As 2018 closes out, storm clouds continue to threaten regional grocery retailers. New market entrants, a spate of acquisitions and a few notable bankruptcies over the past couple of years tell a clear story: time to innovate and reinvent yourself. Taking a page out of Amazon and Walmart’s digital commerce book, forward thinking grocery retailers have invested in their online and offline capabilities. But embarking on eCommerce and digital conveniences for shoppers isn’t just about picking the right tech investments. It's about navigating colliding business models. The expectation of “low risk/steady returns” in the regional grocery business, clashes with “high risk/big returns” in digital enterprise cultures. With this contrast, it's worth reconsidering how success is measured. In a new omnichannel world, regional grocery success metrics need a rethink.
Hundreds of millions of dollars in digital investments may get all the press, but local grocers remain the billion-dollar revenue generators that run successfully in our communities. The differences run much deeper than headlines. Grocers are expected to eke out slim and steady 1-3% annual profit margins. Preserving these margins is primary; growth expectations secondary and incremental. By contrast, pure digital enterprises are expected to grow 30% plus a year, whether burning or printing cash.
If we look at this from the other side, through a customer lens, this divide is not so apparent. Consumers want it all: low price-value offerings and value-added shopping experiences enhanced by digital conveniences. Catering to these shopper demands is becoming less about market segments and more about shopper moods: customers who enjoy and can afford higher end experiences for some of their shopping needs, now split their baskets across several offerings including low-cost value plays. It is not an all or nothing world.
In the last few years, new gig economy software solutions have emerged in the grocery space. Running in parallel with targeted food and beverage offers to appeal to new consumer tastes, digital conveniences appeal to new millennial shopping experience demands. On this front, big wallets are now leading the way. Last mile delivery companies offer upfront grocery choice online and backend delivery to people’s homes. Instacart now boasts an $8 billion valuation. Shipt was acquired by Target for $550 million. Doordash now valued at $4 billion holds out the promise of grocery winning back customers lost to restaurant meals by offering pre-packaged meals delivered straight to home or office. Digital in the grocery industry is not only here to stay; it’s booming.
As grocery races to reinvent itself in an omnichannel world, real questions on whose strategy makes the most sense and how best can grocery retailers make money are being asked. At Mercatus, we’ve long held the view that forward-thinking retailers who had previously relinquished their digital commerce experience to last-mile solution providers will soon realize what’s at stake as digital revenue grows. We believe retailers will emerge with a renewed sense of strategy in 2019 and take back control to protect their brand and revenue.
What follows is geared to helping grocery executives evaluate their current state and decide their next course of action. Measuring success along the digital journey requires a rethink. Knowing that what gets measured also gets managed, are there lessons we can derive from the software world that can help guide regional grocers? While some fundamentals are similar between grocery and software, others are wildly different. Whatever the system, how is success measured?
Key Performance Indicators
There are some metrics exclusive to the brick & mortar grocer because they apply only to physical space such as sales per square foot. Measuring the efficiency of sales space and assets, the average for grocery hovers around $500 but this varies considerably depending on store format. There are, however, a number of metrics that offer real operational value for digital grocers.
What is of mutual interest to regional grocery in-store and online? Against a long list of traditional grocery business KPIs, several prominent ones are interesting and are worth a comment.
Basket Size.Grocers focus on this metric, especially cross-category. A favorite grocer line is “If I could sell just one more item to each customer in a category/department they usually ignore, my numbers would go through the roof.” Online sales offer both an opportunity to increase share of basket and an ever-present threat as competitors take their share at your expense.
Customer Acquisition Costs (CAC).This is essentially the marketing and promotions budget versus the operating budget. Doing online right is not a cheap investment. Grocers need to invest in above- and below-the-line promotion as well as digital content development.
Customer Lifetime Value (CLV or LTV).For venture capitalists, the favorite metric in any pitch-deck is the LTV/CAC ratio. Ideally, a customer ought to generate at least 3 times what it cost to acquire them with the initial payback being under 1 year.
Abandonment Rate. This is generally a bigger concern in digital but happens in-store as well, as shoppers walk through specialty departments but choose to buy elsewhere.
Inventory Levels. Stock Turns. Sell through Percentages. These are generally the same if eCommerce sales come from local stores, and not central distribution. Although theoretically the notion of “one in/one out” shelf space allotment doesn’t apply to digital selling, the reality for most regional grocers is that the item bought online comes directly from the same local store so the KPI challenge remains the same.
Frequency of Shop.This is an interesting one because, not unexpectedly, the availability of click-and-collect and home delivery options change shopper behavior. Old models of measurement need to be readjusted to account for new combinations of frequency, basket sizes, and category mix as shoppers venture both online and in-store (see these results from Mercatus and Winsight Grocery Business.)
Shrinkage.Theft, damage and spoilage occur in warehouses as well as stores with new “who owns it” wrinkles opened up by home delivery.
Display Execution. This one is interesting to consider for eCommerce. Most online visuals are pictures within pictures -- pictures of packages that more often than not have pictures of the product on their label. In the not too distant future, CPGs will realize it makes more sense for visuals online to be of the actual prepared product.
Of course, there are numerous traditional financial measures surrounding sales and profitability, the Cost of Goods Sold (COGS), etc.
