In recent years, a wide array of technologies in areas such as sensors and data capture, automation, and AI have rapidly emerged with the potential to reshape the retail industry. One consistent trend has become clear: retailers that are capable of changing their businesses to capture value from new technologies across functions (such as e-commerce, supply chain, store operations, and customer engagement) are typically more successful. This ability to envision and act on opportunities faster than the competition has become a real strategic advantage.
Accordingly, grocery retailers have been on the hunt for technologies that can help them leapfrog competitors. But finding and implementing new solutions can also be accompanied by high costs and disappointing delays due to existing, inflexible legacy tech platforms that are often coupled with legacy ways of working.
Yesterday’s technology strategies, such as multiyear projects with all value deferred to the final release, no longer suffice given the fast rate of change in grocery retail. These create fragile road maps, vulnerable to even small disruptions in cost, quality, and time to execute. On the other hand, pure online players and innovative incumbents are constantly on the move, so by the time companies complete their three-year road maps, the world looks different again. Fully automated replenishment software and microfulfillment centers, for instance, are streamlining supply and operations, with advanced analytics increasingly optimizing grocers’ supply chains end to end. And who could have predicted the explosive growth of online grocery shopping in 2020 due to COVID-19 restrictions?
With e-commerce now a substantial part of their business, retailers are trying to build a truly omnichannel proposition and corresponding tech platform—no easy feat given the gaps between in-store and online commerce. At the same time, on the commercial side, merchants are increasingly working with largely automated, advanced tools to optimize pricing, promotion, assortment, and sourcing.
Agile, digitally savvy retailers that can derive the most benefit from new technologies will speed ahead of competitors and increase their ability to provide value to shareholders. Our analysis shows consumer and retail companies that are technology leaders increased total returns to shareholders (TRS) at a CAGR of 14 percent from 2017 to 2020, while laggards saw TRS fall by 5 percent CAGR (Exhibit 1). To deliver on this value potential, retailers should embrace five principles to guide their transformations and achieve the flexibility needed to excel.
Five principles to harness new technologies
To become a tech leader that can adapt to changing circumstances, grocers can look to five key principles for guidance:
1. Build a ‘product-led’ organization
A nimble and successful tech organization is able to shift resources between priorities on short notice. It’s crucial for executives to build organizations around “products” (such as customer care or warehouse management) and not focus solely on applications. Leading grocery retailers define business domains and map out product teams for each domain, which could have multiple products. They should be defined at such a granular level that a small team of engineers can own the development end to end (Exhibit 2).
This cross-functional team comprises business and tech talent and is responsible for advancing the product’s overarching vision, functionality, and performance. As market dynamics change, products and their teams can be expanded, reduced, or morphed into new teams to capitalize on new opportunities. These business domain product maps help organizations highlight strategic priorities, set measurable business targets, and enable trade-offs when reprioritization is necessary.
While most leading players are building such product teams with in-house tech talent, the same applies for retailers opting for an outsourced or partner model. Smaller players, for example, may not be able to build a full-fledged in-house team in all technology domains. Still, the logic of a product organization would apply; technology partners should replicate a retailer’s internal product logic. Regardless of the chosen model, some degree of internal control on technical quality will always be required for success.
2. Create a real tech workforce
To cope with underlying uncertainties and master new technologies, cutting-edge grocers are making sure they have the right talent and are providing employees with ongoing training opportunities to fill skills gaps. Today, many grocery retailers rely heavily on external developers and contractors that may not always have the right capabilities or be able to deliver in a timely manner. Over time, building internal skills is likely less efficient but more effective when it comes to strategic digital systems that are designed and delivered in close coordination with business and functional colleagues using agile methods. The best organizations develop a strong internal engineering workforce complemented by flexible access to external talent in areas where it accelerates productivity or is critical for providing scarce skills.
More broadly, executive capabilities will need an upgrade as well. Skill building and lifelong learning on priority tech topics, such as establishing an enterprise resource planning modernization center or a cloud-migration team, should not stop at the operational-tech level. With technology becoming an important enabler of the whole business model, decision makers across the enterprise should also have a better understanding of how technology works, what it can do for them, and how to mitigate risks while pursuing value.
Another factor is influencing architecture renewal: stores are increasingly becoming nodes in an omnichannel ecosystem.
3. Build architecture modules driven by business strategy
The most successful new technology solutions follow a modular approach that is consistent and reusable across channels. This approach requires breaking down monolithic legacy architectures into smaller, self-sufficient services—meaning they can be enhanced and deployed independently from other parts of the architecture. At the same time, these services should be able to provide data to other applications as needed without fragile point-to-point integrations. Breaking architecture down into modular pieces accelerates development velocity and provides a consistent customer experience across multiple consumer touch points (for example, in-store points of sale, web shops, and mobile apps).
