mr. Van Aelst said the grocer’s level of confidence is still growing profit “at a decent pace” next year “will be an important determinant as to how much its share price underperforms” on Tuesday.

Loblaw felt the pressures last month when it said plans for minimum-wage increases in Ontario and Alberta could add about $190-million of labour expenses to the retailer in 2018 alone. Loblaw, which owns Shoppers Drug Mart, will also feel the effects of generic drug reforms.

Drug rule changes are a smaller factor for Metro, which will feel a roughly $2-million hit from the reforms, Mr. La Flèche said. The Quebec government plans to lower generic drug prices over the next five years, beginning this fall, to save an estimated annual $300-million or more.

On the wage front, Ontario plans to boost the hourly minimum wage of $11.40 to $11.60 in October, $14 on Jan. 1 and $15 the following year in a bid to improve consumer purchasing power and stimulate the economy. Alberta plans to increase its hourly minimum wage to $15 from $10.20 by next year.

Metro blamed the weak barbecue season and intense competition, which depressed prices, on its third-quarter gross profit margin slipping to 19.5 per cent of sales from 19.6 per cent a year ago.

Irene Nattel, retail analyst at RBC Dominion Securities, said the quarterly results included “generally lacklustre long weekends” in Ontario – Victoria Day and Canada Day – as well as St. Jean Baptiste Day in Quebec.

Mr. La Flèche said Metro will look at offsetting higher wages with better product ordering, staff scheduling and even electronic shelf tags, which it is testing in a couple of stores.

“We will spare no effort to manage this properly so that we are competitive and we have a good control of our expenses,” he said.

He said the Ontario government has given companies little time to adjust to higher minimum wages. But he said over time, Metro is confident it will mitigate the pressures.

“We are pretty efficient already but there are always opportunities to look at all of our costs – labour and our SG&A” he said, referring to selling, general and administrative expenses. “We’re working hard to find some offsets … All the stuff we’ve been doing and looking at I’m sure will accelerate with this cost increase.”

Mr. La Flèche also said Metro will expand its e-commerce to major cities in Quebec by the end of the year so that it covers 60 per cent of the province’s population. Metro’s online shopping currently operates in some Montreal area stores and includes both home deliveries and customers ordering online and picking up their purchases at select stores. Eventually, Metro will expand its e-commerce to Ontario, he said.

In April, Mr. La Flèche said shoppers generally buy more on each online shopping trip compared with in-store shoppers. “Clearly it’s a customer that’s driven by convenience, less by price,” he said. He said the project was meeting the company’s expectations.

But he suggested e-commerce net profit margins are pinched because “delivery is expensive … . We don’t have the scale yet to be profitable.”


Jack Ma Is Ahead of Jeff Bezos in Grocery Store Ambitions

August 17, 2017, 1:44 PM EDT
  • Alibaba has been incubating its Hema stores for two years
  • At Hema, choose your lobster and have it cooked and delivered
Highlights From Alibaba’s Earnings Report

Alibaba Tops 1Q Revenue, Earnings Expectations

Jack Ma is ahead of Jeff Bezos in one area: grocery stores.

For years, it looked to some like Ma’s Alibaba Group Holding Ltd. was simply following in the footsteps of Bezos’ Inc., the world’s largest e-commerce company. Just like Seattle-based Amazon, China’s online shopping giant started a cloud-computing business and created original entertainment content. But when Amazon’s $13.7 billion bid for Whole Foods Market Inc. sent shockwaves across the retail industry, Ma looked prescient.

Alibaba had been quietly incubating its Hema grocery store concept for two years. It rolled out three new locations last month, bringing the total to 13, the bulk in Shanghai and Beijing. The sprawling, bright supermarkets combine online and offline shopping, where customers who have downloaded Hema’s app scan barcodes on products and pay with their Alipay digital wallet.

The live seafood section is one of the main attractions for Chinese consumers who prize fresh fish and often insist on choosing it themselves. Shoppers at Hema can pick out their own crab or lobster and have it cooked on the spot to eat in the store, or get it delivered to their home. The stores also double as warehouses for delivery in 30 minutes within a close radius.

On Alibaba’s quarterly earnings call Thursday, executives spent a significant amount of time discussing the company’s offline retail strategy.

