Retail in Motion

What U.S. retailers can learn from France

To succeed, retailers need to approach their online grocery businesses in ways that are innovative, yet complementary to their existing strategies and shopper focus. At this moment of reckoning, retailers must build on their existing competitive advantages and evolve to meet shoppers’ changing needs. And the pace of change is astounding. We have seen more retail innovation in the last decade than in the last 50 years, which include Walmart’s coming-of-age.

However, amid all these changes and disruption, the U.S. grocery industry has a huge advantage. For guidance and direction on how to build its path forward, it can look to France, where highly successful online grocery models have evolved over the last 15 years.

Our forecasts indicate that the size of the online grocery prize will grow rapidly. The decision time for retailers and manufacturers is now. Those that do not strategically embrace eCommerce may miss out on one of the most transformational opportunities in U.S. retail.

With online grocery in the U.S. on pace to post $55 billion in sales by 2021, the grocery industry must accept that it is time to commit to strategies for eCommerce.

Lessons From FranceThe model is quite simple. Order your groceries online. Set your pickup window. Then drive to the store or a dark site to have your groceries loaded into your car. After a slow start, the model gained significant traction over the last few years.

Auchan pioneered the Drive model in France

more than 15 years ago.

• Carrefour launched 1st Drive experiment• 1st Casino Drive

• 1st Cora Drive

• More than 120 E.Leclerc Drive pick-up points• Carrefour Drive deployment • More than 400 U stores offer DRIVE service • 1st Drive Discounter Leader Price

• Race opening• First closing

• Drive sales hit more than EUR4 billion

2009

2010

2011/12

2014/13

2015

• Store picking started at Intermarché• Chronodrive (Groupe Auchan) opened

its 1st pick-up point

2007

2000• 1st Opening

(Auchan Drive)

2004

• 1st E.Leclerc Drive

• Store picking started at U2005

Source: Kantar Retail, Kantar Worldpanel

Top Reasons Shoppers Use Drive

Time SavingsControl

Flexible, Delivery Time

Handy

The model should sound familiar. It appears to have inspired Harris Teeter’s click-and-collect model and is similar to the model driving growth at Walmart and Kroger now. After its humble beginnings, 7 million French households use Drive to buy the FMCG/CPG that dominate eCommerce. In 2015, Drive contributed 45% to FMCG/CPG market growth in France. Growth is so strong, in fact, that Kantar Worldpanel anticipates that Drive is on track to reach 6.5% market share by 2018. With an expected average annual growth rate of 12%, the Drive model is forecasted to reach 10% market share within 10 years.

At a glance, our data shows that shoppers in France use Drive for the most basic reasons — convenience and control. By meeting shoppers’ most fundamental needs, retailers have successfully opened more than 3,800 pickup points, achieving a household penetration rate of 23.4% in France. Data also shows that satisfied Drive users are loyal, frequent shoppers with large average basket sizes.

Pick-up points 3,863

Average Basket Size: 61.4€

Average 10.3 trips per year

Market Share: 5.2%

Penetration: 23.4% of Households

Source: Kantar Worldpanel Annual 2016

As eCommerce gained significant traction with French shoppers, the next question in the growing channel became which retailer would win the battle for market share. A retailer’s core offer is its key differentiator, and as competition got stronger, the Drive model seemed to reinforce E. Leclerc’s shopper value proposition.

Leclerc paired its strong and well-appreciated private label range with other unique offers, including on-site sushi and pizza. Leclerc’s Drive format in France features 10% more private label SKUs than its next-closest competitor.The unique assortment, including food service, separated Leclerc from the competition.

Leclerc capitalized on its core strengths to quickly expand and gain online credibility.

Driv

e

Bric

k-an

d-M

orta

r

Cora Systéme U Carrefour Auchan Intermarché Casino Leclerc

47%

Source: Kantar Worldpanel Annual 2016

Leclerc’s Private Label Penetration: Drive vs. Brick-and-Mortar

40 locations

Leclerc’s Drive expansion in France The retailer also improved its service, focusing on optimizing fulfillment speed for shoppers. With an established price leadership perception in the market, Leclerc was well-positioned to capitalize on the growing online grocery channel, specifically Drive.

Constant evolution and innovation served as the critical differentiator for Leclerc. With strong logistics structured around its stand-alone Drive locations, the retailer expanded to new regions throughout France, increasing reach and improving operational efficiency.

2010

2015

598 locations

Source: Challenges.fr

Drive Market Share in France

Today, half of Leclerc’s Drive locations operate well above the market average of EUR3 million to EUR4 million in annual sales per unit; in fact, 10 locations generate at least EUR10 million in annual sales. The Drive model accounts for the bulk of Leclerc’s eCommerce sales and 6.7% of its total sales (excluding petrol) in France.

