Sylvain Charlebois: Retail Bogeyman Keeping Grocers up at Night

December 21, 2017 rbudd Leave a Comment

“Loblaw is playing defense against the boogeyman of retailing. But if they play their cards right with home food delivery, they will be able to deliver much more than food to Canadian homes.”

Dr. Sylvain Charlebois

Dr. Sylvain Charlebois
Dean, Faculty of Management, Dalhousie University

Loblaw is the latest grocer to commit to offering home delivery. Starting in December, the number one food retailer in Canada is looking at deploying this strategy from coast to coast. It intends to deliver food at home, for a fee of course –an ambitious plan indeed. After spending millions in making many of its stores cathedrals where food is adulated, like the Maple Leaf Gardens store in Toronto, serving up President’s Choice in people’s homes now seems to be good enough.

Basically, the socioeconomic fundamentals that have supported large, big-box stores are weakening rapidly. Real estate is not cheap, growing same-store-sales is difficult these days and finding good labour to cover large spaces is challenging. In fact, as higher minimum wages are adding more pressure, grocers need to think of ways to make their equity and human capital work more efficiently. What’s more, a good portion of the Canadian population will become less independent to some degree. By 2025, more than 8 million Canadians will be 65 or older. And if you add Canada’s unpredictable — and sometimes horrid — weather, these indicators point to one thing: the bricks-and-mortar model is becoming much less appealing for a growing number of Canadians.

Our modern lifestyle is also a factor. Quite simply, time-strapped consumers are looking for convenience. Those who can’t or don’t want to cook are also are looking for quick fixes, and that is exactly what the food retail industry is trying to offer. Grocers are increasingly attempting to chase down the money that is showing up at their doorsteps less and less often.

As a result, we are continuing to witness the slow death of the traditional grocery store. For one thing, an increasing portion of our budget is dedicated to eating outside the home. At almost 30% of all of money spent on food, Canadians are on track to breaking a new record this year. Secondly, most of us are online, shopping for anything and everything. And yes, food is part of that portfolio. About 5 years ago, barely 1% of our food purchases were made online. Today, some unofficial estimates suggest that number is now close to 4%. We are progressively catching up to the Americans, who are at 7%. And given Walmart’s recent results, online grocery shopping is expanding. Walmart’s online sales in the U.S. grew by almost 50% last quarter, a lot of which was food sales. Canada is seeing similar trends.

Even though grocers’ balance sheets in Canada are in fairly good shape, Amazon — the boogeyman of retailing — has become a legitimate threat since it took over Whole Foods this summer. Amazon is not just a business killer — it destroys entire sectors. The bookstore was its first victim, and since its acquisition of Whole Foods, we can assume that the grocery store is in Amazon’s sights. It is all about digital transformation for Amazon. It is redefining how the food industry and consumers make transactions in a digitalized, borderless world.

Among scalable home delivery businesses, Grocery Gateway was really one of Canada’s pioneers. For years, this fleet owned by Longo Brothers delivered food products in the GTA, while barely making a profit. In fact, Longo’s acquired Grocery Gateway back in 2004 from a failed dot-com project, a victim of the bubble in that industry. For 13 years, the competition stood back and did nothing, for fear of cannibalizing a fellow market grocer. Several questioned the sustainability of operating a full fleet of trucks while at the same time charging a hefty premium of 15-20% on an order of 50$. But Grocery Gateway learned from this, and is now expanding. For Longo’s, it was about running a good business. For Loblaw, it is about fighting the Amazon effect, which is why we are about to see an evolution in home food delivery.

Leveraged by data, connecting food retailing with homes can be powerful. In some U.S. cities, Walmart is currently delivering food directly to the consumer’s fridge. Imagine coming home and everything is already done for you. But in 10 or 15 years from now, in a revolutionary digital world, there is no limit to what we can do with home food delivery.

As an example, we could even see companies owning the food we receive, and only pay for the food we use and consume. Food in concession, so to speak. Food waste?No problem. Leftovers can be credited, resold on our behalf, and used for something else. Zero waste. Similar gains can be achieved on the nutritional front. Consumers could be wearing a portable device automatically telling their fridge it is time to get replenished to satisfy a customizable diet. The “fitbitization” of our food could allow for companies to deliver to our fridges and cupboards the food we need to better our health. Home delivery makes grocers face up to a more informed consumer. All the data consumers need is readily available online, where they can also shop at their own pace. It makes consumers more rational, so impulse buying would be nearly impossible –a scary thought for many food companies out there. In return, grocers will need to embrace precision retailing practices in order to match higher expectations. All of this becomes more conceivable with home food delivery.

A blend between a digitalized food retailing industry and our homes can seem incredible, and this is only the beginning. Grocery Gateway was more of an experiment. Loblaw, and likely others, may be playing defense for its long-term survival, but the opportunities are endless.

