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Author's profile photo Dmitry Melnik

S/4HANA Grocery Retail Blog part 2

Part 2: How SAP S/4HANA helps grocery retailers becoming “unique”

This three-blog series focuses on grocery retail and the main challenges the industry is facing today. Based on concrete customer examples we describe key success factors like customer loyalty, offering an attractive assortment, optimizing the supply chain and the digitalization of customer interaction. With the help of SAP S/4HANA and further SAP solutions modern grocery retailers can handle Big Data volumes, make the right decisions regarding the size and selection of their assortment and to streamline the most relevant end-to-end processes. Or to sum it up – to do everything to satisfy customer needs!

We composed these article series (blogs) from the standpoint of the end consumer and organized in the logical sequence: customer loyalty and assortment, differentiation from other retailers, evolution of the omnichannel for retailers.

Situation

Mia stood next to the car watching her kids climb out into the Friday evening. With the wind picking up, it was getting colder by the minute. Both children were still arguing about which grocery shop they wanted to visit. Mia sighed, locked the car, and started walking. With her kids in front, she checked her mobile. Her husband, Benjamin, at home with a cold, had messaged her: “Could you please bring aspirin and ibuprofen?” Yes, of course, Mia thought. The store I want to go to has a broad over-the-counter assortment, so I should find the right painkilling analgesics to get you back on your feet quickly.

Even as the automatic doors slid open and she entered the store, the kids were still arguing. Mia smelled the in-store aroma of fresh produce and home-baked cookies, reminding her of the last family vacation to Costa Rica. She thought, Maybe I can prepare the exotic dessert we got the last evening in the resort in Tamarindo. Hey, it is Thanksgiving, and even if this costs a little bit more, it would be a big surprise for Benjamin and the kids. Let’s see if I can get the ingredients here or if I have to visit the store across the street.

* * *

Differentiating oneself from the competition is a dominant consideration in the strategy across many industries, but grocery retail may stand out here more than others. A typical customer has a choice between a variety of stores:

  • Mom-and-pop stores that you can see on the streets of any city
  • Large retailers occupying whole malls
  • Different brands of retailers
  • Competing price segments that can range from more-affordable stores (for example, retailers referred to as “discounters”) to more-exclusive stores (for example, organic-only stores such as Avril or Whole Foods Market)
  • Highly focused stores
  • Diversified stores (for example, Walgreens)

Even within the same retailer brand, it is common to see varying store formats, from a typical supermarket to a much larger, distribution-center-like store. Walmart, for example, operates discount stores, supercenters, neighborhood markets, and Sam’s Club; these are all very different size stores (link and link). In other words, a typical consumer such as Mia has a broad range of options for their grocery shopping. Apart from advertising, how do retailers make themselves distinct? In the first blog, we examined some of the factors affecting grocery purchase by consumers, including loyalty, assortment, and product labeling and disclosures. This blog looks at how consumers choose between one brand or another. Specifically, let’s consider three key areas where retailers often make themselves distinct:

  • Breadth of their Stock Keeping Unit (SKU) selection
  • Slow-moving or “exotic” items
  • Amenities for customers

The bigger the better? Finding the right portfolio

Breadth of the portfolio may sound easy enough, but is it? Here’s a simple comparison of the Stock Keeping Units (SKUs) across a few large retailers. (A quick Web search can yield many more results from various retailers around the globe.) There are many estimates, some of them suggesting over 30,000 items per average supermarket (link). But the actual SKU count may differ greatly: from some 3,500 SKUs at “discounters” to 140,000 at Wal-Mart Supercenters (link).

One can immediately see various challenges associated with broadening the selection of items: planning, sourcing, logistics, inventory management, and so on. Some retailers, such as Costco and Lidl Stiftung & Co KG, purposefully limit the number of SKUs so that they can maintain simpler logistics operations and keep overall costs down. This works for some customers but may not work for others.

For example, a well-researched theme in grocery retailing is exotic or slow-moving items. Imagine a set of spices, for example, offered by a company such as McCormick & Company: these spices sell well but are clearly not as frequent an item in the everyday consumer basket as bread, butter, milk, and so on. Then the question arises: what is it worth for the retailer to carry such a slow-moving item? This question becomes especially important if you consider the associated logistics: as palettes are unloaded from the incoming trucks, slow-moving inventory items need to be separated and stored accordingly (further away), while higher-frequency items deserve a different place in the store storage. This separation may extend even higher up the supply chain, to the point of the start of inbound logistics. Clearly, this eats up some retailer margins and operational resources, and this is where inventory management and logistics in SAP S/4HANA become invaluable. However, the business question persists: what is it worth for the retailer to extend the portfolio?

 

Are slow-moving articles and exotic items necessary?