“This is not a supermarket. This is not a food mall. This is a brand new model,” said Chief Executive Officer Daniel Zhang. “Hema just is an example” of how Alibaba can operate the existing offline business.

Amazon Window

Hema’s experiment with how people pick, pay, and get groceries delivered provides a window into what Bezos may be envisioning for Amazon’s integration with Whole Foods. The deal would give Amazon hundreds of physical stores that could act as warehouses for fast delivery. It’s also an opportunity for Amazon to roll out its digital shopping experiments on a much larger stage.

For now, Amazon’s brick-and-mortar grocery ventures are still nascent. It has just one“Amazon Go” convenience store in Seattle — still an experiment — that lets employees pay with smartphones, without having to see a cashier or go to a checkout kiosk. It also has introduced pickup points so shoppers can drive by and retrieve their items shortly after ordering them online.

Hema has moved beyond its incubation stage. In its latest financial results, Alibaba reclassified Hema’s revenue from “innovation initiatives and others” to “China commerce retail” revenue. For Alibaba, Hema is just the tip of the iceberg. Ma is trying to upend the $4.5 trillion Chinese retail landscape, as he foresees “tremendous challenges” for online-only commerce companies amid China’s slowing economy.

Online Threat

Amazon, too, saw a threat to its online-only model, as retail giants like Wal-Mart Stores Inc. started encroaching on its turf. Bezos was forced to expand into physical retail, and not just groceries: he’s also opening brick-and-mortar bookstores, which the company uses in turn to highlight its gadgets.

In January, Alibaba led a $2.6 billion deal to take private Intime Retail Group Co., which operated and managed 29 department stores and 17 shopping malls across the country. It’s also working with partly owned electronics retailer Suning Commerce Group Co.

If Alibaba seems to be out in front for now, part of that has to do with the makeup of retail in China: Competition is tougher online than off. Alibaba’s scale online dwarfs any of its physical competitors, according to James Cordwell, an analyst at Atlantic Equities. While Amazon is big, it has only about a third of Wal-Mart’s total revenue.

Still, “I’m guessing Amazon is aware of what Alibaba is doing,” Cordwell said. “There will be some degree of copying going on between the two.”

Both Alibaba and Amazon are seeking to leverage the data they have on millions of consumers to make shopping easier. In the Hema app, purchases and preferences are saved and consumers can see a personalized product page. Amazon will likely use its Prime membership to send personalized recommendations and digital coupons to consumers.

“As much as U.S. consumers are engaged with mobile devices, it’s still ahead in China at this point,” said RJ Hottovy, an analyst at Morningstar Inc. “That gives them a leg up in the offline-online strategy when you see the level of engagement in mobile devices.”

Organic Rooftop Garden

Montreal supermarket opens huge organic rooftop garden

IGA rooftop garden

© Tact Conseil (used with permission) — Francis, Richard, and Daniel Duchemin, storeowners, sit in their new rooftop garden

Talk about slashing food miles; ‘fresh from the roof’ is as local as it gets.

When an IGA supermarket in the Saint-Laurent borough of Montreal was told by the city that it had to install a green roof on its 25,000-square-foot building, owner Richard Duchemin went an unconventional route. He built a big, beautiful organic garden on top, where 30 kinds of vegetables are grown organically in soil watered by the store’s dehumidification system. Two employees tend the produce – beets, kale, tomatoes, eggplant, lettuce, radishes, and basil, among others – and package them for sale downstairs, where “fresh from the roof” has become a fun new tagline.

What’s interesting about this garden is that the vegetables are grown using soil, rather than the hydroponic systems that are more commonly encountered on rooftops (like the amazing set-up at the Dizengoff Center in Tel Aviv). Duchemin wanted to do it this way so that the produce could be certified organic by Ecocert Canada. It is difficult to keep soil fertile on a rooftop, so an agronomist was brought in to develop a proper fertilization plan.

The rooftop also features eight beehives that produce 600 jars of honey each year. These are sold in the store below. There has been some trouble with insect pests, but the gardeners are trying to offset that naturally by planting deterrent wildflowers. Eventually the store may start selling its rooftop-grown fresh-cut flowers, too.

Duchemin told the Montreal Gazette that he hopes to inspire other supermarkets with this project, said to be Canada’s biggest rooftop garden:

“People are very interested in buying local. There’s nothing more local than this… Some restaurants have little boxes where they grow herbs. We pushed it further because we know we’re able to sell what we produce here.”

