topic 4 – diversity in the retail...

JBA-2018 – FINALIST’S ESSAYS1

Joe Berry Australian Retail Industry Executive Awards 2018

Topic 4 – Diversity in the Retail Environment

Q. Considering the width of the retail industry, what defines diversity in a way that is recognizable to all parties? In which areas of the industry is diversity now a major issue? How can diversity be better embraced by the retail industry? Is diversity truly manageable

or is it too ambiguous to be truly strategic?

Entrant Number: JB-18-205

Name: Molly Gill

!

Word Count: 2500


Executive Summary

There is increasing diversity in the retail industry, primarily caused by globally

shifting sociodemographic trends and consequent changes in shopper behavior and

expectations. In order to reflect the increasing heterogeneity in the marketplace, retailers

are responding by diversifying their own operations, particularly in three key areas: 1) retail

formats, 2) product range, and 3) retail channels. Through reference to global case

examples, academic studies, and financial reports, this paper explores these areas to

determine whether integration of diversity into retail strategy is manageable and

commercially worthwhile, and if so, how a retailer can better embrace changing market

conditions when making strategic choices. This paper concludes that a customer-led

approach to diversification will be essential for retailers to remain competitive, particularly

within the Australian retail market.


Introduction

Over the past two decades, traditional retailers have faced disruption and existential

challenges due to increasing heterogeneity in the marketplace. With the

sociodemographic landscape globally changing, shopper expectations and habits are also

rapidly evolving, reflecting the diversity in the wider population. A growing number of

retailers are responding to changes in customer expectations by pursuing diversity within

their own strategies. For example, while retailers have traditionally serviced one set of

chosen consumers within a single format, 70 percent of global retailers now operate

between two and eight formats . Meanwhile, emerging online channels are growing 7 1

percent faster than the total retail-sector . 2

The diversification strategies of retailers and their suppliers have consequently

been a key focus of strategic-management research. However, findings on the

effectiveness and profitability of retail diversification have been mixed, with some studies

showing persistently slow revenue-growth for retailers operating in multiple product

sectors and others, such as Amazon, realising unprecedented growth through their 3

diversification efforts into new product categories and channels . Diversification has been 4

accordingly labelled an “unpredictable, high-stakes game” , and the question has been 5

raised whether the emerging diversity in the marketplace is too complex to successfully

address with a targeted and integrated retail-strategy.

This paper argues that the best-practice principles and customer-focused mindset

that is required to fully exploit the potential of diversified retailing have seldom been

followed, thereby accounting for the inconsistent performance results within the literature.

In an increasingly competitive marketplace, the relevance and survival of a retailer will be

Shi, Y., Lim, J.M., Weitz, B.A. et al. J. of the Acad. Mark. Sci. (2018) 46: 147. https://doi.org/10.1007/1

s11747-017-0559-0

Retail Trends 2017, Strategy&. Retrieved from: https://www.strategyand.pwc.com/trend/2017-retail-2

trends

Global Powers of Retailing 2018, Deloitte. Retrieved from: www.deloitte.com/global/en/pages/3

consumer-business/articles/global-powers-of-retailing.html

www.forbes.com/sites/adamhartung/2011/07/28/amazons-4-secrets-to-spectacular-revenue-growth/4

#33dd61dc2cd3

https://hbr.org/1997/11/to-diversify-or-not-to-diversify5


determined by their ability to meet the demands of the modern shopper. More often than

not, diversification will be an essential strategy in fulfilling this requirement.

1. What are the key trends creating diversity in the retail industry?

The changing sociodemographic profile of the global population is having a major

influence on consumer purchasing-power and shopping behaviours, and the implications

are important for retailers to understand. Indeed, as noted by research consultancy

GlobalData, “reaching a mass market is much more difficult because there is no mass,

homogenized market to reach” . 6

Of the sociodemographic changes that are impacting retail, the rapidly ageing

population (i.e. those aged 55+), and the rising influence of millennials (i.e. those born

after 1980), are considered to be the most dramatic. Indeed, by 2030, the Australian

population aged 65 years or older is projected to reach 5.7m, growing 78 percent on its

level in 2012 , and millennials are outgrowing the baby-boomers in terms of their size . 7 8

Understanding the shopping habits of these groups is critical as they are expected to drive

the majority of retail-spending over the next decade. Additionally, the rate of urban-

dwelling is rapidly increasing, as is the rate of migration, creating more multicultural

communities particularly in urban areas . 9

A number of key changes in shopper expectations and behaviours have emerged

as a result of increased sociodemographic diversity in local markets:

1. Technology-enabled shopping. Perhaps most importantly is the pervasive

influence of digital-technology in modern consumer’s lifestyles. Most millennials

have never lived without the internet and smartphones, and user-friendly mobile-

www.retailthinktank.co.uk/whitepaper/how-will-demographic-trends-in-the-uk-affect-the-retail-sector/6

Australian Bureau of Statistics, Population Projections, Australia, 2012 to 21017

www.retailthinktank.co.uk/whitepaper/how-will-demographic-trends-in-the-uk-affect-the-retail-sector/8

www.euromonitor.com/australia-in-2030-the-future-demographic/report9


solutions are enabling older generations to also “go-digital” . Thus, there is 10

increasing demand for retailers’ to step-change their e-commerce capabilities

and integrate technology into the in-store experience.

2. Convenient-shopping. The modern shopper holds unprecedented expectations

of convenience. This demand for efficiency and simplicity is a combined result

of the elderly consumers’ need for proximity, mobile-technology enabling

increased-delivery options, and the on-the-go lifestyle that is encouraged by

increased city-living.

3. Price-sensitivity. Most modern-shoppers are highly-educated on price, with 60

percent describing themselves as “value-seekers” . Exposure to the internet is 11

dramatically increasing price-transparency, and the economic-recessions

experienced by older-generations has heightened price-sensitivity. Price is also

a key contributor to store-selection decisions of visible minorities, particularly

Asian shoppers . 12

4. Health-focus. The modern-shopper is increasingly health-concerned, creating

demand for transparency around the product being consumed – shoppers want

to know where products come from and how they are produced, leading to a

marked preference for fresh, local and organic products . This trend is 13

exacerbated by increased ethnic communities, who particularly value fresh-

food . 14

5. Services-not-stuff. The past two years has seen the consumption of

“experiences” grow three-times faster than the consumption of goods . The 15

health and wellness needs of older-shoppers are driving retailers to become

service-providers, and similarly, millennials are living in a social-media driven

www.retailthinktank.co.uk/whitepaper/how-will-demographic-trends-in-the-uk-affect-the-retail-10

sector/

Nielsen Global Retail-Growth Strategies Survey, Nielsen, 201611

www.canadiangrocer.com/blog/building-relevance-with-ethnic-consumers-1504412

“Changing What Matters”, 2016, Kantar Retail Predictions Report. 13

“10 Retail Investments for an Uncertain Future”, PwC, 2017. Retrieved from: www.pwc.com/2017/14

totalretail

Deloitte Global Powers of Retailing Report, 2017, Retrieved from: www.deloitte.com/global/en/pages/15

consumer-business/articles/global-powers-of-retailing.html


“sharing-economy” creating a trend toward owning-less and experiencing-

more . 16

2. How are retailers responding to increasing diversity in the industry?

The pressures felt by retailers to confront shopper diversity are evident in a 2016

survey whereby 60 percent of global industry CEOs cited shifts in consumer behaviour as

the potential disruption that concerns them the most . Accordingly, retailers are 17

transforming their strategies by diversifying in three major areas of operation: retail format,

product range, and retail channels.

The Future of Retail to 2020, Daymon Worldwide, 2015. 16

Retail and Consumer Product Trends, PwC, 2016. Retrieved from: www.strategyand.pwc.com/trends17

Figure 1. Summary of diversity in the retail environment.


2.1. Retail format. The industry has recently seen a proliferation of non-

traditional retail formats. For example, 150 million square feet of grocery selling-

space has been added in the last 5 years, though essentially none of this space is

occupied by traditional supermarket formats . Instead, retailers are rapidly 18

diversifying into smaller-format stores, such as hard-discount and convenience-style

“express” stores. Urbanization is a clear key trend driving expansion into smaller-

formats, with traditional stores finding it difficult to secure suitable city locations

proximal to the urban shopper. However, urbanization is not the only aspect of

emerging diversity that retailers must address when diversifying formats. Rather,

smaller-format stores are being shopped differently to the primary outlet, and

additionally, smaller-format shoppers have different needs beyond the store simply

being geographically closer (Figure 2) . 19

Four Forces Shaping Competition in Grocery Retailing, PwC, 2017. Retrieved from: 18

www.strategyand.pwc.com/media/file

Four Forces Shaping Competition in Grocery Retailing, PwC, 2017. Retrieved from: 19

www.strategyand.pwc.com/media/file

Figure 2. % of shoppers rating as important or very important. Source: Strategy&/Food and Marketing Institute

Services.


U.S. retailer Walmart’s 2011 expansion into a string of “Express” stores

demonstrated that a simple “shrink-to-fit” adaptation of the larger store is unlikely to deliver

success, with all 102 of these sites having closed by 2016 following reports of

unprofitability . Similarly, major UK grocer Tesco failed to penetrate the market with a 20

convenience-store format “Fresh and Easy”, losing $1.6B and withdrawing from the market

in 2013 . These retailers’ strategies to target their existing market with a smaller-version 21

of their larger-offering, rather than developing a format around the smaller-store shopper,

was unsuccessful.

The highly publicized Amazon Go, a trial-supermarket recently launched in the U.S

city of Seattle, exemplifies a retailer reinventing their proposition when diversifying into

new retail-formats. Indeed, to exist within a compact urban environment, Amazon Go

necessarily occupies only 1,800 square feet. However, its’ differentiated offering of

cashless, checkout-free stores has matched the needs of their target consumer – “busy

customers [who want to] get in and get out fast” . Moreover, the use of innovative 22

walkout-technology adds to the experiential expectations of their key-demographic (the

“young, high-income shopper”) . These case-studies demonstrate that to succeed, 23

diversification into small retail-formats must offer something other than being small, and

the additional format must be personalized to the local shopper.

2.2. Product range. Shopper diversity has initiated a radical shift in the ways

retailers select, source, and merchandise their product range. In order to address

diverse shopper-needs while competing with the endless “aisles” of assortment

offered online, many retailers have followed-suit by providing consumers with more-

and-more options. For example, the number of grocery SKUs available per-store

has grown 88 percent since 1990, while sales per-store have only grown 8 percent

www.cbsnews.com/news/are-there-dark-days-ahead-for-big-box-stores/20

Shi, Y., Lim, J.M., Weitz, B.A. et al. J. of the Acad. Mark. Sci. (2018) 46: 147. https://doi.org/10.1007/21

s11747-017-0559-0

www.amazon.com/b?ie=UTF8&node=1600858901122

Global Powers of Retailing Report, Deloitte, 2017. Retrieved from: www.deloitte.com/au/en/pages/23

consumer-industrial-products/articles


in this same time-period . These findings are consistent with the “paradox of 24

choice” psychological theory, whereby increased assortment size precipitates

shopper anxiety through “choice overload”, precluding a positive impact on sales

performance . That is, simply adding more products to the market will likely not be 25

an effective strategy for retailers to satisfy increasing customer diversity.

