Monthly Archives: February 2017

Guide to the Digital Grocery

Sometimes industries hit a tipping point. It looks like nothing is happening for a long time, while forces of change build up, and then everything shifts at once. That is happening in the grocery industry now. A shift is taking place in the most fundamental form of shopping: consumers’ purchases of food products and other basic household goods. The most visible signal of this shift occurred in June, when Amazon announced its acquisition of the Whole Foods grocery chain, but the basic trajectory was already long under way.

Central to this shift is the new digital grocery platform rapidly emerging in industrialized countries. In the U.S., Walmart and Amazon are each leveraging their scale advantages, but under different paradigms. Walmart has achieved unparalleled success with a “push” model that ships full truckloads of goods to more than 4,000 Walmart stores across the country, offering “everyday low prices,” as the slogan puts it, without sales or promotions. Amazon operates a similarly powerful supply chain but with a “pull” model that responds directly to customer demand by shipping packages rather than pallets of goods. The rest of the nation’s supermarkets and grocers must find a way to compete in this environment. Other industrialized countries have similar dynamics: traditional grocery competitors are squeezed between a “push” leader like Walmart and a digital native “pull” player like Amazon or Alibaba.

Undoubtedly, the new competitive dynamics will give consumers many more options for pickup and delivery of basic household goods, at lower cost and with far more convenience than they have ever had before. But they come at the expense of the traditional supermarket. For more than 50 years, convenience, largely defined by store location, has been the dominant factor in grocery retail. It has allowed even small players to survive, and thus helped create a fragmented sector. But now, the digital reframing of the grocery business, encompassing the entire purchase experience from order placement to delivery, reverses that reality. Conventional supermarket companies face an existential threat and must change their business models to compete and, ultimately, to survive.

One potential approach shows particular promise. It could be called the “ply” model — as in, “ply your wares with digital technology.” This model seeks to offset the scale advantages of Amazon and Walmart by leveraging the distinctive capabilities of a local grocery store: a supply chain fed by full-truckload shipments (which Amazon lacks); dynamic pricing and promotion (which Walmart disdains); and the ability to command intensive loyalty from shoppers, because of its local community knowledge, customer segmentation, and product customization. To compete in the coming decade against the twin disruptions of Amazon and Walmart (and their equivalents), today’s grocers and supermarkets need to return to the customer-centric mind-set of their 19th-century predecessors, while making the most of today’s digital tools.

A near-future scenario might involve a suburban family of two adults and three children. They are mindful of both price and convenience. Their favorite neighborhood grocer continues to win their loyalty because it understands what they are looking for; it regularly stocks its shelves with new items likely to appeal to them. On a Tuesday evening, the store sends the oldest child, a 15-year-old being driven home from a soccer game, a text saying his favorite box of prepared food, suitable for a low-cost and healthy school lunch, is half-price in the store they are driving past. Moreover, other items the family regularly purchases, including a new flavor of their favorite breakfast cereal, their usual laundry detergent (which they haven’t purchased in a few weeks), and a bag of oranges, can be boxed together for them along with a few surprises that the grocery store will “throw in just to see if you like them.”

The teenager receives the message because the store’s algorithm, after years of data analysis and machine learning, recognizes that the parent is probably driving and thus cannot text. Meanwhile, the other family members waiting at home have also received the offer and have clicked a box to indicate their support. The teenager alerts the driver to all this, and they stop at the store. As the teenager steps out to pick up the package at curbside, a store employee offers some cold sports drinks as additions to the boxed order. No payment is required right then; the cost is added to the family’s monthly tab.

Strategy for Utilities

In April, Texas regulators rejected a bid by Florida utility giant NextEra Energy to acquire Dallas-based Oncor Electric, whose parent company was in bankruptcy. The regulators expressed concern that Oncor’s new board would be controlled by an out-of-state entity, which would impair local decision making. In May, Kansas regulators turned down the proposed sale of electric utility Westar Energy to Missouri-based electric utility Great Plains Energy, saying they were concerned about the financial leverage of the combined entity and its potential disadvantages for customers.

The deals are still pending. But these events show that mergers and acquisitions, which have been common in the utilities industry, could face heavier scrutiny going forward. That means utilities seeking to gain a competitive edge through M&A will have to convince regulators that the transactions will produce meaningful efficiencies and synergies. They must also show how their plans will translate into explicit benefits for ratepayers and improvements to transmission and distribution networks.

During the past two decades, the utilities sector has consolidated broadly.

Consolidation has been driven by several factors. Some utilities have been seeking to diversify regulatory risk by having operations in multiple states. Others have sought complementary assets, such as gas pipelines, or expanded into new service functions, such as gas distribution or electric generation. Regardless of the motivating factor, the overall outcome is clear. The utilities industry is top heavy; it has a majority of large companies and a shrinking minority of smaller companies.

As the opportunities for M&A narrow, the need for M&A as a vehicle for growth persists. Utilities face some significant challenges unique to their industry. Revenue gains from traditional areas such as power generation and distribution have stalled for most utilities. As services have accounted for a greater share of economic activity, demand for electricity in the economy has flattened. In some areas, demand is even declining, because population and business expansion is more than offset by energy efficiency and conservation efforts. In its annual financial review, the Edison Electric Institute reported that the number of gigawatt-hours available for distribution in 2016 was 2 percent lower than the 2008 figure.


roviding Free Snacks

What’s the difference between culture and employee engagement? It’s a good question. Many people use the two terms interchangeably. In their minds, the term company culture is synonymous with free food, foosball tables, and other workplace perks deemed to improve the employee experience, increase satisfaction, and drive greater commitment to the company. There is, of course, a lot more to employee engagement than workplace goodies. Employee engagement surveys typically ask about factors such as empowerment to make decisions, freedom to innovate, and work–life balance. There is some evidence to suggest that high scores on these issues make a difference to a company’s bottom line. According to Gallup’s 2016 Q12 Meta-Analysis report, business units in the top quartile in terms of employee engagement outperformed business units in the bottom quartile by 21 percent in profitability.

However, simply changing a culture in an effort to improve employee engagement won’t necessarily lead to improved business performance. In fact, treating engagement as the goal of culture evolution can have a negative impact. That’s because although there are widely recognized drivers of engagement that are independent of strategy or industry, the cultural drivers of success differ widely from company to company. The same behavior can drive success at one company while hampering success at another (see exhibit).

We’ve learned through our work at the Katzenbach Center that the key to unlocking performance via organizational culture is to align company culture to business priorities. This requires the selection of a “critical few” behaviors that enable the desired business outcomes. When these behaviors are coupled with structural and process changes that support them, the entirety of these changes have an impact on the employee experience. Using culture to drive performance thus requires emphasizing elements of the employee experience compatible with desired business outcomes, and downplaying non-compatible elements. Whether the elements of the employee experience that drive performance also drive increased engagement is of secondary importance. Employee engagement should be regarded as a byproduct of culture evolution efforts rather than a tangible goal of them.