Episode 5: How Grocery Retailers Are Reacting to An Online World
As consumers become increasingly comfortable in an online world, what is the future of grocery retail?
Rachel Elias Wein, Founder and President of WeinPlus, sees the grocery sector heading towards a model where online and offline storefronts are inexorably linked. A model where inventory, accounting, and customer data across both channels are streamlined, enabling grocery stores to not only gain a more complete understanding of their consumers, but also create new and unique experiences for them.
Read the Transcript
John Rougeux: Hi everyone, and welcome to another episode of People In Places. I’m John Rougeux, VP of Marketing here at Skyfii, and your host for today’s episode.
John Rougeux: Our guest for today is Rachel Elias Wein, who’s the Founder and President of WeinPlus, a strategy and management consulting firm focused exclusively on the retail and real estate sectors.
John Rougeux: Rachel, welcome to the show.
Rachel Wein: Hi, John. Thanks.
John Rougeux: You bet. All right. Now in a moment, Rachel, I know you’re interested in sharing your thoughts on some of the shifts in trends you’ve seen take place in retail and real estate this year.
John Rougeux: But, before we get into that, tell us a little bit about yourself.
Rachel Wein: Thanks, John, and thanks for having me. As you mentioned, I am the Founder and President of WeinPlus. We serve the retail and real estate community. We work with large, small, public, and private real estate firms, as well as retailers with a specific focus on the grocery sector. And we’re excited to work with teams that are undergoing major strategic change, and work with them to support their efforts.
John Rougeux: Good deal. Now, I understand that you have a background in both architecture and design. Is that right?
Rachel Wein: I do, yes. This is a little known fact. I did start my career in architecture. And I really got excited about the real estate sector, just in the way that real estate is more proactive about changing communities and, rather than waiting for just the right client, really being the client and making those moves within the community and working together with designers and owners and retailers and other service providers.
Rachel Wein: So that’s when I made the move, pretty quickly.
John Rougeux: Very cool. Well that background certainly gives you a unique perspective on the space that I think few others are able to claim. So, interested to see how that plays out in our interview today.
John Rougeux: All right. So, to kick things off, one of the things that you and I were talking about earlier is how the barrier between the offline space and the online space is really starting to break down. So maybe to set up today’s conversation, tell us a little bit more about what you’re seeing there.
Rachel Wein: Yeah, thanks. One of the things that we’re looking at is how the online and offline presences at retailers have previously been very segregated as really a separate business unit. And that was when the internet was sort of a novelty, and how many people are really going to be buying online, and let’s set up a separate silo for that group.
Rachel Wein: And you really saw that a lot with the apparel retailers, I would say about 15 years ago. And I think The Gap is a really good example of how that worked, where they had a separate online division and offline division. And it started to set up disincentives, if you will, for the in-store staff. So if I was a shopper and I went into a store, and I was unable to find the size that I needed in the store, the salesperson could order that item for me online. But then they didn’t register the sale in that location.
Rachel Wein: And so that’s problematic for a couple of reasons, first of which being that the productivity of the store is not really reflected appropriately. The productivity of that salesperson is not reflected, as well as the mall owner, right?
Rachel Wein: So, so much of the way that we think about the valuation of stores and of assets are related to the sales generated by that foot traffic. And so we find, over the last 10, 15 years, foot traffic is down and sales in-store are up. But they aren’t capturing the full measure between online and offline at the moment.
John Rougeux: Hmm. So, in a way, some of the KPIs that were set up around offline performance and online performance, they’re almost penalizing certain aspects of the business. Or at least, they weren’t really capturing the full picture about whether the business was being successful holistically.
Rachel Wein: You know, I would say that’s absolutely true for legacy retailers. And, you know, if I had a nickel for every time I heard someone say sales per square foot isn’t the right measure, you know … But, at the same time, no one’s been able to give me a better one, right?
Rachel Wein: However, for legacy retailers, that’s really important, right? Because they aren’t marrying up appropriately, in my opinion, online and offline. But for digitally native retailers it’s all one, right? So, they evolved in a time where all of these sales were online. So when I go into Warby Parker, that sale is registered online. It’s also registered in the store, and it’s shown to increase the power of that MSA. The physical store is increasing the power of that MSA.
Rachel Wein: When you open a store, the online sales increase. When you close a store, the online sales dramatically decrease. So, that’s all really important. And where I find the evolution moving towards now, is in the grocery sector, right? Because apparel was evolving their online and offline presence at a time where we were all still getting used to the idea of buying online, and the comfort, and the security. And now, grocery sector is developing an online, or click-and-collect, or direct delivery platform at a time where there’s widespread comfort in purchasing online, right?