Case-studies have since suggested that the focus must be removed from existing

as a one-stop-shop for all customers, to instead, curating a range around specific shopper-

needs. In 2016, Australian retailer Lincraft reduced its product range by a third in 20 of

their stores, curating an “essentials” assortment based on sales-data that prioritized a

range based on how quickly it moved from the store, as well as consumer insights that

revealed the products that were necessary to satisfy their key shopper-mission . While 26

Lincraft does not share financial details, they are estimated to hold 25 percent share of a

market worth $2.1 billion . Similarly, rapidly-growing Aldi carries only 8 percent of the 27

selection traditional grocers do, with most of their assortment private-label, permitting

lower-prices and a simpler shopping experience for their key older-demographic . 28

Retailers are also differentiating their range by shifting their product-sourcing and

merchandising strategies. For example, in their newly opened metro-store in Sydney’s

inner-west, Woolworths are moving essentials and ready-made meal kits to front-of-store,

and merchandising frequently co-purchased items to better serve the needs of the

convenience-seeking, grab-and-go shoppers (Figure 4). Moreover, retailers including

Woolworths are increasingly partnering with local suppliers, such as farmers and bakers,

in order to increase supply-chain transparency and fulfil consumer demand for fresh

produce . 29

Strategy& Food and Marketing Institute24

Paradox of Choice, Harper Perennial 200425

www.smartcompany.com.au/industries/retail/lincraft-undergoes-revamp-as-australian-retailers-get-26

crafty-with-store-spaces/

www.smartcompany.com.au/industries/retail/lincraft-undergoes-revamp-as-australian-retailers-get-27

crafty-with-store-spaces/

www.ausfoodnews.com.au/2015/07/01/3-essential-pieces-of-the-supermarket-business-model.html28

www.news.com.au/finance/business/retail/woolworths-unveils-newlook-flagship-store-featuring-living-29

lettuce-meal-kits-and-14-chooks/news-story/63778db4a42adb1a2cc75723b921bc6e


2.3. Retail channels. With the rapid emergence of e-commerce and its’ particular

influence on the purchasing-behaviour of millennials, a growing number of

traditional retailers are unsurprisingly developing a digital footprint . However, 30

despite expectations that online-retailing will more than double by 2020 , the level 31

of spending in physical stores remains several multiples higher than that spent

online . Thus, many traditional retailers have rushed into e-commerce to match 32

online-competition, while 1) underestimating the enduring value and importance of

their physical stores , and 2) over-estimating their financial-capacity to adapt to the 33

Retail Trends 2017, Strategy&. Retrieved from: www.strategyand.pwc.com/trend/2017-retail-trends30

The State of Retail: Consumer Behaviour, Timetrade, 2016. Retrieved from: www.timetrade.com/31

resource/state-of-retail-2016-consumer-behavior

“Retail Sales Worldwide Will Top $22 Trillion This Year”, eMarketer.com, 201432

The State of Retail: Consumer Behaviour, Timetrade, 2016. Retrieved from: www.timetrade.com/33

resource/state-of-retail-2016-consumer-behavior

Figure 3. Woolworths Marrickville Metro features expanded fresh food, ready-to-go meals and health offerings, and a dedicated front-of-store pick-up area for online orders.


costly logistics of online-retail . Consequently, “omnichannel” efforts have thus far 34

been reported as largely unsuccessful in delivering growth , . 35 36

Despite underwhelming performance results, even traditionally pure-play online

giants such as Amazon are still seeking to complement their dominant digital business with

physical-stores . This omnichannel strategy aligns with research showing the modern 37

consumer does not exclusively shop using either digital or physical. Instead, shoppers will

utilize both channels on the path to even a single purchase . For example, the worlds’ 38

leading furniture retailer IKEA enables shoppers to browse options, compare

specifications, and order items online. Meanwhile, in-store shoppers are offered superior

customer-service, interactive digital-platforms, and socializing-areas, permitting a richer-

interaction with products . Importantly, the two-channels are well-integrated: IKEA’s 39

physical-store network is an integral part of their online-order fulfilment system, combined

with simplified pick-up, returns, and assembly-services. Successful omnichannel-retailing

will offer a seamless shopping-experience to consumer’s that no longer distinguish

between channels.

3. Implications for the Australian retail industry – what can we do better?

Australia is the most culturally diverse nation in the world , has the highest global 40

percentage of Smartphone-penetration , and is facing an acceleration of international 41

“Solving the online logistics dilemma: A practical guide toward profitability”, 2017, Retrieved from: 34

www.strategyand.pwc.com/reports/solving-online-logistics-dilemma

“Omnichannel Efforts Have Underperformed”, 2017, Retrieved from: www.strategyand.pwc.com/trend/35

2017-retail-trends



www.seattletimes.com/business/amazon-plans-to-open-six-more-cashierless-go-stores-recode-says/37

The Power of Omnichannel Stores, Bain & Company, 2017. 38



Cultural Diversity and its Impact on Global Consumer Markets, Euromonitor International, 2015. 40

www.pewglobal.org/2016/02/22/smartphone-ownership-and-internet-usage-continues-to-climb-in-41

emerging-economies/

Figure 4. A customer-led decision-making process to retail diversification.


retailers establishing a presence in the Australian market . Consequently, Australian 42

retailers are particularly vulnerable to the increasing competitive pressures of a diverse

retail landscape, and they must be prepared to rethink their strategies. As discussed,

many retailers have learned harsh lessons from attempts to rapidly diversify for

diversification sake without ensuring it is right for their customers (or their business). This

paper thereby proposes that a customer-led strategy to diversification will be critical for

success – the choice of areas in which to diversify will be dictated by both 1) the retailers’

capabilities and 2) its’ customer needs.

1. Customer. Retailers must firstly develop a granular-level of understanding of

their customers. Considering the width of shopper-diversity, retailers cannot

afford to target every growing segment with a diversification-play – knowing the

area’s most relevant to your consumers is a critical investment. Woolworths’

has recognized this importance, investing $20M for 50 percent stake in data-

analytics company Quantium in 2013, enabling detailed customer-

understanding . 43

2. Capacity. Less than half of retailers are able to integrate customer-insights into

their new-business operations , creating immense competitive advantage for 44

those who can. Thus, retailers must identify the capabilities needed to deliver

on their customers’ expectations, while also assessing how they can best utilize

their existing competitive-strengths. If a company is lacking critical capacities,

they must decide if these can be developed or substituted in a profitable way . 45

3. Execute. Most retailers cannot afford to reconfigure their networks and

processes all at once . Successfully executed diversification-plans evolve over 46

http://blog.deloitte.com.au/the-continued-globalisation-of-australian-retail-and-what-it-means-for-42

small-to-medium-businesses/

www.cmo.com.au/article/553618/quantium_helps_woolworths_get_personal_customers_ceo_says/43

www.strategyand.pwc.com/reports/your-companys-customer-strategy44

https://hbr.org/1997/11/to-diversify-or-not-to-diversify45

The Future of Retail Supply Chains, KPMG, 2016. Retrieved from: https://assets.kpmg.com/content/46

dam/kpmg/pdf/2016/06/The-future-of-retail-supply-chains.pdf


several years, requiring coordination across all business-functions. Data and

analytics will be key to understanding end-to-end logistics optimization and

execution capabilities. Showrooms , click-and-collect services, and the use of 47

physical-stores to fulfil online-orders (precluding the development of a costly

network of distribution-centers) , are examples of ways that retailers are 48

leveraging existing strategic-assets to execute diversification plans while

maintaining profitability.

4. Evaluate. Companies such as Amazon are successfully diversifying, not

because they are “digital”, but rather, because they are systematically testing

and improving their diversification-efforts to ensure they have a model that

works . This perpetual use of testing-technologies at every step of the 49

diversification-process is critical to successful implementation.

Conclusion

This paper has argued that a customer-focused approach to retail-diversification

removes much of the ambiguity associated with increased shopper-diversity, thereby

permitting strategic retailer decisions. This approach highlights that within a diverse

shopper-landscape, all parties within the retail industry should have one overriding goal:

selling goods and services to customers however they want to buy them. Competition in

this space is increasingly tough, and therefore, diversification may no longer be an

aspiration but a baseline-requirement. Retailers can either meet this expectation or lose

shoppers to competitors better able to meet their needs.

www.strategyand.pwc.com/trend/2017-retail-trends47

www.strategyand.pwc.com/reports/solving-online-logistics-dilemma48

Kantar Retail Predictions, 201749



Topic 2 – Technology Looming as the Next Metric

Automation and technology are playing an increasingly important role in retail price and

margin calculations. How much further can they be developed across a wide variety of

retail formats? Where will the effects of automation and technology be most beneficially

measured for retailers and suppliers? Will consumers benefit from these advancements on

price and in product range?

Entrant: JBA-18-289

Michael Cullerne

!

Word Count: 2,499


Executive Summary

This essay discusses the impact automation and technology will continue to have on retail.

It considers where technology has got us, what the future looks like and who will benefit

the most. Technology touches all parts of the retail experience, from sourcing ingredients

through to social media – no aspect is spared.

Retailers and suppliers that take advantage of technological solutions are best placed to

increase margins and offer competitive prices. To do this they need to understand what

their consumers want and how to deploy technology to deliver it. Effective use of data,

smarter logistics solutions and delivering an extraordinary consumer experience are three

areas that require attention.

Understanding how technology impacts key metrics will identify where value creation is

possible. Industry leaders will be those that empower all levels of their organization to

challenge the status quo and embrace technology with the opportunity it brings.

Introduction

From the horse and cart, to the development of shopping centres and now the internet –

technology has relentlessly pushed retail forward. At the NRF expo in New York, Brad

Banducci, CEO Woolworths, said “technology has become crucial to the future of retail -

this is the key for us”. The realization that technology is such an important factor in retail, 50

while not new, is paramount in addressing the rapidly changing environment we operate

in.

Advancements in technology will give consumers access to more offers from a variety of

new and existing retailers. Cutting through the clutter requires a deliberate strategy

focused on building consumer understanding, becoming more efficient and creating

experiences that stand out from the crowd. 51

Patrick Hatch: “Why Woolies boss is looking at start-ups to never run low on bread again” The Age 17/1/2018 https://www.theage.com.au/50business/companies/why-woolies-boss-is-looking-at-tech-start-ups-to-never-run-low-on-bread-again-20180116-p4yyjb.html

Ian Linton: “Critical Success Factors in Retail” Bizfluent 26/9/17 51 https://bizfluent.com/list-7232715-critical-success-factors-retail.html


The Story So Far

Technology has played a key part in the ongoing development of the retail environment.

Improved logistics, tailored shelf layouts and self-scan checkouts are a few examples of its

impact.

In Australia, the high concentration of grocery retailers has seen significant technological

focus on operational efficiency and extracting margin out of the supply chain. Centralized

warehousing, primary freight and integrated forecast systems have all contributed. With

the emergence of new competitors, that margin is now being invested into price.

In Australia, the focus on price has been primarily driven by ALDI. They have been

successful in gaining share by rolling out their discounter model. ALDI relies on strong

forecasting and logistics technologies to run its stores with minimal personnel. Even

product packaging is deliberately designed to minimise the need for in-store

merchandising.

Labour is a significant cost of doing business (figure 1) and ALDI’s ability to run with low

staff count puts significant pressure on its competitors. The use of technology in place of

people is a key competitive advantage in the battle on price. In the U.K. the impact of

discounters has seen a significant drop in overall retail employment, which is a side-52

effect of technological investment.

