Rethinking cost transformation for the “next normal” in food retail

By , Shayan Zaidi, and Jessica Blum | 5 minute read | September 25, 2020

It seems every week brings news of how food retailers are pivoting and innovating in response to COVID-19. For example, Walmart recently announced a partnership with Instacart in four markets, supplementing its existing delivery capabilities. [1] Amazon is launching technology-infused, fresh grocery stores featuring smart carts and customer service powered by its virtual assistant Alexa. [2] As discussed in our previous LinkedIn series outlining “the next normal” in food retail, the pandemic is driving changes in consumer behavior as well as a restructuring of the food retail value chain, leading food retailers to adapt their business models. These moves highlight two important challenges faced by food retailers:

  • The surge in demand for eCommerce
  • Heightened focus on convenience in stores and online.

Undoubtedly the larger challenge for food retailers has been the surge in demand for eCommerce which has increased pressure on already thin margins. While these retailers, especially grocers, are seeing a boost in profitability at the moment as consumers stay home and shift restaurant spend to them, demand will normalize when the pandemic subsides.

Ultimately, the “next normal” in food retail will usher in a new era of profitability that reflects lower demand overall with higher levels of margin-dilutive, digital demand than food retailers experienced pre-pandemic.

While most retailers will look for ways to cut costs to protect margins  in the post-Covid era, cost transformation programs  in food retail must simultaneously relieve margin pressure while seeding sustained revenue growth. To do this properly, companies must first define a set of core strategic capabilities through which they will differentiate in the new industry landscape. An effective cost transformation campaign should be highly targeted, focusing any cost-cutting on non-core elements of the business model, in a way that funnels savings directly into revenue-driving innovation plays.

Additionally, the food retail leaders of tomorrow need to realize efficiencies in a way that preserves the employee experience while simultaneously growing market share through differentiated experiences for customers. Retailers quick to embrace this growth mindset will reap outsized return on investment.

Historical approaches to cost transformation just won’t work

Even before the pandemic started, cost transformations were limited in their effectiveness for two reasons.

First, food retailers attempted to apply a broad vs. strategic lens in identifying where to apply cuts. Rather than identifying core strategic capabilities to protect and focus cuts in less critical and commoditized functions, companies often slashed a percentage of their expenses across the board. While this approach introduced short-term relief, it negatively impacted a broad set of remaining staff, and maintained the profit margin status quo.

Second, food retailers tended to focus on using technology for process improvements and reducing headcount rather than enabling employees and increasing productivity. Applying technology to process improvements or using it to displace staff is a short-term move that does not help an organization systematically take costs out of its core business.

Growing importance of employees to cost transformation

Prioritizing the experience of staff as well as customers will be critical for effective cost transformation programs in “the next normal”. Retailers today understand that associates are assets who have played an outsized role in stores and the customer experience since the pandemic took hold. High performing companies also know that there’s a race for talent. If you destroy culture through ill-conceived cuts to staff or improper application of technologies, it will have a negative impact on  employee recruitment, retention, morale and performance, which in turn will negatively impact the customer experience. In fact, some studies show that after firm layoffs, remaining staff experience a 20% decrease in job performance, 41% decline in job satisfaction, and 36% in organizational commitment. [3] In contrast, when done properly, digital initiatives implemented in service to employees can enhance associate performance, reduce operation costs up to 10%, and increase annual revenue growth up to 10%.[4]

Four strategic plays for successful cost transformation

To succeed at cost transformation in “the next normal”,  food retailers must protect their core capabilities, cut non-core capabilities and reinvest for growth. This will involve identifying the elements that are critical to the customer experience with a focus on things that differentiate them from the competition (for example, assortment, convenience, price). Food retailers must also determine how to approach their non-core capabilities in a more cost-effective way. Ideally, the savings from cutting non-core elements should be aggregated  in an investment pool that can be used to fund customer- and employee-facing innovations.

Overall, we recommend the following four strategic plays:

1. Re-envision your business model, identifying core capabilities in which to reinvest savings to drive innovation.

Identify core capability areas that will constitute your enterprise advantage in the evolved industry landscape. For each, leverage human-centered design to define a future state, assess gaps in capabilities to move from current- to future-state, and conduct a corresponding build vs. buy vs. partner analysis as to how best to achieve this evolution.

2. Apply intelligent automation to non-core capability areas to achieve cost-savings that pave the way to sustained revenue growth.

Explore “plug-and-play” intelligent automation solutions with proven results in driving tangible savings. Set success metrics for each capability area and measure performance against them continuously.

3. Define a strategy to upskill your staff.

As your organization becomes more “intelligent” with robust data insights, upskill staff to leverage information to improve their own productivity and that of their store. Build a reskilling roadmap, taking into account input and recommendations from your primary users – the employees themselves. Explore adoption of agile ways of working to further improve employee productivity and engagement.

4. Develop procedures to harness up-front operational savings and fund ongoing innovation through partnerships, reinvestment and gainsharing.

Build a self-sustaining mechanism to capture operational savings and fund ongoing innovation (e.g., tools to improve employee experience and productivity). Engage partners to help fund and sustain ongoing innovation, architecting any financial arrangements to align incentives and build trust across retailers and their partners (e.g., proportional bonus to service providers based on savings achieved, capped at an agreed upon limit).

 

Sources

(1)   https://www.supermarketnews.com/online-retail/walmart-teaming-instacart-same-day-delivery-pilot

(2)   https://www.supermarketnews.com/retail-financial/amazon-unveils-first-amazon-fresh-grocery-store-woodland-hills

(3)   https://hbr.org/2018/05/layoffs-that-dont-break-your-company

(4)   IBV 2018, The coming AI revolution in retail and consumer products

 

See how IBM Enterprise Strategy builds cost transformation strategies for grocers and other enterprises

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