Adapting the Supermarket For The New Era
by Richard Wolf

Published in Grocery Headquarters
April 1999
Rapid cultural change made possible by information technology will reshape the landscape of food marketing. How can your company survive this change?

A Futurist's Scenario

My personal food software shopper is reminding me that I've been working in my home office for six hours and had better approve a dinner menu to give my appliances time to prepare our meal in our "smart" kitchen. Thanks to automatic replenishment of my home inventory, I'm confident that my pantry is stocked for our favorite meals.

Ever since on-line shopping and automatic price comparison software became ubiquitous, my shopping time and costs have dramatically declined. While my Shopbot is searching the Internet for the kids school lunch menu in order to compile tonight's dinner recommendations I receive an incoming video from my wife.

She's helping her Mom install a fiber connection in Leisureville and won't be joining us for dinner tonight. Now that Mom has finally agreed to stop driving, she's also agreed to learn to shop from home.

My wife suggests that I take the kids to the KrogerLand tonight instead of having dinner automatically prepared. When the kids overhear this on our home information center, they beg and plead to go on the virtual roller coaster and eat at the food pavilion. Despite my dread of physical shopping, I agree to go to the real world supermarket for a few hours of recreation.

Shopbot proceeds to upload our personal profiles and our galley inventory to the Kroger database to permit us to gain entry to the food purchasing area. Suddenly I have a strange sense that Shopbot feels hurt that it's not preparing dinner for us tonight. Once we arrive at KrogerLand, I transfer $35 of Krogerclub bonus credits onto the kids' smartcards so they can enter the rides.

Rather than open my palmtop to summon my Newsbot, I decide to use this time to wander over to the meal experience tasting area to sample some new meals to add to our database. There are so many scheduled food tastings that I use a public kiosk to get some advice. Based on my past preferences and consultation with my Medbot, I decide to go to the low sodium/low fat food area.

As I walk through the large food pavilion interior space it occurs to me that, except for the food tasting areas and the restaurants, there are more computers than food items here! After sampling and uploading several surprisingly tasty genetically enhanced soy gluten main-meal selections to my replenishment order, the kids are back from the rides.

We decide to go to the in-store fun food restaurant and they offer to treat me to dinner with the remains of their store credits. They really enjoy the infrequent experience of being served slamburgers (a biologically enhanced food product) by a real person while I munch on my newly discovered gluten burger.

On the way home we swing by the consumer drive-through to manually pick up this week's packaged food modules thereby saving a $2 UPS delivery charge.

After being automatically loaded into my car trunk, the food modules will be mechanically unloaded when I get home and auto-scanned through my home food portal. During checkout I'm suddenly alerted that one of my milk containers has signaled my refrigerator that its' content is reaching the critical bacteria level of milk so I approve a replacement. I'm too old fashioned to bring myself to drink that non-perishable synthetic milk though the kids seem to love it.

When we arrive home I ask Videobot to find and download the Police Academy 22 video we've been trying to watch for several days. During the first on-screen food fight we hear the kitchen appliances moving into action. I check with Shopbot to learn that my wife requested a pizza and beer to be served an hour from now. While instructing Videobot to restart the food fight, I reflect on how much better off we are than the previous generations in terms of conveniences in food shopping and preparation.

The Metamorphous

The force of cultural change inspired by information technology is about to reach a critical threshold. This force will completely transform today's shopping environment. Cultural changes are being fed by enabling technologies and are being propagated via a ubiquitous global information network.

During the 1990's, technological cost/performance improvements seduced customers with new options for shopping convenience. The next decade will significantly outpace the 1990's in terms of technologically based shopping opportunities. When the next generation of shoppers is presented with an individual shopping environment that best serves their personal shopping preferences, a metamorphous in food shopping will spread throughout the industry at epidemic rates.

Since the technology necessary for a cost-effective, individualized shopping experience is currently available to your potential competitors, the time left to formulate a survival strategy for the 2000's is running out.

The New Cultural Norm

Information technology is permeating and transforming the way in which we shop. While information technology is necessary to nourish a revolution in food marketing, it is not sufficient.

The key to today's business change is the integration of technology into our cultural norms. There is overwhelming evidence that our society is embracing electronic commerce at an exponential pace. Bear in mind that it took 22 years to sell 10 million fax machines and only one year to sell 10 million Internet browsers.

Enabling technologies are teaming together to provide an intimate and user-friendly relationship with increasing numbers of technologically aware consumers. Regardless of how we get there, our grandchildren will view today's supermarket equally as quaint as the cracker barrel.

