Albertsons Cos. president and chief executive officer Vivek Sankaran recently spoke with Mass Market Retailers editor-in-chief Jeffrey Woldt about the need to remain nimble and flexible as consumer behavior changes, the company’s response to COVID-19, and Albertsons’ growth strategy. This is an edited version of that conversation, which is available in video form on massmarketretailers.com.
WOLDT: What lessons did Albertsons learn when the first COVID-19 surge hit, and how are you preparing to deal with an unfortunate second surge?
SANKARAN: When the first surge hit, it was a bit of a fog we were all operating in, searching for the best answers. We called people in Italy, who were ahead of the curve and learned from different parts of the world. And we quickly came to the realization that a few things matter.
First is safety. And so we put a lot of energy into the safety of our associates. I’m always a believer that if our associates feel safe, then they’ll make the customers feel safe. And that’s exactly what happened. And we invested tremendously in that. We made sure we invested in our associates, including with appreciation pay.
The second thing was supply. What I learned in this pandemic is it’s not about muscle. It’s about being nimble and flexible in supply. I’ll give you an example. We ran out of chicken quickly. But there were restaurant distributors with a lot of chicken, except it was in big packages, ready to go to restaurants.
But we have butchers in our store. So we brought the chicken in. We trimmed it, packaged it, made it ready for families. That’s the kind of flexibility that was needed, and we’ve kept that.
So in anticipation of a second wave we’ve started preparing on supply and safety. Safety protocols have advanced so far. And on the supply end we are more prepared for the second wave. And I’m thankful for that because I think we’re seeing an early surge in some of the sales. Not like last time, but we are seeing it.
WOLDT: Do you think that not only Albertsons but the grocery supply chain as a whole is ready for this second wave?
SANKARAN: Much more ready, I think. And I think you’re going to find the consumer, too, is better prepared. They may pick up a little more toilet paper, vitamins and disinfectants. But I think people are going to be more stable when it comes to the food consumption. And the supply chain is good.
WOLDT: The pandemic, as you alluded to, is causing a lot of shifts in consumer behavior. Maybe you can talk a little bit about how that fits in with your evolving strategy at Albertsons.
SANKARAN: Yes. The shift in behavior that we saw and we’re still seeing is that people are coming to the store less often, but when they do come they’re buying a lot more.
And then of course they are making use of our omnichannel capabilities, either by ordering online and picking their groceries up at the store — Drive Up & Go, as we call it — or they are ordering online and having their purchases delivered to the home. Now what we are finding is that when they come to the store to do the full shop, when you step back and think about the behavior at home, which is eating a lot more at home, they’re anchoring their shop on the fresh categories.
So you’ve got to have great produce, great meat, great variety of it because they’re cooking at home. And then they want variety in the store, so they can finish their shop. So they want the spice that’s hard to find or the vegetable or organic produce that’s harder to find. They want to finish that shop. And we’ve always had an advantage there. And it’s become a bigger one in the current environment.
And then with the rest of the store, we carry a wide variety of product. We believe in variety. And while we have great own brands, we’re also a house of brands. So our customers can finish their shop in our stores. We’re gaining market share, as a result of that.
And then, of course, they have stepped up their desire to use e-commerce. And we stepped up with them, and we still have room to grow with that part of the business and rapidly improve it.
WOLDT: You reported some very strong second quarter results, including a 243% surge in e-commerce business. In light of that shift, both at Albertsons and throughout the industry, how will the store continue to evolve? I know you’ve done some innovative work in your stores in Boise, and other places. How do you see the store changing, going forward?
SANKARAN: If I go back a couple of years, e-commerce would have typically accounted for 2% or 3% of a store’s business. At that scale, you don’t get enough leverage. You end up adding resources to do the e-commerce and, at the same time, taking resources from other parts of the store.
Now you’re seeing it at scale. And when it gets to scale, we are stepping back and asking ourselves how we want to think about the overall labor model in a store, and how we can optimize that, giving up certain things and adding other things. What’s an example? Hold more case-pack water in the back rack of the store, so somebody doesn’t have to put it on the shelf, and then bring it back to a separate location for the e-commerce customer. Just hold it in the back room, and pick it out of there. That is the kind of adaptation we’re making.
I am a manufacturing engineer by training. I used to put in industrial warehouse systems and such. And I was in our San Jose store, where we have a micro-fulfillment center. I never thought I’d see a day where you have an automation in the back of a store that enables e-commerce, really, to make a step change in the picking algorithm and the picking speed that we have.
But that’s where we’re heading. I think you’re going to see things blurring, technologies blurring boundaries, so that what was a DC before is in a store. Those changes will allow us to not only serve the customer but to better optimize our labor.
WOLDT: And do you see an auto-replenishment sort of function, where you meet the needs of consumers, sort of as a just-in-time delivery function?
SANKARAN: We think speed in delivery matters. I think there are two models that work in America. One is drive up to a store and have somebody put it in your car. The second is shorter and shorter delivery windows. In both those cases, if you think about the American consumer, she is in more control. Nobody likes waiting at home for four hours for you to show up in any five-minute window and deliver groceries. People like control.
In the Drive Up & Go, she picks when to show up to the store. We are waiting on her. So I think those are the two modes. But to your point, I think you’re going to find the window starting to shorten, as a competitive piece.