The Amazon effect is real, and it is here to stay and is keeping most grocers up at night, including Loblaw. Well, at least, Loblaw had the foresight of acting now before it is too late.

Dr. Sylvain Charlebois
Dean, Faculty of Management
Dalhousie University
November 2017

Sylvain Charlebois: Democratizing Organics

November 9, 2017 rbudd Leave a Comment

“Amazon is essentially about merchandizing convenience for all. Organics, meal kits, it’s all about convenience. For years, Walmart mastered the concept of simplicity in a big box store. On the other hand, Amazon is hedging against the indolent nature of mankind. And for that, it’s winning.”

Sylvain Charlebois

Whole Foods

Amazon is not wasting time. Speed of execution is at the essence of Amazon’s model. As soon as U.S. regulators approved its acquisition of Whole Foods, it announced that it would aggressively reduce the price of several organic staples in all of the 431 Whole Foods stores in America and Canada. Amazon’s playbook is about low margins and high-volume sales, for anything, including organics.

Technically, Whole Foods was in a free fall before its acquisition. Store traffic was shrinking, sales were sluggish and the company was having difficultly convincing shareholders that organic food sales are immune to economic cycles and pose a bright future for the company. Whole Foods reinforced the fact that organics were, for the most part, exclusive and for the elite. Organic groceries can cost consumers almost twice as much as conventional food products. Margins are also a sweet deal for grocers, as they can be as much as 5 times of what it would be for mainstream food products.

Amazon obviously knows all this and intends to make organics more affordable, more democratic. At the same time, it also expects to make a statement as a change-agent in groceries, putting everyone on notice. Slumping stock prices for main grocery chains in the U.S. show Amazon certainly has the market’s attention.

This is not the first time a giant food retailer attempts to make its mark in organics. Through its influential logistics, Walmart has made organics more affordable over the last decade or so, however with mixed results. When it committed to organics, Walmart wanted to offer well over 140 different organic products to its customers, but failed miserably. Walmart soon found out that the realities of organic farming make accessibility more challenging. Over the years, it adjusted expectations by offering fewer but cheaper products. Today, Walmart is now the largest seller of organic food products in America. Amazon, on the other hand, has Whole Foods, the Mecca of organic food retailing, giving it a huge advantage over Walmart. By acquiring Whole Foods, Amazon gave itself access to an incredible eco-system which includes well-established organic farms and wholesalers. Unlike Walmart, Amazon can execute its strategy almost instantaneously.

And so, it begins, but it remains unclear as to how all this will affect the Canadian organic market. Unlike in the U.S., food prices in Canada have started to rise again in recent months which has given grocers some well-needed breathing room. If anything, we could see organics go up in price due to Amazon’s willingness to make organics more appealing to American consumers. With higher demand south of us, procurement could become more challenging for main Canadian grocers, even if our currency remains strong against the greenback. With time though, as Amazon increases its footprint in Canada, this may all change.

The American food distribution landscape is much different, especially these days. With German-based Lidl and Aldi also expanding in the U.S., Americans may witness a continued food price war. Except for July, food prices have dropped for 18 months in a row, the longest stretch since the 1950s. Pricing always has a very direct short-term impact on profitability. Over time though, survivors are the ones able to absorb shocks coming from the competition. Since Amazon has never played the high-profit, high-dividend game, this is a non-issue for the company. But with organics, the Amazon-Whole Foods story will only make matters worse for Kroger and Cie. Convenience, for organics, is the primary factor, price is less so. The physicality of organic retailing coupled with online selling can only leverage Amazon’s position in the market place. The distribution story behind Amazon’s move on Whole Foods makes the online giant almost immune to any procurement challenges which is typical with organics.

Amazon’s next move could be with meal kits. For years, grocers have considered food service as an afterthought. Given that some project that the online food service market is likely to increase 15 times faster than the rest of the restaurant business by 2027, some are starting the move. The first one in Canada was Metro. Metro’s brilliant move of purchasing MissFresh this summer is evidence that grocers are starting to see the potential, but it has been slow. Amazon is clearly not as patient.

Blue Apron just announced it was reducing its sales force to better calibrate sales with capacity. Several start-ups have emerged and have done well, but no one has proven that the meal kit business can be sustainable for the long term. Many must spend an outrageous amount on marketing and set very high price points for their products. It is easy to see how Amazon can clarify the essence of the meal kit space by using its massive data-driven schemes.

Amazon is essentially about merchandizing convenience for all. Organics, meal kits, it’s all about convenience. For years, Walmart mastered the concept of simplicity in a big box store. Amazon is quite frankly hedging against the indolent nature of mankind. And for that, it’s winning.