Various retailers examined this question, some empirically. In other words, they reduced the number of SKUs to reduce costs, only to see a decline in overall sales. How could that be? Well, a further deep dive into the topic revealed one simple truth: when customers seeking such an exotic item cannot find it, they take their business elsewhere, and that, in turn, includes their purchasing of frequent items as well. So, retailers that choose not to carry certain slow-moving inventory items may never see certain segments of customers. What does this mean for the IT system? To resolve this complication, strong analytics with Customer 360 are key to making optimal strategic decisions around the SKUs, and what-if scenarios in SAP S/4HANA can help weigh the pros and cons of adding items to the portfolio or even removing them.

Portfolio breadth clearly raises a related question: how many items on the retailer shelves (or in the Consumer Packaged Goods (CPG) company brand portfolio) are enough? When does the addition of a new item translate into a point of diminishing return? Many analyses are performed by brand owners and sellers; one of them is depicted here:

Source: SAP internal research

While this is conceptual, we have seen that in certain cases, a third of all SKUs created little or no incremental profitability, and some 15% of the portfolio items actually pulled down the gross margin. Popular wisdom captures this phenomenon in the proverbial 80-20 rule: 20% of products can ensure 80% of the revenue. When retailers and CPG companies realize that their portfolio might have grown “too much,” they start rightsizing it.

What solutions does SAP S/4HANA offer to address such challenges? Its analytical capabilities are well known and referenced by many happy customers. A wide selection of SAP solutions help analyze portfolio performance, define its structure, enable sales, source and procure the right items, and so on (link). However, one specific SAP S/4HANA innovation stands apart: the Universal journal. This is the  foundation, for many SAP S/4HANA capabilities, which simplifies data structures, optimizes ERP performance, and therefore leads to deeper insights about your portfolio. Consider The Hershey Company, a producer of multiple chocolate brands, most of which are company owned with others being licensed from Krafts Foods Inc., Nestle S.A., Cadbury, and others.

“Enterprise connectivity is going to be the single most important thing to be able to win in the marketplace. And we want to win. Having access to information in a live business environment lets you act on insight at equally fast speeds. Tear down the silos and get that information to as many people as possible. You’ll discover some great insights from some surprising places. We use SAP S/4HANA in our supply chain where we’ve been able to influence how we think about inventory, how we procure goods, and how they move through our system.” –J.P. Bilbrey, Chairman, President, CEO, , The Hershey Company. Source: link.

In addition, when a retailer or CPG manufacturer rightsizes its portfolio, master data becomes the core center of many activities. It needs to be cleaned, optimized, and well governed. This is where SAP S/4HANA can support the effort by physical inventory movement overview, including detecting slow-moving or unprofitable items, performing analytics of master data governance, and providing master data management. SAP S/4HANA also introduces a new concept of business partner, which enables easier analysis of retailer transactions with our suppliers and customers.

But let us come back to Mia and her family. As Mia moved through the aisles, Thomas and Jennifer continued pulling her arm: “Mom, do you think dad will feel better tomorrow?” She remembered the message from her husband asking for aspirin and ibuprofen. She glanced at the signs above the aisles and noticed one saying, “Health Clinic and Pharmacy.” Mia singed with relief and went straight to the pharmacy in front of her.

The role of amenities as a potential differentiation factor

This brings us to another topic of retailer differentiation: amenities. Of course, this can quickly become very broad, encompassing a whole range of issues such as how malls are or should be organized and run, how real estate should be managed, and so on. Let’s examine one specific trend that retailers recently started exhibiting: healthcare clinics inside the retail stores:

  • Each major retailer in the USA launched or is planning to launch, Health Clinics. Even e-tailers invest in primary care: link
  • These are typically located within the store or right next to it, on the same mall; some retailers also offer virtual care link
  • Combined with the in-store pharmacies, Health Clinics can provide most of the basic needs including vaccinations, labs, physicals, medications, dental exams and so on. As an example, see the list of services by Walmart Health link

Strategic benefits of these initiatives are clear: direct more customer traffic to your retail facilities and incentivize customers to spend more time and money with you. In these examples, getting a good annual physical in a clinic at a competitive price can also improve customer loyalty to the brand itself. At the same time, such diversification from “pure retail” into retail plus health services (including virtual care) creates certain challenges around procurement, operations, staffing, compliance, to name a few. Real Estate management also becomes more critical for large retailers with multiple sections within the store and occupying most of the mall space. SAP solutions are designed to deal with such complexity. And as such, they help retailers to diversify and differentiate themselves to stay competitive.

So which retailer did Mia take her kids for shopping? We do not know. And frankly, this isn’t critical for our story. But we do know that multiple retailers around the globe avail themselves of SAP S/4HANA and other SAP solutions to optimize their portfolio, make the shopping experience more pleasant, and provide consumers with more things to do in the retail store. SAP S/4HANA helps retailers to stand apart from other retailers and compete effectively for consumers’ wallets and loyalty: link.

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