Figure 1: Cost of doing business highlighting the significance of labour 53

Oscar Williams-Grut: “A technological revolution is tearing through retail” Business Insider 26/10/17 52 https://www.businessinsider.com.au/brc-tech-revolution-killing-retail-jobs-q3-decline-biggest-ever-2017-10?r=UK&IR=T

The Productivity Commission “Relative Costs of Doing Business in Australia: Retail Trade” Australian Government 1/9/14 53 https://www.pc.gov.au/inquiries/completed/retail-trade/report/retail-trade.pdf


The disruption of discounters has happened alongside the emergence of a more

connected consumer. Digital technologies continue to reshape the landscape and provide

consumers a greater product range and transparency on price. Amazon carries over 4

million lines and has a substantial network to distribute this to consumers almost 54

anywhere. Like ALDI, Amazon creates a relentless competitive advantage by leveraging

automation to minimise supply chain bloat and reduce labour costs.

The challenge to offer consumers the right price while growing margin is as old as retail

itself. While we are in a time of accelerating change, it is critical for incumbents to

remember that the core concepts of retail are the same. Technology’s role is to make the

experience easy and satisfying for consumers. Simply bolting on an online offer is

inadequate. To compete, there is a need to select and integrate the right technology and

not get distracted by gimmicks or things that don’t add value.

A Never-Ending Journey

Technology will continue to bring consumers and producers closer together. Retailers

need to be able to shift their mindset from it being able to just ‘add value to current

operations’ to how it can ‘completely change the way we do business’. Uber’s entry into

the transport industry is a recent reminder of what can happen. 55

The traditional supplier/retailer model is under threat due to significant price and margin

pressure. Technology can ‘remove’ players from a market. Subscription services such as

the ‘Dollar Shave Club’ and ‘Harry’s’ are examples of where the retailer is not required to

create a great consumer experience. They have impacted not just retailer’s sales but also

large suppliers of shaving products.

“How many products are sold on Amazon.com?” 1/1/17 54 https://www.scrapehero.com/how-many-products-are-sold-on-amazon-com-january-2017-report/

Adi Gaskell: “The Impact of Uber on the Taxi Industry” Forbes.com 26/1/17 55 https://www.forbes.com/sites/adigaskell/2017/01/26/study-explores-the-impact-of-uber-on-the-taxi-industry


Figure 2 – sales of razors by manufacturer 56

Whilst forecasting the future impact of technology is difficult, it cannot be ignored. There 57

are three key areas retailers and suppliers need to consider for its application: Data,

logistics and consumer experience.

1) Data

Data procurement, analysis and security will be at the forefront of modern retailer strategy.

It gives critical insight into consumer behaviour and is highly sought after by suppliers,

partners and advertisers. Its value in negotiations will skyrocket particularly for those that

can extract the maximum insight from it. Other than providing intelligence on what

consumers want, it can also indicate what they will pay. The development of machine

learning (AI) will enable faster and richer conclusions to be drawn on price/margin. 58

Its use will be prevalent with everyday items consumers purchase regularly. Being able to

predict and replenish these items will rely on being constantly connected to consumers

through devices and the ‘internet of things’. The technology to show that you need more

milk in the fridge is here. The battle is now on for the retailer that can automatically 59

replenish it.

Sharon Terlep “Gillette, Bleeding Market Share, Cuts Prices of Razors” Wall Street Journal 4/4/17 56 https://www.wsj.com/articles/gillette-bleeding-market-share-cuts-prices-of-razors-1491303601

James Brian Quinn “Technological Forecasting” Harvard Business Review March 1967 57 https://hbr.org/1967/03/technological-forecasting

Sven Brodmerkel “Dynamic pricing: Retailers using artificial intelligence to predict top price you'll pay” ABC News 27/6/17 58 http://www.abc.net.au/news/2017-06-27/dynamic-pricing-retailers-using-artificial-intelligence/8638340

Lance Ulanoff “Samsung fridge lets you check what's inside” Mashable 6/1/16 59 https://mashable.com/2016/01/05/samsung-fridge-amazon-alexa


Auto-order and subscription models have the potential to build large amounts of

predictable demand that will be very lucrative for retailers that can leverage the available

data. The more sense that can be made of forward demand the more efficiently a retailer

can service it, creating opportunities to increase margin. Amazon CEO Jeff Bezos notes

“the best customer service is if the customer doesn't need to call you, doesn't need to talk

to you. It just works.”

The collection of data can intrude on privacy. It is important to be transparent on what you

are collecting and why. Brad Banducci, CEO of Woolworths notes that "shoppers will let

us use their data to help them have a better experience, but we've got to be very

cautious ." 60

It is not uncommon for there to be ‘too much information’. Having strong systems around

how data is stored, used and interpreted is important. Amazon ensures that access to

information is widely available across the organisation. This enables people to discover

insights, test ideas and leverage cross-functional experience.

2) Logistics

Getting to the consumer will continue to evolve rapidly. Automation of warehousing,

picking and transportation will increase fulfillment speed. Self-driving trucks, trains and

drones will create a network of on-demand delivery solutions. AI is beginning to be used

to manage inventory and plan transport routes creating significant savings even at very

busy times. Labour is being replaced by robots that can pick/merchandise with greater 61

efficiency. Figure 3 highlights robots are becoming more cost-effective, increasing

potential margins. The social implications of automation are more difficult to calculate.

Patrick Hatch “Why Woolies boss thinks Uber Eats is a bigger threat than Amazon” Sydney Morning Herald 24/2/18 60 https://www.smh.com.au/business/companies/why-woolies-boss-thinks-uber-eats-is-a-bigger-threat-than-amazon-20180223-p4z1gp.html

Christine Chou “How Cainiao set new record delivery times” Alizila.com 23/11/17 61 http://www.alizila.com/cainiao-set-new-record-delivery-times-11-11/


Figure 3 – robots vs human cost 62

Winning retailers will harness distribution networks that can reach their consumers

anywhere. But do they create their own network or rely on others? Vertical integration is

an emerging trend where retailers can take cost out of the supply chain by controlling end

to end distribution. This can reduce bloat and increase margin. Figure 4 shows how 63

Amazon has been able to use scale and vertical integration to create margin for

themselves while putting pressure on their competitors.

“Logistics robots to make 40% of sector's low skilled workers obsolete” Consultancy.uk 19/7/16 62 https://www.consultancy.uk/news/12161/logistics-robots-to-make-40-of-sectors-low-skilled-workers-obsolete

Boris Wertz “The Next Big E-Commerce Wave: Vertically Integrated Commerce” TechCrunch.com 29/9/12 63 https://techcrunch.com/2012/09/29/the-next-big-e-commerce-wave-vertically-integrated-commerce/


Figure 4 – Amazon revenue/margin vs. competitor 64

An efficient route to consumers is not just a competitive advantage, it can also be an

income stream. In Australia, Fulfillment by Amazon (FBA) has launched. Third party

suppliers can make use of Amazon’s logistics network. FBA removes a key barrier to entry

for many suppliers – getting their offer to market at a predictable cost . We can expect 65

many partnerships and mergers to happen as companies determine their best route to

market.

The demand for ultra-convenience is here and traditional grocery retailers are competing

for the family meal against companies like Uber Eats and Domino’s. Whilst speed of

delivery is a key, doing it low cost is difficult. In the UK, it costs on average £15 to pick and

deliver an online grocery order, significantly lower than the price they charge the consumer

(£0-7 average) . In many markets third-party couriers are a more cost-effective, low-66

Nicholas Condoleon, Mark Knight “Retail Disruption Set to Escalate“ Ausbil.com 5/5/17 64 http://www.ausbil.com.au/research-insights/research/retail-disruption-set-to-escalate

Sue Mitchell “Amazon Launches Fulfillment Service for Australian Marketplace” Australian Financial Review 27/2/18 65 http://www.afr.com/business/retail/amazon-launches-fulfilment-service-for-australian-marketplace-sellers-20180226-h0wntb

“Discounters Go Digital: How Can Aldi and Lidl Tackle Grocery E-Commerce?” Coresight Research 2017 66 https://www.fungglobalretailtech.com/research/discounters-go-digital-can-aldi-lidl-tackle-grocery-ecommerce/


investment and scalable approach as opposed to ‘doing it yourself’. Retailers like Coles

have been trialing such an option with Uber as they explore sub one-hour deliveries . 67

3) Consumer Experience

Building amazing consumer experiences should be the goal of everyone involved in retail.

An omnichannel approach is required but many retailers have struggled with this. Store,

online and mobile teams are often siloed and don't work together . Online/mobile 68

channels provide broad access to consumers while the in-store experience can create

deep connections with brands and products. Integrating the three is critical in nailing the

consumer experience. A great example of this is Apple. It has strong online presence for

consumers to explore while providing unforgettable customer service in-store.

Nordstrom has unveiled a new store format ‘Nordstrom Local’. Local is a 3,000-square 69

foot store that brings the normal 140,000-square foot Nordstrom store to life. Customers

can try products but the store carries no inventory. Using virtual reality and trained stylists,

customers select their products in-store for delivery anywhere in L.A. the same day. Local

offers manicures, beer and wine and connects to its online/mobile platforms, offering pick-

up and return services.

Using technology, Nordstrom has created a full department store experience in a fraction

of the space. This allows them to penetrate high-rent areas like Beverly Hills. Nordstrom

commented, “there aren’t store customers or online customers — there are just customers

who are more empowered than ever to shop on their terms.”

A great consumer experience doesn’t necessarily need to involve designer architecture.

Amazon’s in-home device Alexa is making even the most boring purchases a magical

experience. As your personal assistant, you can simply say “Alexa, we need dishwashing

liquid, something eco-friendly please” and it is included in your next Amazon Prime

delivery.

Patrick Hatch “Coles is teaming up with Uber for home delivery” Business Insider 29/8/17 67 https://www.businessinsider.com.au/coles-has-launched-home-delivery-trial-with-uber-2017-8

Simon Birkenhead “Why Most Retailers Fail at Omnichannel” L2Gartner 24/1/17 68 https://www.l2inc.com/daily-insights/why-most-retailers-fail-at-omnichannel

Suzanne Kapner “Nordstrom Tries on a New Look: Stores Without Merchandise” Wall Street Journal 10/9/17 69 https://www.wsj.com/articles/nordstrom-tries-on-a-new-look-stores-without-merchandise-1505044981


Connecting with consumers and their most basic of demands is a powerful way of making

‘chore’ shopping easier and more delightful. Automated interactions will grow through in-70

home devices, social media, and apps like WhatsApp where AI-built ‘ChatBots’ can talk

directly with consumers. Humans will still play a key role in service delivery but in many

instances, AI will do it better, or cheaper. 71

Making Sense of the Possibilities

Actual consumer demand, not excess technological capacity, is the primary force behind

change. Technology should only be used if it can service a need. With so much change 72

on the horizon it is easy to get swept away with the latest fad. Retailers and suppliers will

need to be disciplined on what provides real value. They will require clearly defined

metrics that acknowledge the impact technology is having on their consumer and their

margin.

Key areas to measure are:

1. Availability; is my product readily available where/when it’s wanted?

2. Efficiency; am I delivering effectively?

3. Satisfaction; are my customers delighted?

4. Loyalty; is my offer unique and worth coming back for?

5. Utilisation; are my resources used effectively?

Consumers stand to benefit greatly from the effective use of technology. However,

predicting the impact it will have on the bottom line will be critical in decision making.

Technology is not a measure itself. Instead, one needs to consider the impact it will have

on key consumer and margin metrics.

