Forget range reviews and reducing SKUs, the future of the supermarket lies in a difficult collaboration to create ‘thin, shoppable layers’ before Amazon disrupts the industry

Sainsbury’s recently made announcements that were worrying and controversial to many FMCG brands.

The briefings pointed to two types of brands that Sainsbury’s wished to sell in their stores and online: Those with strong brand equity and those with strong distinctiveness.

Stocking brands that come with ready-made brand equity or brands that add a point of difference on the shelves is a reasonable response but there is a serious problem with this approach.

The problem is that the Big 4 sit in a squeezed middle ground between the premium retailers, such as Waitrose, Ocado and M&S, and discounters such as Aldi and Lidl. Asda – the most price-driven of the big four – has been suffering in this environment, leaving the other three also scratching their heads to answer: ‘Just what do we stand for in the minds of the shopper?’.

You can see where Sainsbury’s thinking has come from. In previous decades, the value of a supermarket was the collection of integrated processes that move goods from farms and factories to trolleys.

But in the age of Amazon, it’s becoming increasing clear that the real value is a thin layer on top, what Zenith USA’s Head of Innovation Tom Goodwin calls a “thin, value-adding brand layers”

Tom goes on, “Warby Parker doesn’t make its own glasses and Dollar Shave Club sells Korean razor blades via a third-party logistics company in Kentucky – at a loss. We’re seeing retail becoming a stack of thin tranches of business that seek to specialise in a part of the process, but not all. When you think like this, costs can be reduced, audiences can grow rapidly and profitability seems easier.”

The problem is, supermarkets haven’t yet got the memo.

Despite that fact that Amazon’s different shopping channels are incredible awkward and confusing to shop, the grocery industry talks about Amazon all the time because it understands that its value is not in owning and controlling its inventory. It’s in having the best digital layer that adds value.

Here’s what Sainsbury’s should be worrying about: not cutting brands that don’t add instant sales-driving value to its ‘shoppable layer’, but working out what the value proposition of that shoppable layer is in a multi-channel world.

The problem is, Sainsbury’s and the other major grocers, are seeing the problem from a position that is rapidly being eroded. The starting point for Sainsbury’s range reviews seems to be ‘space is limited’. Tesco’s recent range reviews seem to have a starting point of ‘too many SKUs is confusing’.

Consequently, each retailer reduces the number of SKUs and aims to be left with those that either drive huge volumes per centimeter of shelf space, or get people inspired and leaving shoppers with the subconscious after-thought ‘Sainsbury’s is where I discover new ingredients’.

But all these assumptions are based on limited space. But what if:

1. These retailers had an e-commerce channel that was not limited to the stock available in stores

2. The in-store stock wasn’t seen as however-many-thousands-of-SKUs, but how-many-thousands-of-meals

Let’s look at both potential solutions to deliver a value-driven shoppable layer.

Strategically Use Of E-commerce In A Multi-Channel World

If your current inventory and supply chain model is based on limited space, you must make range decisions. But that problem doesn’t necessarily need to apply to e-commerce, except when your tech and warehousing systems force the problem upon you.

Currently, you cannot have a product listed on Tesco.com if it’s not listed in physical stores. There are two reasons for this. Firstly, because Tesco prefers a ‘pick from store’ model to serve e-com shoppers, and secondly, because the current IT systems work this way.

So why not change this? Because, dark stores cost £60-80 million last time I checked. The 2016/17 operating profit of Tesco was £1.28bn, so if Amazon’s FMCG sales reduced Tesco’s operating profit by 1%, that would amount to just £12.8 million. Currently Amazon is not a big enough threat to afford those dark stores. (of course, the other option is not to build and own those dark stores yourself, but to lease the technology, but that’s another debate).

If these tech and financial issues could be overcome, how might you use the e-commerce retail channel strategically?

It’s all about the long tail. If you stock SKUs from the major food companies such as Unilever, Mondelez and Kraft Heinz, you satisfy a good proportion of shopper’s baskets, but in a world of endless choice, lifestyle choices and endless NPDs, it’s not enough just to deliver what people need today. We must offer something for everyone – an idea that drives Amazon’s ‘everything store’ approach.

