The grocery retail industry in the US, a $800 billion market, faces intense competitive rivalry among existing firms. The fact that there are plenty of firms competing for customers in the industry proves it. At the same time, the aggressiveness with which competitors compete with each other is astonishing, as the grocery retail industry is known for its razor thin profit margins. Furthermore, customers buying their groceries in the US face very low switching costs. The low switching costs makes competition in this industry fierce, as firms in the industry heavily compete with each other when it comes to pricing, services, quality, and overall shopping experience.
Firms that most thoroughly understand the market’s key drivers of change will be the ones to outlast and outperform competitors. Based on an intense research and analysis of the US grocery retail industry, I am confident that following drivers of change will define the industry in the years to come:
Firms in the US grocery retail industry will have to adapt to the fact that young generation consumers are expecting grocery retail industry firms to be easily found. Therefore, firms must locate their grocery stores conveniently. At the same time, the fierce competition in the industry will require firms to wisely spread their geographic locations – to steal as much customers and revenues from its competitors as possible.
Changing Consumer Expectations & Behaviors:
We live in an era of 1-hour, 2-hour, and same day deliveries. The younger generation of consumers are used to acquiring what they want, when they want it and at low prices. Such trend will spread to the retail grocery industry as well. At the same time, younger generations are more conscious about their eating habits. Therefore, firms should prioritize organic and naturally-produced offerings.
Furthermore, customers have increasingly more access to information. Due to social media and all the digital platforms available, customers are becoming knowledgeable of how businesses are being run. The fact that younger generations are more prone to boycotting businesses with unethical practices, requires firms to conduct their business based on good practices. Impactful CSR efforts, good employee compensation packages, strong company cultures, and an emphasis on customer service should be a pivotal focus for firms.
Customer behavior is also changing in the sense that people are less inclined to cook. Either because of time, energy, or convenience, customers are more prone to buying already-made food. You can see this increasing trend in groceries’ in-store dining options, which are becoming increasingly popular. At the same time, you can see such trend in the increasing popularity of simpler cooking offerings from a variety of companies – such as Amazon’s Cooking Pot.
Firms in the grocery retail industry should also be aware of the fact that customers really value a good overall shopping experience. Factors such as store appearance, cleanliness, easiness of finding the products, merchandising, customer service, and in-store deals are all factors of great value to customers. Companies should understand how to leverage such trend to their advantage.
Online Shopping Option:
Even though some customers will always prefer the tactile experience offered by brick-and-mortar stores, the online grocery retail is increasing in usage and popularity. Whether customers buy online for its convenience or time-saving advantages, the matter of the fact is that online retail is gaining more awareness. Firms should consider providing customers with an attractive and user-friendly online buying option to prevent them from choosing a competitor’s online offering.
The development and efficient implementation of new technologies will be vital for the US grocery retail industry. In order to keep prices low, firms should consider either adopting, implementing or developing technologies that suit their specific needs. At the same time, firms should take advantage of advanced business data analytics in order to fully understand the patters and insights the data provide regarding their store’s performance and areas of improvement.
This might sound unique, but as a marketing major and enthusiast, I believe that private labels have great power within them. Their power relies upon customer’s association with the labels. Such association makes customers’ shopping experience more pleasant and enjoyable for different reasons. For starters, customers familiar with private labels might immediately know what they are buying. For instance, Costco shoppers know that Kirkland Signature products are either of equal or greater quality than nationally branded products. Similarly, Trader Joe’s shoppers know that Trader Joe’s private labels offer good-quality and organic products at great prices. Likewise, customers shopping at Whole Foods Market immediately know that its 365 brand stands for quality organic products at more affordable prices. Firms should definitely consider implementing their own private labels, as having private labels enables customers to save time and energy in comparing similar products – preventing customers from entering shopping paralysis due to heavy variety of options they might encounter when shopping.
Administering Food Spoilage:
Food spoilage in the grocery retail industry, if not managed efficiently, can lead to terrible losses. Firms in the grocery retail industry should keep exploring and researching ways in which food spoilage can be controlled more effectively and to increase the turnover rates of the products they offer.
Amazon/Whole Foods Market Potential:
Based on the research conducted and the analysis made of the industry’s key drivers of change, I believe that the Amazon/Whole Foods Market alliance has a powerful potential to disrupt the US grocery retail industry. There are many factors and advantages that their combination presents that will allow them to have an edge over their competitors.
Now that Amazon has acquired Whole Foods Market, Amazon will enjoy both a strong physical presence and an already established, user-friendly online grocery retail platform. At the same time, even though Whole Foods Market might charge higher prices to its customers relative to what competitors are charging, there are plenty of ways such thing can change. Amazon’s Prime Members, for instance, do enjoy certain discounts when buying at Whole Foods Market. Similarly, Whole Foods Market already offers its customers organic products at lower prices through its 356 brand. Furthermore, Amazon’s potential to scale, master supply chain activities, power over suppliers, and availability to acquire customers is definitely undisputable. Amazon has tremendous potential to decrease prices at Whole Foods Market. Given that Whole Foods Market already enjoys a strong reputation of valuing its commitments to all stakeholders and having a strong company culture, the firm will gain considerable territory in terms of revenues and market share through Amazon’s leadership.
For starters, Whole Foods Market is already known for its organic and high-quality products. At the same time, its 365 private brand enables customers to acquire organic products at even more affordable prices. Moreover, Whole Foods Market has a strong brand reputation and public image of being a people-focused company that greatly values their stakeholders. Customers already associate Whole Foods Market as a responsibly led organization with an empowering company culture.
Amazon will also give a big boost to Whole Foods Market in a variety of ways. For example, Amazon will now enjoy both a powerful online and a brick-and-mortar presence. The acquisition of Whole Foods Market will not only allow Amazon to be present literally everywhere, but will also give a boost to AmazonFresh, Amazon Pantry, and Amazon Prime – as these online services could greatly benefit from Whole Foods Market’s store network as well as from its loyal customer base. Moreover, Amazon’s expertise in scaling could give Whole Foods Market great potential in eliminating costs, reaching and acquire further customers, increasing the firm’s market share, and improving its distribution and supply chain network.
By easily reducing supply chain costs and decreasing its selling prices, the Amazon/Whole Foods Market combination has the power to undercut its competitors. Through such alliance, Amazon has the potential to disrupt 3 markets: the retail grocery stores, the online grocery shopping, and the food delivery market. Even though Amazon lacks the brick-and-mortar and in-store merchandising experience, Amazon has created strong fears for the firm’s in grocery retail industry in the US.
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About the author(s) Dymfke Kuijpers is a senior partner in McKinsey’s Singapore office. “Reviving Grocery Retail: Six Imperatives.” McKinsey & Company, http://www.mckinsey.com/industries/retail/our-insights/reviving-grocery- retail-six-imperatives.