Further to growing existing business, savvy retailers will have access to new markets with

technology. ALDI’s entry into the Chinese market is a great example. Rather than opening

hundreds of stores, they partnered with Alibaba to sell their range on the TMall online

“2018 Retail Trends and Predictions” VendHQ.com 2017 70 https://www.vendhq.com/2018-retail-trends-predictions

Trips Ready “How chatbots can help reduce customer service costs by 30%” IBM 17/10/17 71 https://www.ibm.com/blogs/watson/2017/10/how-chatbots-reduce-customer-service-costs-by-30-percent/

James Brian Quinn “Technological Forecasting” Harvard Business Review March 1967 72 https://hbr.org/1967/03/technological-forecasting


platform. This has significantly reduced the cost of entry and allows them to learn quickly 73

about Chinese consumers.

Keeping Australian retailers and suppliers competitive is an urgent priority given how

connected the world has become. This will require significant infrastructure investment by

the Government and private sector. The NBN, 5G and improved transport systems will all

be critical in connecting retailers to their markets. This will be important in ensuring

Australian business can win on a global scale.

Conclusion

Technology will remain a key part of retail. It will not make brick-and-mortar obsolete but it

is changing the way retailers need to operate to be successful. It creates significant

efficiencies and a far deeper consumer experience. Digital and in-store retailing each

have their role but the benefit is integrating the two with the use of technology across data,

logistics and in enhancing the consumer experience. Where retailers used to be able to

take a ‘build it and they will come’ approach, now it will be consumers that dictate the

terms of their shopping experience.

The winners will be those that appreciate how technology can understand, reach and

delight consumers. It will unlock margin by bringing demand and supply closer than ever.

A clear strategy and measuring the right indicators will help make sense of its impact. It is

important we address data privacy concerns as well as the influence automation will have

on the retail workforce.

The challenge for all Australian retail stakeholders is to embrace the right technology to

reach and excite consumers here, and around the world.

“Aldi China Opening Store on TMall” Inside Retail Asia 3/3/17 73 https://insideretail.asia/2017/03/03/aldi-china-opening-store-on-tmall/



Topic 1 – Global Pricing Algorithms

Q. What are the looming ramifications for retailers and suppliers where prices and pricing

structures can become so globally transparent? What might happen to the trading

relationships between retailers and suppliers as a result? Will trading terms cease to be an

efficient negotiation tool? Are there new opportunities within this challenging global

monitored pricing environment?

Entrant Number: JBA-18-137

Name: Samantha Healey

!

Word Count: 2,500 words


Index

Executive Summary 2

Introduction 2 Transparency the new normal 3

Two keys to success for online retailers 4

Shortfalls of today’s pricing methods 4

Ramifications for Retailers and Suppliers 5 Dynamic Price Planning (DPP) – Changing the Retailer/Supplier Relationship 6

‘The World of Jane’ 6 Agile structure and mindset is an enabler 8

Organizational Capability 9

Conclusion 9


Executive Summary “Your margin is my opportunity”

Jeff Bezos – Founder and Chief Executive - Amazon 74

Welcome to the retail environment of the 21st Century - where increasingly available and

sophisticated data sets and the growth of ‘non-traditional’ retailers like Amazon are forcing

a re-think of corporate strategy. Online shopping and mobile is not only increasing price

transparency but changing the landscape of how and when we shop, and what we buy.

The result is a broad spectrum of reactions from retailers and suppliers. Some have made

knee-jerk investments into tactical pricing moves, with no shift in capability or business

model. Others have embraced the technological change and adopted agile practices to

ultimately win in this new world marketplace.

This submission aims to identify the ramifications for retailers and suppliers navigating this

changing market landscape. It calls for the re-defining of the supplier/retailer operating

model to focus on customising the price for the consumer – ‘Jane’ – through data-led

insight. Dynamic Price Planning (DPP) should be the new approach to pricing and

integrated business planning within our industry – a customer-centric model that leverages

technology to jointly build insights and pricing customisation opportunities that lead to

sustainable category growth.

The success of DPP is enabled by:

1. Adopting an agile structure and mindset to facilitate rapid, insight-led decision-

making and innovation, and;

2. Expanding organisational capability and understanding of data science

skillsets, as well as consumer behaviour across all business functions.

Lashinsky, A: ‘Amazon’s Jeff Bezos – The Ultimate Disrupter’; - Fortune Magazine 16 Nov 2012; http://fortune.com/74

2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/

http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/

http://fortune.com/2012/11/16/amazons-jeff-bezos-the-ultimate-disrupter/


Introduction

Online competition and on-the-go availability of data have transformed the pricing

landscape within the retail industry globally. Retailers like Amazon are increasingly

leveraging technology and an agile business model to capitalise on the ‘fourth industrial

revolution’ - devouring competitors and exacerbating declines in traditional bricks-and-75

mortar environments. If you cannot compete on price, then your product or service offering

must act as a point of difference to incentivise customers to buy.

53% of Australian Grocery shoppers consider price the most important factor when 76

purchasing a product. They are more selective on where and how they spend their

income , and while the retail sector is not in decline (refer Fig.1), the pie is growing slowly. 77

Fig. 1: Australian retail sales over the last 5 years - Month on Month Growth % 78

!

Australian online retail is the darling segment for future growth, valued at $24bn in the 12

months to November 2017, equivalent to 7.7% of spending in bricks-and-mortar retailers

http://www.abc.net.au/news/2017-11-16/will-australia-be-the-lucky-country-in-tomorrows-economy/915388475

IRI, ’Grocery Market Moves’ Shopper Panel Survey, Nov 201776

Kirby, J and Kohler, A: ‘The Money Café with Kirby and Kohler’ – Podcast 20 July 201777

Woodhouse, A: ‘Australian retailers rise as November sales beat estimates; - Financial Times, 11 Jan 2018 - 78

https://www.ft.com/content/75f1cb70-2e8d-3174-953f-26d21a140591

http://www.abc.net.au/news/2017-11-16/will-australia-be-the-lucky-country-in-tomorrows-economy/9153884

https://www.ft.com/content/75f1cb70-2e8d-3174-953f-26d21a140591


and growing at +14.4% versus prior year. In China, online accounts for 22% of retail 79

sales . 80

Transparency the new normal

Pricing transparency is the new normal. It equals ubiquity for retailers and suppliers alike.

Pricing algorithms provide dynamic and continuously refined pricing moves that

complement consumer expectations. If executed correctly, they can optimise profitability

based on a customer’s willingness to pay both online, and in-store. There are multiple 81

examples across similar industries - consumer and household electronics (MediaMarkt,

Kogan), ride sharing (Uber), and travel (Airlines, HotelsCombined, Booking.com et.al) - all

embracing the influx of digitisation to exploit pricing opportunities with increasing

competitive or even ‘radical’ transparency (Everlane) . 82

Fig 2: Everlane’s ‘radical transparency’

The success of these retailers falls to two crucial pricing concepts:

McDonald, B: ‘NAB Online Retail Sales Index – November 2017’ – National Australia Bank, 10 Jan 201879

Waters, R: ‘Tech trends for 2018 – the big will get bigger’ – Financial Times, 28 Dec 2017 – https://www.ft.com/80

content/36e7b168-eb3e-11e7-bd17-521324c81e23

Oldeman, O: ‘Dynamic Pricing – four pitfalls to avoid’ – Simon Kutcher & Partners, 22 Jan 2018 - https://81

www.simon-kucher.com/en/blog/dynamic-pricing-four-pitfalls-avoid

https://www.everlane.com/about82

https://www.everlane.com/about

https://www.simon-kucher.com/en/blog/dynamic-pricing-four-pitfalls-avoid

https://www.simon-kucher.com/en/blog/dynamic-pricing-four-pitfalls-avoid


1. Price Perception - enhancing the perceived value of your product, brand or

organisation in the eyes of the customer or consumer , and; 83

2. Price Differentiation - a flexible and defendable approach that draws on an

organisation’s detailed consumer journey (with other parameters) to tailor a price or

offer for the consumer.

Amazon relies on price perception as the foundation of their pricing strategy (executed by

algorithm) - their width of pricing activity is linked to the top 100 selling products (Key

Value Items – ‘KVI’) only. For the remainder of Amazon’s assortment, retail price is

generally higher than other retailers . In the US, 44% of online shoppers navigate directly 84

to the Amazon site to make a purchase . 85

Shortfalls of today’s pricing methodologies

Conversely, traditional pricing frameworks tend to be static in nature – FMCG suppliers

often provide fixed price lists underpinned by tactical promotional calendars. Mechanics

tend to focus on cycling prior year results, with the hope of generating incremental volume

or revenue. When the wrong pricing decisions are made, unnecessary margin and brand

erosion are the result . 86

There are three issues with this approach:

1. The pricing process does not fully factor in changes in market landscape;

2. Utilising single price points only is inefficient given part of the profitable demand

curve that could be feasible to other consumers is priced out of the market, and; 87

3. The retailer/supplier relationship is often focused on a win-lose view of margin

realisation (without addressing changing consumer needs).

Heda, S. et.al: ‘How customers perceive price is more important than the price itself’ – Harvard Business Review, 3 83

Jan 2017 - https://hbr.org/2017/01/how-customers-perceive-a-price-is-as-important-as-the-price-itself

Simon, H: ‘Whole Foods is becoming Amazon’s Brick-and-Mortar pricing lab’ – Harvard Business Review, 12 Sep 2017 84

- https://hbr.org/2017/09/whole-foods-is-becoming-amazons-brick-and-mortar-pricing-lab

Chen, L., et.al: ‘An Empirical Analysis of Algorithmic Pricing on Amazon Marketplace’ – Apr 2016 - https://85

mislove.org/publications/Amazon-WWW.pdf

Head, B: ‘The Amazon Effect’ – Company Director, Australian Institute of Company Directors, 01 Nov 2017 - https://86

aicd.companydirectors.com.au/membership/company-director-magazine/2017-back-editions/november/the-amazon-effect

LaRiviere, J. et.al: ‘Where predictive analytics is having the biggest impact’- Harvard Business Review, 25 May 87

2016 - https://hbr.org/2016/05/where-predictive-analytics-is-having-the-biggest-impact

https://hbr.org/2017/01/how-customers-perceive-a-price-is-as-important-as-the-price-itself

https://hbr.org/2016/05/where-predictive-analytics-is-having-the-biggest-impact

https://mislove.org/publications/Amazon-WWW.pdf

https://mislove.org/publications/Amazon-WWW.pdf

https://aicd.companydirectors.com.au/membership/company-director-magazine/2017-back-editions/november/the-amazon-effect




https://hbr.org/2017/09/whole-foods-is-becoming-amazons-brick-and-mortar-pricing-lab


Therefore, enabling data-led price differentiation (to drive price and value perception at a

consumer level) is a more sustainable alternative for both retailers and suppliers.

Ramifications for Retailers and Suppliers

Amazon is tipped to acquire ~$200m of the Australian retail market and price comparison 88

sites like Skyscanner, Shopbot and Trivago are increasingly holding suppliers to account

with real-time tracking of price changes. Amazon as a route-to-market solution (with its

pricing algorithm tool) is already a feasible option for many Australian suppliers selling

through the site. It is not a question as to whether our industry should adopt dynamic

algorithms to address the changing consumer and market landscape, but when.

A 2016 study into the need for organisations to adopt agile pricing demonstrated that 89

internal processes for determining and changing price were too rigid and slow to respond

to market changes. Additionally, pricing was treated as a tactical issue, rather than a

strategic one.

