How a Russian retailer is building a next-generation grocery business

In February 2020, when Russian food retailer Pyaterochka was piloting its express-delivery service, the average volume was about 600 orders a day, says its CEO Sergei Goncharov. Only a year later, the 17,000-store chain is fulfilling approximately 30,000 online orders daily. Goncharov recites these numbers with obvious pride—in both the company’s agility and the talent that made it happen. He recently spoke with McKinsey senior partner Alexander Sukharevsky, who leads McKinsey Analytics globally, about how Pyaterochka is preparing for the next evolution in food retail. The following are edited excerpts of the conversation.

Alexander Sukharevsky: Pyaterochka’s investments in technology have paid off; your business is growing and profitable. Yet, around the world, there are technology-heavy grocery businesses that are getting significant valuations but are still cash negative. What’s the recipe for developing a highly technological grocery business that is also net profitable?

Sergei Goncharov: First, it’s very important to keep your end goal in mind. This is easier said than done. A lot of people, when they start doing new things and experimenting with new technology, get carried away. They drift away from the original goal. So, the first thing is to understand why you’re doing it.

Second, make sure your technology investment is beneficial to the current business. For example, about two years ago we bought a platform that allowed us to roll out online delivery very quickly, and we started online delivery in early 2020. The timing worked out very well for us, because the COVID-19 pandemic hit just a couple of months later. What I’m saying is that your investment has to have synergies with your main business.

Third, have the ambition to look beyond the horizon. Think big; don’t just look two or three years ahead. Invest a portion of your capex in a few big, interesting ideas so that you’re not stuck in just “today or tomorrow” kind of thinking, but you’re looking at what’s around the corner over the longer term.

Alexander Sukharevsky: Say more about that. Let’s look ahead—say, ten years down the road. How do you think food retail will change? What will the grocery-shopping customer experience look like in 2030?

Sergei Goncharov: It’s useful to look at history as a basis for predicting what is to come. I think we will continue consuming food the way we do now. We will eat; we won’t just become integrated with machines and plug ourselves in and get charged with electricity or anything like that—maybe in 100 years, but not in ten years. I also think the model of distributing food will not dramatically change; there will be various distribution channels to get food from the food producer to the end user.

But just like we’ve seen in the past few decades, there will be changes in the channels and formats in which groceries are sold. I think we’ll hit a major fork in the road in the next few years. Consumption will revolve around two main paradigms: one is food as a utility, and the second is food as a pleasurable experience. For the first one, food basics and utility items—the things that you always stock in your pantry—consumers will shift to fulfillment by subscription or online delivery. For the second one—choosing your own food and treating meals as an interesting and pleasurable experience—people will go to physical locations like supermarkets.

Alexander Sukharevsky: If that happens, what would be the implications for Pyaterochka’s real-estate strategy and portfolio?

Sergei Goncharov: We’ve already started remodeling our locations more in favor of the second paradigm: food as a pleasurable experience. We’re reallocating some floor space away from dry foods and toward fresh categories like fruits and vegetables, meat, and dairy. The purchase of dry foods has already started to shift to online.

As for our overall real-estate expansion, we’ve been opening 2,000 to 3,000 stores per year over the past five years. We will probably stabilize at 25,000 to 26,000 stores in Russia. At that time, we will continue opening stores but at a slower pace.

Alexander Sukharevsky: Your investment in online delivery proved prescient. What technology investments are you making today to gain competitive advantage in the future?

Sergei Goncharov: First and foremost, we’re investing in people. I think we have one of the best big-data and analytics teams in the country—and I don’t mean just in the retail business, but in business in general, including banking and high tech. We invest a lot in new hardware as well. And we invest in understanding and learning about new practices and new ways of doing business. It’s not just our tech people who do this, but all levels of management in the company, and not just top management.

Alexander Sukharevsky: What do you see as the role of big data and analytics in future consumer journeys?

