Digitalisation in the food retailing sector

Interview with Frank Lehmann of Retail-Profiling & Supermarkt Inside

Retail manager Frank Lehmann has been working for major corporations for many years now. Retail grocery is his specialty. He held positions of responsibility in a variety of areas at major companies such as Rewe, Edeka, Karstadt and Kaufland. At Kaufland, he was in charge of retail shop expansion from 50 to over 1200 shops in 8 countries, working his way up from sales manager to Chairman of the Board.

What issues are currently at the fore in the food retail sector?

Frank Lehmann: The sector is undergoing many changes. Retail grocery and the conventional grocer’s shop are currently in a massive digitalisation phase. The objective here – not the only objective, but a common one – is to develop omnichannel strategies (multichannel strategies). Future grocers won’t make it with the brick-and-mortar business alone. They will have to create online channels – and all retail corporations are busy doing just that.
Although we have been pushing this change for almost ten years now, these activities are just getting started and all retailers are trying to find their way there.

For example: About six years ago, the Kaufland Group opened a contemporary online shop with delivery service and tested it in Berlin. A few years later, they closed it again. After a few more years, the company took over the Marketplace from Real and relaunched it under Kaufland.de. This is an example of how a major corporation has implemented a strategy change within an extremely short time. We also see this in the difference between Penny and Rewe – the one has only certain products in the online shop, while the others offer an entire online supermarket.
Retail grocery is working on finding its way in e-commerce such that profitability cannot be affected negatively over the long term. This is a massive technical and commercial challenge for those who help to run grocery businesses. No one knows where the journey is going long-term. Simultaneously, the brick-and-mortar business is increasingly coming under attack from the fast delivery services. These include Gorillas and Flink, which have now launched in nearly all major German cities. These companies operate dark shop supermarkets. What does that mean? Say, for example, you’re grilling out in your garden and need meat urgently. The aforementioned company then delivers the meat to your garden within ten minutes.
These new formats were unheard of in retail grocery three years ago – they are true upstarts. When we look at the financial outlook behind them, we know what is driving them.

These are some of the big pain points with which retail as a whole is currently struggling. Over the last 10 years, we have seen over 50% of brick-and-mortar clothing and shoe retailers have to close their shops because they failed to respond to Zalando, Amazon and the like. The brick-and-mortar retailers had no response to daily deliveries right to your door and a flawless complaint/return process. Now they are scrambling to catch up, particularly major corporations such as the Schwarz Group, Rewe, Edeka and the like. The Schwarz Group is currently building an IT campus for 5,000 employees. This signifies that they can get their 14,000 Lidl and Kaufland shops worldwide up to speed digitally.

However, today’s challenges are much more serious. We have more or less got through the COVID-19 pandemic and now people are dying every day in Ukraine. The war gives additional momentum to inflation, which was sharply on the rise anyway. Inflation means that prices are going up – exploding, in fact. In the retail grocery sector, prices in Germany rose by 7.3% in March 2022. This is unprecedented, and we will be dealing with it for some time. As a result, all retail grocers are having to constantly correct the prices upwards all the time for a wide variety of reasons, and customers don’t like this one bit!

Let’s also look at the energy sector. What happens if Nord Stream 1 is shut off? What happens if it becomes increasingly difficult for oil to reach Germany? What happens if gas no longer gets here? The price of petrol will continue to rise. These, too, are issues of major concern to retailers in general and the entire industry.

How about customer communication? What’s the situation there?

Frank Lehmann: Customer communication in conventional brick-and-mortar shops is very limited. Usually, customers are greeted by a welcome sign at the entrance, but shopping at the grocery’s shop or supermarket is a rather anonymous experience for them – they enter the shop, pick out what they want, pay and are on their way again. This is true unless the customer carries a loyalty card, which provides the opportunity to communicate with them. That’s a great and very important opportunity. The register receipt data play a major role here.
The major current topic now is app communication with the customer. As soon as the customer walks into the shop and is logged in, they are sent a greeting and shown personalized offers. For example, if I like white wine from Tuscany, the system tells me “Hello Frank Lehmann, thank you for shopping with us today. Please note that we have a sale price for XY white wine of just 5 euros.” Checkout using the mobile phone (when the customer scans in all groceries themselves and just holds their phone up to the reader after shopping) is becoming more commonplace and being rolled out by a few major retailers. It has great momentum that way. Only retailers whose customers use the app or loyalty card can keep in contact with them. Those who can communicate with their customers have the great opportunity to sell more and know customers’ needs. Then, it continues with custom data – when you know what Frank Lehmann buys and what’s on his regular shopping list, you can offer him special deals or, ideally, send them to him directly.

What are the pain points in the workflow that have to be solved in the future?

Frank Lehmann: Stocking goods is going to be a fundamental pain point in the future. Let’s take a look at the process in retail: First, the purchasing department creates a product range, the product range is purchased and delivered to the central warehouse. From there, it is made available on pallets or rolling containers from the logistics area more or less automatically. A lorry driver then comes to drive the goods to the shops.
Pain point number one is the lack of automatic order picking, which still has to be done manually in some cases. There are no robots for certain areas – they will have to be developed first. The big retailers such as the Schwarz Group and REWE are all already working with order picking robots, but they are far from being in place for all product lines. Another point is data quality, where major tasks still await us.

The second topic involves logistics, lorry drivers to be precise. In Germany, Switzerland and Austria, most lorry drivers are non-natives nowadays. One might ask who will drive the lorries in the future. Will there be automated vehicles, perhaps?

The process continues once the pallet is in the shop’s stockroom. In the future, there will be a question of how the goods get onto the supermarket shelves. Hardworking people put them there now, but no optimal solutions exist yet for the future. Automated shelves have already been tested. The goods are placed into the rear of a “vending machine”. The goods are then distributed among the shelves automatically. Then, they can be removed by the customer, but this technology is incredibly expensive and still in its infancy. Unstocking goods at the shops is, accordingly, a major pain point.

There is also the process of creating price signage at the shop. This involves the prices on the shelf, promotional areas and secondary positioning, big and small labels. The current system still uses paper labels for the most part. This is based on a manual process. Thousands of employees spend time printing these and changing them out – optimising price signage in the shops is thus a major pain point. A new technology, ESL, electronic shelf labelling (link), can help here. I’m surprised this isn’t seeing greater investments because this technology could make processes substantially easier and, in times of inflation, having prices that are dynamic to a certain extent is very important.

After price signage, the next priority is the checkout. The goods have to be brought to the customers. Germany is a very conservative country in terms of its checkout habits. Customers want an attended checkout counter and, by and large, still resist self-scanning. In England and Ireland, self-scanning is 80% rolled out, while in Germany this figure is just 10-20%.