“…the challenge lies in the ability to face reality and make tough decisions to build agility

and innovation into business models...Apple and Amazon have each built their

organisations to behave like a start-up, with the maturity of an adult’. 90

Introducing Dynamic Price Planning (DPP) – Changing the Retailer/Supplier Relationship

Consider Jane – an Australian consumer:

Ibid (#13)88

Bozadzhieva, M: ‘Global companies need to adopt agile pricing in emerging markets’ – Harvard Business Review, 19 89

Sep 2016 - https://hbr.org/2016/09/global-companies-need-to-adopt-agile-pricing-in-emerging-markets

Patel, K: ‘Can fixed pricing save retailers?’- Financial Times - Opinion, 4 Apr 2012 - https://www.ft.com/content/906844111c-7d6b-11e1-81a5-00144feab49a

https://www.ft.com/content/6844111c-7d6b-11e1-81a5-00144feab49a

https://www.ft.com/content/6844111c-7d6b-11e1-81a5-00144feab49a

https://hbr.org/2016/09/global-companies-need-to-adopt-agile-pricing-in-emerging-markets


!

!

Jane represents one of millions of potential consumers within the retail industry.

Thousands of data points that indicate her shopper preferences and willingness to

purchase could be utilised by retailers and suppliers in a dynamic pricing model to

customise a price and/or service offering directly to Jane.

Bezos’ ‘your margin is my opportunity ’ emphasises the need for our industry to adopt 91

more agility and optimisation not only into our current pricing models, but our negotiation

discussions to acknowledge the shift in consumer power. This means actively moving

away from win-lose trading term arrangements and shifting to a collaborative ‘DPP’ model.

DPP takes a win-win-win industry approach by establishing a joint category growth

strategy that satisfies consumer need. It is executed through a jointly-tailored algorithm

that optimises margin realisation for both supplier and retailer. The result is a customised

price and offer for ‘Jane’ that satisfies her shopper preferences and needs – no matter

what her shopping platform.

Fig 3. DPP on a Page

Ibid (#1)91


!

As part of ongoing business planning routines, retailers and suppliers take insights

generated from the vast pool of consumer data - the World of Jane - coupled with market

and competitor information, to align on the DPP strategies of ‘where to play’ and ‘how to

win’. This aligns both parties to a collective target focused on growing category value for

mutual benefit.

Suddenly, performance-based incentives that target key consumer metrics (basket size/

penetration etc.) become the focus, with ‘everyday price’ or ‘hi-lo’ mechanics no longer

needed to be blanket foot-driving tactics. Instead, these mechanics could be customised

moves to drive a desired ‘price perception’ (like Amazon’s KVI’s). The pricing algorithm not

only executes the aligned strategy but eliminates the need for ‘guess work’ on mechanics.

It also initiates change requirements when there are variances to expected performance

(e.g. on portfolio assortment, or ATL marketing campaigns) via continued algorithm

refinement.


While the intent of DPP is to re-establish collaborative partnerships between suppliers and

retailers through a common consumer focus, the model’s success is also enabled by the

following internally:

Organisational agility at the heart – structure and mindset

Bezos’ mantra is to hold onto ‘Day 1’:

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline.

Followed by death. And that is why it is always Day 1”. 92

Whole businesses must demonstrate behaviours that recognise the importance of Day 1,

with management setting the frameworks and direction for the organisation in the context

of a constantly evolving market landscape. Innovation must be championed as a means of

staying relevant to changing consumer needs, as data-driven decisions focused on driving

the best outcomes for the consumer will lead to mutual benefits for the industry and

category.

For example, Amazon’s recent US$13.7bn acquisition of Whole Foods is less about a

need to gain instant access to its bricks-and-mortar store network, and more about gaining

access to 456 customer-friendly ‘pricing labs’ servicing ~eight million consumers weekly. 93

When you consider the static nature of pricing decisions of FMCG suppliers in this context,

it becomes increasingly apparent that having the agility in operational structures to make

informed decisions quickly and efficiently is not an industry strong point. While the Whole

Foods acquisition is significant in scale, it demonstrates the organisation’s maturity and

desire to use data-driven insights as a competitive advantage, gaining a greater

understanding of ‘Jane’ in an offline environment to be able to tailor and customise pricing

and the shopper experience in the physical world.

Locally, the introduction of WooliesX is also testament to this notion, unifying e-commerce

and digital platforms with customer service and loyalty to enable the focus and innovative

thinking required to capitalise on a rapidly changing market. Amanda Bardwell, WooliesX

Managing Director illustrates ‘…we’re constantly trialling and experimenting with new

Bezos, L: 2016 Letter to Shareholders – Amazon, 12 April 2017, reproduced at https://www.recode.net/92

2017/4/12/15274220/jeff-bezos-amazon-shareholders-letter-day-2-disagree-and-commit

Ibid (#11)93

https://www.recode.net/2017/4/12/15274220/jeff-bezos-amazon-shareholders-letter-day-2-disagree-and-commit




technologies and monitoring retail trends in Australia and overseas…it’s important to

understand how digital is influencing your customers’ research and shopping behaviour’ . 94

Organisational Capability

An increasing dependence on sophisticated data also means that dynamic pricing cannot

solely be relied upon without human intervention (think Amazon’s $23m genetics book or 95

Air NZ’s $125 US to NZ airfare ). As algorithms continually optimise themselves over 96

time, concerns are also raised on the increased likelihood of pricing collusion . While the 97

technology is smart, neglecting the human aspect could have serious ramifications on

organisational reputation and profitability.

The issue is that capability in understanding the technology is limited across all industries,

not only Retail. Big Data and Analytics (to which pricing algorithms are leveraged) rely on

introducing new information into prediction and decision-making processes. As this new

information is generally ‘buried in detail and relatively unstructured’ , data scientists are 98

required to bring together technical skillsets to enable actionable insights to be drawn.

Tech-led players like Amazon tend to be well-versed in this space, whereas the retail

industry enters with more traditional skill sets. Upskilling existing teams or adopting

recruitment strategies that build a data science skill set is one solution. The other is driving

engagement with data across the entire organisation – building an understanding of ‘The

World of Jane’ across all functions, broadening knowledge of the value-stream and market

landscape to an omnichannel view, and changing the sales outlook from internally focused

tactical opportunities, to a collaborative growth mindset with the consumer at the heart.

Ultimately, dynamic pricing should not be a ‘black box’ – it needs to be explained by all

levels of the organisation.

Ibid (#13)94

Jopson, B: ‘Amazon robo-pricing sparks fears’ – Financial Times, 9 Jul 2012 - https://www.ft.com/content/95

26c5bb7a-c12f-11e1-8179-00144feabdc0

Gardiner, S: ‘Air New Zealand flights from the US accidently offered for as low as $125’ – Sydney Morning Herald, 96

26 Jan 2018 - http://www.smh.com.au/business/consumer-affairs/air-new-zealand-flights-from-the-us-accidentally-offered-for-as-low-as-125-20180126-h0oxef.html

Lynch, D.J: ‘Policing the digital cartels’ – Financial Times, 9 Jan 2017 - https://www.ft.com/content/9de9fb80-97

cd23-11e6-864f-20dcb35cede2

Ibid (#14)98

http://www.smh.com.au/business/consumer-affairs/air-new-zealand-flights-from-the-us-accidentally-offered-for-as-low-as-125-20180126-h0oxef.html

http://www.smh.com.au/business/consumer-affairs/air-new-zealand-flights-from-the-us-accidentally-offered-for-as-low-as-125-20180126-h0oxef.html

https://www.ft.com/content/9de9fb80-cd23-11e6-864f-20dcb35cede2

https://www.ft.com/content/9de9fb80-cd23-11e6-864f-20dcb35cede2

https://www.ft.com/content/26c5bb7a-c12f-11e1-8179-00144feabdc0

https://www.ft.com/content/26c5bb7a-c12f-11e1-8179-00144feabdc0


Conclusion

The balance of power within our industry is shifting – from supplier, to retailer, and now to

the consumer. Collaborative partnerships and integrated business planning like DPP are

required to move away from a traditional win-lose mentality. We must develop joint

consumer strategies and parameters that capitalise on opportunities for pricing

optimisation and category growth. By harnessing the power of algorithms, we can better

understand ‘Jane’, removing the unnecessary margin and brand erosion we see today.

However, to take full advantage of this new technological landscape, we must bolster the

technical skill sets required to analyse and interpret increasingly sophisticated data sets.

We must embrace an agile mindset to enable innovative and timely decision-making. Only

then, will we have a chance of harnessing the power of ‘Day 1’. 99

Ibid (#19)99



Topic1 – Global Pricing Algorithms

Q. What are the looming ramifications for retailers and suppliers where the prices and

pricing structures can become so globally transparent? What might happen to the trading

relationships between retailers and suppliers as a result? Will trading terms cease to be an

efficient negotiation tool? Are there new opportunities within this challenging global

monitored pricing environment?


Name: Esra Ozege

!

Word Count: 2500


Index

Executive Summary…………………………………………………………………………….....

3

Introduction………………………………………………………………………………...…….....

4

1. What are the looming ramifications? …………………..

……………………………….....

5

2. What might happen to the trading relationship between retailers and

suppliers?...

8

3. Will trading terms cease to be an efficient negotiation

tool?.....................................

9

4. Are there new opportunities in this

environment?......................................................

10

Conclusion……………………………………………………………………………......

..............

14


Executive Summary

The information asymmetry that once existed between retailers and consumers has

disappeared and consumers are now able to obtain price information from multiple

sources in seconds.

This essay evaluates the key ramifications for retailers and suppliers where prices and

underlying pricing structures are globally transparent. These are:

• Increased pressure to price match;

• Increased penetration of generic substitutes; and,

• Margin erosion.

This essay concludes that the retail environment has evolved and only those who get

smarter with their pricing, use of data, and execution through technology with the

consumer at front of mind will survive.

This essay sets out the future state of retail, specifically:

• Adoption of dynamic pricing;

• Electronic shelf labels;

• Targeted pricing promotions through predictive analytics; and,

• Evolution of the Account Manager.

Retailers and suppliers need to accept that this is the new normal and we need to boldly

declare that we plan to keep up, or otherwise accept that we will be left behind.


Introduction

Less than two decades ago, Australian retail was perceived as ‘Treasure Island’ . There 100

was great hubris in this sentiment as ‘Australian consumers were land-locked, and

retailers could charge what the market would bear’ . 101

Today, Australian shoppers are connected to the worldwide marketplace through the

internet and have unprecedented access to information on prices through price

comparison sites and online marketplaces like Amazon, who dynamically adjust millions of

prices per day to respond to market conditions.

This essay argues that the prices generated by price comparison sites act as a contextual

reference point and can influence the attractiveness of prices encountered later as

consumers shop locally in incumbent retailers.