There are also KPIs that look similar but should be reconsidered in an eCommerce enviroment. Take foot traffic as an example. Eyeball tracking online isn’t exactly the same. Lamenting that customers visit online but don’t always make purchases (so-called shopping basket abandonment) misses the point that shoppers routinely go online to do their research, much of which later lands them in-store. Linking their activity to later in-store purchases is a difficult exercise. KPI tracking of eCommerce only sales as if it represented a stand-alone store misses the mark as it misrepresents this primary shopping behavior.
For eCommerce, the metrics that typically get mentioned come from conventional digital marketing practices. The list is lengthy. Consider these common KPIs:
It’s difficult to find in these lists KPIs that will resonate with a grocery executive’s interest. Of course, mobile site traffic and new (vs. returning) customers spark some attention but only in tandem with “how many shoppers” and “how much did they spend?”
The problem with marketing KPIs in general and digital marketing metrics for grocers, in particular, is they are in constant danger of becoming surface level “vanity metrics.” They impress the audiences they were built for, like “social followers and fans” but fail to impress business owners. In many instances, these KPIs don’t just miss the mark, they mask ills that can go undiagnosed and untreated.
Thinking like a software company
Complaints from shoppers in the store are difficult to ignore. Angry or upset customers typically are “in your face” and there’s a tendency to inflate customer problems into bigger issues. With online assets, it’s the opposite. It's easy for customers to “walk out” on the relationship with the grocer and equally easy for those responsible to keep this reality hidden even as customer relationships are poisoned with click-bait, spamming, poor UI design, and lack of integration across channels. Few take the time to properly measure downside metrics.
Poor uptake on an email push campaign should prompt inspection as to why and what, if any, damage occurred. Unfortunately, that kind of discussion, never mind inspection, is rare. Instead, the reflex of many marketers is to double down, sending out more poorly designed campaigns hoping for a positive number to showcase. Spamming and click-baiting are not the fault of basement hackers; arguably they are the well-intentioned and ill-informed vanities of digital marketers.
By contrast, clarity metrics are operational metrics that represent “the hidden gears that drive growth… [and] solidify your competitive advantage.” They focus businesses of all kinds, regional grocery included, on finding new customers to acquire and retaining their current customers as new offers come to market. Online, in particular, provides a gear to achieve that one essential, needed cross-category sale every grocer looks for. Why not have a Category Development Index that measures cross-category basket sales and determines if its shrinking or growing, including online’s contribution to this metric?
The answers lie in being able to think like a software company while solving for a grocery business. The ideal reality for a grocer to pursue is for customers to be online and drawn into the store while away, and when in-store, interacting online in pursuit of an ideal personalized experience. In light of this goal, new metrics need to be in place. Consider, for example, Unique Household Interactions, a measure that embraces the buying power of a consumer household in an omnichannel world.
A great irony in grocery retail is that the most profitable parts of the business are too often the furthest ones from “digitization” of any kind. Private label brands, pre-packaged meals, locally grown produce -- all the most differentiating and opportune forms of profit that are the basis for regional grocers’ success are too often the furthest from being offered in a compelling way online. A Private Label Penetration metric may make sense if this is what is driving profits, including holding digital partners accountable for their commitment to promote private label.
The power of these metrics is that they change the conversation from the outset. Many digital solutions want to grab share by tackling the easiest part of the opportunity without focusing on what drives value for the grocer. In the long run, the hard parts like private label are where the win-wins can be created. Getting new, complex thingsdone is familiar ground for large successful software companies. Interestingly, many have turned away from traditional KPIs and instead have turned to OKRs.
OKRs: Objectives and Key Results
OKRs are goal-oriented systems used by software companies. Google started using OKRs in its first year back in 1999, and still uses it today. We use OKRs at Mercatus as well. Like a KPI, they are a metric based tool that creates alignment and engagement around measurable goals. Unlike a KPI and traditional annual planning methods, OKRs are frequently set (usually quarterly), tracked, and then re-evaluated. With OKRs, the short-term goal-oriented measures help create a much faster cadence and do so from the ground floor up, engaging each team’s perspective and creativity.
Consider what software companies do and apply it to the grocery industry. Specifically, think about what Google really is. It claims to be a search engine, but its primary goal is to provide a "direct response advertising engine optimized to put the right ad in front of the right person at the right time." Now think about what your grocery eCommerce site is.
To the public, grocery eCommerce is an online storefront with a search engine and purchase capabilities. Like Google though, its real value lies in being an advertising engine optimized to put the right products in front of the right shopper at the right time. It should be the number one reason that your shopper never feels compelled to look further. Grocers can know what each of their customers likes to buy, how often they like to buy, and what’s on their shopping list. Grocery eCommerce is the opportunity to build a personalized shopping experience that tailors to every individual shopper's needs.
Understanding that objective, every department in a grocery business should be tasked with imagining how they contribute in new creative ways to bring highly personalized convenience to customers. OKRs can help in focusing everyone, not just the marketing department, around how best to engage digital shoppers so they become repeat customers and purchase across a broader mix of categories. And when new big opportunities arise, like click-and-collect, and delivery of hot and fresh ready-to-go meals, everyone can rally around their measured contribution to achieving these goals.
With the right measures in place in 2019, regional grocery executives can navigate the strong winds of change that carry with them enormous opportunities for future margin growth and profitability. We’ve seen this in our own research at Mercatus, and I encourage you to read it. There’s a tangible effort-reward dynamic when it comes to eCommerce adoption. Retailers that offer online commerce and own the experience of click-and-collect and delivery will drive new shopping trips that grow top-line revenue and future growth.