Take, for instance, omnichannel basket calculation: this task is often a pain point for grocers, but when it is modular, it can be used in every channel, thus facilitating new features such as coupons, personalized promotions, and other forms of loyalty offers.
Another factor is influencing architecture renewal: stores are increasingly becoming nodes in an omnichannel ecosystem. Use cases include click-and-collect, local promotions, and last-mile deliveries. The underlying technology architecture must offer sufficient flexibility to integrate third parties, such as delivery partners.
4. Shorten time to market
Consumer behaviors are changing faster than ever. Shorter software release cycles allow retailers to better meet these shifting customer expectations by enabling experimentation, testing new capabilities quickly, and scaling up what works best. Instead of big code releases a few times a year, which are hard to adjust or adapt, companies must build the capabilities to provide new releases faster. This cadence can be as fast as multiple times a day in customer-facing systems, with monthly releases in back-end systems to incorporate user feedback. This accelerated release pace can be accomplished only if modern technology practices, such as automated code deployment and effective test automation, are in place.
5. Use data as the foundation for all improvements
Data are more abundant and flowing faster—and across more boundaries—than ever. Therefore, it is no longer enough to monitor structured transactional and supply-chain data. Grocers instead need to capture millions of daily events and interactions so they can be analyzed to optimize experience and productivity. New technologies in this space are providing unprecedented flexibility to rapidly aggregate, process, and analyze these data.
With this capability, companies can keep close tabs on changing consumer demand. No longer is experience alone enough to make the best decisions. Retailers must complement it with data-driven decision tools—often powered by machine learning. Tailoring these tools to the most critical value drivers of the business is another truly strategic capability.
Data also improve decisions about where to invest the IT budget. Wherever possible, analysis of direct user feedback can identify areas to improve and inform decisions about further priorities. Investments into critical tools, such as A/B testing and performance monitoring, allow companies to gain better access to user feedback at scale and to act on it.
The agile approach in action
An international grocery retailer decided to double down on digital opportunities, but it needed to radically change its approach to technology adoption. To begin, leadership created a new board-level technology role: chief digital and product officer. Then, the retailer hired eight tech and product leaders who came from purely digital companies or competitors with more advanced tech strategies. It established an offshore tech hub and hired more than 90 engineers, in addition to strengthening the engineering capabilities at headquarters. On the system front, it transformed its underlying architecture, starting in the e-commerce space, where a monolithic system was incrementally replaced by smaller software-as-a-service (SaaS) offerings and self-developed microservices. The retailer also invested in continuous integration and deployment capabilities and established quarterly, monthly, and even weekly business reviews to evaluate and improve the performance of its key products.
With this new setup, the grocery retailer increased the return on its tech investment and enabled code deployments multiple times per day. Within two to three months, it was able to launch multiple new products, including a new shopping app, a click-and-collect service, a scan-and-go feature, and an express delivery service. At the same time, its digital businesses grew rapidly. Before, e-commerce business had stagnated at approximately 500 orders a day. Nine months after implementing the new strategy, the company had increased the number of online orders to more than 20,000 per day. And since the outbreak of COVID-19, it has further multiplied the number of daily orders generated by its online business.
Setting the right priorities at the outset
To get started on a tech transformation, grocery retailers are using the following strategies:
- Embrace the change as an enterprise-wide transformation. Instead of being limited to certain functions, an enterprise-wide approach will maximize impact and prevent the change from creating different cultures within the company.
- Measure what matters. The primary goal in IT should be to increase growth and productivity in the core business, which matters far more to the bottom line than shaving a few tenths of a percent off the cost of IT. Yet many IT organizations are measured only by cost versus revenue. Top executives should focus on business impact, and IT leaders should be sure to hold their people accountable to hitting the same metrics as their business colleagues. To be a real business partner, IT cannot measure itself solely by IT metrics.
- Focus on tech opportunities that provide the highest business value. An endless number of possible improvements exists, so companies should consider creating minimal viable products to demonstrate value quickly and build appetite for change. Choosing the right “battles” is critical: trying to implement change everywhere will result in comprehensive impact nowhere. Therefore, the focus should be on doing a few things well that create tangible value and the potential for a road map that is at least partially self-funding.
- Shorten technology planning cycles. Moving from an annual planning cycle to a flexible planning model on a monthly or quarterly level allows rapid prioritization and deprioritization of products based on their ability to continually generate value.
- Make your entire leadership team accountable for the technology change in their domains. True, agile transformation requires the entire board, the C-suite, and their teams to work across functions and silos.
Grocery retailers have a golden opportunity to make better use of the innovation potential that technology is bringing. The path to success is not about picking one solution over another; rather, it lies in building the organization’s capacity to drive change with tech leaders and other functions working together. The pandemic forced a new level of collaboration at a pace and scale not imagined before, and teams should build on the lessons from that difficult time as they chart their course toward a tech-enabled future.