He has noticed a decrease in energy costs, as well, since the garden insulates the roof in wintertime. The store itself is LEED Gold-certified. As you can see in the promotional video below, the garden paths have been laid out to spell the name ‘IGA,’ apparently visible from planes landing at Montreal-Pierre Elliot Trudeau International Airport.

It’s wonderful to imagine a world where industrial-sized buildings transform their roofs into urban gardens. It makes so much sense to use those vast, flat, sunny spaces to grow food for the surrounding neighborhood and eliminate (or at least reduce) the need to import produce from elsewhere, especially during Canada’s brief growing season. It creates valuable, meaningful, healthy work and makes more of a profit for the store than simply planting vegetation on top. Such gardens don’t even have to be run by the store; other urban farmers could rent the space from which to start a market gardening business or CSA program.

When it comes to urban rooftop gardens, the sky’s the limit.



Viewpoint: ‘Superconsumers’ drive sales in fresh departments

IDDBA research finds growth opportunity

Mike Eardley 2 | Aug 17, 2017

Shopper traffic in our fresh departments has traditionally been a key measure of success. Logically, it makes sense: The more shoppers visit a department, the greater the sales volume. But what if I were to tell you that 10% of shoppers drive as much as 25% of sales in a given department. How would that impact the manner in which your stores and departments engage your shopper base?

IDDBA’s latest research classifies these shoppers as “superconsumers,” individuals who over-index in volume, sales and profit. These consumers are engaged and insightful when it comes to shopping, and they have a passion for the food they purchase and consume. And these traits are reflected in their shopping behaviors:

• They eagerly look for new products;
• They happily pay price premiums;
• They shop the bakery, deli, cheese or dairy categories frequently;
• They have above-average category knowledge;
• They are more open to marketing messages; and
• They can articulate and anticipate latent demand.

By zeroing in on these characteristics, departments can not only tailor their messaging and products to capture the attention of these important shoppers, but develop ways to turn potential superconsumers into actual superconsumers. Let’s take a look at a typical bakery superconsumer, one of the five fresh department shoppers examined in “The Superconsumer Opportunity in Dairy, Deli, and Bakery.”

Despite representing only 10% of households, bakery superconsumers drive 24% of total bakery spend. They also spend an average of $357 per year in the department, purchasing from six product subcategories. In a sense, bakery superconsumers are “hiring” the in-store bakery to elevate meals, as evidenced by the shopping patterns of one bakery superconsumer interviewed for the research. “John” enjoys cooking dinner for his family, but when running late, looks for something that can quickly be made: sandwiches. But not just any sandwich. John creates his dinnertime sandwich using a toasted croissant, which keeps his family happy and his values intact. It’s a win-win for John: He’s providing a meal with a homemade feel to it, while at the same time saving money by not purchasing a more expensive quick-serve restaurant meal.

What lesson can in-store bakeries learn from John? Quite simply, that the department can be a source of every daypart—even dinner in the form of sandwiches—which is exactly how superconsumers view it. And this idea can also resonate with potential superconsumers, with the proper messaging. In this example, the messaging would be that it’s OK to prepare and serve sandwiches as a meal option, if they’re made with special bread from the in-store bakery.

Superconsumers like John are shopping our bakery, deli, dairy, cheese and prepared food departments. By examining their food preferences and shopping behaviors—which is what IDDBA has done through this latest research—stores can not only better engage with these customers, but also help create new superconsumers that drive department success.

Free Garden

A Garden That Is Huge, Sustainable, Empowering And Free

It’s a 5,000 square foot art project called Swale

August 18, 2017

Created by artist Mary Mattingly as a way to grow produce in a public space, the Vergedescribes it as a floating garden brimming with edible plants, including apple trees planted atop a 6-foot hill. Open to the public, anyone can board the barge and pick fresh food for free One such person is Alessandra Potenza who took a ride on the barge and here’s what she had to say.

“The idea behind Mattingly’s project is to bring foraging to the concrete jungle, where very little fresh produce is grown locally. Mostly, fresh fruits and vegetables are imported and thus expensive. There’s definitely a market for local food: New York City alone is estimated to have over $600 million worth of unmet annual demand for local food.”