One important cultural change made possible by the revolution in information technology is our eagerness to communicate in new ways. With over 42% of U.S. households having at least one personal computer, the PC is poised to become a more functional replacement for the TV and telephone. Nonetheless, the present pace of PC sales is leisurely compared of what will happen when the existing crop of techno-fearless students enters the workplace.

Significantly, the number of households with PCs increases by a whopping 8% when there are one or more teens at home. Consider too that according to Student Monitor's latest annual campus poll, when asked what's hot on campus, 72.5% of college students point to the Internet, beating out beer for the first time since polling began! The next generation of shoppers will be well positioned to enjoy the benefits of on-line commerce, dragging their parents into the brave new world of electronic retailing.

Another important societal dynamic is the rise of telecommuting. According to the latest National Survey of Attitudes and Work Styles (http://www.telecommute.org), there are now over 11.1 million telecommuters, increasing at a yearly rate of 30%. This study also points out that telecommuters use the Internet to gain access to information twice as much as they use their phones and newspapers.

According to January 1997 estimates as reported in Chain Store Age, the average U.S. shopper spends 8 hours/month at the local supermarket. Given the busy and productive lives that telecommuters typically enjoy, they are less likely to be willing to make this investment in time. As a hint of the future, according to the 1998 FMI Consumer Attitudes Annual Study, younger shoppers are the least satisfied with supermarkets.

The telecommuting family is now home-based and ready to benefit from the advantages of on-line shopping. Given the trends in household demographics, it should not be surprising that there is an explosion underway in the usage of Internet commerce. According to shop.org (http://www.shop.org), yearly on-line shopping is tripling resulting in a sales projection of $112 Billion by the end of 2000.

Further supporting the economics of electronic food shopping, Peapod.com on-line sales reports indicate that the average on-line grocery bill is higher than an equivalent in-store checkout order. As many airlines started to discover several years ago, electronic commerce is a good deal for both the vendor and the customer. This explains why Delta Airlines, to the dismay of travel agencies, attempted to impose a $2 surcharge for each ticket not purchased on their Internet site!

The Role of Enabling Technologies

While consumer-buying options are evolving at a rapid rate, the enabling technologies underpinning these changes are also advancing rapidly. The technology of light, known as photonics, has provided us with vast data storage and transmission capabilities and holds the promise for faster computers as well. For example, today's optical cables have more than 100 times the capacity of those deployed in the early 1990's.

CD-ROM, an optical storage technology, was considered state of the art a few years ago. Now it has become obsolete with the introduction of DVD. Photonics progress has resulted in a dramatic reduction in both data storage and transmission costs. Soon broadband pipes will reach millions of consumers' homes providing inexpensive high-speed connectivity. This in turn will result in high quality residential audio and video reception, further accelerating the convergence of the TV and PC.

Thanks to high-speed data transmission, the future home information center will permit the consumer to enjoy a much better shopping and entertainment experience. Integrated circuit (IC)/semiconductor technology launched the initial phase of the information revolution with the 1947 invention of the transistor.

One need only consider the increase in the value of computers to appreciate the benefits that 52 years of IC deflation have provided to the consumer. Throughout this period, semiconductor technology continues to obey Moore's Law, which predicts a doubling in functionality every 18 months.

Another consequence of this law is that consumers are resigned to pay to upgrade their computer hardware every few years. Semiconductor advances have turned our five-year-old computers into trash and Intel stock into gold. Software technology progress is at the core of the information revolution. Thanks to rapid advances in software design, we have arrived at the first moment in the brief history of computing when computers will be able to deal with humans on human terms. The current state of the graphical user interface (including mice and keyboards) will give way to speech interaction, computer vision and animated on-screen servants known as shopbots. The PC will also get smarter thanks to the application of biologically based neural network techniques. These developments will endow computers with the ability to see, hear and understand their users.

Grocers on the Internet

The current state of electronic commerce can best be viewed through your Internet browser. Today the majority of grocers have a presence on the Internet. Unfortunately, most grocery sites are not commerce-enabled.

As with physical stores, Internet sites must offer something of value to the consumer. Is your site fun, time and money saving or informative? Is it a secure and trustworthy place to visit? Just as we wouldn't waste time at a supermarket that didn't offer products and services, on-line consumers will not waste time on web sites that aren't commerce-enabled. Nevertheless, the majority of grocery web sites contain only recycled print media junk mail and corporate annual reports. They offer little appeal to time hungry consumers.

Even this modest net-presence is crucial for large and small groceries. The very existence of your trademark on the Internet is reinforcing consumers' perception of the quality and normalcy of on-line shopping.