Although Auchan introduced French shoppers to online grocery and Drive, Leclerc has taken over as the clear market leader, capturing 46% of total Drive market share, almost three times more than Auchan and far more than other competitors

46%

17%

9%

8%

7%

8%

3%2% Casino Drive

Cora Drive

leDrive Intermarché

Chrono Drive

Courses U

Carrefour Drive

Auchan Drive

E.Leclerc Drive

Source: Kantar Worldpanel Annual 2016

As the fight for new market share increases, so does the need for productivity.

In France, after extensive investment in deploying Drive locations over the last few years, retailers have hit a critical point in operational efficiency. With traditional pickup points having lost some of their “newness,” retailers are shifting toward improving productivity and profitability rather than reach and penetration. Indeed, Drive locations in France have contracted rather than expanded, with retailers closing underperforming Drive units.

While Drive works in rural and suburban areas, retailers have started to recognize the challenge of catering to shoppers in urban areas such as Paris. As shoppers move online, click-and-collect and lockers in urban areas are more suitable to solving the accessibility issue for large metropolitan areas where separate Drive locations may not work well.

The State of Online Grocery in the U.S.

Food & Alcohol

Drugs, Health & Beauty

Care

Furniture & Home

FurnishingsApparel & Footwear

Toys & Sporting Goods

Books & Magazines,

Music & Videos

Electronics & Appliances, Computer & Office Products

Many categories have made a smooth transition to strong sales online. Books, magazines, and consumer electronics have reached over 30% of sales online. However, online grocery sales were slow to take off until recently. In the next five years, the share of food and alcohol sales is set to triple online.

In the U.S., eCommerce continues to drive retail growth.

Online Share of Sales by Category, 2011-2021F

Note: In 2021, 5% of food and alcohol spending will be online and, conversely, 95% of food and alcohol spending will remain in stores.

2%

6%

12%

17%19%

21%

24%

5%

13%

18%

28%28%

33% 32%

0.6%

3%

6%

9%10%

15%

19%

Source: Kantar Retail

2011 2016 2021

By 2022, sales of grocery consumables are set to reach approximately $55 billion, so retailers and manufacturers need to begin planning accordingly. Based on the growth curve in Europe — particularly in France, which has similar demographics and geography as the U.S. — the next few years are expected to be when online grocery models evolve and retailers innovate.

2009 2011 2013 2015 2017 2019 2021

$3

.4% $6

.7%

$202.2%

$5

.6%

$10

1.1%

$35

3.6%

$4

.5%$7

.8%

$27

2.8%

$6

.7%

$14

1.4%

$44

4.4%

$55

5.2%

One of the key questions for retailers and manufacturers is why we are finally seeing movement in online grocery now. Much can be said for familiarity. Shoppers have already moved online for nonconsumables, so moving online for consumables is a natural next step.

Online grocery sales are expected to nearly triple in the next four years.

Source: Kantar Retail

Food and Alcohol: Annual Spending Online(USD billions and share)

However, some of the willingness to buy groceries online is simple. As shoppers look to decrease stressful shopping experiences and get the basics inexpensively and conveniently, the online grocery model aligns with shopper needs.

Online grocery aligns with shoppers’ growing expectations.

Most Important Factors When Shopping

Minimizing spending 65%Feeling like I got a “good deal” 64%

Stress-free shopping 60%Shopping in one place 48%

Completing shopping quickly 44%Purchasing high-quality goods 37%

Having fun/enjoying myself 27%Employee interaction 19%

Discovering new products/ brands

Having access to info

Shopping to reflect my values 11%11%

16%

Source: Kantar Retail ShopperScape®, April 2016- March 2017

% ranking factor among top 4 most important when shopping in general

Since retailers have been slow to adopt a model, accessibility has been limited. Today, shoppers indicate more interest in models that connect them to retailers as opposed to new parties or services.

Shoppers are just discovering their online grocery options.

36%Delivered to Home by Reseller

34%Pickup Outside Store

34%Pickup Inside Store

Source: Kantar Retail ShopperScape®, August 2016

Interest in Grocery Delivery ModelsShare of primary household shoppers who have not used service who indicate they are very/somewhat interested

Four key online grocery fulfillment models emerged in the U.S. The first is home delivery directly from retailers. Peapod and FreshDirect were the initial entrants in this space, with Amazon jumping in more recently.

Then a few retailers, most notably Harris Teeter, began to explore a click-and-collect model where shoppers order their groceries online, but pick them up at a store location. This model is very similar to Auchan’s original Drive concept. With Kroger’s acquisition of Harris Teeter and its expansion of ClickList, along with Walmart’s successful Click & Collect pilot, this model appears to have strong momentum.

We also see subscription models, such as Amazon’s Subscribe & Save, and third-party home-delivery players, such as Instacart and Shipt, gaining ground in the U.S. These models seem to serve very specific trip types.

Could a U.S. iteration of France’s Drive model be the model of the future?

2014

Today

Online Grocery Penetration

Regardless of model, retailers have rapidly embraced this space. In 2014, online grocery options were concentrated and accessibility was restricted to major metropolitan areas. However, in the last three years, online grocery penetration has increased dramatically as Walmart, Kroger, and strong regional players have expanded into hundreds of markets.

