Grocery Store 2.0

18.3.2016 -

Grocery retail in an increasingly digital operating environment

Digitalisation enables completely new operating and revenue models in the supply chain of groceries. New models in the multichannel operating environment will change the operations and roles of the actors in the supply chain. The new models will diversify the consumer offering, and they will be more cost-effective than the current models. Online grocery retail is still scarce but the signs of change are there. The growing dignative generation and fast developing technology will inevitably change the operating environment of the retail sector.

Logistics will play a significant role in the change

The operating models in tradition retail have developed under restrictions that have gradually been eliminated during the past few years. Grocery retail as it is today started as small-scale stores that sold a very restricted range of goods. To improve cost-efficiency and increase offering, the next development phase was retailing groups, logistics centres and larger but dispersed stores. This path seems to have come to an end, and people’s shopping habits are changing. Due to digitalisation, the need to change is certainly widely known, but in the course of years, the retail engine has been tuned for the brick-and-mortar model, and changing the course of development will take its time.

Organising the delivery of the products to be sold has steered the development of online retail. In the first phase, the most common products sold online were music, films etc., i.e. products that could be distributed directly over the Internet. They were followed by specialty goods with fairly high unit prices, such as electronics and clothes that could be delivered by traditional mail and in which the share of delivery of the total price of the product was small. The delivery of groceries sold online poses many new challenges compared with earlier online retail models. The challenges in the supply logistics include various handling requirements and delivery to the consumer (“the last mile”). The challenges will, however, inspire the development of completely new operating models and concepts in grocery logistics.

Change is an opportunity for all the parties in the chain

Online retail allows the development of a completely new grocery store concept. In the future, it will be possible to have products offered by hypermarkets and market halls delivered to a small local store or a separate collection point. Purchases can be made at any time and they can be picked up in a local store or have lifted into your car on a drive-in lane of a collection point. Stores can facilitate shopping by selling ready food bags with recipes and by targeting marketing and sales campaigns in accordance with the customers’ consumption habits or latest food trends.

The current store model, which is based on the principle of push control, requires careful planning and forecasting throughout the supply chain to ensure that supply and demand in a single store meet as well as possible. In forecasting, balance is sought in terms of availability and waste. In online retail, store-specific forecasting of demand is not needed. Deliveries are made direct from the central warehouse of the basis of orders. In this way, waste is reduced and cost efficiency improved. As the central warehouse serves the whole country, also specialty goods can be included in the offering.

In Finland, food home delivery is only profitable in a few densely populated areas and for expensive one-time purchases that are suitable for home delivery (e.g. wholesale consignments, specialty goods). Globally, the collection point has been a well established operating model for some time, and it is especially suitable for online grocery retail. Collection points also offer new opportunities to stores in the form of additional sales and services.

For suppliers, online retail offers possibilities for direct sales and expansion of product ranges. In the future, suppliers could sell their most unique specialty goods online even before they are made by utilising a partial pull control method, for example specially spiced sausages on order for the weekend. In the traditional store model, many small volume manufacturers are not able to sell their products in retail stores as demand for them is not sufficient in the area that an individual store serves. When the product of a small volume manufacturer is sold online through a central warehouse that serves the whole country, demand for the product could be significant for the manufacturer.

However, the new grocery retail model requires changes in consumers’ buying behaviour. Maybe in the future, stores will only have “kiosk offering” if no advance order is placed, “hypermarket offering” on 24-hour order, and”market hall offering” on 48-72 hour order. This means that we will have to learn how to plan our purchases in advance. On the other hand, online stores will provide us with functions that facilitate shopping, for example, ready recipes that suit our food habits, allergies, cooking skills, as well as ready baskets or automatic reminders of missing purchases. Instead of writing shopping lists, we will be able to choose meals from a list in accordance with our grocery habits, untick the ingredients that we already have in our kitchen cupboards and pick up the purchases at a collection point on the following day.

The new model requires new thinking

Grocery Store 2.0 benefits the entire supply chain. New operating models will allow stores to increase sales and reduce waste, and completely new supply channels and possibilities to expand product offering will open to the industrial sector. Consumers will pay less for food and save time as they need not walk around hypermarkets to find the products they need. In addition, the domestic wholesale and retail sector, food industry and entire food culture will have new development possibilities.

What is written above is already possible today, and partial solutions are already in use. However, the current infrastructure and information systems still support the old store model in many areas. Solutions are already available for offering Grocery Store 2.0, and in the near future, we will certainly see new ideas on the subject.

Ilkka Muilu

Ilkka Muilu

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