Given the changing landscape, it is unclear to what extent Australian retailers in their

current format can continue to provide retail services in the future. The purpose of this

essay is to identify opportunities within this new era of global price transparency for

retailers and suppliers to sustain their ongoing relevance in the market.

http://www.smh.com.au/business/retail/coles-chiefs-treasure-island-warning-to-suppliers-20151208-glijm3.html100

http://www.afr.com/opinion/leaving-a-retail-treasure-island-on-a-brand-australia-lifeboat-20171101-gzchoa101


1. What are the looming ramifications?

1.1.Increased pressure to price match

As one of the leading global adopters of the smartphone with 88% penetration , more 102

Australians have access to ecommerce and price comparison websites than ever before,

and “over two-thirds of consumers are using their smartphone for product research (65%

price checking) while in a physical shop” . 103

Today’s shopper is more price conscious with 38% of shoppers citing price/promotions as

the key factor driving purchase decisions and 36% when deciding where to shop . 104

https://www2.deloitte.com/au/mobile-consumer-survey102

The truth about online consumers, 2017 Global Online Consumer Report, published January 2017, available at 103

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/01/the-truth-about-online-consumers.pdf

Ibid.104

https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2017/01/the-truth-about-online-consumers.pdf


Accordingly, retailers recognise the importance of price and have adopted price matching

policies to respond to the online threat . Notable retailers including Bunnings, Myer and 105

Harvey Norman match online prices when prompted by consumers , and Woolworths, 106

Dan Murphy’s and IGA proactively seek out competitor prices and respond.

It is astounding that in 2018 retail giants like Woolworths are still “employing people to

physically walk into Coles to check individual prices to feed back to head office” . It blows 107

my mind that it takes Ritchies IGA “10 weeks to individually check every single listed

product in competing retailers” . We say we are ready to compete with Amazon, but 108

Amazon dynamically adjust their prices millions of times per day to respond to market

conditions and have been successfully executing this for years. 109

https://www.choice.com.au/shopping/packaging-labelling-and-advertising/advertising/articles/lowest-price-and-price-105

match-guarantees

Ibid.106

Recorded conversation with Paul Chan, Commercial Buyer Woolworths Group Ltd, February 2018107

Recorded conversation with John O’Kelly, National Senior Buying Manager Ritchies IGA, February 2018108

https://www.businessinsider.com.au/how-amazon-adjusts-its-prices-2015-1?r=US&IR=T109


1.2.Increased penetration of generic substitutes

Price and price structure transparency can create damage to companies’ reputations by

creating perceptions of price unfairness and exposing weaknesses in retailer brand value

propositions which can lead to enduring distrust . 110

In response, we are seeing an increase in private label/generic substitutes in the market.

These goods generally offer better margins for retailers and give them some protection

from price comparison . They also dilute the performance of majority shareholding 111

brands within categories, improve the retailer’s bargaining position to sustain high

margins , and deliver a more profitable mix for the retailer at the detriment of suppliers. 112

1.3.Margin erosion

Amazon, unlike Australian retailers, does not rely on gross profit margin for success. Its

model is based on sales volume, meaning that it can out-compete almost any business in

industries it enters by undercutting the competition and doing it cheaply at massive

scale . JB Hi-Fi and Harvey Norman have both publicly predicted that they will be able to 113

compete with Amazon on price , but given their high-margin and high-cost business 114

model, is this sustainable?

This practice of deep, unsustainable and potentially unprofitable deep discounting has

started to attract criticism for retailers , and economists have long been concerned that 115

price matching and price beating policies have the potential to erode profitability and drive

category value down . 116

https://hbr.org/2000/03/cost-transparency-the-nets-real-threat-to-prices-and-brands110

http://www.news.com.au/finance/business/retail/the-rise-of-the-supermarket-phantom-brand-secret-private-label-111products/news-story/6f29585ef70c54a7d404d5fcbc956d42

https://theconversation.com/no-frills-alternatives-are-helping-our-favourite-brands-survive-25261112

http://www.roymorgan.com/findings/7375-amazon-comes-to-australia-november-2017-201711240244113

Ibid.114

http://www.telegraph.co.uk/finance/newsbysector/retailandconsumer/11423518/Tesco-fightback-hits-Asda-sales.html115

https://hbr.org/2012/10/why-price-match-guarantees-can-be-bad116


What might happen to the trading relationship?

Relationships between retailers and suppliers are non-integrated and vertical, with the

balance of power being held in the retailers favour. This asymmetry is liable to breed

market inefficiencies and anti-competitive effects and findings suggest that the relationship

between retailers and suppliers is unlikely to be improving in the short term as price

pressure continues to drive margin pressure for both . 117

Retailers are operating in a two-sided market competing both amongst themselves in 118

the upstream market dealing with suppliers but also they are competing in the downstream

market selling to consumers, competing against other retailers. Hence, as retailers

continue to focus on price and look outward at what others are doing online, there is a risk,

retailers will continue to erode their margins, and suppliers will not be in a position to pass

on any cost increases.

With price deflation continuing in Australia , while simultaneously seeing rapidly rising 119

input costs, particularly around energy , and labour costs being the highest in the 120

world , we are stuck in a state of margin compression and there is ultimately a smaller 121

profit pool to share . 122

The nature of the trading relationship between retailers and suppliers will come down to a

handful of determinants: the nature of supply where commodity conditions prevail; product

attributes that impact cost to do business (i.e. high shrinkage); consumer demand; the

effect of competing products or substitutes; and the existence of competing retailers.

https://www.law.ox.ac.uk/sites/files/oxlaw/the_relationship_between_supermarkets_and_suppliers.pdf117

https://www.tresor.economie.gouv.fr/Ressources/file/326935118

http://www.afr.com/business/retail/energy-and-grocery-price-pressures-threaten-manufacturers-afgc-20170628-119

gx0v8h

http://www.afr.com/news/australian-households-pay-highest-power-prices-in-world-20170804-gxp58a120

https://tradingeconomics.com/country-list/labour-costs121

https://business.nab.com.au/wp-content/uploads/2017/09/The-future-of-retail-September-2017.pdf122


Will trading terms cease to be an efficient negotiation tool?

Retailers have clearly established target returns to ensure the business covers the cost of

doing business and nets a profit - which in Australia is 3-4% . In order to get that return, 123

the retailer will establish average category margins they need to reach, and accordingly

trading terms are and will remain a very important part of the return equation for a retailer.

Retailers are effectively financed using suppliers to provide their substantial working

capital needs , and given their overall net profit margin pool being so small, they are 124

likely to keep trading terms front of mind and continue to seek greater funding and

promotional support to increase their sales and accordingly their net profit.

However, buyer power and retailer power are mutually reinforcing . As their retail market 125

share decreases, so too does their ability to secure better deals from their suppliers.

Hence if consumers become more loyal to brands over retailers, then ultimately the

supplier of those brands has an improved bargaining position.

http://www.agriculture.gov.au/SiteCollectionDocuments/ag-food/publications/price-determin/section5.pdf123

Ibid.124

https://www.law.ox.ac.uk/sites/files/oxlaw/the_relationship_between_supermarkets_and_suppliers.pdf125


Are there new opportunities within this environment?

Adoption of Dynamic Pricing

Most pricing decisions require a trade-off between margin and price perception. To avoid a

race to the bottom, retailers should forego a blanket price match policy and hone their

ability to make smarter pricing investments that leads to more relevant prices more often.

Dynamic pricing, or real time pricing, is an approach to setting the cost of a product that is

flexible and adjusts based on supply and demand or other factors like time of day or

geographic location.

Changes are effectively controlled by pricing bots, or software agents that dive into the

retailer’s data and a number of other sources then use basic pricing rules or algorithms to

adjust prices, or make recommendations to maximise sales based on the consumers

implied willingness to pay . 126

Economic theory argues that dynamic pricing (i.e. individual level price discrimination) is

inherently good for the profitability of retailers and suppliers , because it allows us to 127

capture a larger share of the consumer surplus, but ‘anecdotal evidence from retail

experiences with internet-based dynamic pricing suggests that consumers react strongly

against this practice’ . Recent dynamic pricing trials have not been well received by 128

Gabarino, Ellen, ‘Dynamic Pricing in internet retail: Effects on consumer trust’, Psychology & Marketing, 6 May 2003, 126

http://onlinelibrary.wiley.com/doi/10.1002/mar.10084/abstract

Ibid. 127

Gabarino, Ellen, ‘Dynamic Pricing in internet retail: Effects on consumer trust’, Psychology & Marketing, 6 May 2003, 128http://onlinelibrary.wiley.com/doi/10.1002/mar.10084/abstract




Australian consumers, perceived as “a scheme to grab more money from consumers” in 129

the Village Cinemas trial, or “unfair” as the AFL looks to adjust prices based on demand . 130

When it comes to dynamic pricing, Amazon is still the retailer to beat and the retailer that

others attempt to emulate, yet dynamic pricing has actually been around for much longer.

The oldest form of dynamic pricing is the form of a farmer’s market where stall holders

adjust their prices based on traffic, competitor prices and time of day. Also consumers

have learned to accept dynamic pricing when purchasing airline tickets, participating in the

stock market, and making hotel reservations.

Dynamic pricing strategies do not necessarily mean higher prices for consumers. They

mean ‘more market driven and competitive prices’ , so provided we keep the consumer 131

front of mind and look to the US and the UK to understand what is working, and stagger

our approach (i.e. the lunch specials Marks & Spencer trial ), learn and adapt – we can 132

deliver a solution in market that works for us and delivers a greater benefit to the

consumer.

Electronic shelf labels

Electronic shelf labels (ESL’s) are an electronic label system that replace paper tickets

with digital displays on shelf and will enable Australian retailers to trial and later adopt

dynamic pricing.

Further, ESL’s are said to improve profit margins (retailer 5th margin) by up to 3 per cent

by using technology, mainly as a result of reducing the amount of waste created by stock

left at the end of the day . 133

If we look to the UK, Sainsbury’s, Morrisons and Tesco have all trialed ESL’s in their

stores . In the US, Dick’s Sporting Goods, Wholefoods (now owned by Amazon), Sears, 134

http://www.news.com.au/finance/business/other-industries/cinema-group-under-fire-for-trialling-dynamic-pricing-and-129charging-more-during-peak-periods/news-story/6b5ffcd895419117cfe2d440d528a945

http://www.abc.net.au/news/2016-02-17/afl-defends-fluctuating-ticket-price-plan/7177720130

https://thenewdaily.com.au/money/your-budget/2017/06/27/surge-pricing-supermarkets/131

http://www.bbc.com/news/business-40423114132

http://www.telegraph.co.uk/news/2017/06/24/exclusive-end-fixed-prices-within-five-years-supermarkets-adopt/133

https://www.theguardian.com/global/2017/nov/20/dynamic-personalised-pricing134


Marks & Spencer and Best Buy are just a few on a growing list of players who have

undertaken this move . 135

If we look a little closer to home, Ritchies IGA in Australia were very early adopters of this

technology, with their first implementation in 2003 . Ultimately the trial was not successful 136

although they did identify a number of opportunities that we can learn from, namely to

keep the consumer front of mind, consider consumer engagement at point of purchase;

and ensure you have the right back end data and algorithm to execute . 137

Despite Australia being critiqued as being slow to adopt technology we have been 138

pinned to follow the UK as soon as 12 months after their execution so we need to be 139

ready.

Targeted pricing promotions through predictive analytics

We need to consider the role of artificial intelligence including machine learning or

predictive analytics to deliver personalised experiences to our customer base individually

http://www.mirador.com.au/blog/electronic-shelf-labels-9-retailer-created-applications-and-benefits.aspx135

Recorded discussion with John O’Kelly, National Senior Buying Manager Ritchies IGA136

Recorded discussion with Roslin Verhaaf, Victoria State Manager Ritchies IGA 137

http://www.telegraph.co.uk/news/2017/06/24/exclusive-end-fixed-prices-within-five-years-supermarkets-adopt/ 138

https://www.frasercoastchronicle.com.au/news/could-australian-supermarkets-introduce-e-pricing/3194720/139

http://www.telegraph.co.uk/news/2017/06/24/exclusive-end-fixed-prices-within-five-years-supermarkets-adopt/


at scale. 30% of Amazon’s revenue comes from their targeted outreach that promotes

complementary products or pushes alerts about products based on buying patterns . 140

Through the use of a software program or algorithm that undertakes predictive analysis,

retailers and suppliers alike will be able to understand which customers are straying, and

which customers have potential to be a long term user, or even when they are most likely

to make their purchase. Retailers and suppliers can then use this data to target that

specific customer, and incentivise or motivate them to come back into the store or visit the

website . 141

Woolworths have just recently launched their loyalty program ‘Rewards’ in a smartphone

format into Apple Pay application which it states will help it ‘send offers directly to

customers’ . This could potentially allow Woolworths to collect new data and target 142

consumers by sending them messages directly to their phones when products they buy

frequently are in stock, or on promotion for particularly value conscious shoppers.

