Rumours of the demise of the supermarket have been exaggerated. Although their role is changing profoundly, bricks and mortar remain firmly entrenched in omni-channel strategies.

During the dot-com boom of the late 1990s the myth of the “death of the retail store” made the rounds as more and more consumers discovered Amazon, and retailers like Nordstrom rapidly migrated their catalogue shopping operations to e-commerce.

As we now know, this never eventuated. Retail stores are still ubiquitous. Arguably, their numbers have actually increased.

Instead of killing the supermarket, the mass adoption of digital tech is changing them. They are morphing from being the single touch-point for research, consideration, purchase and fulfilment to now featuring in only one or two of those elements of the customer journey.

In this omni-channel world, the store needs to deliver more value in terms of customer engagement relative to the status quo. Simplifying store administrative and logistical activities is critical to free up store employees to spend more time talking to customers — listening to their needs and showcasing the most relevant products or solutions based on the customer mission.

In a grocery store, mass disruption is waiting to happen. Many of the categories on offer are up for grabs given the lowered barriers to entry (Nespresso, anyone?). In some markets, this means the traditional box faces a death by 1000 cuts — or potentially one big chop of the Amazon Fresh axe.

This is possible for three reasons:

  • Rapid advances in the power of networked computing and ease of use make it easier than ever for buyers to connect directly with producers ushering in an area of bold disintermediation (e.g. Uber, AirBnB);
  • Today’s customer journey is not really that good — the idea of a one-stop shop for the weekly grocery order is losing steam;
  • The store-based grocery model is highly inefficient — with notoriously razor-thin margins — and frankly difficult to execute well at scale.

Today’s customer journey

The notion of defining a customer journey is now well embraced, mapped and often dissected to the nth degree. What is often missing is the fundamental customer mission that triggers the journey, as not all journeys are created equal.

Think of a simple mission such as stocking the pantry. In this situation the consumer simply does not want to run out of the stuff (toilet paper, tea, coffee, baked beans, pet food) they already know they need. Currently, shopping for these items each week is not necessarily a great experience. Soon, with innovations such as Amazon Dash Buttons where the consumer simply presses a button stuck onto the washing machine when the washing powder is getting low and it soon arrives, shopping for these items will not be necessary at all. Our connected homes will simply reorder goods before they run out.

But other customer missions do benefit substantially from the visit to the physical store. Consider hosting a dinner party — being able to offer an informed description of that wonderful truffle salami on the cheese board upon arrival becomes more important in the Masterchef era, as does explaining how the kale was picked up at the Friday morning farmers market from a local producer named Simon who also is co-owner of a developing biodynamic winery.

The problem is that most grocery stores try to cater for the full range of customer missions in the one box. Different missions need different boxes.

Let’s consider the business model efficiency related to those refill the pantry shopping missions. Take dog food, for example. Your German Shepherd Rex is big and has a bigger appetite. To meet this demand, your local supermarket has hundreds of bags of dog food waiting for you to browse and choose from in aisle 10. Aisle 10 in fact takes up a lot of space. Depending on where you live, the cost of commercial property rents is non-trivial. A portion of the heating or cooling, lighting and utilities for that big box must also be allocated. Keeping those large bags well presented on the shelves is also a must, and that takes time and effort, contributing to the cost of labour.

What happens to the cost equation if your smart pantry knows when Rex’s food is running low and automatically orders more? Many supermarket executives ask the question “How will we make money with online shopping if we need to pick the groceries for the customer and pay for the cost of fulfilment to their home — all on top of our current store network cost base and razor thin margins?”

The better question, in my view, is to ask how anyone would expect to make money through bolting a plethora of digital and fulfilment capabilities onto an existing store-based business, considering that revenues are unlikely to increase in proportion to the increased cost and complexity.

The key lies in re-thinking the box in the first place — how does the store need to be re-engineered to be sustainable in the digital world. In Australia, Officeworks has announced plans to design and pilot omni-channel stores where the full suite of services and products are made available to their customer base through a store format the size of a convenience store.

Just like Officeworks, to adapt to the grocery shopping patterns of the smart home, supermarkets need to de-couple inventory from the actual physical retail outlet —enabling stores to cater for appropriate missions and leaving refill missions to be supported purely by fulfilment infrastructure.

This will profoundly change store economics and overall inventory efficiency, keeping supermarkets alive and well.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.

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