But there is a problem. Swale produces just about 400 pounds of food per season, which is not enough to satisfy even one person’s fruit and veggie intake in one year. So floating barges are unlikely to meet the local food demands on their own.

Swale is completely powered by solar panels, and it recycles its own water thanks to a system of pumps and sand filters. It also collects rainwater, and it can desalinate and purify the brackish river water if need be. The barge adds arable land in a dense urban area where land is scarce, and it can float from neighborhood to neighborhood — serving different communities from month to month. Last year, Swale was docked in the Bronx, on Governor’s Island, and then Brooklyn from May to October.

Some other of Swale’s offerings include strawberries, blackberries, kale, lettuce, and chamomile.

New York City has about 30,000 acres of public parks, but foraging is strictly prohibited and most public land in the city can’t be used to grow food. Swale is now partnering with the Parks Department to open the first ever edible garden in a public park in the Bronx, a few feet from where Swale is currently docked.

Potenza tried a blackberry from the garden, as well as a bright orange edible daylily that had a little bug inside it, and she ate that as well.

Organic Sales

Market Overview: Sizing up 2016 organic and natural products retail sales [infographic]

As the natural and organic market matures, growth slows overall and for independent natural retailers. Review top-level numbers from the annual Natural Foods Merchandiser 2017 Market Overview report in this infographic and download the complete report below.

Christine Kapperman | Jul 18, 2017

The face of the natural products industry is changing as it grows to $141 billion in sales in 2016.

Each year, Natural Foods Merchandiser magazine tracks the trajectory of an industry it measured early on at $1.9 billion in 1980. The annual report dives into market-size numbers and benchmark data for the industry as well as by store types including supplement stores, health food stores and natural products stores.


Digital Grocery

A Strategist’s Guide to the Digital Grocery

As Amazon and Walmart disrupt the grocery industry, smart retailers can compete by plying their wares in a technologically enabled way.

Sometimes industries hit a tipping point. It looks like nothing is happening for a long time, while forces of change build up, and then everything shifts at once. That is happening in the grocery industry now. A shift is taking place in the most fundamental form of shopping: consumers’ purchases of food products and other basic household goods. The most visible signal of this shift occurred in June, when Amazon announced its acquisition of the Whole Foods grocery chain, but the basic trajectory was already long under way.

Central to this shift is the new digital grocery platform rapidly emerging in industrialized countries. In the U.S., Walmart and Amazon are each leveraging their scale advantages, but under different paradigms. Walmart has achieved unparalleled success with a “push” model that ships full truckloads of goods to more than 4,000 Walmart stores across the country, offering “everyday low prices,” as the slogan puts it, without sales or promotions. Amazon operates a similarly powerful supply chain but with a “pull” model that responds directly to customer demand by shipping packages rather than pallets of goods. The rest of the nation’s supermarkets and grocers must find a way to compete in this environment. Other industrialized countries have similar dynamics: traditional grocery competitors are squeezed between a “push” leader like Walmart and a digital native “pull” player like Amazon or Alibaba.

Undoubtedly, the new competitive dynamics will give consumers many more options for pickup and delivery of basic household goods, at lower cost and with far more convenience than they have ever had before. But they come at the expense of the traditional supermarket. For more than 50 years, convenience, largely defined by store location, has been the dominant factor in grocery retail. It has allowed even small players to survive, and thus helped create a fragmented sector. But now, the digital reframing of the grocery business, encompassing the entire purchase experience from order placement to delivery, reverses that reality. Conventional supermarket companies face an existential threat and must change their business models to compete and, ultimately, to survive.

One potential approach shows particular promise. It could be called the “ply” model — as in, “ply your wares with digital technology.” This model seeks to offset the scale advantages of Amazon and Walmart by leveraging the distinctive capabilities of a local grocery store: a supply chain fed by full-truckload shipments (which Amazon lacks); dynamic pricing and promotion (which Walmart disdains); and the ability to command intensive loyalty from shoppers, because of its local community knowledge, customer segmentation, and product customization. To compete in the coming decade against the twin disruptions of Amazon and Walmart (and their equivalents), today’s grocers and supermarkets need to return to the customer-centric mind-set of their 19th-century predecessors, while making the most of today’s digital tools.