Evolution of the Account Management

If we look at the way promotions management works in traditional retail today, effectively

we are locking away our promotional programs for the next 6-18 months. We have limited

agility to respond to market changes, and when retailers opt to price match the

competition, suppliers are either asked to fund or retailers take the hit.

As we look to the future of retail and the genuine possibility that algorithms and dynamic

pricing will come into effect, we need to consider how we as commercial buyers, account

managers and pricing teams support the change.

We need to consider how we can set our organisations up to be responsive and support

dynamic pricing, and how we move to a more agile way to manage our trade spend and

margins.

Could today’s foreign exchange analyst or trader be tomorrows Account Manager?

https://econsultancy.com/blog/68052-what-is-predictive-analytics-and-how-could-you-use-it/140

Recorded Interview with Tim Clover, CEO GLOW Australia, Former Director Retail Analytics PWC141

https://www.itnews.com.au/news/woolworths-digitises-loyalty-card-for-iphone-users-476621142


Conclusion (150 words)

Retailers should remember that there is more than one way to execute a price strategy

and that algorithms, like the one employed at Amazon, have a role to play in our long-term

success and survival in this increasingly competitive environment.

This essay concludes that new opportunities exist that can improve retailer and supplier

margins through smarter pricing, technology, and better use of data. Specifically, this

essay purports that retailers that survive in the increasingly competitive retail landscape

will be those that adopt dynamic pricing, ESL’s, and predictive analytics to deliver

personalized shopping experiences for consumers at the best price.

Suppliers and retailers alike need to prepare the infrastructure for the next wave of digital

retail as price matching processes in Australian retail today are slow, labour intensive, and

expensive – and fast approaching the end of their shelf life.



Topic 3 – Optimising Strategies to Challenge Online Retail

Q. What changes should retailers pursue with store formatting to provide every

shopper with a more compelling experience than that of online pure-play retailers?

Should retailers change their strategy on store numbers or change their product

range? What does an optimum and profitable store count look like? Accordingly, how

can these strategy changes best service Australia’s regional areas?


Name: Melissa Maher

!

Word Count: 2500


Index

Executive Summary 27 ............................................................................................

Introduction 28 .....................................................................................................

Transparency the new normal 29 ................................................................................

Executive Summary 53 ............................................................................................

Introduction 54 .....................................................................................................

Recommendation 1: Adapt store formats to suit their changing needs of today’s customer 55 .......

The typical retail customer is changing 55 .................................................................

Shoppers generally don’t like to purchase their groceries online 55 ..................................

The ‘bigger is better’ traditional supermarket model is outdated 57 ..................................

Recommendation 2: Embrace ‘bricks and clicks’ strategies 57 ............................................

Recommendation 3: Innovate and leverage natural advantages to create a ‘magic box’ for your customers 59 .......................................................................................................

Recommendation 4: Leverage the advantages of physical networks to give regional customers a tailored experience 60 ............................................................................................

Regional customers are not the same as their metropolitan counterparts 60 .........................

Regional areas present operational challenges for online retailers 60 .................................

Regional customers want convenience and innovation too 61 ...........................................

Conclusion 62.......................................................................................................


Executive Summary Online pure-play retailers are becoming increasingly dominant in Australian markets and

causing concern for existing bricks-and-mortar stores who are struggling to compete with

the convenience, range and pricing that e-commerce provides. This threat is particularly

real in the grocery sector, where Amazon looms as a powerful threat to the strong and

established duopoly.

While the shopping landscape is changing, so are consumer preferences and purchasing

habits. Online retailers are leveraging their strengths in technology to force innovation in

B&M stores, including creation of no-checkout stores and smart trolleys, however they are

also opening physical stores as a means of providing more convenient distribution

channels for their customers.

While online retailers can achieve some advantages in a metropolitan environment, there

are challenges particular to regional areas that play into the hands of traditional retailers.

However, these advantages are not to be taken for granted – B&M stores need to invest in

upgrades in the form of service, convenience and quality of produce in order to keep these

consumers satisfied and stave off competition.


Introduction Internet retailers have challenged the conventional operating models of traditional bricks-

and-mortar (B&M) stores to create a highly competitive retail sales environment, with

international behemoths such as Amazon and Alibaba threatening to enter and dominate

domestic markets through technology-driven strategies.

This has stimulated a greater urgency amongst B&M retailers to innovate to align with the

evolving preferences of consumers, who seek options that fit with their ever-changing

lifestyles. As shoppers become more urbanised, technology-savvy and sophisticated in

their tastes, these needs can be distilled into three key areas: convenience, range and

pricing.

While B&M stores will continue to exist, the traditional model of continual store openings is

no longer viable, as retailers are constrained by capital and operating costs, including high

commercial rents in capital cities. Consumers’ desire to embrace ‘bricks and clicks’

retailers is strong in both metropolitan and regional markets, however there are

fundamental differences in the shopping preferences of the two markets, combined with

geographic limitations. It is important for retailers to recognise and understand the unique

characteristics of each segment and tailor their offerings accordingly.

This essay focuses on the challenges specific to the Australian grocery market. It provides

four recommendations for B&M retailers to maintain the edge over their online

counterparts, beginning with adapting store formats to suit the changing needs of today’s

customer, embracing ‘bricks and clicks’ strategies, innovating to create a ‘magic box’ for

customers, and leveraging the advantages of physical networks to create a tailored

offering for regional customers.


Recommendation 1: Adapt store formats to suit their changing needs of today’s customer

The typical retail customer is changing

The socio-economic landscape is shifting towards consumers who are becoming

increasingly urbanised, tech-savvy and sophisticated in their preferences. A rising 143

population concentrated in large cities has created a new demographic that typically lives

in high-density accommodation and wants the convenience of shopping close to home or

work. With ownership of smartphones and tablets almost universal in metropolitan areas,

shoppers want to incorporate technology into purchasing so that they can buy exactly what

they need anywhere, anytime, with the proliferation of amateur cooking shows seeing a

resurgence in demand for top quality, local produce. 144

Shoppers generally don’t like to purchase their groceries online

While this environment seems optimal for a pure-play online retailer to succeed, it is

important to note that online shoppers are not necessarily online grocery shoppers. Online

shoppers are more likely to buy groceries online than others, however fewer than 10% of

shoppers have bought non-perishables, and only 2% have bought fresh food. 145

In comparison, over 12 million shoppers are visiting a supermarket at least once a

week , on average making more than 2.5 trips. Shoppers are moving away from doing 146 147

‘one big shop for the week’ to a series of ‘top-up’ shops where they can pick up items for

consumption that day. Transport is a key factor in this shift, with many inner-city shoppers

not having access to a vehicle to carry goods home.

Nielsen, ‘Roadmap to Retail Growth: Why Bigger is No Longer Better’ 15 June 2016 143

http://www.nielsen.com/au/en/insights/news/2016/roadmap-to-retail-growth-why-bigger-is-no-longer-better.html

Thomas Hunter, ‘The Masterchef Effect’, Sydney Morning Herald, 22 July 2010 https://www.smh.com.au/144

entertainment/tv-and-radio/the-masterchef-effect-20100722-10lsg.html

Mirko Warschun, ‘A Fresh Look at Online Grocery’, AT Kearney http://www.atkearney.com.au/consumer-145

products-retail/ideas-insights/article/-/asset_publisher/LCcgOeS4t85g/content/a-fresh-look-at-online-grocery/10192

Roy Morgan, ‘State of the Nation Retail Spotlight’, 6 December 2016, http://www.roymorgan.com/146

findings/7076-australians-yet-to-embrace-online-grocery-shopping-201612060915

Roy Morgan, ‘State of the Nation Retail Spotlight’, 6 December 2016147



http://www.roymorgan.com/findings/7076-australians-yet-to-embrace-online-grocery-shopping-201612060915



https://www.smh.com.au/entertainment/tv-and-radio/the-masterchef-effect-20100722-10lsg.html

https://www.smh.com.au/entertainment/tv-and-radio/the-masterchef-effect-20100722-10lsg.html

http://www.atkearney.com.au/consumer-products-retail/ideas-insights/article/-/asset_publisher/LCcgOeS4t85g/content/a-fresh-look-at-online-grocery/10192




Recent surveys have revealed several reasons why shoppers prefer to visit B&M stores:

• ‘I like visiting the store’: Shoppers like the in-store experience of a grocery store

and don’t see the added value of online food shopping. 148

• ‘I like to touch and see the product’: Shoppers prefer a tactile shopping

experience where they can select their own fresh items and guarantee quality. 149

• ‘I don’t know what I want’: Some shoppers don't decide what to buy until they are

in the supermarket, so online food purchases require advanced planning. 150

• ‘Shopping online is too hard’: Shopping online is difficult due to the number of

items that are typically purchased in one transaction and the requirement to scroll or

search by keyword, rather than spotting products on the shelves. 151

• ‘I want my food now’: Shoppers want instant gratification which is not always

possible to achieve due to delivery and collection constraints.

There are also several things that annoy shoppers about visiting supermarkets, including

high prices, items being out of stock, long queues at the checkout, and limited parking

options. Online retailers are in a prime position to service these customers, given their 152

ability to supply a broader range of products, operate at lower cost and provide delivery

options that remove the need to visit a store altogether. The potential for growth in the

Chris Pash, ‘Amazon Faces An Uphill Battle to Sell Groceries to Australians’, Business Insider, 148

5 December 2017

https://www.businessinsider.com.au/amazon-faces-an-uphill-battle-to-sell-groceries-to-australians-2017-11#p3HwmJIAcxfKy9TS.99

Chris Pash, ‘Amazon Faces An Uphill Battle to Sell Groceries to Australians’, Business Insider, 149

5 December 2017

Mirko Warschun, ‘A Fresh Look at Online Grocery’, AT Kearney150

Michelle Levine in ‘Revealed: Why Aussies Have Given Online Grocery Shopping The BIG Thumbs 151

Down!’, B&T Magazine http://www.bandt.com.au/marketing/study-aussies-give-online-grocery-shopping-big-thumbs

Colmar Brunton, ‘Grocery Shopping Habits Explored ‘, 19 July 2013, http://www.colmarbrunton.com.au/152

pdfs/RW_JUL19_2013.pdf



http://www.bandt.com.au/marketing/study-aussies-give-online-grocery-shopping-big-thumbs

http://www.colmarbrunton.com.au/pdfs/RW_JUL19_2013.pdf

http://www.colmarbrunton.com.au/pdfs/RW_JUL19_2013.pdf


online grocery market is significant, with industry revenue increasing by 14.2% in

2017-18. 153

The ‘bigger is better’ traditional supermarket model is outdated

The traditional model of continual store openings and large store footprints is becoming

outdated as the customer evolves. Supermarkets are capital and labour intensive and

operate at very small profit margins. Stores cannot afford to hold large amounts of stock as

waste will quickly erode profits. Furthermore, major supermarkets have reached saturation

point where one store opening will cannibalize sales in another.