To be effective, a website must offer an alternative to in-store shopping. As an example, compare the Tupperware and Rubbermaid websites. While the Tupperware website does not offer customers a buying opportunity (http://www.tupperware.com), the Rubbermaid website (http://www.Rubbermaid.com) is e-commerce enabled thereby providing a complete on-line shopping service. It is clear which alternative will best serve time-starved consumers.

The Slow Pace of On-line Grocery Shopping

The adoption rate of electronic shopping in many other segments of the economy has outpaced food marketing. According to Forrester Research, food and drink accounted for only 6% of total on-line revenue in 1998.

Consider the recent increases in on-line sales of computers, travel, real estate, entertainment, apparel, gifts and flowers. Who could have predicted that in a span of several years Amazon.com would become the world's largest bookstore or that Microsoft would be a significant player in the travel business?

Unsatisfied customer demands are attracting powerful techno-savvy competitors from all sectors of the economy. Just as the Internet has transformed the landscape of the travel market, it will rapidly transform the face of grocery shopping forever!

While other retail sectors are embracing on-line sales, why is there a glacially paced movement toward on-line supermarket shopping? Perhaps it is because the relatively small number of on-line shoppers has created a sense that the Internet won't significantly impact food marketing.

The Western Union Company did not identify the competitive threat created by the invention of the telephone because their management believed that telephony was simply a passing fad. More recently, major U.S. retailers overlooked the importance of TV home shopping because early video-based shopping adopters were rare. In both cases, traditional market players were too complacent to adapt to an important technological opportunity.

Perhaps the on-line grocery lag is linked to the fact that the existing model of the food marketing industry has required a large capital investment that will be rendered virtually obsolete by the changes to come. There are many examples of companies with a large invested base threatened by technological obsolesce. Those that failed ignored the inevitable. Consider, for example, the contrast between the success of two typewriter companies, IBM and Royal.

Whatever the reasons for the slow pace of on-line grocery shopping, it provides an opportunity to companies with technology vision to gain market share and establish brand recognition with a relatively small capital outlay. Net-based competitors will be traditional supermarket chains, established retailers such as Wal-Mart or entrepreneurs with $10,000 to invest in establishing their presence on the Internet.

Common Food Marketing Myths

There are several myths that are often used as excuses to underestimate the threat of on-line competition. The following are examples of some of those commonly held attitudes:

The Myth of Brand Loyalty
Many believe that brand loyalty will insulate the established grocer from the fierce competition of the net. Established companies with respected brands will need to quickly compete with on-line competitors to survive. Encyclopedia Britannica once recognized as a leading resource for information and research waited too long to embrace electronic media. Perhaps EB strategists reasoned that buyers would always prefer a hundred pounds of their world-renowned books to a faddish CD ROM multimedia experience. When they finally released a CD-ROM encyclopedia, it did not have the multimedia appeal of Colliers or Microsoft Encarta. Encyclopedia Britannica, once a première information content company, could not compete and thus was forced to go out of business and sell their brand name.

The Myth of In-Person Shopping
Despite the popularity of milk and grocery delivery during the first half of this century, there is a modern myth that people inherently prefer to shop at a supermarket. Why would anyone volunteer 8 hours per month to pick items off supermarket shelves when the alternative is to have our food automatically delivered? Improvements in scanners, décor or loyalty programs cannot avoid the basic truth that much of today's' supermarket shopping is simply not necessary or time-efficient from the consumers' perspective.

The Myth of In-Store Produce Shopping
Another myth frequently used to downplay the significance of electronic grocery shopping is based on the misguided belief that consumers demand to select their own meats and produce. While some industry experts reluctantly concede that there may be a small niche for on-line dry goods replenishment shopping, many feel that since the consumer is already driving to the local market to feel the fruit, they will do all of their replenishment shopping there as well.

Conversely, market studies conducted by the Food Industry Management Program at Cornell University have shown that consumer direct sales of produce are actually higher than the percentage of sales of produce in-store. Peapod, a successful on-line home shopping service, reports its produce sales at 14%, considerably higher than the present in-store average. Note too that web sites such as http://www.omahasteaks.com are selling lots of upscale meat. Today's family is more willing to let experts pick out perishables so long as the cost and quality of the delivered product is as good as that found in the local supermarket. Tomorrow's family will insist on the convenience of direct sales for high quality perishables. Besides, the on-line model eliminates the hands-on public display with its excessive spoilage. As more and more satisfied consumers buy perishables on the net, word will spread via the net and the meat and produce myth will quickly evaporate. As a result, one more barrier to Internet grocery shopping will collapse.

