With at-home demand remaining elevated and most retailers picking online orders from stores, the centre store is under pressure for the first time in many years. We look at how retailers are responding to this and what the longer term implications could be.
Retailers and suppliers are generating positive returns as they implement omnichannel-focused initiatives. In our latest report for Retail Analysis subscribers, Winning in omnichannel, we examine how suppliers are evolving to win, the impact on supply chains and consider best-in-class retailers in China and the US.
The pandemic fix
Over the last five years, there has been no shortage of articles and white papers presenting solutions to reinvigorate and return growth to the centre store. This had been under pressure as retailers prioritised fresh and foodservice elements, in part to emphasise the experiential nature of food retail. While various ideas have been tested, all it really took was a pandemic-induced surge in demand.
Elevated demand will remain
From being a really challenged part of the store, elevated at-home demand and the flight of consumers to trusted brands, has seen its growth prospects transform. Core categories including cooking ingredients, soups, home baking, snacks, paper goods and cleaning supplies have been among the best performing categories. While the elevated demand is expected to moderate, it will remain higher than pre-pandemic levels. There is an element of stickiness to many of the new consumer behaviours and more people will be working from home, for at least part of their time, than before.
Supporting online fulfilment
However, the added factor to consider is the growth of grocery ecommerce and how this is also placing a pressure on the centre store. In the US, most retailers fulfil their online orders with store level inventory, directly from the shelf. While we may see some changes to this, through more micro-fulfillment solutions being adopted and additional dark stores being developed, this will remain the case for most operators. With many US retailers also relying on on-demand third-party companies to pick customer orders, the ability to change their models quickly is challenging.
Source: IGD Research, General Mills
Retailers in the driving seat
With the centre store under pressure, SKU rationalisation is being undertaken to support the highest volume lines. We saw this as one of the earliest responses to the pandemic. However, in most of those cases, this was supplier driven to optimise the availability of products. Currently, it’s the retailers in the driving seat. For multiple reasons, supply last year was challenging, with many retailers seeing their substitution rates go up. This year, to retain the new customers they attracted, this is one of the top focus areas as they seek to improve operational execution.
Improving operational metrics
So, what can we expect to see? Further range rationalisation is certain as more retailers aim to improve their operational metrics and build customer loyalty. They have invested in additional ecommerce capacity which needs to be optimised. They are also focused on reducing the cost of goods sold as part of a broader set of measures to improve channel profitability. For suppliers with the leading products in the category, this is likely to be a win.
Bringing uniqueness and differentiation to the category
For others, the outlook could be more challenging, especially for those unable to offer something unique, differentiated, or can tap into emerging shopper trends. ‘Me-too’ brands with low loyalty could find the environment challenging. A return to pre-pandemic ranging is not likely.
Stores will remain at the heart of ecommerce strategies for most
Further ecommerce growth, after what we expect will be a relatively flat year in the US this year, could make store-based picking with no changes unsustainable over the longer-term. However, with most retailers committed to an omnichannel approach and continuing to position their stores at the heart of their ecommerce operations, innovative solutions will emerge.
A turning point for micro-fulfillment?
Potentially, this could be a turning point for the adoption of micro-fulfilment (MFC) in the US. Isolating ecommerce picking to a dedicated area of the store frees up the centre store for in-store shoppers and can be ranged accordingly. This can also support one of the core capabilities of micro-fulfilment in terms of being able to deliver a locally relevant range; high volume lines picked within the MFC and the flexibility to also pick from the wider store range. Great in theory, but this can start to impact overall pick rates and the MFC ROI depending on the proportion of items picked from outside the unit.
Attracting shoppers back into physical stores
Without doubt the centre store will continue to evolve. Some of the earlier potential solutions to the growth challenges of centre store - defined category zones, cooking demonstration areas and branded playgrounds – are also likely to materialise. The reason will be less about centre store itself, but the desire of retailers to give shoppers purpose to come back into store and shop in a more profitable channel.
We build on these ideas in a series of new reports for Retail Analysis subscribers including, Winning in omnichannel and Click and collect: short-term solution, the long-term play.