Increased consumer digital engagement, e-commerce usage and food-at-home purchases likely won’t shrink back to pre-pandemic levels as COVID-19 abates, Albertsons Cos. President and CEO Vivek Sankaran said this week at the FMI Midsummer Strategic Executive Exchange.
Sankaran spoke in a Q&A with McKinsey & Co. senior partner Sajal Kohli during the virtual session “Retail 2021: The State of Grocery.” McKinsey partner Bill Aull also gave a peek at new research on the pandemic’s impact on grocery, done in tandem with FMI. An online-only event, the Midsummer Strategic Executive Exchange runs June 21 to 25.
“One of the things that I don’t think will reverse is more digital engagement from customers, and I don’t mean just when they shop. They’re all engaged much more with their phones, whether it’s for entertainment or for shopping. So they’re just more digitally engaged, and that makes a huge difference,” Sankaran said. “The second thing is e-commerce. I don’t think that reverses. The desire to shop and the convenience of having something delivered to your home or put in the trunk of your car is incredible. And consumers never give convenience back, right? So that trend will only continue. In both of these cases, you’re going to see that technology will make a difference, and we’re going to make a difference to make [engagement and e-commerce] even easier for customers.”
A lingering trend that Sankaran said he hadn’t anticipated is more consumers working remotely at home, which stands to help grocery retailers.
“A third area, which I never predicted and I think is becoming a reality, is more remote work. One more day at home, two more days at home. That’s a meaningful difference in the food and beverage business,” he explained. “That’s a massive difference actually, when you look at the total dollars involved. When people stay at home, whether it’s a breakfast or lunch at home, I think that sticks because for many people it’s more convenient and the technology gets better and better.”
More questionable are the future of pandemic-driven trends toward cooking at home and trading up to more premium items and brands in food and grocery purchases, according to Sankaran.
“Now let’s talk about couple of things that could be transient. One is cooking at home. A lot of people are cooking more at home. Will that stick? I would imagine restaurants will find creative ways to bring people back. It’s happened in the past. It happened slowly, but it’s likely to happen over time — over the next two, three, four years. That’s something we’ll just have to see,” he said. “The second one is that, during the pandemic, a lot of people traded up. If you’ve gone and bought a $20 bottle of wine at a store, and it tastes better than a $30 or $40 bottle of wine at a restaurant, and you bought a better cut of steak, do people just go back? Do they regress on quality? I don’t know, but I could imagine that [trend] sticks for a while, too. So that’s how I see it. But the first three things I mentioned are substantial trends that can be very positive for us.”
McKinsey’s Kohli agreed that the jury’s still out on the long-term traction of the cook-at-home and trade-up trends that emerged from the pandemic.
“You have a whole new generation that’s learned how to cook during these times. So we’ll see how sticky that is,” Kohli said. “And if you go back to the last financial crisis that we had — obviously a very different crisis — we did see some trading down, some trading up. The sand shifted quite a bit. So these are two trends which may or may not reverse, but we’ll have to see. And obviously, there are important implications.”
During the previous 15 months, the United States saw 12% growth in food-at-home spending — versus 3% historically — and a five-year acceleration in grocery sector e-commerce penetration, to a new baseline of 10%-11% of grocery sales, McKinsey’s research revealed. Although grocery store trips were down 40%, grocer balance sheets saw a one- to two-times cash increase from the huge spike in consumer demand. E-commerce’s impact was evident as Amazon, Instacart and Shipt delivery services added a million jobs to meet demand.
McKinsey’s findings also indicate that consumer spending in grocery stores will remain elevated from pre-COVID levels. Of shoppers surveyed, 70% said their grocery store spending would stay the same post-pandemic versus pre-pandemic, while 19% said it would increase and 11% said it would decrease, for a 7% net gain in intent. In comparison, the net intent was +5% for dine-in restaurants, +1% for takeout, -3% for food delivery, -21% for meal-kit delivery and -9% for grocery delivery.
“We found in our research that grocery purchasing will continue to be high into 2021, and retaining that share of stomach — in ready-to-eat meals, frozen and prepared foods — is a big driver of the ongoing expected growth in the sector,” McKinsey’s Aull said in the session. “We do expect grocery delivery to reduce over time but still be at a higher level than pre-pandemic. Our view is somewhere in the range of 10% to 11% online penetration, in an ongoing way. So many of the trends we see as the sector starts to reopen will balance as we move forward.”
The number of grocery stores visited per week dropped 43% from 4.4 before COVID to 2.5 in 2020, according to McKinsey. But consumers expect the frequency of their grocery purchases to stay about the same this year, with those shopping twice weekly changing 1.1x in 2021 versus 2020, compared with 1x for those shopping weekly, 0.9x once every two weeks and 0.9x for once a month or less often.
“We’ve seen significant reduction in trip frequency over time through COVID, and I’ve started to see that rebound, with consumers saying they are back to levels of 80% to 90% of what they were pre-pandemic,” Aull said. “But consumers are starting to tell us that they are still looking for that significant shop and, in the purchase that they’re making, being able to be a fulfilled, total basket shop more than ever. And while pre-pandemic we were seeing a significant number of two- and three-stop shops over the course of a week, we are still seeing reduced intent across across shopping frequency from consumers as we moved into 2021.”
Grocery industry CEOs deem e-commerce and its profitability and an even bigger role for technology as the top trends shaping the sector this year. Of more than 40 grocery retail CEOs polled by McKinsey, 53% cited the continued momentum in e-commerce as among the top three trends impacting the industry in 2021. Thirty-eight percent named online grocery profitability and 34% pointed to an elevated role of technology as top-three trends.
Other trends cited by CEOs as among the top three this year were increased focus on pricing pressure (25%), more focus on loyalty (25%), greater relevance of ready-to-eat foods/meals for pickup (22%), more foodservice occasions in grocery (16%), a premium store experience (16%) and supply chain reinvention (16%).
“For me, digital engagement of a customer is worth its weight in gold, because now you understand that customer at a level of detail you never could in a purely physical experience,” Sankaran said. “So we should just absolutely embrace it because you can personalize more and more things for that customer, not just from the e-commerce shop but what you offer her in prices, innovation, etc. There’s so much you can do.”
Besides winning share in e-commerce, McKinsey’s Grocery Retail Practice sees advanced analytics, automation and technology, more agile organizational decision-making and social stewardship — especially in sustainability — as the top areas that will define the “new normal” for grocers.
“When it comes to e-commerce, we are at an odd point. I wish we had even more scale in the sector. Scale can cure a lot of things because you can invest behind it. You’re not adding on things — you’re actually optimizing things when you get to a certain scale,” according to Sankaran.
“We’re at that window where we’ve had a big step change during the pandemic. Now I don’t think it’s going to continue at that rate over the next two, three years, but it’s going to continue at a healthy rate,” he said. “And we’re going to get to a scale in our sector where we can start making the right trade-offs between different channels or different ways of serving customers. Technology is going to become stronger, whether it comes to picking technology, optimizing delivery, improving in-stock conditions and giving [shoppers] more choices, and so on. That’s going to get better. And then we’re going to find ways of monetizing the connection with that customer in different ways. I imagine that our P&Ls will look different, whether it’s looking for media revenues or other things. We’ll have a different P&L in our grocery business as a sector than it was, say, five years ago.”