Rachel Wein: So they’re able to find a way, and I think a better way, of marrying up online and in-store, such that the store doesn’t need to be penalized. That store manager who’s trying to meet their sales goals, their sales goals can still be met.
Rachel Wein: It’s going to be less easy when Walmart is going to take an online order from the distribution center and take it directly to your house. How are they going to attribute that order to the store that’s nearest to you? Because maybe you went into that store, looked at couple of items, and then went home and decided to purchase online. That’s a harder thing to do.
John Rougeux: Hmm. So, it’s almost like there’s this kind of progression of different items or categories that are being sold online. I think even back in the 90s we started with books and, as you mentioned, apparel became one of the next big shifts. And now you’re starting to see that shift take place in grocery, which has its own unique kind of challenges and circumstances that they’re dealing with.
John Rougeux: And I think one of those that you’ve talked about on your own blog is how the role of the grocery store itself is in fact starting to change, and how consumers are maybe finding less need to actually touch produce and handle things in hand. But that’s not quite all sorted out yet.
John Rougeux: Talk to us a little bit more about that.
Rachel Wein: Sure. I think there’s still quite a few folks that really want to touch their tomatoes and pick out just the right strawberries, and I think that’ll be the case for quite a long time. I don’t see a hundred percent grocery absorption online.
Rachel Wein: But I do think that those kinds of needs will fade over time the same way they faded for books, which you don’t really need to touch. But maybe you used to like to read inside the cover and what not. And then for apparel you wanted to try it on, and certainly there’s very, very large rates of return.
Rachel Wein: But for grocery, the role of the store as you had mentioned, is evolving, right? So maybe it’s for, I’ve got a dinner tonight and I’m going to be entertaining people, and so there’s a certain selection of things that I want to go and see what’s the freshest to be able to make that meal. But yeah, for repeatable items, items like milk and eggs and toilet paper and paper towels and sparkling water, those things maybe I can have delivered on a schedule.
Rachel Wein: And I do think that we’ll get to a time where your regular grocery retailer, whether that’s Kroger or Walmart or Safeway or Publix will get to know you well enough that they’ll be able to have you, rather than opt in, maybe even just opt out.
Rachel Wein: We see, John, that you have a big family. You go through paper towels quite a bit and baby wipes and toilet paper and we noticed that you buy them every four weeks. And so, how about every four weeks we’re just going to send them to you on a Tuesday? And we’re going to send you a message on your phone to pick a two hour window when you’re going to be available to receive that delivery on every fourth Tuesday.
Rachel Wein: And, all of a sudden, the friction is going to be reduced. Now Amazon is starting to do that, right? But, for me now, I don’t trust Amazon to do my grocery shopping. I happen to not live in a Whole Foods market, but maybe I would if I was in a Whole Foods market.
Rachel Wein: But I do think that there are habit changes that are coming with the consumers where we’re still sorting things out, as a miss comes also with the merging of online and offline is that how the groceries touch the store and how they get to you matters, because the last mile is certainly the most expensive.
Rachel Wein: Now there are others in the real estate sector that will disagree with me. And they will say that, for the time being, for the foreseeable future, the store will still be the most economical way to deliver those goods.
Rachel Wein: And I disagree, in part, because I don’t think that folks fully load the labor and distribution burden into that statement. Item comes from the distribution to the store. If I have customers and online order pickers both going to that shelf and depleting those shelves, then I might need twice as many folks within the store to load those things back on the shelves.
Rachel Wein: So, if you can avoid having the pickers for the online orders, if you can avoid having those pickers take things from the customer-facing shelf, that’s going to be a big difference in the productivity and the profitability of those orders.
John Rougeux: So you’re saying that the in-store real estate, if you will, the shift that we might start to see is less about those shelves being consumer-facing and more … Are you saying that they’re designed to be more employee-facing or maybe even robot-facing? Or that’s at least the change that we’ll start to see in the coming years?
Rachel Wein: I think we’re going to start to see a segregation of online order fulfillment and consumer-facing store. So, there’s a couple different methodologies. And if I was to say that … You know, I advise retailers all the time, I advise grocery retailers, “I think you should have an electronic distribution system, or a robotic distribution center.”
Rachel Wein: Well, of course. But how do you do that? What’s the best method? Well, there’s two right now that are being tested out. So, Kroger has an exclusive license agreement with Ocado. Ocado is the grocery retailer up in the UK that operates robotic distribution centers, where they take online orders. They take the goods from the farm or from the manufacturer directly to the distribution center, pack those orders, and then ship them directly to someone’s home. They never touch a store.
