'Be Bold': FMI Closing Keynote Maps a Tough Road Ahead for a Resilient Industry

In a wide ranging and rapid-fire closing keynote presentation to FMI’s Midwinter Executive Conference, McKinsey’s Sajal Kohli crammed dozens of insights and recommendations into a 25-minute talk urging food retailers to act with purpose and determination as they navigate a future transformed by omnichannel and technology, and shaken by the global pandemic.

In short, retailers will have to drastically reduce their expenses, intrepidly pursue new places and partners for growth, and tackle profitable online selling, personalized marketing and a crisis-proof supply chain, while developing a new operating model to withstand those challenges, said Kohli, a senior partner of McKinsey leading its Global Retail and Consumer Packaged Goods Practice.

“When we look at companies that have shown resilience to past downturns, we see that they’ve made bold decisions regarding their organization and operating model, which determine their success,” Kohli said. “Leading organizations can make moves that will sustain their growth and advantage for years to come, but they must be bold.”

In his address, Kohli identified five “critical imperatives that grocers absolutely need to get right,” and each of those with recommendations, as follows:

Getting E-Commerce to Profitability

The unprecedented acceleration of e-commerce has been a “double-edged sword” for retailers that have seen sales and customer acquisition “at a clip only imaginable in their wildest dreams” but with wildly varying net margins on the business.

Depending on the various labor and fulfillment models, McKinsey research indicates net margins ranging from negative 20% on omichannel to plus 5%, driven by cost variances, product handling and last-mile and third-party fees.

“This will necessarily require a more bespoke and tailored approach to pick and delivery models depending on your footprint and your operation based on the labor and transportation realities you face in each of your businesses and markets,” he said.

Make a Permanent Shift From Mass to Personalized Marketing

Personalization in grocery has traditionally lagged other sectors of retail like apparel and beauty, “but it’s quickly getting momentum,” Kohli said, particularly for those such as Kroger with in-house capabilities like its 84.51 data group.

“We know that at scale, personalization is proven its potential beyond revenue,” he said. “It’s a marketing efficiency play. It’s a critical enabler of customer engagement, and a driver of new customer acquisition.”

The industry is getting the message. “Historically digital marketing represented a meager 5% to 10% of a marketing budget. Yet many grocers are budgeting close to 50% for 2021 and 2022,” Kohli said. “With that shift comes an arms race to build a better marketing tech stack and operating model to drive rapid campaign deployment with a test-and-learn engine underpinning the approach.”

Embrace COVID-Resilient Merchandising

The financial downturn brought on by the pandemic will eventually play itself out in consumer food shopping choices, Kohli asserted, and will reward retailers that are prepared to offer value along with excitement.

“It’s crucial that retailers bring affordability and availability to the everyday shopper during and beyond the pandemic,” he said. “We believe that retailers have a real opportunity to drive accelerated private label penetration and reinvigorate stale categories with flavors, ingredients and ways of preparation that are both exciting and approachable for home cooks.

“Customers have never been more open to exploring and switching, [so] now is the perfect time to build loyalty and differentiation through store brands,” he continued. “There might’ve been an abundance of shooting from the hip during the early days of the pandemic, but now is the time to double down on optimizing assortment planning and forecasting as the pandemic continues.”

And with COVID bringing lots of questions as to the right assortment for stores, he recommended that retailers:

Reshape the Supply Chain

Strategic retailers should view the supply chain not as a cost center but a “strategic asset,” Kohli said.

“Prior to the pandemic the primary focus of supply chain was to deliver goods on time and at the lowest cost per case. Demand was largely predictable and resilience was really an afterthought,” he said. 

But performance in the pandemic, he argued, aligned closely with those with the best product availability, with in-stock rates rebounding with the winners much quicker than those who lost share.

His five recommendations for the supply chain—each coming with their own questions—are as follows:

An Operating Model for the ‘New Normal’

Kohli made no secret of his contention that retailers need to reduce personnel and other expenses by 20% to 30%. “There is no other option,” he said. “As a percent of sales, these costs need to continue to grow more slowly than the top line.”

Retailers should also prioritize their investment in growth areas at “two to three times” than other capabilities, and look to a cross-trained workforce, and use temporary and project-based workers where necessary.

Four recommendations in the new operating model:

Kohli closed his presentation by reiterating a message that boldness is a key to survival in the world ahead.

“This pandemic has tested the resolve of our global citizens, our social fabric, the power and effectiveness of our institutions,” he said. “One thing that is starting to be clear is how resilient we are and can be. Our supply chains are resilient. Our sector is resilient. Customers are resilient, our employees and especially our front-line heroes, they’re resilient. We do have the ability to emerge from this pandemic much stronger and much bolder. My challenge to you as leaders of essential organizations is to act as boldly.”