E-Commerce, Loyalty, Labor and Consolidation Loom Large in '19

2018 was a challenging year for the grocery sector, with changes in consumer shopping behaviors and competition from alternative retailers forcing many to re-evaluate their entire operations and how they engage with consumers. Online shopping and home delivery, both defining trends for other retail sectors over the past decade, have had a dramatic impact on the grocery sector, paced, of course, by Amazon. Traditional grocery chain consolidation and a tight labor market also contributed to the upheaval of 2018. But while those macro-trends are unlikely to fade in 2019, there remains significant opportunity for grocers willing to adapt and pursue agile, customer-centric strategies.

The grocery business may be changing, but grocers can capitalize on that change by differentiating their operations and focusing on the customer experience.

E-Commerce Comes to the Grocery Store

Perhaps the single biggest trend that impacted the grocery industry in 2018 was online/mobile ordering, home delivery and store pickup. Pushed by Amazon’s aggressive entry into the grocery delivery sector, with its Amazon Fresh service and acquisition of Whole Foods, grocers across the country embarked on e-commerce strategies of their own. But for grocery stores, with their large brick-and-mortar footprints and legacy merchandising processes, shifting toward an Amazon-style business model will take more than simply launching an app.

2019 will be defined by how well grocers reckon with this new reality. We will see a move toward more warehouse and storage space to accommodate delivery and pickup. A continued decline in foot traffic will prompt grocers to invest more in their digital and mobile properties, including e-commerce apps. And the allocation of labor will shift, as self-checkout and prepayment becomes more prevalent in all store formats. Some of these adaptations will be easier for grocers to execute than others—reallocating in-store square footage is more capital-intensive than optimizing a mobile app, for instance—but overall success for grocers will be determined by how well and quickly they can respond to these disruptive changes.

Shifting Labor Costs

Labor costs have increased across the U.S. as persistently low unemployment rates have introduced upward pressure on wages. According to the National Grocers Association (NGA), labor and benefits accounted for a record high 15.16% of sales in 2017, and labor became more scarce in 2018. This trend will likely continue at least through the first half of 2019. For grocers, there is an opportunity to reduce these costs by introducing more self-checkout solutions and online payment options. However, those gains might be offset by the extra labor needed to fill delivery and pickup orders, and to staff increased warehouse space. Grocers that can manage this shift effectively will carve out some competitive advantage. Expect to see more “just-right” staffing models, as well as technology solutions that improve staff communications and streamline HR functions, for example, self-service portals.

Consolidation Reduces Number of Chains

The grocery sector has been in the midst of an ongoing consolidation trend since at least 2015 (when Albertsons merged with Safeway), and 2018 simply reinforced the dominant position of the largest grocery chain networks in the U.S. As the economic cycle further matures in 2019, expect more acquisitions to come.

This continued consolidation indicates the need for extensive system integrations as grocers look for a holistic view of their entire businesses. As grocery chains unify their systems, schemes and programs from multiple banners under one corporate structure, they will need the right technology partners to facilitate these integrations.

Multiple Coalition Loyalty Partners

The grocery industry, particularly when compared to other retail sectors, is often a leader in loyalty program adoption and execution. With the exception of big-box and discount operators, the typical grocery store chain has a loyalty program implemented, and leans on it to drive both customer retention and in-store spend. What smart grocers in 2019 will realize is that loyalty programs are the key to capturing and leveraging customer data. The more a grocer knows about their customers’ habits, activities and preferences, the better they can market to those customers and keep them coming back. A loyalty program that combines personally identifiable information (PII) with point-of-sale data can create insights that drive personalization, product mix optimization, real-time offers and help grocers differentiate themselves in a more crowded competitive environment.

Importantly for grocers, a multi-merchant (or coalition) loyalty program can provide these advantages. An example is a coalition program like Fuel Rewards, in part because it provides value and flexibility to customers (fuel savings are consistently consumers’ most preferred reward, surpassing even cash back), and in part, because it gives grocers access to customer data that can inform marketing and merchandising strategies. This year, expect more grocers to embrace these kinds of programs.

Competitive Advantages: Fuel Discounts, In-store Differentiation and Online Presence

Loyalty programs—particularly everyday value programs with popular currencies such as fuel discounts—are also key differentiators for grocers. Amazon Fresh and home delivery competitors do not offer loyalty programs per se—traditional grocers are well-positioned to compete in this area. Similarly, online-only grocery competitors don’t have an in-store experience to leverage; grocers do. Focusing on improving the shopping process for customers will pay dividends in 2019. And of course, grocers will need to expand their digital presence, both online and through the mobile channel, in order to meet their customers’ needs wherever they are. The good news is, their loyalty programs can be integrated into all of these strategies, multiplying their effectiveness and the perceived value to the customer.

Yes, challenges will continue to persist for grocers in 2019. But all of the consumer and economic trends that spark these challenges also present opportunities. The e-commerce revolution that came late to the grocery sector represents an opportunity for grocers to become more agile and rethink their traditional store structures. Changes in the labor market present an opportunity for grocers to adopt more self-service options and invest in their digital channels. Consolidation can lead to efficiencies in systems integration and the ability for customers to engage across brands and banners. Increased competition means more chances to differentiate, including through multi-merchant loyalty programs and leveraging the in-store experience. We’re excited to see how grocers will seize these opportunities in 2019 and beyond.

Scott Schaper is EVP of program operations for PDI Software, an expert in grocery operations, loyalty and marketing. His two decades of experience in grocery and fuel operations include positions with Winn-Dixie and Safeway, as well as corporate development for Randalls Food Markets.