Retailers should re-evaluate what a typical store looks like and tailor their offering to suit

specific demographics. This strategy can be distilled into four key elements:

• Putting stores in more convenient locations: building stores where people live

and work, e.g. in train stations, office buildings and inner-city apartment blocks • Supplying through a variety of distribution channels: exploring additional

avenues for purchasing, including home delivery, Click-and-Collect, and pickup in

non-food outlets such as petrol stations and lockers. • Creating smaller store formats: reducing the size of the store footprint to improve

ability to access inner-city locations while economizing on rental costs. • Tailored product ranges to suit the demographic: only selling what people in a

particular location want, whether that be pre-prepared food options or niche

categories.

These strategies are already being implemented through small-format inner city stores

such as Woolworths Metro, and non-fuel outlets such as Coles Express and The Foodary.

Recommendation 2: Embrace ‘bricks and clicks’ strategies

In consideration of how online retailers could successfully compete with their B&M

counterparts, Microsoft’s Head of Global Retail stated that:

IBISWorld, Online Grocery Sales – Australian Market Research Report, October 2017, https://153

www.ibisworld.com.au/industry-trends/specialised-market-research-reports/online-retail/online-grocery-sales.html

https://www.ibisworld.com.au/industry-trends/specialised-market-research-reports/online-retail/online-grocery-sales.html




"Brick and mortar will never go away because brick and mortar is the essence of

retail…but what does need to change is the fabric, or certainly the model of brick

and mortar." 154

Key to this change is the need to make shopping in stores just as easy as it is online, as

“…consumers grow accustomed to single-click payments and merchants knowing their

details, order history and personal preferences.” Shoppers want a seamless integration 155

between the online and the physical where they can use their phone to browse and

purchase items while on the move or employ technology in-store to research and locate

items or facilitate payments. Retailers are anticipated to capitalize on the growing use of

mobile devices with two-thirds of ‘online Australians’ using a form of contactless 156

payment such as Paywave and mobile wallets and smartwatches becoming more

commonplace. 157

Interestingly, pure-play retailers such as Amazon are beginning to open their own B&M

stores or leverage off existing networks to complement their online offer. Pure-play

retailers recognise that a network of physical stores is a significant advantage due to the

convenience of offering multiple pickup alternatives – analysts observed that after

Amazon’s acquisition of Whole Foods Market, “…Amazon has gained not just a grocery

retail chain, but delivery hubs and distribution centres across the United States.” 158

Similarly, eBay is using Woolworths stores as a Click-and-Collect outlet for purchases

made within Australia.

Patrick Hatch, ‘You’ll Be Shopping Like the Jetsons Pretty Soon’, Sydney Morning Herald, 19 January 154

2018 https://www.smh.com.au/business/companies/you-ll-be-shopping-like-the-jetsons-pretty-soon-20180119-p4yyn2.html

Hatch, 2018155

IBISWorld, Online Grocery Sales – Australian Market Research Report, October 2017156

Lillian Zrim, ‘Information is Crucial For Online Australian Shoppers’ Nielsen, 12 April 2016 157

http://www.nielsen.com/au/en/insights/news/2016/information-is-crucial-for-online-australian-shoppers.html

Nicholas Nakos, ‘Amazon Fresh to be Scaled Back in the US’, Australian Food News, 6 November 2017 158

http://www.ausfoodnews.com.au/2017/11/06/amazonfresh-to-be-scaled-back-in-the-u-s.html

http://www.nielsen.com/au/en/insights/news/2016/information-is-crucial-for-online-australian-shoppers.html

https://www.smh.com.au/business/companies/you-ll-be-shopping-like-the-jetsons-pretty-soon-20180119-p4yyn2.html

https://www.smh.com.au/business/companies/you-ll-be-shopping-like-the-jetsons-pretty-soon-20180119-p4yyn2.html

http://www.ausfoodnews.com.au/2017/11/06/amazonfresh-to-be-scaled-back-in-the-u-s.html


Recommendation 3: Innovate and leverage natural advantages to create a ‘magic box’ for your customers

The fact that consumers like to visit a supermarket puts retailers at a considerable

advantage over their online counterparts, however it is important that stores continue to

innovate in order to maintain the interest of consumers. Liebmann urges B&M retailers to

create places of excitement for customers. stating that customers expect retailers to “build

them a magic box. Create something experiential for me again. Otherwise I’ll go back to

(online).” 159

Australian supermarkets have been changing their formats to return the ‘theatre’ to their

stores. Stores are evolving to appear increasingly like marketplaces, where shoppers can

experience the sights and smells of freshly baked bread, purchase a made-to-order lunch

from a sushi chef and scoop popcorn (still warm!) into large buckets to take home for the

family movie night. At more niche retailers such as Hill Street Grocer in Tasmania, the

focus is on creating local meeting places where staff serve you in the café while wearing

badges naming their favourite products.

Online retailers are driving some of the most high-tech innovation with Amazon opening

the first ever checkout-free grocery store to the public, with customers simply walking out

of the store once they have selected their items. Similarly, several companies are 160161

working on smart trolleys that use cameras, artificial intelligence and robotics to enable

customers to navigate through aisles based on the contents of their shopping lists, auto-

checkout, then have the trolley return itself to the store. 162

Innovation doesn’t necessarily have to be futuristic. Both supermarket giants have tapped

April Miller, ‘Stores Must Evolve Into ‘Magic Boxes’, Shopper Marketing Mag, 18 February 159

2016, https://shoppermarketingmag.com/stores-must-evolve-magic-boxes

Jeffrey Dastin, ‘The Future of Grocery Shopping? Checkout Free Store Opens to the Public’, Sydney 160

Morning Herald, 21 January 2018 http://www.smh.com.au/business/retail/the-future-of-grocery-shopping-amazons-checkoutfree-store-opens-to-the-public-20180121-h0lwr9.html

Dastin, 2018161

Hatch, 2018162

http://www.smh.com.au/business/retail/the-future-of-grocery-shopping-amazons-checkoutfree-store-opens-to-the-public-20180121-h0lwr9.html



https://shoppermarketingmag.com/stores-must-evolve-magic-boxes


into the convenience needs of customers by expanding their online delivery options

including leveraging the shared economy (e.g Uber and Deliveroo) to trial new delivery

options. Coles recently collaborated with Airtasker to enable its customers to book their

own ‘personal shoppers’ to help get through the Christmas period. 163

Recommendation 4: Leverage the advantages of physical networks to give regional customers a tailored experience Regional customers are not the same as their metropolitan counterparts

While metropolitan shoppers cited location and convenience as the most important factors

in buying groceries, a recent study showed that regional shoppers were less concerned

about the location of a store and more interested in stores with convenient trading hours

and good quality fresh fruits and vegetables. Transaction values in regional locations 164

tend to be higher, however the number of transactions is lower, as regional shoppers

prefer to come into stores for one large shop, rather than multiple ‘top-ups’.

Regional shoppers need stores to stock a broader range of items, as the options for

purchasing can be limited – shoppers cannot simply ‘go somewhere else’, nor can they

return tomorrow if an item is out of stock. Regional customers are also less likely than their

metropolitan counterparts to embrace technology, with only 82% of households living in

inner regional areas having access to the internet. 165

Regional areas present operational challenges for online retailers

Regional areas present difficulties for online retailers, particularly in a country the size and

spread of Australia. Issues with distribution channels, high delivery costs, quality of

merchandise, etc. would only ever see limited scope for e-commerce in grocery , with 166

Prinitha Govender, ‘Amazon Eyes Australian Grocery Sector’, Power Retail, 17 January 2018 163

http://www.powerretail.com.au/news/amazon-australian-whole-foods-trademark/

Roy Morgan, ‘State of the Nation Retail Spotlight’, 6 December 2016164

Scott Ewing, ‘Australia’s digital divide is narrowing but getting deeper’, The Conversation, 25 February 165

2016, https://theconversation.com/australias-digital-divide-is-narrowing-but-getting-deeper-55232

Govender, 2018166

http://www.powerretail.com.au/news/amazon-australian-whole-foods-trademark/

https://theconversation.com/australias-digital-divide-is-narrowing-but-getting-deeper-55232


service outside of the eastern seaboard becoming almost cost-prohibitive as retailers

factor in the need for multiple distribution centres and high transportation costs.

Grocery delivery is particularly challenging, as orders usually consist of multiple products,

some of which may have specific temperature requirements. A wide product selection may

prove difficult, as retailers are unable to guarantee quality of goods over long distances. 167

Physical stores are significantly advantaged in regional areas as they provide retailers with

extensive distribution networks to bring product to where people live. This is particularly

true for multi-category retailers that are able to leverage all site locations (e.g. grocery,

fuel, liquor) as potential pickup points.

Regional customers want convenience and innovation too

The inherent challenges of operating in a regional area can eliminate certain kinds of

delivery innovation, such as home delivery and share-economy services, however

customers are embracing Click-and-Collect because it offers “…an immediacy that

traditional home delivery usually can't match, particularly in Australia where delivery times

(are) slow.” Click-and-Collect also guarantees supply, providing the customer with the 168

opportunity to advance-order any ‘unusual’ items and resolve any quality issues

immediately in store. 169

Furthermore, while not all regional consumers are able to access technology, many can

still benefit from mobile integration and personalization. The ‘magic box’ concept can be

implemented regardless of location however the focus may evolve to more community-

centric concepts such as support of charities.

A B&M supermarket offers significant intangible benefits by strengthening local

Mirko Warschun, ‘A Fresh Look at Online Grocery’, AT Kearney167

Gary Mortimer and Louise Grimmer, ‘Why retailers are pushing you to click and collect when you shop 168

online’, The Conversation, 30 August 2017 http://www.abc.net.au/news/2017-08-30/click-and-collect-why-retailers-are-pushing-shoppers/8856504

Mortimer and Grimmer, 2017169

http://www.abc.net.au/news/2017-08-30/click-and-collect-why-retailers-are-pushing-shoppers/8856504

http://www.abc.net.au/news/2017-08-30/click-and-collect-why-retailers-are-pushing-shoppers/8856504


communities and generating social value. Examples of this are many and varied, 170

ranging from an ability to operate pharmacy services within a store, to supporting local

industry by selling produce from local suppliers, to providing the community with jobs.

Regional supermarkets tend to create local personalities – long-serving, well-known

employees that customers visit a store specifically to see. This can create goodwill that

benefits the entire network.

Conclusion

The unique characteristics of food retail make it difficult for retailers to operate a purely

online strategy. Retailers are best placed to straddle both online and physical, providing in-

store experiences that fit with changing consumer lifestyles while supplementing with a

online convenience offer that allows delivery to a multitude of sites, including non-food

retail. B&M stores hold significant advantages in regional areas where home delivery can

be cost prohibitive and the need to ‘get the order right’ is more urgent given infrequency of

trips to the store. Recognising the differences in regional markets by exploiting the

strengths of community and investing in the right innovations will create a shopping

environment that is increasingly difficult for online to compete with.

Matthew Taylor, ‘Supermarkets could play a vital role in strengthening communities’, The Guardian, 14 170

January 2014 https://www.theguardian.com/sustainable-business/supermarkets-communities-social-value

https://www.theguardian.com/sustainable-business/supermarkets-communities-social-value