John Rougeux: Hmm.
Rachel Wein: So Kroger is going to have 20 of those locations, they’ve already announced the first one and that’ll be just outside of Cincinnati, Ohio. And they call that a shed. And over time they will build spokes from that shed, and that will be how they service.
Rachel Wein: So, one large distribution center, 335,000 square feet, 55 million dollars. An alternative is Albertson’s. Albertson’s has a partnership with Takeoff Technologies, which has a very small footprint. It’s six to ten thousand square feet, and it operates in the back stockroom of a store, and it’s robotic picking of orders. So, in that case, they will take part of the existing store footprint that is not customer-facing, they will use it to pack orders. Those items will not go onto the customer-facing shelves, and so it will be able to utilize their existing footprint.
Rachel Wein: Now the question is, of course, over time does a 45,000 square foot grocery store end up having more and more and more of the space being non consumer-facing and less and less of it being consumer-facing as the center of the store shrinks? As Cheerios, paper towels, cleaning supplies, bubbly water, as all of those things start to be subscribed to or ordered online or automatically replenished, where we no longer need as many of those things? And instead, what you’ll go to the store for, are those special items for tonight, or for an upcoming event, or I just need to get a meal kit for this evening.
Rachel Wein: And so that’s where I think that we’re going to see the store evolve in the future.
John Rougeux: Interesting. So, if we can go back a couple decades, I’m sure you’re well familiar with the story of Webvan. And it sounds a little similar to what Kroger is trying, with kind of a large centralized distribution center and then a delivery network built on top of that.
John Rougeux: Now that’s probably an oversimplification, but I’m curious to hear your take on why Kroger will be successful in this approach or what … Maybe a better way to phrase it would be, what kinds of things will Kroger need to do right in order to be successful with this approach that maybe hurt Webvan when they tried to do this a couple decades ago?
Rachel Wein: So, and actually can I just pause for a second? Was Webvan a Kroger?
John Rougeux: Yeah, no, Webvan was a-
Rachel Wein: Webvan was its own thing, right?
John Rougeux: It was it’s own thing. Yeah, yeah, it was a big VC-backed startup.
Rachel Wein: Okay. So, let me take that in pieces. Webvan, I think, falls into the category of being a good idea at the wrong time. And Publix actually had something similar as well, and you may not be as familiar with Publix in Lexington, but down here in Florida they’re very dominant and they have 1,400 locations. And about 20 years ago they had Publix Direct which, similar story to Webvan, huge fleet of air-conditioned trucks delivering, and a large write-off in the end.
Rachel Wein: It’s a good idea at the wrong time. We didn’t yet have a comfort to buy things online sight unseen. And in many cases, even today, we’re not quite ready for that. But the amount of time that it’s taking people to change their behaviors is shortening, right? So, if you would have told me a couple of years ago that I could have delivery of my groceries in 90 minutes in St. Petersburg, Florida, I would have thought you were crazy, right? I mean, sure, New York, LA, San Francisco, Chicago maybe. But the technology that exists in our phones has really opened us all up to be more comfortable with engaging electronically with, not just buying things that show up, but also just doing the other things that go along with having these phones, right?
Rachel Wein: Getting into an Uber, renting an Airbnb, using Rent the Runway or any other number of things. And so I think that our comfort level is getting better, so we will start to see a rapid increase in adoption of these services. And they take time, right? The physical retail space takes time. These things don’t happen overnight.
Rachel Wein: So even just the decision to go and license with Ocado, then to have those 20 locations, then to build those 20 locations, then to start to utilize and implement all of those things are going to take multiple quarters. And in that time, all of our preferences, all of our daily activities, are evolving to meet the technology.
Rachel Wein: So I think Webvan was a good idea at the wrong time, as with lots of things throughout history. It’s not just the good idea, it’s also the execution and the timeline and maybe there’s another life for them.
John Rougeux: Yeah, that’s right. And you hit upon a really important piece, which is there’s a lot of infrastructure and operational changes that have to happen for these changes to occur. And I think another aspect that I’m curious to hear your thoughts on is just how rapidly consumers are willing to change their own behavior as well.
John Rougeux: So, to take your example of these different types of delivery options. One of them of course is this idea of driving to the store and having your groceries delivered in the back of your car, which sounds very convenient, and it is if it’s done right. But as you’ve written about, if you get rotten produce or if you get an off-brand or substituted for something that really isn’t appropriate, that’s a bad experience, and now you’re just even less likely to try that than you might be otherwise.
John Rougeux: So what are you seeing retailers do to make sure that they get this right the first time, and they’re not turning people off from trying these new things?
