As part of our new Podcast series, Profitero’s Keith Anderson interviewed Bill Bishop, founder and CEO of Brick Meets Click, a consultancy and analyst firm that focuses on the intersection of traditional retail with technology.
With the number of US households buying groceries online increasing from 11 percent in 2013 to 21 percent in 2015 (latest Brick Meets Click research), Keith and Bill discuss the growing importance for retailers to connect their digital and brick-and-mortar operations, the growth of click-and-collect, the future of dynamic pricing, as well as the changing role of category management.
Q: Why don’t you just tell us a bit about your background and what you do now.
I’m a consultant to food retailers and manufacturers who are interested in their retail marketing channel. I founded Willard Bishop a number of years ago and did a lot of consulting with retailers and manufacturers there. In 2012 I founded Brick Meets Click to focus on the digital transformation that was happening in the grocery retailing business. eCommerce is obviously a pretty big part of that, and in fact we’ve just finished a survey of some 12,000 grocery shoppers regarding their online grocery shopping.
Q: Any insights you can share from the recent study?
Well, in the last two years, the number of households who have bought groceries in the last 30 days online increased from 11 percent two years ago to 21 percent at the end of last year. So, the penetration figure is a good indication of the growth that we can expect in the future.
Q: How do you define eCommerce and how do you think about its role in this broader digital transformation that you follow at Brick Meets Click?
We define eCommerce basically as ordering groceries online, and then those groceries are either shipped directly to your home via third-party distributor or UPS, or you can pick them up, or some grocers actually deliver. It’s the transactional part of the business, but the increasing use of digital by consumers is broadening the digital shopping experience well beyond the transactional component. And in many respects I think that’s where the action is today. I definitely feel that those retailers that do not figure out how to operate in both the real and virtual worlds are going to be very vulnerable in the relatively near future. They’re probably vulnerable right now, it’s just not that evident.
Q: Where do you see the competition intensifying? What should retailers do that they aren’t doing?
I think the primary vulnerability is the way the retailer connects with the consumer or their customers. For time immemorial, that vehicle has been print. That vehicle has been primarily the print circular. Everybody knows today that the circular, the printing and the distribution of that, runs between 60 and 80 percent of the total marketing spend of retailers. They also know that that spend is rapidly becoming less cost-effective. So how do they migrate that spending confidently to a digital platform? I think today the biggest players, certainly Walmart and Kroger, have done a very good job in that area.
The medium-sized players are quite variable, but the smaller players for the most part haven’t migrated very much at all. And so I think the greatest vulnerability is just losing that share of attention, that connectivity, and as more and more people go to the internet for information on products or digital coupons, all the different reasons they find value, if you’re not there it’s sort of like musical chairs and there’s just not one in place for you.
Q: Have you seen vehicles that seem poised as successors to circulars, or do you really need more of a toolkit of vehicles to try and offset some of the declines in more traditional approaches?
At this stage of the game, I think it’s primarily multiple tools in a kit, but relatively soon, I think we’re going to see some online exchanges, some online ad placement or digital marketing move into retailing, in a fashion where they’ll be able to reach out on a scale that will be sufficient to match what they used to do with circulars. It’s not going to be the same, for sure. To your point, it’s a very fragmented world, but you can see these platforms being put together and once they operate on a digital platform, they’re able to do the targeting and the tracking that allows them to be much more efficient in the placement or the positioning of their ads and promotions. So I think in the relatively near term, we’re going to see much more of that and I think the somewhat unnerving aspect of where we are today is that there are a significant number of retailers that haven’t even thought about what I just described, so they’re a long way from learning the best practices in that space.
Q: How is it or why is it that so many retailers and grocers in particular have their heads in the sand?
First of all, these folks are skilled in logistics and they’re skilled in customer service. They’re not skilled in marketing generally, and they don’t have that many technical skills. So, they’re now being exposed to an area of competition that they need to operate in that they’re just not prepared for, and as a consequence it’s easy to be in denial about it. And it’s also easy to misread what’s happening in the market.
They also fear that this will cause customers to go into the store less, and they’ve made such an investment in that area and most of their differentiation is there, that that’s just something they don’t want to do. I think we’ve got a fair amount of hangover of that type, but it’s changing. 2015 was a big year of change.
Q: You mentioned a couple of points around what these grocers are good at and some of their challenges. How prepared do you consider some of these US grocers for models like click and collect, and how do you think about that model versus others that are emerging?
Most of the grocery retailers that we work with are pretty well prepared for click and collect. As a matter of fact, we’re anticipating that 2016 is going to see a significantly faster increase in the share of online grocery spending because of the tremendous expansion of click and collect. But that’s really kind of another story. How are they and why are they prepared? I think the methodology of selecting orders is something that they’re skilled at. The question then becomes, how do you optimize? How high is up when it comes to fulfillment?