A near-future scenario might involve a suburban family of two adults and three children. They are mindful of both price and convenience. Their favorite neighborhood grocer continues to win their loyalty because it understands what they are looking for; it regularly stocks its shelves with new items likely to appeal to them. On a Tuesday evening, the store sends the oldest child, a 15-year-old being driven home from a soccer game, a text saying his favorite box of prepared food, suitable for a low-cost and healthy school lunch, is half-price in the store they are driving past. Moreover, other items the family regularly purchases, including a new flavor of their favorite breakfast cereal, their usual laundry detergent (which they haven’t purchased in a few weeks), and a bag of oranges, can be boxed together for them along with a few surprises that the grocery store will “throw in just to see if you like them.”

The teenager receives the message because the store’s algorithm, after years of data analysis and machine learning, recognizes that the parent is probably driving and thus cannot text. Meanwhile, the other family members waiting at home have also received the offer and have clicked a box to indicate their support. The teenager alerts the driver to all this, and they stop at the store. As the teenager steps out to pick up the package at curbside, a store employee offers some cold sports drinks as additions to the boxed order. No payment is required rithen; the cost is added to the family’s monthly tab.

What the family members don’t know is that the pricing on those items reflected economics put in place by the grocery chain for their mutual benefit. The school lunch promotion resulted from a special deal with a consumer packaged goods (CPG) manufacturer, interested in pushing out particular products in that local market. Neither Amazon nor Walmart would have matched that deal, because their approaches don’t favor the same kind of supplier relationships. The grocery chain’s inventory-monitoring algorithms had noted an oversupply of fresh oranges in the store, and its customer profile data noted the family history of purchases, suggesting a win-win opportunity. The store did not discount the laundry detergent since its algorithms noted the brand loyalty; it reserved those trade promotion dollars for a different customer. The cold sports drinks offered at pickup were among the higher-margin items in the store, normally bought on impulse in the checkout line, but explicitly recommended because the algorithm recognized the family as participants in previous soccer league promotions. The retailer was plying its wares: matching its preselected assortments to the customers most interested in them, with offers designed to be irresistible — and profitable.

Many established grocery chains will not gladly accept the dramatic changes involved in this new business model, but some new approach is urgently needed. A study published in 2016 by the Food Marketing Institute noted that as recently as 2007, 67 percent of shoppers chose a supermarket as their primary source for groceries. Nine years later, that number was down to 49 percent. And it’s almost certainly continuing to fall, eroded not just by online shopping, but by the increasing proportion of purchases made at supercenters such as Walmart (picked as the primary source by 23 percent of shoppers), club stores such as Costco (11 percent), and drugstores (5 percent). E-commerce will continue to gain market share, especially with Amazon’s and Walmart’s increasing focus on selling fresh food. Profitability and top-line growth are rapidly fading for conventional supermarkets; so are shareholder returns. Overcapacity in the grocery industry is growing, with too many facilities holding too much in inventory. Consumers are getting savvier in using multiple formats (different store types, online subscription models, online bulk orders, meal kits) and using their smartphones to compare prices. And the global expansion of discounters from Germany (Aldi, Lidl) and China (Bailian) may lead to even greater competitive pressure in the U.S., U.K., and elsewhere.

In 2007, 67% of shoppers chose a supermarket as their primary source for groceries. In 2016, that number was down to 49%.

For now, these changes will continue to be felt most strongly in what grocers call the “center of the store”: the aisles of mass-market pantry and household staples such as breakfast cereal, canned goods, cleaning products, and frozen foods. Most incumbent supermarkets have responded to industry changes by strengthening the periphery: prepared food, wine, artisanal cheese, locally baked bread, and organic produce. That helps in the short run — assuming the store can attract shoppers interested in more expensive, fresh products — but fails to address the fact that the store center has been critical to supermarket business models. With the decline of shoppers’ high-volume “stock-up” trips, the central aisles will be more like ghost towns, and this will bring a new round of stress to margins and profitability.

Some traditional grocery chains will respond by pressuring their core suppliers, the consumer packaged goods companies, to lower prices further. They might also try to squeeze more items into the center of the store in hopes of competing on variety. But they will have better success in collaborating with CPG companies to achieve a unique capability in digital grocery. The ply-your-wares concept could give them that capability.

