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Roundtable

Roundtable: How Much of the Consumer Experience Should You Own?

When the FT and Grocery Dive both wrote about the growth of Instacart and others, and the challenges of profitability, data ownership, and consumer relationship, it's time for Rob and Peter to talk about longer term strategy for brands. It's not just in grocery - over the next 5 years, who will own the consumer? 

Peter:

Hello everyone, Peter Crosby coming to you from The Digital Shelf Institutes Cape Cod office. And Rob is on from the Berkshires. Hey Rob.

Rob:

Hello.

Peter:

So, Rob, I saw an article in Grocery Dive from Sam Silverstein, basically, the headline being to own or not to own delivery groceries, reassess the Instacart dilemma. And it really was sort of a survey of what's happening with online delivery and out of that, the issues of who owns the consumer relationship, who owns the data, and can this be profitable. Um, and, and so that really struck me as an interesting conversation have not only in grocery, but I think, you know, there are other industries, I mean, particularly as marketplaces grow where your brands are kind of giving up control of the customer, uh, in an, in an age where that data becomes ever more important and profitability, it becomes an issue. Uh, and I think you're kind of excited about this topic.

Rob:

Yeah. I think in the big picture if you take retail aside, you take CPG aside, the ownership of the consumer relationship, the end-user is the most important thing in the age of the internet. So you look at what Google did originally, right? Google owns the end user's relationship in search, and that gives them leverage over its suppliers. So Google, basically by owning the consumer relationship, a commoditized supplier of content who is now subservient to Google's whims in some way, Amazon, uh, also owns the consumer relationship as the search bar for retail owning a huge percentage of retail search. And through that, they've commoditized suppliers. And so suppliers struggle to plan effectively with Amazon and margins tend to be lower than traditional contracts they've got through traditional retailers and so on and so forth. And so that linchpin point of owning the consumer relationship commoditized those underneath you, you look at Instacart, Instacart owns the consumer relationship, and that is basically turning the store into just like a warehouse that food comes from.

Rob:

And, and so if you're a store like, um, I mean, think of a Publix, which is an experience-oriented grocery chain in the United States, where they put a lot of effort into making, walking into a Publix, a good experience, Publix has effectively outsourced their, uh, e-commerce strategy to Instacart. It's like all of that investment in stores doesn't even matter when the users never even walk into the store and it's, it's the Instacart experience, right? So they risk commoditization here and, and it's, uh, I think strategically a big risk in the age where owning the consumer relationship is becoming the most important point of leverage in a supply chain.

Peter:

Yeah. Research by UBS in the UK found that 71% of respondents said they will shop online as often or more after the COVID-19 situation improves. Bane estimates that between 35 and 45% of the recent increase in online sales will turn out to be permanent. Um, and, and, and I think even, you know, even beyond B to C, you know, as Granger starts to really invest in, in being an online B2B marketplace, you can see that same trend coming, uh, in, in B2B sales and kind of discernment, disintermediating, uh, the sort of the sales relationship that, that suppliers have consistently had. Yeah,

Rob:

This is, this is the big risk all around here. Um, uh, a brand manufacturer traditionally doesn't own a consumer relationship, right? So brand manufacturers 10 years ago used the word customer within their walls to talk about Target, to talk about Walmart's, to talk about Granger and their relationship with the end shopper is through brand marketing, through panels and things like that. Right? Really the relationship is owned by the retailer and what companies like Instacart are doing, or an Amazon, uh, is there. And they're taking away that relationship from the retailer, and they're there, they're turning the retailer more into just the warehouse and where they're just competing on price. You know, the old, old retail adage location, doesn't apply when the location is, you know, your web browser, your phone, and so on and so forth. Right. So, these, yeah, the disintermediation is, is exactly right here. And, uh, I think that the article grocery dive really captured it right. To, you know, do you want to own your relationship with the consumer or not? Or do you want to, do you want to outsource it to Instacart? And I'm a huge fan of Instacart, I think from a grocery chain strategy perspective, um, that is a risky business to, to really just trust your whole, uh, online experience to a company that that is going to, you know, basically disintermediate you, um, from owning the consumer.

Peter:

Yeah. Their Instacart's total order volume increased 274% in August alone compared with a year previously that put it slightly behind Walmart in us, grocery pickup and delivery sales, like that's huge. And at the same time, Walmart's testing Instacart in four markets right now, uh, shipped, says its sales through the service Target owns them 300% year over year. Um, Uber's new grocery delivery generated gross bookings, 1 billion annualized run rate in September, and is on track to bring in business at multiple times that pace in 2021. So it ain't going away. I think the question is over the next five, seven years, how are brands going to think about, and retailers think about their strategies for, um, for balancing that, you know, and what are those strategies.