More SKUs provides navigation issues to shoppers of both physical stores and e-com shopfronts. It’s a UX problem. How do we make it easy for shoppers to shop from 100,000 SKUs vs 50,000 SKUs? How do we help shoppers navigate a supermarket when it is laid out in categories, but shoppers are looking to buy meals? It’s a huge problem, but the problem is not going to go away by cutting the range and pretending to the industry it’s doing everyone a favour.

Instead, if we figure out how to easily navigate e-com shopfronts and solve the tech and financial issues of offering expanded ranges, we might use e-com to satisfy shoppers’ every need. Then the supermarket ecosystem might look something like this:

Convenience stores: essentials for today/tomorrow

Large format: 80% of what I need in the next week or two

E-commerce: All my needs catered for, with products and offers personalised to me

Now, this thin, shoppable layer has a lot of value.

It’s worth noting that Ocado supports this view that e-com can grow by offering more products. Ocado’s range is much bigger than that of the other major UK supermarkets, which might account for the 12.5% increase in group revenues and the increase in shoppers announced in its 2017 half-yearly results.

Working With Brands To Achieve The ‘Everything Store’ Vision

CPG brand owners have had a love-hate relationship with supermarkets over the years. On one hand, the modern supermarket invented the concept of national and global brands, with brand recognition being driven as much by space on shelves as by above-the-line advertising. But supermarkets also dictate the rules to brands as it owns the shopfronts – ‘We need your prices to be this’; ‘We are going to stock these SKUs and not these…’.

But in the e-com world, where the end-to-end supply chain becomes one of the most expensive elements of trading, it’s by collaborating with brands that retailers might create those thin, value-added layers where the profit comes from.

Imagine these two scenarios:

1. Sainsbury’s uses an e-commerce shopfront as a fast-paced data-driven platform to spot category trends and breakthrough brands. Imagine if you use that data to extract the maximum value from each new trend, from coconut water to meal kits (without breaking UK competition and pricing laws, of course). This would be where you would spot the distinctive brands of today and tomorrow, then use that data to make precise decisions on which ranges to stock in the physical store estate.

2. Tesco works with brands to deliver just-in-time inventory. What if the supply chain software was open sourced to brand partners, so they could collaborate to tweak the process and algorithm to do an even better job of delivering just the right number of products to the right places. What if retailers and brand owners invested collaboratively in the technology that would sell more of their products?

Avoiding The D2C Red Herring

Many brands are investigating direct-to-consumer e-com approaches in frustration that their ability to trade and drive profits is being controlled on the grocers’ terms.

But D2C is a huge gamble. It might make sense if you have a much-loved brand with a specific research process or specific purchase cycle needs, but when you are selling everyday branded goods, is D2C going to be what shoppers want? I already juggle having logins for Tesco, Sainsbury’s and Ocado… why would I want to manage my shops through a load of separate brand owner sites as well?

The sense I get is that many brand owners are not investigating D2C because it seems like a good way of driving sales, but because brand owners are increasingly frustrated with the power of retailers to make or break their brands through distribution to shoppers.

To address this issues, what if The Big 4 made reaching shoppers easier and adopted the two scenarios above? Would it not make sense for brand owners to divert the time and money they are currently investing into D2C into working collaboratively with the retailers to drive data-driven e-com sales and supply chain efficiencies?

So, What’s Next?

It’s clear that a timely combination of changing consumer behaviour and enabling technology is breaking the previous retail model. And fixing it for the future takes a lot of time and money. But that’s no reason to take a ‘wait and see’ approach. The first step is for retailers to ask what a value-driven stoppable layer looks like and work forwards from there.

What do you think? Please comment and let me know. With an industry, as complex as ours, it’s highly likely that you disagree with some of the above, or that some of my assumptions are incorrect… or maybe you have an idea to add to my suggestions… so comment and let me know…

Viv