I would say the majority of people today fulfilling in the store are not selecting too many more than 45 to 55, maybe 60 items an hour. So that’s not really very much more than an order. When you get to the highly efficient in-store selection, they could be at 120, 130, 150, and if you were selecting in a dedicated warehouse, you could be selecting at over 200 items an hour. So what we’re seeing happen is people are moving up that learning curve from 40 or 50 to 120, and then they hit capacity at the store, probably between five and ten percent of sales, and they begin to move … and only a relatively small number of US retailers have done this compared to what’s happening in Europe, but then they move to the so-called dark store or depo pick-up situation, where you get to the 200 per hour productivity.
So I think that’s a trajectory that’s working really well. The thing that I don’t think we’ve seen yet is the rapid growth in pick-up remote from the store. So, this usually involves some kind of locker, an automated product locker. There are thousands of them installed around the developed world, and we’re expecting basically that the interaction between the availability of those lockers, either the big box, putting those lockers into convenience stores or gas stations and expanding that way, or putting them on their own properties to receive somebody else’s eCommerce to drive traffic there, is actually likely to concentrate business more in the hands of those who are skilled and deeply involved in eCommerce, because the retailers who are doing it are going to gain incremental sales.
Q: I now want to switch gears a little bit. I was on your site recently and saw a topic that’s close to our heart, which is dynamic pricing. Where do you see that headed? Is it appropriate for some grocers, all grocers? What’s the interplay between online and brick and mortar?
I’m glad you raised this and I know you folks are experts at providing that kind of competitive pricing intelligence. My own feeling is, and this is based on probably almost 20 years of doing retail pricing strategy for retailers, that dynamic pricing is going to be the way forward increasingly.
So what do I mean by that? When retailers set their pricing strategy, at least in my experience, they’re normally trying to build a price reputation, build and reinforce a price reputation, and have that price reputation be meaningfully distinguished from the competition. And over the years, I know we’ve done plenty of that, others I’m sure have helped people. I’m thinking less about price optimization and more about retail pricing strategy. Optimization mainly being an executional tool whereas the strategy being a positioning tool.
So when you take a look at how that plays out in the minds of the consumer or the customer or the shopper, there are generally some signal prices, known value items are typically the technical term, that you can concentrate on, which are disproportionately weighted to influence a price reputation. So people manage to the known-value item prices. They’ll either match them or get below them or get comfortably above them. When, however, you move into dynamic pricing, everything becomes relative, and so your tactical as well as your strategic execution becomes more complicated.
Walmart’s certainly moved in this direction following Amazon. The time-based changes that Amazon go through are incredible. So I’m assuming that they have their own models for building price reputation as well as price optimization simultaneously in this environment, but I don’t know how you’re going to be able to maintain your margin budgets, your sales volumes and your reputation. That’s kind of the long definition of dynamic pricing, so I think it’s going to be coming our way, and if we had a broader base of digital shelf labels, and you can see some retailers moving into the digital shelf, I think we would have already seen it in the stores.
I believe that there’s one thing that’s going to change the economics of what historically we’ve called electronic shelf pricing, and that is a full digital shelf. Kroger’s been working on this for 40 years – the ability to project both shelf price and promoted price.
It also has a shopper marketing facet to it, and it is in and of itself a sort of interactive, digital point of interaction so you can use near-field communications to communicate with them.
Q: I was just recalling a brief but really interesting conversation you and I had at NRF around the way that the traditional discipline of category management is being impacted and evolving as a result of these and so many other changes transforming retailing. What are your thoughts on the relevance and the evolution of category management and the way that suppliers work with retailers collaboratively and strategically?
I guess category management now is at least 20 years old and it was created in a completely different context, a completely different world. When you take a look at notions of assortment, notions of pricing, which we’ve already talked about, the world is completely ripe for reinvention and I’m quite sure that the category management association is engaged in a major update trying to move to category management. Trying, striving to move to category management 2.0. Folks like Gordon Wade and other leaders in the field.
But it’s got to happen soon, because what’s happening now is what we saw 25 years ago, which is that collaboration is one-off, and as a consequence relatively less efficient. There was a press for a while to move into much more shopper-centric category management, and I think almost by definition that happens when you’re in a digital environment. Once we begin to bridge that gap so that our best practices, our metrics, are the same online and in-store, I think we can begin to converge even more rapidly on some good new sets of answers.
Q: Bill, this has been really interesting. If people want to reach you, where should they look?
I’d invite everyone to stop in at Brickmeetsclick.com and you can e-mail me at firstname.lastname@example.org.
To hear other industry thought leaders discuss the key eCommerce trends impacting the CPG and retail sector today, visit our brand new Profitero Podcast Series.