Rob:

Yeah. And it has the, is the horse already out of the barn too, right? 

Peter:

Mean, it's, you know, think

Rob:

About the use of largely ineffective attempts to, um, regulate Google as a monopoly. Now, Google is not actually a monopoly they're they're um, because you know, the competition is only a click away, so you can regulate Google all you want. There's still the consumer that keeps going back to Google, to the default behavior, right. And, and the risk when you get a very large aggregator of consumer attention in demand is that at some scale they're kind of unstoppable. There's not really a good way to regulate these folks. And with Instacart at that scale, the question, is it almost, is it too late, right? Like as it is, uh, you know, can you, can you take it back and offer a differentiated experience? Can you invest in micro fulfillment e-commerce solutions like a takeoff, um, in, in order to, to win back and experiential advantage there? Uh, I don't, I mean, that's, you know, it's becoming in my mind an urgent thing for people to be worried.

Peter:

Yeah. I mean, the, um, the grocery dive article, again, Sam still Silverstein did a great job. He went over a couple of grocers that are trying, you know, a hybrid approach. Um, sprouts have their own website and it uses its own store employees to pick and pack orders. Um, instead of delegating that to Instacart Kroger, um, you know, they're using Instacart because that's where eyeballs are and they bring people in. But I do think they are trying to transfer those, those people over time, if they can, you know, find out who they are into their own online sales because it says the bulk of Kroger's online sales are coming through its own app and website. Um, so Kroger's, uh, the chief financial officer on an earnings call said, we really do see the value in owning the overall relationship and creating a seamless experience.

Peter:

Um, giant food. Greg D'Orazio is the e-commerce lead there. Um, they kind of separate the users into Instacart and are the most time-sensitive customers. And so they look at those that they have a real immediate need for rush delivery, and they look at it more as a premium service, but their own delivery service giant delivers. They leave it to lean into giant employees and they add personal touches. Like drivers get to know people want deliveries to the front of the back door of the garage, or if it's somebody's birthday or so, or children in the household. So if, if they can build a relationship and in grocery, so sometimes you can where there's some consistency, um, you know, people that are less urgent. I need this in the next couple of hours. I might want to see the giant food guy come to their door, like the milkman from the old days. I don't know.

Rob:

Yeah. I mean, I think Kroger has been investing in this for years and years, and it has a head start. Um, of, some of these others are playing a little bit from behind. I mean, what kills a lot of these programs is in the short term, the picking and delivery fees, uh, or picking and delivering costs rather for the retailer are substantial and Instacart has significant financial backing and, and investors that believe in the long term vision of the company. And so it can withstand, um, losses on, on aspects of the operations of the business. You know, people are basically betting long on the model, even if, even if in the short term, the model is expensive and a giant, and some of these other, these other grocers they've got to, they've got to make sure that they've got to struggle with that, right. It's there enough, uh, room for the CEO and CFO and others to invest in some of the solutions, even if it means in the short term, their fiscal, their financial performance is going to be objectively worse. Right? Um, so I mean, it's, it's hard, this is a hard problem, but ultimately they've got to find some way to manage the customer relationship. And when we, when we talk about brands, I'm going to switch, I'm going to switch gears here for a second. Let's talk about brands that have done a good job here. Uh, I'm a huge Baker as we've talked about in the podcast. Um, and also behind the scenes, making the podcast possible is a big Baker and

Peter:

I'm a big eater. Does that count?

Rob:

That totally counts. Yeah. It's so, uh, I use King Arthur Flowers, a bunch of my baking over the years, King Arthur rebranded this year from King Arthur flour to King Arthur baking company. And they've expanded their product portfolio. They'll launch a new e-commerce site on big commerce. It's a great site. It's a great experience. And they've expanded the products that they sell to instead of being, you know, simply flowers and things like that. It's everything you would need to bake. I mean, I've got their, uh, their, their Christmas catalog here. They sell things like the Wolf stand mixer. They sell, uh, King Arthur branded, uh, bench knives and Le baking late Baker's lanes and things like that. They sell King Arthur, branded stoneware for storing flour, uh, effectively. They have, I mean, just a ton of products and they're trying to become a one-stop-shop for baking.

Rob:

So they've taken a position of strength where, you know, they were, uh, uh, a beloved brand of manufacturing flour. When you think about a commodity product, like how, how come, how commodity can you get other than flour? Right. But they had differentiated flowers and they had people who love their products. And they use that base to expand, to being a baking retailer. That's going to own direct to consumer relationships because people will go to King flower or King Arthur's baking company and, and can transact there instead of going through other means. And I love the strategy. I love the clarity. Their website also has a lot of content that adds value. And it's just a really great play. I mean, it's, it's obviously a group that cares about owning their own shopper relationship. I think they've done a really effective job at it.

