Arms race in retail innovation

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The retail industry is in the midst of a golden age of experimentation and innovation. Triggered by intensified competition, changing consumer dynamics, and the revolutionary impact of digital technology and e-commerce, merchants have had no choice but to rethink the way they do business or risk obsolescence, a process that took Sears Holdings down a long, drawn-out trail that finally ended in Chapter 11 bankruptcy.

Examples of companies determined to avoid that fate are abundant. One of the more intriguing projects currently under way involves two of the nation’s top retailers, Kroger and Walgreens Boots Alliance. In a bid to capitalize on their respective expertise in food and health and beauty care, the companies announced in early October that consumers in northern Kentucky could place grocery orders with Kroger online and pick them up at 13 Walgreens drug stores in the region. Those locations also started to offer selected products from Kroger’s Our Brands private label portfolio.

The two companies earlier this month expanded the pilot program by bringing Kroger Express, a curated mix of 2,300 items — including Home Chef meal kits — to the 13 Walgreens outlets in northern Kentucky. In addition, 65 Walgreens stores in greater Chicago are now offering Home Chef Express meal kit options, with recipes rotating on a biweekly basis.

Kroger chairman and chief executive officer Rodney McMullen says he sees the partnership with WBA as a means to “rethink convenience and redefine the way America shops for food.”

While a food/drug combination store is nothing new, growing consumer demand for fast, simple, easy ways to obtain the products they need makes the new offer an attractive proposition. With some 9,800 stores in the United States, Walgreens is in very close proximity to where most Americans live and work.

For his part, WBA executive vice chairman and CEO Stefano Pessina notes, “It is essential that we transform our retail business to create a modern offering that builds on our convenient locations and differentiates our stores in a crowded market. Most importantly, we must do this at a value proposition that is attractive to our customers and competitive against other comparable retailers.”

Groundbreaking partnerships are one way WBA is going about that task. Besides the ongoing collaboration with Kroger, the drug store operator is working on projects with FedEx, Sprint, Birchbox and LabCorp to augment the front-end and health care products and services Walgreens customers can access.

Walmart is another retailer striving to reinvent itself. Since Doug McMillon became president and CEO in 2014, the company has worked to recast for today’s omnichannel marketplace the legacy of Sam Walton, whose laser-like focus on delivering quality merchandise at the lowest possible price made Walmart the largest corporation in the world. The clearest signal of the company’s commitment to forms of retailing that extend beyond the traditional discount store and Supercenter remains the $3.3 billion acquisition of the e-commerce business a little more than two years ago, but its efforts in the digital realm encompass almost every aspect of its operations.

“Did you know we file thousands of patents a year in categories ranging from last-mile delivery to biometrics to augmented reality?” McMillon asked attendees at Walmart’s investment community meeting in October. “Did you know we’re pioneering the use of blockchain for food safety at scale and that we’ll be increasingly able to trace products directly to the farm in seconds? Did you know that we’ve developed a mobile video game to teach associates about store processes?

“Did you know we’re using machine learning across the enterprise from our supply chain to real estate to merchandising to legal and more? You may be surprised to learn that we’ve got tech hubs in 12 cities around the world. … Did you know that Sam’s Club has a team of behavioral scientists that work to gamify the in-club digital experience for new members in a way that drives member retention, and we did it in three months?”

Walmart is clearly a very different place than it was during Walton’s time or even that of McMillon’s predecessor, Mike Duke. And what’s true of Walmart is true of the broader mass retail sector. If Kroger, WBA and Walmart are working to change the rules of the game, so are Target, with its small-format strategy and commitment to omnichannel capabilities; Albertsons Cos., an early entrant in online food retailing and an innovator in such areas as meal kits; and CVS Health, whose recently finalized $78 billion acquisition of Aetna promises to transform health care and, in the process, redefine community pharmacy.

Not all of these bold experiments will bear fruit, but the fact that competitive forces have caused leading retailers to concentrate so many resources on improving their business should ensure that access to quality merchandise at sharp prices and customer service will improve markedly. The ultimate winner in the retail arms race will be the consumer.



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