Dirk Dreisbach, Dmitry Melnik

This 3-series blog focuses on retailers: challenges various realities they face, complications from internal and external factors such as supply chain disruptions, and solutions such as SAP S/4HANA they utilize to solve their strategic challenges. The blog is based on multiple SAP customers and is written from the standpoint of the end consumer.

Part 1: How SAP S/4HANA helps Retailers to increase customer loyalty and offering an attractive assortment

Situation

Friday afternoon in Chicago was sunny, but the first November snowflakes already started circling in the area. With her husband Benjamin ill at home, Mia turned onto the main street and looked in the rearview mirror. Her 7-year-old Jennifer and 8-year-old Thomas were chatting at the back seat about the homework and their plans for the Thanksgiving weekend. The outlines of the local mall shined through the front windshield where the snowflakes started sparkling and reflecting the streetlights.

Mia lowered the speed, looking for the turn. Thomas glanced through the window and shouted, “Mom, let’s go to Walmart; I want that beef jerky we had last time! It’s very tasty!” Jennifer grimaced at him, pouted and said firmly, “No, Mom, we are going to Aldi across the street. The ice cream at Aldi is the best. All my friends love it!”

Mia smiled thinking of the long shopping list her husband had left for her. Beside her regular weekly demand, she needs medicine and something healthy to bring her husband up.  Furthermore she decided 6 month ago to become vegan and became conscious about the carbon footprint and the sustainability profile of the selected shopping locations… “Which shop should we go to?” Mia looked at her purse on the passenger seat with the Walmart membership card and Aldi Weekly Specials in it… and turned into the parking lot…

This situation illustrates some of the dilemmas that many modern grocery retailers face daily. How to attract customers, how to keep them, and how to serve them in the most cost-effective way?  In this blog, we examine grocery retail operations from the lens of a typical consumer, such as Mia and her family. This is something we did with various SAP customers, and this approach proved right given its customer-centricity. So, what typical questions do grocery retail customers ask? In other words, what goes on in Mia’s head?

• What food does my family need this week? Do I have to consider some special needs?
• Where should I shop? Or, put in different way, where will my shopping be the most pleasant and effective?
• Should I shop in-person or can we use an app and have the order ready for curbside pickup or home delivery?
• Which retailer offers the best value for the lowest or the most reasonable price? This includes not only prices themselves but the breadth of selection and delivery services too.

Customers face many other considerations, but these are clearly the fundamental ones. Some of these questions may seem too simple: after all, a typical family has a relatively stable nomenclature of their food and non-food items, usually dictated by their cultural and dietary / health needs, and where they shop is typically determined by the proximity of the retailer. However, specific events – such as a Thanksgiving family dinner or “impulse purchase” – may influence the standard grocery list as well as where the family shops at; the same is true of online grocery shopping. Moreover, health preferences for products, the display of food and non-food items, retailer campaigns and promotions, not to mention various social events (e.g., holidays, Superbowl, etc.) can also influence the choice and size of the grocery basket, shopping venue, delivery methods and so on. In other words, various factors complicate consumer choices, therefore generating respective retailers’ responses. Let us examine some of them.

Retailers have evolved membership, or loyalty, programs into one of the tools to incentivize consumers to shop at a particular retailer. Not only do membership cards keep the consumer psychologically happy for the discounts and/or redeemable points but they also provide a wealth of information to the retailer about the purchase patterns. But this immediately brings in the topic of Big Data and ability to analyze and act on the information collected form consumers.

The importance of Big Data handling regarding membership and high transaction volumes

One trend we experience among our customers is membership. This is true for various types of retail, not just grocery. Amazon, for example, claims some 150 million Prime members (link); Apple Music almost 80 million (link). Costco, a significant retailer with almost $170 billion in revenue, offers $60 (‘Gold Star’) and $120 (‘Executive’) membership cards (link). These cards, carried by almost 110 million members, represent approximately 2% of their revenue but 70% of the operating profit (source: SEC filings)! This is why, among other reasons, Costco can afford deeper discounting: its membership fees are flat, non-negotiable, and the 90% renewal incentivizes card holders to stay loyal – after all, they paid for their membership. While typical markups at supermarkets run at approximately 30%, and Walmart’s markups reach an average of 24%, Costco’s markups range from 11 to 14% (link). Experts believe that various forms of membership and loyalty cards will continue to drive consumer behavior in the retail grocery space and for some retailers will continue to be a source of their competitive differentiation especially for personalized consumer offers (link).