Ply to Push to Pull to Ply

To understand the challenge of the digital grocery disruption, you have to look back at history. Today’s transition is one of three great shifts in grocery industry business models since the Industrial Revolution. In the 19th century and several decades of the 20th, most grocers used an over-the-counter approach. A merchant interacted with each customer, bringing forward the requested household staples from a narrow selection of options kept in the stockroom. A shopper had to visit several shops — which might include a butcher, baker, greengrocer, and packaged-goods store — to fully stock the household pantry.

Then came the supermarket, pioneered by King Kullen in New York in the 1930s. Combining a broad array of products in a large, self-service format, it seemed at first like a retail miracle. During the next 40 years, supermarket chains built ever-larger outlets with a discount push approach: “stack it high and sell it cheap.” Simultaneously, consumer goods manufacturers built national and then global brands. Together, the manufacturers and retailers created vast supply chains to capture economies of scale, coupled with price promotions designed to push products heavily. Large trucks delivered pallets to crowded backrooms; weekly sales flyers attracted customers into the stores to empty the shelves, using discounts that manufacturers generally funded. Today’s trade promotion practices, which have grown to generate up to 25 percent of a typical manufacturer’s gross sales, are descended from the coupons and flyers of the past.

In the 1980s, the next great shift occurred, with Walmart’s entry into grocery categories. Walmart, founded in 1962, had achieved US$1 billion in sales by 1980, just 10 years after going public: This was faster growth than any company, in any industry, had previously achieved. It continued to grow through its steady push approach: eschewing discounts, building large stores with varied selections, targeting underserved locations (especially in rural areas), and maintaining stability through its low prices. This removed the bullwhip-like vicissitudes of discount pricing and the excess costs of the traditional supermarket. The company shipped goods in full truckloads, just like its rivals — but it achieved a steadier flow and enormous scale, which kept supplier plants and retail stores running at full capacity.

Grocery now accounts for more than half of Walmart’s U.S. sales, making the company the largest purveyor of groceries in the world. Even Walmart engages in some temporal discounting, but it tends to use trade promotion dollars from manufacturers to fund its everyday low prices, setting a calendar of very limited weekly promotions. Some of its key suppliers, including Procter & Gamble, have adjusted their practices to accommodate the steady push approach. By any standard, the approach is successful: In the fiscal year ending Jan. 31, 2017, according to the data Walmart releases, its revenues totaled $487 billion from more than 11,500 stores in 28 countries.

But the power of a steady push system wasn’t enough to prevent a third paradigm shift. This was the digital pull system, made possible by the Internet and supersized by the smartphone. In a pull system, customers identify what they want and the system delivers it on demand. To make smaller orders profitable, the supply chain has to be restructured. The pathbreaking digital pull pioneer, of course, was Amazon, whose skill at user experience and operational excellence has made it the only general retailer adept at this approach. (Some pull purveyors have succeeded in specific categories, such as Inditex/Zara in apparel.) Amazon developed its remarkable pull-based supply chain by borrowing lean management techniques from the Toyota production system (TPS). Coincidentally, Taiichi Ohno, the father of TPS, drew some of his original inspiration from a visit to an American supermarket in the 1950s.

After the crash of the Internet bubble in 2000, Amazon continually kept costs low, sacrificing delivery time by centralizing its facilities in Kentucky. At that time, its guaranteed delivery time frame was a range of two to five days. But the company kept investing heavily in its distribution network, always seeking to increase speed and precision. Today, after an order is placed, the site displays a countdown clock indicating how many minutes until the product ships. In fiscal year 2016, Amazon revenues totaled $136 billion, which equates to just 28 percent of Walmart’s revenues. But Amazon is growing faster; in 2016 it captured one-fourth of the total growth of all U.S. retail, half of all online growth, and the fastest share price growth in the global economy.

Amazon’s entry into the grocery sector can be traced to 2005, when it introduced Amazon Prime, a service guaranteeing free two-day delivery of selected products for members who paid an annual fee. Currently, 40 million of the 400 million items sold on the Amazon online platform qualify for Prime shipping. A more explicit food business began in Seattle in 2007 with AmazonFresh, which now offers 500,000 perishable and nonperishable products. In 2014, Amazon launched Prime Pantry, offering tens of thousands of grocery items for two-day delivery to doors anywhere in the U.S. for a $6 fee. The last barrier has been fresh and frozen foods. Amazon has struggled to master the “cold chain” required to handle refrigerated groceries: It took six years of experimentation before AmazonFresh expanded to other locations in 2013. It is now available in many major U.S. metropolitan areas (Atlanta, Boston, Chicago, Houston, Los Angeles, Philadelphia, San Francisco, and Washington, D.C., among them) and London.