Source: Kantar Retail

2015

2017

Click-and-Collect Expansion at Walmart and Kroger

Source: Kantar Retail

Established brick-and-mortar U.S. grocery retailers have a competitive advantage here because they can leverage their nationwide store footprint to expand click-and-collect. With tens of thousands of stores in the U.S. — fewer than 10% of which currently support online grocery — growth is expected to come fast. Currently, Walmart and Kroger are racing to dominate click-and-collect.

Competition drives innovation. New eCommerce models take off when two top retailers battle it out.

Differentiate between urban and nonurban. Segmenting urban and nonurban shoppers is important. Drive is not winning in big cities. It is winning in the more nonurban parts of France, where cars play a big role in people’s lives.

Shoppers demand choice. Convenient time slots and locations are key to the Drive model’s success. When done correctly, Drive provides the ultimate customer experience.Supply-chain management is critical. Picking from the store is easiest, but it is a short-term solution and disruptive to inventory forecasting. Instead, Drive requires a dedicated supply chain. While capital intensive, a stand-alone supply chain is a more scalable solution.

Explore new performance metrics. Since gross margin can be confusing when applied to eCommerce, retailers must use different metrics than the ones they use in store. Items with similar gross margins can have widely different picking/distribution costs.

Online Grocery and Drive: Lessons and Considerations for the U.S.

As online grocery expands in the U.S., we can take considerable learnings from the evolution and maturation of online grocery and the Drive model in France:

Pros Cons

Shoppers • Offers convenience• Saves time • Allows for budget management —

less tempting to buy unnecessary items• Provides flexible delivery windows

• Limits choice of fresh products• Leads to shortage of key items,

leading to substitutions• Requires additional fees or upfront costs

Retailers • Grows sales (marginally)• Expands footprint• Consolidates loyalty• Helps refine shopper profile• Generates data to segment

shoppers and tailor promotions

• Hurts store traffic• Requires high investment to scale up• Stresses logistics and supply chain• Creates high operational costs• Challenges ability to build basket

Suppliers • Supports brand visibility• Reinforces brand loyalty• Allows for better shopper targeting (if

retailer shares data)• Serves as the perfect channel for

bulky items

• Becomes tough to leverage impulse buys• Results in execution not always up to standards• Means loss of power to influence how retailers

show items

Before proceeding with Drive, U.S. retailers should first weigh the model’s pros and cons for themselves, their shoppers, and their suppliers.

Think about how to start

Stand-alone pickup locations require scale. Attached pickup locations are cheaper and easier to set up, but can be hugely disruptive.

Optimize your supply chain

Minimize out-of-stocks and double stock some SKUs to prevent in-stock issues. Provide an efficient picking team that can assemble the orders and meet strict one- and two-hour delivery windows. Wait to add fresh and frozen items to the final order until the pickup window is near. Establish operational benchmarks.

Invest in staff training

Without managing staff, stores, and inventory efficiently, retailers risk damaging customer relationships. Train staff to provide a quick, hassle-free process.

Know your shopper

Consider the shopper demographics and traffic flow of the area, accessibility, and store footprint.

Meet shopper expectations

Being able to offer predictable delivery slots, free next-day delivery, and an accessibly priced same-day service is becoming the norm. Explore how you can meet these changing expectations while making the economics work for your business.

The Drive model can increase incremental sales if segmentation and targeting are done correctly. When it is built considering the efficiencies, synergies, and long-term wins it can generate, Drive can help retailers boost their eCommerce sales while minimizing the costs associated with fulfilling online orders.

If they decide to implement a Drive model, retailers should take these actionable insights into account:

Actionable Insights for U.S. Retailers Considering Drive

While the evolution of online grocery is driving significant change in the U.S. today, retailers and manufacturers have a unique opportunity to learn from the growth trajectory of online grocery in other markets. France serves as the perfect case study for the U.S. grocery industry because its geographic makeup and historic grocery model are both similar to the U.S.

Kantar Retail believes that online grocery evolution in the U.S. will take a similar path to the one seen in France over the last decade with the Drive grocery fulfillment model, which is a more sophisticated version of the click-and-collect grocery fulfillment model in the U.S. Retailers can learn from both the successes and challenges observed in France as retailers, including Auchan, Leclerc, and Carrefour, explored the online grocery models that worked best for their shoppers.

Diana Sheehan, Director, Kantar Retail

Eric N. Batty, Global eCommerce Business Development Director, Kantar Worldpanel

Alvaro Morilla, Associate Analyst, Kantar Retail

Conclusion

Authors

About Kantar

Kantar is one of the world’s leading data, insight and consultancy companies. Working together across the whole spectrum of research and consulting disciplines, its specialist brands, employing 30,000 people, provide inspirational insights and business strategies for clients in 100 countries. Kantar is part of WPP and its services are employed by over half of the Fortune Top 500 companies.

For more information visit www.kantar.com

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