WOLDT: And, so far, which model do your customers prefer?
SANKARAN: The fastest-growing piece for us is Drive Up & Go. People prefer coming to the store, and it depends on your location. Some of our banners are 100 years old, and so they’re sitting in great locations, close to where people live. And I think the Drive Up & Go works well for us because you’re passing our store, going home or going to work. And you’re so close, in that range.
WOLDT: Sure. Let me ask you this. We talked about COVID, in relation to your food business. How is it affecting your pharmacy and HBA business?
SANKARAN: All of that, because people have come into the store. They’re consolidating their trips, so you’re seeing everything go up. We geared up a lot more this year for immunizations, so for flu, and we are gearing up for the vaccine, when that comes. I hope it comes soon. We’re gearing up for that. So we are being, let me say, of more service to our customers because of the capabilities that we have. But it’s lifted all categories in our business.
WOLDT: Let me ask you a different kind of question. The new Albertsons has grown through acquisition, and it’s really become a force in a very short time, by that avenue. As you look ahead, do you see that continuing, or do you intend to focus on omnichannel and other things?
SANKARAN: We are very good at it, Jeff. And so we are acquiring Kings and Balducci’s in the Northeast. That hasn’t closed. But think of that acquisition. What it does for us is it expands our presence in the contiguous market, with a really strong brand anchored in fresh that we can now connect to our existing distribution centers and our existing management team.
We like those, and we’ll continue to look for those because we create value very quickly with those. The large ones, who knows? Those may or may not come, but we’ll continue to look for these tuck-ins.
WOLDT: You would agree, though, that there is likely to be more consolidation in the grocery business.
SANKARAN: That will be the trend. It’s hard to operate without scale in this business, because we just talked so much about technology. That’s own brands. That’s technology, not just in e-commerce but how you operate everything in your business anymore. And those things lend themselves to a lot of leverage from size. And that’s why I think you’ll see consolidation.
WOLDT: You mentioned own brands. I know that’s an important focus for you. Maybe you can talk about how that part of your business is growing and evolving.
SANKARAN: Yeah, 18 months ago, I was on the other side, and I always said national brands are better than own brands. But you see a different reality when you’re on this side of the business. We are going to be a house of brands. We want people to finish their shop in our store. But the own brands for us provide a couple of sources of value for customers.
Remember, the own brands today are different. If you look at own brands 20 years ago, you always had to compromise some quality and you got a lower price. Not today. Today you don’t compromise quality, and you get a lower price because we’re not spending the marketing money that a CPG company might spend.
And some of our own brands, like O Organics, Open Nature, Waterfront Bistro — these are brands that provide some lifestyle choice that the customer is making. And we find both those, the Signature or these other lifestyle brands are all growing, 1,000 basis points more margin for us, so we love it.
But I tell my team, “Hey, you guys are all going to earn your way to the shop, just like a CPG company, so think like a CPG company.”
WOLDT: And you have your own research and development capabilities for own brands, yes?
SANKARAN: Yes, absolutely. And that was one of the great things that came from the combination of Albertsons and Safeway. Safeway was further ahead on own brands, like with a couple of the brands I mentioned. We brought that together, built on that capability, took it more broadly in the country.
WOLDT: How much of your business is accounted for by own brands at this stage?
SANKARAN: Our penetration was 25.6% when we closed last year. So what you’re seeing, as you go through this pandemic, because people are buying everything on the shelf, so there’s a slight shift, but it will come back. It’s just a matter of stabilizing.
WOLDT: You alluded to your experience in the CPG sector. You also worked for McKinsey.
WOLDT: Maybe you can say how that experience has influenced your view of the grocery business in your current role.
SANKARAN: First, I never take myself too seriously. There are a lot of great people in the company who do so many amazing things, every day. But I’m a lucky guy, that I’ve had a chance to work at two great companies like that. McKinsey was about critical thinking, problem solving, because one of the things you do at a firm like McKinsey is you always get thrown into very different situations.
One day it’s oil. Another day, it’s an insurance company. Another day, it’s high tech. So you learn how to critically think and solve problems from first principles. PepsiCo, and especially my eight years at Frito-Lay was all about learning to execute. And so they took the consultant a little bit—shrunk that down a little bit, and made me get things done.
And I brought that combination. I think that combination has helped me here. This is an industry going through a lot of change, and so the problem solve, I love that. I love thinking through where it might go. At the same time, retail is about execution every hour of the day. And so that’s helped me a lot as well.
And the last thing I’ll say is that I know how the CPGs think.
WOLDT: As you talk about the combination of skills, I suppose they both become very important as you look to counter moves like Amazon’s recent decision to enter the field of pharmacy.
SANKARAN: Correct, yes. This is forever changing. And they’re not the only one. There are many players coming up with different moves. And we are, too. And so it’s an ever-changing game, and I keep my team focused on that consumer. And we are going to build on our equities. Our equities are food. We have pharmacies.
There’s a physical aspect to the pharmacy, too, Jeff. We provide immunization. There’s a set of customers who know the pharmacist, trust that pharmacist. There are some of those things also that are important in that aspect. But you’re right. It’s always changing.