Dr. Sylvain Charlebois
Dean, Faculty of Management
Dalhousie University
August 2017

Sylvain Charlebois: Amazon’s Appetite for Disruption

September 7, 2017 rbudd Leave a Comment

Amazon’s appetite for disruption

File 20170830 24237 1wkunnf — A man shops for avocados at a Whole Foods Market in New York on Aug. 28. The splashy price cuts Amazon made as the new owner of Whole Foods has attracted some curious customers.
(AP Photo/Mark Lennihan, File)

Sylvain Charlebois, Dalhousie University

Amazon is not wasting time in its acquisition of Whole Foods. Speed of execution, after all, is at the essence of the tech giant’s business model.

As soon as American regulators approved its acquisition of Whole Foods, Amazon said it would aggressively reduce the price of several organic staples in all of the 431 Whole Foods stores in the United States and Canada. They began doing so last week. Amazon’s playbook is about low margins and high-volume sales — for anything, including avocados, baby kale and grass-fed ground beef.

In fact, Whole Foods reinforced the notion that organics are, for the most part, exclusive and for the elite. Its nickname in the U.S., after all, has long been Whole Paycheck.

Organic groceries are more expensive, costing consumers almost twice as much as conventional food products. Margins are also a sweet deal for grocers, as they can be as much as five times what they would be for non-organic foodstuffs.

Amazon obviously knows all this and intends to make organics more affordable and more democratic. At the same time, it also expects to make a statement as a change agent in the grocery business, putting all the players in the industry on notice. Slumping stock prices for the major U.S. grocery chains show Amazon certainly has the market’s attention.

Walmart biggest seller of organics in U.S.

It’s not the first time a giant retailer has attempted to make its mark in organics.

Through its mastery of supply chain management, Walmart has made organics more affordable over the last decade or so, although with mixed results. When it committed to organics, Walmart wanted to offer more than 140 different organic products to its customers, but failed miserably.

Outside a Walmart store in Daytona Beach, Fla.
(Shutterstock)

Walmart soon discovered that the realities of organic farming make accessibility more challenging. Over the years, it adjusted expectations by offering fewer but cheaper products. Today, Walmart is now the largest seller of organic food products in America.

But Amazon now has Whole Foods, the mecca of organic food, which gives it a huge advantage over Walmart. With its newfound access to an incredible organics ecosystem that encompasses well-established farms, suppliers and wholesalers, Amazon can execute its strategy almost instantaneously in ways that Walmart could not.

And so it begins, but it remains unclear how all this will affect the Canadian organic market.

Unlike the U.S., food prices in Canada have started to rise again in recent months.

If anything, Canadians could see organics go up in price too due to Amazon’s determination to introduce more Americans to organic products. With higher demand south of us, procurement could become more challenging for Canada’s major grocery chains even if our currency remains strong against the greenback. But over time, as Amazon increases its footprint in Canada, all this could change.

The American food distribution landscape is much different, especially today. With German-based Lidl and Aldi also expanding into the U.S., Americans may witness a continued food price war.

Food prices dropping in U.S.

Except for July, food prices in the United States have dropped for 18 months in a row, the longest stretch since the 1950s. Pricing always has a very direct, short-term impact on profitability. Over time, though, the survivors absorb the shocks coming from the competition and from lower prices.

Since Amazon has never played the high-profit, high-dividend game, this is a non-issue for the company. But in terms of organics, the Amazon/Whole Foods story will only make matters worse for Kroger, Safeway and other competitors.

Why?

Convenience rather than prices is the primary factor in organics. And so organic retailing coupled with online selling can only leverage Amazon’s position in the marketplace. The distribution power driving Amazon’s move on Whole Foods makes the online giant almost immune to any procurement challenges, a common issue in organics.

Meal kits next?

Amazon’s next move could involve meal kits.

For years, grocers have treated food services like meal kits as an afterthought. But given that some analysts are projecting the online food service market is likely to increase 15 times faster than the rest of the restaurant business by 2027, some are starting the move.

The first out of the gates in Canada was Metro. Metro’s brilliant move of purchasing the ready-to-cook meal delivery company MissFresh this summer is evidence that grocers are starting to see the potential, but it has been slow.

Amazon, however, does not move slowly.

Blue Apron, a U.S. meal kit provider, just announced it was reducing its sales force to better calibrate sales with capacity. Several meal kit start-ups have emerged and have done well, but no one has proven they can be sustainable for the long term.

Many have to spend an outrageous amount on marketing, and set very high price points for their products. It’s easy to see how Amazon could get into the meal kit business by using its massive data-driven strategies. Will Amazon bulldoze into Blue Apron’s territory?

Amazon is essentially about merchandizing convenience for all. Organics, meal kits — it’s all about convenience.

For years, Walmart mastered the concept of simplicity and one-stop shopping at a big box store. But Amazon is, quite frankly, betting on the indolent nature of mankind. And it’s winning.

Sylvain Charlebois, Professor in Food Distribution and Policy, Dalhousie University

This article was originally published on The Conversation. Read the original article.

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Amazon’s appetite for disruption

Walmart biggest seller of organics in U.S.

Food prices dropping in U.S.

Meal kits next?