The Myth of Security and Privacy
Despite the fact that there are effective security and privacy safeguards on the Internet, many potential consumers are unwilling to use the Internet for shopping because of its perceived security and privacy weaknesses. To believe that Internet security and privacy concerns will remain as barriers to e-commerce ignores reality. A dramatic rise in encrypted credit card usage for on-line purchases over the Internet over the past several years suggests that electronic security will be less of a deterrent for tomorrow's shopper. Consider too that consumers routinely relinquish their credit cards to potentially insecure retailers (e.g., waiters, call center agents and checkout scanners) with little concern for security or confidentiality. It is also interesting to note that the vast majority of consumers voluntarily give away their intimate personal data (including their buying patterns and Social Security numbers) to enjoy the savings offered by loyalty programs. Evidence shows that your customers will share their secrets with you if and only if you make it worthwhile for them and protect their security and privacy. The issue here is not the medium of commerce; it's the trustworthiness of the retailer. Regardless of the mode of commerce, it is the responsibility of the retailer to assure their customers' data security and privacy.

Opportunities to better serve customer desires have ignited a three-phase transformation of food marketing. Phase 1 introduced customers to in-store technology. Innovations in point of sale scanning terminals, credit card scanning and loyalty programs have prepared both buyers and sellers for the tidal wave to follow. The on-line presence of traditional supermarkets (e.g., http://www.aptea.com), direct vendors (e.g., http://www.Kraft.com) and dis-intermediaries (e.g., http://www.Peapod.com) are preparing consumers for the next transition phase. Phase 1, having matured during the 1990's, is now giving way to the next phase.

Phase 2, which is currently in its infancy, will be characterized in terms of the increased rate of customers and revenue shifting to on-line commerce as compared to phase 1. As more and more customers move to Internet commerce and home delivery, word of mouth and word of email will provide a positive feedback loop reinforcing this new medium.

Thanks to the growing normalcy of electronic grocery shopping, the survival of the local supermarket will force it to evolve. While there will remain a small and decreasing number of traditional consumers doing their fill-in and meat/produce shopping at the local market, vans from competing shopping services like Peapod will dominate supermarket parking lots. Professional shoppers will swarm over the shelves and rapidly exit through automated high volume corporate discount checkout scanners and van loading docks. The supermarket will rapidly evolve into a neighborhood distribution center leading the local townsfolk to complain about the resulting noise and traffic congestion.

Once a critical mass of consumers has moved on-line for all of their routine food shopping, there will remain a small number of up-scale specialty markets (e.g., http://www.dean&deluca.com) as well as food oriented theme markets (e.g., http://www.junglejims.com). These niche offerings will provide specialized products and entertainment to entice in-store grocery shoppers.

Traditional boundaries will collapse as experienced distributors such as Wal-Mart grab market share from traditional food retailers such as A&P. To add to the confusion, the distinction between restaurants and supermarkets will begin to blur, further destabilizing the competitive landscape.

As phase 2 matures over the next several years we will reach a critical threshold sparking a new era in food marketing. The third phase will build on the expanded e-commerce customer base and will totally automate the selection, distribution and preparation of in-home meals.

Signaling the start of phase 3, grocery chains will discover that adapting their existing supermarkets to serve in-home shopping services is neither cost effective nor popular with local communities.

During the initial stage of phase 3, the neighborhood supermarket will become a food entertainment and restaurant center, a specialized market or a valuable commercial real estate property. Large fulfillment centers will broker and maintain "just-in-time" inventories for a focussed stock of items from a vast on-line supplier network. Stock levels will reflect real-time consumer demand.

Consumers will purchase and install home delivery portals to avoid the need to manually re-supply their pantries. Automatic in-home deliveries will include weekly replenishment and special order groceries, including meat and produce. The rise in home delivery will increase traffic for transport providers such as UPS and FedEx allowing them to slash prices and still flourish.

The resulting decrease in product distribution costs will benefit both the consumer and supplier and will easily compensate for the small increase in transportation expenses incurred by home delivery. Consumers will gain access to many competitive on-line dis-intermediaries thereby assuring a high level of competition.

Summary

In order to survive the next decade, your company needs to recognize that this is the start of a profound disequilibrium in retailing. For the first time in history, consumers can redesign their individual shopping environment to suit their needs. Since traditional supermarkets are behind the technology curve, they are very vulnerable to techno-savvy competitors. There are many budding entrepreneurs who can scrape together the funds needed to compete on your turf. To avoid becoming a corporate dinosaur doomed by an inability to adopt to a sudden change in the environment, companies must innovate and respond to the cultural changes made possible by information technology.

© Copyright Rich Wolf. All Rights Reserved.