Sergei Goncharov: Big data will provide information not just in the aggregate but also on individual customers, so it will allow us to make our offers more targeted and personalized. We already collect a wealth of information through our loyalty-card program. If you’re a Pyaterochka customer, we can predict, with fairly high accuracy, what you will want to consume in the next two weeks or two months, based on your past consumption.

I’ll give you an example of how we’re offering promotions that are more targeted to individual needs: we know that a certain customer buys toothpaste every month and a new toothbrush every three months at our stores. If our data shows that the customer is continuing to purchase toothpaste from us but has stopped purchasing toothbrushes, we know that either the customer is using the old toothbrush longer or—more likely—has started buying toothbrushes somewhere else. So, we can make a special offer to motivate that customer to buy toothbrushes at our store. The same goes for a customer who buys expensive fruits and veggies but cheap alcohol; we know that, given behavioral patterns, that doesn’t make a lot of sense—so we’ll offer that customer promotions on alcohol.

In the future, I see customer data being integrated into and analyzed along with data from other sources: banking data, social networks, et cetera. So, we can predict what you will be consuming not only next week or next month, but also next year or two years from now. We’ll be able to predict not only your shopping behavior but also your overall behavior, your health, your habits. We will be able to offer you options depending on your goals. For example, if you want to go on a weight-loss program, we can create that for you. If you want to eat healthier food, we can provide recipes and shopping lists for you.

The future of shopping: Technology everywhere

The future of shopping: Technology everywhere

Alexander Sukharevsky: The more you go into personalization, the more you start dealing with privacy issues. How can companies stay responsible and ethical while providing consumers with personalized offers?

Sergei Goncharov: Unless we live off the grid in a cabin in the woods, data about us is being disseminated, whether we like it or not. Laws and regulations play an important role in this issue; we should not underappreciate that. But an organization’s mission and values matter, too. Our company’s mission is to earn the lifelong trust of our customers, so we think a lot about how to go further than what the law requires.

The poster behind me says, “Everyone is important,” which is one of our slogans. We respect each and every one of our customers. We work hard to make sure that our customer data is held and managed in an absolutely secure way, and that our customers have the ultimate say in what data we collect about them and what types of offers they want to receive from us.

Alexander Sukharevsky: Grocery is not necessarily the most attractive industry for many of the brightest analytics or digital minds. How do you attract tech talent, considering many other companies—banks, technology companies, players in other industries—are fighting for the exact same talent?

Sergei Goncharov: You’re absolutely right—retail is not an industry that is top of mind for tech talent. Many people still see it as an old, stodgy industry. In the beginning, it was very difficult for us to attract this talent. The pay scale, of course, is important, but the atmosphere and culture are also important.

A few years ago, we separated big data into its own organization, separate from our traditional retail business—like a department within a department. Then we put an incredibly capable leader in charge of that department. We charged him with creating a culture within that organization that would be attractive for tech talent: a culture that is conducive to experimentation and does not punish for mistakes but actually encourages people to take risks, make mistakes, and learn from those mistakes.

Little by little, we started attracting some great people, who then attracted even more great people. Now it’s a bit easier than it was in the beginning. But there’s no magic bullet; it’s a combination of the culture, the environment, and the problems that they get to work on. They want to work on things that are interesting and innovative—and our industry and our business certainly allow them to do that.

Alexander Sukharevsky: Do you think the culture within the traditional grocery part of your business has changed as well?

Sergei Goncharov: Yes. A very interesting thing started happening after we hired tech talent. As I said, they have a different mentality from people in the traditional retail industry; they’re not as risk averse as traditional retailers. Some of them are actually quite risk loving. And they started changing the culture around them. Their risk-taking mentality started trickling down into the organization. We started to see a lot of people in the traditional retail departments changing their attitudes and mentality. So, I think we’re all benefiting from this mindset. It has become one of our competitive advantages, for sure.

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