Peter:

Yeah. And you see that you see that in pets as well. Like, I guess, especially in those, in those categories where people have an emotional connection to the activity, there's an opportunity to create an educational and inspirational bond with the consumer, uh, to drive margins and repeat business that you, you won't get if there isn't that emotional relationship. And I think those are the places and baking is certainly one of those where if you love to bake, you want to use the best and you want to use things you trust and you want to get tips and tricks and be part of a community. And, um, yeah, and, you know, Rob, we've talked a lot, you know, both in the DSI just as we build this. And, uh, and also in, in commerce in general, just how the new thing is a community, the new value that you can deliver as a, as a brand, uh, is a connection to people who have the same passion for what you're doing or the same interests. And I wonder if there's something in that for a lot of these brands, particularly.

Rob:

Yeah. I, I, I completely agree. I mean, it's, it's ultimately the risk is, um, you're gonna, you're just competing with, uh, plenty, good enough product and private label and a category that's increasingly commoditized and where there's a lot of DTC, upstarts, and, um, and where your relationship with the consumer is disintermediated by retailers and aggregators and others. And you're just, you know, you're just producing widgets, right? That's, that's like one fork in the road, a final destination that a lot of these brands are gonna end up in, right. They're just, they're producing a product that's, you know, kind of comparable to a lot of other products. And the brand name means less and less over time. And the other, the other fork in the road, it's almost the other opposite is having a direct relationship with a community of people that find value, not just in your products, but in your, your point of view and, and other value that you add to their lives outside of simply the product transaction.

Rob:

You know, like you're saying, the community is one, um, is one example of it. King Arthur has, uh, others like the recipes, baking guides and sourdough guides and other things that really help people out that are value add above and beyond just transacting to buy a pound of flour. Right. And so I think that there's a lot of different ways where you can transcend the purely transactional nature of a lot of product categories and move into one where there's, where there's real brand loyalty, right. Where there's, there's a real engagement directly with the brand, um, you know, between the shopper and the, and the brand.

Peter:

And I think there are also opportunities. I remember doing a webinar with Rachel tipper graph from MikMak, and she was talking about how increasingly brands are partnering up, you know, noncompetitive, but related brands will do offerings together. Um, so you can imagine like a King Arthur connecting up with somebody else in the flavor or food business, um, to bring together a partnership for a particular, um, I dunno, set of recipes or, um, or expertise in, in how to make something particular. Uh, and, and I think more and more brands might need to lower some of their resistance to the kind of associating with, with other brands and kind of build almost an, a baking ecosystem of experiences together. I think that would be really cool to experiment with. Yeah, I agree. You know, one of the things that, you know, sort of coming back to groceries just for a minute, uh, the financial times in, in the article that Jonathan Eley and Ryan McMorrow wrote, they have a terrific chart for the struggle for margin and online groceries, and they kind of layout, um, all the different sort of models to handle, uh, to handle, you know, pick and collect and delivery and show the profitability gaps, um, even with, uh, a delivery or click and collect fee.

Peter:

And there's just basically nothing in the online models today, that's delivering, um, uh, profitability. And so there, you know, something's going to have to happen to shake that off. Either making people pay more or finding a way to make this process more efficient over time. So, uh, I think the challenges are there, I think the opportunities for thinking about what are the, um, the differentiated experiences that can be designed to kind of take back control and start bringing in that data. I think it is, uh, you know, it's a five-year plan, but I think brands are really going to need to focus on it.

Rob:

I totally agree. And, uh, I think there's a that's a good place to wrap. I mean, this is, this is, I think becoming an existential issue. Everyone's got to think about how they own the direct to consumer relationship, some way shape or form in the future.

Peter:

It is indeed a perfect place to close Rob. Uh, thanks. I would say one of the things this brings up in my mind is once again, these are hard conversations, right? The need to sort of rethink your business model and, and rethink who your customers are. There are big conversations to have, and that's why at the DSI, we're going to have an upcoming webinar with Joe Gerstand. He's an expert speaker, author and advisor on organizational diversity and inclusion, but he's coming to the DSI to offer, uh, our, our members, our listeners, the latest techniques for modeling and encouraging candid conversations in a time of rapid change. I forgot the stat, but it's something like 85% of business leaders in the UK. And we said that there were things that they didn't feel comfortable discussing with fellow employees or people to whom they report. And that number has to change. So join us on Thursday, November 19th at 1:00 PM Eastern, annual include a link in the show notes. So as always, thanks for joining us, and thanks for being part of it.