Managing members, markups, and pricing on thousands of items and millions of transactions requires amassing significant amounts of data and using it smartly.  This is where some of the SAP S/4HANA value comes handy: in-memory database which effectively supports Big Data, customer 360 capabilities supported by analytics and powerful visualization, integration with SAP Customer Activity Repository (CAR) and various Point-of-Sale (POS) systems (example). On the back end, SAP S/4HANA supports subscription management, large volumes of receivables, complex pricing and bundling scenarios which are especially important for seasonal campaigns retailers run constantly.

For example, Zalando, a leading European retailer with 35 million customers in 17 countries during peak seasons daily (!) processes 100 million material movements, 10 million general ledger records, and a million dunnings in SAP S/4HANA (link).

Offering the right assortment to attract and keep consumers

As we saw with Mia’s example in the beginning, the breadth of product selection is one of the consumer considerations for choosing a retailer. Some retailers prefer to limit their selection in order to keep the costs down and pass the savings onto consumers; others seem to grow their assortment in order to attract consumers of all segments. What is the right balance here? Customer decide for themselves (link) but we see that they increasingly invest in assortment planning and related capabilities: inventory management, inbound and outbound logistics, etc. One of the assortment dimensions is health and sustainability. Consumer perceptions of the quality of food and its packaging is becoming one of the most significant considerations in the retails business. In addition to proper labeling and managing product ingredient disclosures, this also encompasses private label vs. branded items.

In addition, the items procured from various consumer product companies (“CPG”) such as Unilever or Proctor & Gamble (“branded items”), many retailers carry either private label or store-owned brand items which can range from chocolate or tea to chicken and spices. For example, Aldi’s product mix is 90% private label: “ALDI exclusive brands allow us to provide the same high-quality product without passing on all of the hidden costs associated with the national brands, such as marketing and advertising” (link). These necessitate the retailer’s own packaging and ingredient disclosure. Even branded items sold on retailer premises must comply with the ingredient disclosure laws and regulations – and the retailer is a key stakeholder here. Customers demand healthier, more sustainable products and packaging, and this demand triggers a complex interplay of recipe management, packaging, disclosure and advertising actions by CPG suppliers and retailers. What does it mean for the underlying IT system? Well, it needs to track all the items, including input ingredients, trace all of them throughout the value chain such as production, transportation, yard management and warehousing, and not only ensure compliance but help the vendor avoid misleading packaging or erroneous labeling.

Case in point: Blue Diamond Growers is a US-based agricultural cooperative which processes almonds and offers, among other products, almond milk. This is in line with the trend for alternative foods such as milk from nuts – produced, not harvested from cows. However, dairy providers may be upset with the rise and proliferation of such alternative milks, and often demand (i) alternative labeling for such milk, such as “juice from nuts”, along with (ii) retail placement outside the dairy section. While the political debate on this and similar topics is outside our discussion, this highlights the challenge for Blue Diamond Growers and similar relatively new entrants into the alternative milk market: they face heightened scrutiny from the incumbents and any errors in disclosure and labeling may quickly escalate into a lawsuit. And such an error is exactly what happened once (link).

“When an ingredient in one of our products got updated or a recipe was altered, moving the change through all the channels wasn’t seamless — for example, our online store at one point listed an ingredient for a milk product that we hadn’t used for over six months. As a result, our R&D group approached IT to ask for help getting their arms around the recipe change process… We are seeing and anticipating a lot of benefits from the overall SAP implementation — from the planning, to the quality, to the purchasing, and to the customer product catalog aspects of it. It all ties together and streamlines workflow for the company.”  — Steve Birgfeld, Vice President of IT, Blue Diamond Growers

This is one of the many examples how SAP S/4HANA and related solutions enable product compliance and marketability and, as such, allow better connection with consumers who seek healthy and sustainable food.

We just glanced at a few typical challenges and emerging trends that shape the relationships between the customer and its grocery suppliers – just a few of the factors which determine today’s decisions on food purchase by consumers like Mia and her family. What food items will Mia buy for her family? We do not know the answer to this question, but we know that SAP S/4HANA and other solutions ensure the full assortment of food and non-food items in most grocery retailers around the globe. Every day, SAP solutions work non-stop to satisfy our basic demands. While in this blog we largely discussed the retailer-consumer relationship in the context of food selection, in the next series of this blog we will examine this topic further, analyzing how retailers differentiate themselves to “stand out” and redirect the consumer traffic.