Rachel Wein: That’s a really good question. I’m not sure that I’ve seen the perfect example of how they’re getting it right. I do know from a customer service perspective in many cases you can choose just the window when you’re going to be arriving. When your phone with the app pulled up on your phone crosses the threshold of the parking lot, it will notify the store that you’ve arrived. Kroger has overhangs for the car to avoid getting wet as they load your car. Amazon has the trial where you pull up kind of like a Sonic carhop station and someone comes out right there.
Rachel Wein: So there’s a lot of different options, but I think you’re right. There’s also the expectation. If I go pick my groceries, I know it’s going to be perfect because, if there’s something that isn’t on the shelf, I will pick just the right alternative. And if someone else does it for me, it may not be perfect. It probably won’t be perfect. And that’s a hard expectation to meet, perfection.
Rachel Wein: And I think that it’s easier, personally, I think that it’s easier with delivery than it is for pickup. And I’ll tell you why. I think that’s because I am willing to forego a certain amount of control because I didn’t have to leave my house. The convenience weighs so much greater than if I spend the 20 minutes on my phone, pick out everything I want, and then I go to the store and it’s not right. Well then I’ve got to wonder why didn’t I just get out of my car and go in the store and do the 20 minutes in the store instead of the 20 minutes on my app?
Rachel Wein: So I think that there’s a greater, I don’t know, a greater understanding for discrepancies in delivery than there is in click-and-collect.
John Rougeux: So you’re saying that, because with delivery there’s more convenience or utility to be had on the consumer side, the consumer’s a little bit more willing to give up some of the control over the groceries. Whereas when you drive to the store and pick up groceries that are pre-picked for you, it is more convenient, but it’s not as convenient because you’re, like you said, you’re having to leave your house and so it’s more of a marginal increase in convenience.
John Rougeux: And so, if that’s all that you’re getting in return, there really should be no sacrifice in terms of what you’re getting from the store.
Rachel Wein: Absolutely. And I think we will get to a point where we have perfect inventory management. And Instacart is doing a great job of having real time inventory management so that I know when I pick something, it’s going to be there. But we’re not quite there yet. We’re not quite there yet.
John Rougeux: So let’s end today’s interview by tying this conversation about grocery and fulfillment and subscription services back to a big trend we’ve seen throughout this year. And that’s private equities increased in volume in the commercial real estate and retail space.
John Rougeux: What are your thoughts on how that increased interest is changing things like store development, store growth, store closures, and other trends in just the physical footprints that stores have?
Rachel Wein: Sure. Well there’s certainly been a bifurcation in the market for the retail sector. And it’s really a story of haves and have-nots. And among the very best mall-based retail centers, there’s been transaction volume with Brookfield Properties buying GGP, certainly. And a lot of interest in redeveloping those assets, those really irreplaceable trophy assets, into mixed use with really Ala Moana Center being a fantastic example of what can be done in an area that has the demand.
Rachel Wein: We haven’t seen any very large transactions from the private equity side. There’s certainly interest in the grocery sector and in open area retail in general. It wasn’t so long ago, just a few years ago, that Blackstone purchased Excel Trust and the U.S. Assets of RioCan and that’s now known as Shop Tour. And I really do think that we’re going to continue to see movement here because, so long as there’s a discrepancy in the market and price dislocation, I do think that there’s going to continue to be opportunities.
John Rougeux: Good stuff. Well, Rachel, you have shared quite a few thoughts today and lots of great insights. We really appreciate you being on the show.
John Rougeux: If one of our listeners wants to get in touch with you, what’s the best way for them to do that?
Rachel Wein: The best way to do that would be through Twitter. I’m @RachelEliasWein, or my email is RWein@WeinPL.us. Thanks for having me, John.
John Rougeux: You bet, Rachel. Thanks for being with us.
John Rougeux: Now, just a couple of quick things before we go. If you like what you heard today, please do me a huge favor and leave us a five-star review on Apple Podcasts. It would mean so much to me, and it will help make sure that great advice from people like Rachel get heard by more people.
John Rougeux: Secondly, if you have an idea for the show or a guest that you’d like to propose, send us a note at Podcast@Skyfii.com. That’s Podcast@ S-K-Y-F-I-I, dot com.
John Rougeux: Okay, well that’s it for today’s episode of People In Places. I’m John Rougeux with Skyfii. Thanks for listening. We’ll see you next time.
People in Places is a podcast dedicated to helping today’s shopping centers, retail outlets, airports, museums, universities, and other physical locations optimize the experience of their visitors. Get in-touch: firstname.lastname@example.org. See all current episodes on our website here.
- You can get in-touch with Rachel on Twitter.