In March 2017, two AmazonFresh pickup locations in Seattle began offering curbside service, placing groceries in customers’ cars at a time specified when the online order was placed. Thanks to Amazon’s small-batch delivery capability, the Fresh pickup sites are no more than one-fourth the size of a typical grocery store carrying the same variety. Another retail experiment is a small-store format called Amazon Go, which has adopted the type of sensor technology and artificial intelligence used in self-driving cars to eliminate cashiers and checkout lines; the building is designed to track purchases as customers walk around. The prototype stores will be about 1,800 square feet, and carry only 500 to 1,000 items, most of which will be freshly produced on demand (applying the pull approach) by a dozen or more on-site food preparers. And of course, with the purchase of Whole Foods, the company now has a viable presence in communities throughout the U.S. (and a few outposts in Canada and the U.K.), providing a platform for further experiments. Meanwhile, on the supply chain side, the company has announced plans that include adding 48 new distribution facilities worldwide to its existing 380, about 230 of which are in the U.S., building upon a current global total of 139 million square feet — plus its own air hub in northern Kentucky to house 40 leased air-freight Boeing 767-300s. These numbers represent such a high competitive bar that no single retailer, and certainly no supermarket, can feasibly match Amazon’s pull approach.

Walmart, meanwhile, is acquiring online retailers (notably in 2016 for $3.3 billion and the men’s apparel outlet Bonobos in June 2017 for $310 million), and offering its own online-order-and-store-pickup services called “Click & Collect” and “Pickup Today.” Collectively, the two behemoths — along with a group of smaller startups — are shifting consumer expectations about ordering food online. The perception of food shopping convenience is changing from an open checkout lane to a smartphone app with a frictionless user interface. Even a small shift in customer attitudes can disrupt traditional supermarkets. Unless traditional grocery stores respond aggressively, Walmart, with its push model, and Amazon, with its pull, could plausibly divide most of the grocery category between them — a category that represents roughly half of retail sales.

Introducing the Ply Model

How, then, can traditional grocers respond to these threats? They don’t have the scale to match Walmart’s steady push or Amazon’s digital pull. But they do have advantages that Walmart and Amazon can’t match: their supply chains, dynamic pricing and promotion, and customer loyalty. Digital technology can and probably will be used to increase the value of these advantages. On the supply chain side, new entrants are already setting themselves up as platforms that established retailers can deploy. These include Instacart, a $3.4 billion startup partly owned by Whole Foods, which has tried to explicitly compete with Amazon on grocery delivery; other delivery startups such as Postmates, Shipt, StorePower, and GrubMarket; Google’s version (known as Google Shopping); and a growing number of food preparation startups, such as Blue Apron and Sun Basket. To be sure, the costs of home delivery (the “last mile”) are still as great as they were when one of the first such startups, Webvan, failed in 2001. And the initial partnerships between these new companies and traditional retailers have primarily been “no regrets” experiments, largely funded by the startups and offering little risk to the incumbents. Home delivery will need to be a more integral part of digital grocery strategies in the future.

In customer relationships and promotion, digital technology will be critical for enabling the ply-your-wares approach. A food retailer will now use mobile devices, customer segmentation, and pricing to change the promotion game entirely. This new paradigm is, at its core, a digital upgrade of the earliest retail model. In medieval village marketplaces, merchants aggressively hawked their products and haggled over prices, using a keen eye to assess each customer’s willingness to pay. They also kept watch for regulars who could be counted on to show up every week. At the end of the market day, savvy merchants had fully depleted the inventory of goods — be it fresh meat cuts or fur hats — that they had already purchased.

