A radical rethink of the grocery value chain and long-term investment in labour productivity growth are essential. Tinkering at the margin won’t be enough, argues Ocado Solutions chief executive Luke Jensen.
For grocery ‘old-timers’ like me, the past couple of years have been a source of huge pride, as well as frustration.
I’m proud of colleagues across our sector for the role they played on the front line of a global pandemic. For many, this meant adjusting decades of normal practice to a world in which shopping patterns changed overnight.
Of course, frustration also comes with wishing we could have done more, particularly at the start of the pandemic to reach more households.
But pre-Covid no business had built contingency against the odds of a global pandemic, particularly in grocery, where fresh food often makes up half the basket and stockpiling is impossible.
Grocery retail is always at the coalface of shocks in the global economy. Food is a staple, and even small changes in consumer confidence and the cost of living can have a big impact on household budgets.
The issue of grocery growth
Today inflation is beginning to bite, with prices rising faster than we’ve seen in 30 years.
Inflation isn’t a new phenomenon in grocery. Across the industry, colleagues know that managing costs in a way that reflects rising wholesale prices while helping customers protect household budgets is an important balancing act in challenging times.
But it is worth reflecting that this pressure is also coming through as longer-term trends pose fundamental questions about the infrastructure of mass-market grocery. In particular, whether it is equipped for a radically altered world.
The thorny question of labour productivity in grocery is a big part of this debate. It has been for a long time. In mature markets, productivity in grocery has trailed other retail channels for decades.
Between 1987 and 2018, annual productivity growth in US grocery was just 0.6% against a much healthier 2.9% in retail more widely.
Compared with retail electronics, productivity growth in grocery was almost 20 times slower.
Much of this comes down to the cumbersome infrastructure underpinning the 20th-century grocery model. Long, complex supply chains, big property portfolios and hyper-competitive cost environments all drive a business model that’s slim on margin, high on volume and slow to change.
“Productivity in grocery has trailed other retail channels for decades”
For many grocers, the historic hesitancy about adopting ecommerce at scale was in part because the most obvious fulfilment method was simply to overlay extra labour onto this – already stretched – model.
Picking orders in store remains the prevailing fulfilment method worldwide, but demand is no longer marginal. Small wonder therefore that a huge rise in capacity to serve online during Covid had little to no positive impact on the bottom line for most grocers.
Sweeping changes in consumer behaviour are pushing long-tail agenda items to the front of the shelf in supermarket boardrooms. How do store economics stack up in the era of omnichannel? What does the retail workforce of the future look like?
At Ocado, we took a first-principles view of the grocery supply chain for the world of online, carving out the network complexity and shortening the product journey from the farm to the fridge door.
Beyond that, we invested in a technology pipeline to drive more efficiency and cut painful costs from grocery P&Ls – costs such as food waste, which not only has an enormous environmental impact but also takes a massive toll on margins.
And we’ve invested in people, bringing together talent across grocery, technology and engineering backgrounds to develop the grocery careers of the future.
Now across the whole industry, radically rethinking the value chain and making long-term investments in labour productivity growth are a must. Tinkering at the margin won’t be enough.
This is not an existential debate about robots or about asking already stretched colleagues to do more in challenging times.
It is about making structural investments in a supply chain infrastructure that hasn’t changed significantly in over half a century. It’s also about smarter investments in our people, helping bolster the grocery retail workforce to grow into the future.
We can’t do any of this if we still assume that the 20th-century grocery model is off-limits for change.
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