A digital ply model gives consumers something they can’t get from a scale-based model: tailored offers based on historical in-store shopping patterns and micro-segmentation derived from big data. The family being targeted by a digital message is not just segmented, but analyzed for its needs and wants, almost down to an individual level. The supermarket no longer tries to compete with Amazon or Walmart by providing everything; instead, it provides what it perceives its customers will want and need most. Sometimes this will be fresh or precooked food; other times, just the right assortment of staple goods. Sometimes, the supermarket offers rare items that a few key customers have bought in the past, and that happen to be available now.

The most important technological enabler for this new format is real-time, big data software that maximizes the return on the investment in store-based inventory. Under the digital ply model, retailers and their brand partners manage product promotions the way airlines manage airplane seats. The most loyal customers don’t get the lowest prices, but they get priorities and special perks. When the supply of inventory is sparse, it is set aside for loyal customers. When abundant inventory needs to be sold, selective promotions target the price-sensitive customer who would not purchase otherwise. The retailer models the economics of customer purchases — including the likely impulse purchases made by customers drawn into the store through promotions — and adjusts the assortment and pricing accordingly.

Some companies are already applying elements of this approach, using technologies emerging now. One forerunner is the Safeway chain “Just for U” app that identifies individual tastes and directs consumers accordingly. Another is the Denver-based analytics firm FullContact, founded in 2010, which helps companies combine their customer information with data from platforms such as Twitter and Facebook. Ply marketing isn’t easy, and it won’t solve all problems. But those who embrace it could find that it allows them to survive the coming battle between Amazon and Walmart.

Getting to the Digital Grocery

Whether they adopt the digital ply-your-wares paradigm or another framework, supermarkets will end up shifting their operating models dramatically during the next few years. There is no other way to counter the loss of business to Amazon, Walmart, and a few other multichannel platform creators. Collaboration among grocery manufacturers and retailers probably represents the best way to begin. Both sectors are threatened by the same industry dynamics. They are both aware of the power of the Internet, and particularly mobile devices, to reach consumers on the move. Together, they can reach out to loyal customers, alert them to opportunities at stores near their locations, and attract spur-of-the-moment purchases that offer real value and yield incremental revenue.

Unfortunately, the apps from traditional retailers are not yet up to the challenge. According to a recent analysis by the business intelligence research firm L2, only one of 15 grocer apps and five of 10 general retailer apps provided information on individual stores’ inventory, a critical functionality for purveyors of groceries. Today’s grocers, like the village merchants of the pre-industrial era, need to focus on selling their inventory at the highest margins possible. But all too often, that inventory is put on sale across the board, independent of the store’s current portfolio of goods. At times, the products advertised in a traditional push promotion are out of stock at some stores, because the space allocated to the inventory was insufficient to cover the increased demand. So rather than finding a great bargain, the consumer is frustrated by an empty shelf — particularly maddening to stores if the consumer was a loyal shopper who would gladly have paid full price. Out-of-stocks, whether on promotions or not, represent a failure for the store, the brand, and the consumer.

Admittedly, maintaining an accurate view of inventory is far more challenging in a grocery store than in an e-commerce fulfillment center of the sort that Amazon runs. The fulfillment center operates in a highly controlled environment, using best practices such as “cycle counting” (an auditing practice in which part of the inventory is counted on a particular day) as well as draconian measures such as pat-downs of every employee exiting the facility. In a grocery store, when the computer shows an item in stock but the shelf is empty, it could be in the back room, in a shopping cart awaiting restocking, or in another consumer’s hand in the checkout line.

Digital grocers will use big data to address this problem. It can help stores improve inventory accuracy by noting sales patterns — such as a significant drop in sales when an item is out of stock — in order to trigger a targeted inventory count to address the issue. Loyal customers could help by clicking a button on their mobile app if they don’t find a desired product on the shelf. The signal alerts the store manager, who might intervene on the spot and find a substitute, suggested by the algorithm, perhaps with a discount to keep a loyal customer, or a promise to deliver the item the following day. Customer data can also identify habitual purchases, say, the largest package size of a favorite cookie brand, and offer two-for-one promotions to specific customers when there is too much of the product in inventory.

Few things are certain about the future of traditional grocers in the digital world, except that decline awaits those who sit back and do nothing. But supermarkets should take heart — loyalty to grocery store chains sometimes scores higher than loyalty in any other retail category. The shoppers are supermarkets’ to lose. It’s time for grocers to stop thinking about the coming threat, and start planning for the opportunity.