Building ecosystems around physical and online grocery offerings: An interview with Per Strömberg

Question: What are the most interesting trends in the grocery business now?

Per Strömberg: I see a few trends that have accelerated in Sweden. First, price sensitivity has increased, with consumers shifting to private label. Second, the scaling of online e-commerce is very important in Sweden. But it is not only online; everything that is digital, such as digital engagement solutions, is increasing in importance.

Furthermore, we clearly see a heightened consumer interest in sustainability and health in general, which is often related. In convenience food, we have seen a shift from ready to eat in grocery to delivery platforms like Foodora.

Question: How did your organization adapt to these trends?

Per Strömberg: In Sweden, we have a very strong market position, with 36 to 37 percent market share, which means that we are a mainstream player. The most successful players during the past year have been the more price-aggressive players such as soft discounters Willys and Lidl. We are therefore reviewing our value-for-money proposition, with more competitive pricing policies and attractive private label.

Online is something we have been working on for many years. We decided to partner with Ocado a few years back, and this year we will launch an Ocado customer-facing platform, as well as an automated warehouse early next year.

In the short term, we have scaled up our dark stores, which are distribution centers used exclusively to fulfill online orders. We have one in Stockholm, and we are opening one in Göteborg. In other areas, many of our independent retailers have successfully scaled their pickup and delivery capacity.

Question: Any challenges your organization is facing from these trends?

Per Strömberg: Given the global economic environment, we expect slower GDP growth and higher unemployment rates, which will make “price to value” even more important. We also expect this online push to continue. As COVID-19 starts to wind down, we will see slower growth rates, but we believe many of the customers that have now started to use online will continue to do so. In our research, 90 percent of customers claim that they will continue to do online grocery shopping, and 40 percent claim that they will use online shopping as their main shopping channel. Like all other players in Europe, we will therefore be challenged in terms of profitability online.

Question: What share of online grocery do you anticipate for ICA in Sweden?

Per Strömberg: At the start of 2020, we had a relatively low online share—around 3 percent in active stores. We ended last year at around 6 to 7 percent. We have seen that the more closed down society is, the more the online share goes up.

When we look at 2025, our target for online share is 7 to 8 percent, and then closer to 10 percent when you move into 2030. The longer the COVID-19 pandemic lasts, the more sticky consumer behavior will be. If customers are happy and satisfied, they will continue to do online shopping.

Question: What are the challenges to profitability in online grocery, and what measures are you are taking to improve it?

Per Strömberg: If you look at last year, when we scaled quickly, we didn’t get the operational efficiency right. That requires more time. So we suffered in terms of profitability, even though we delivered very strong numbers last year overall.

The main step we are taking now is our partnership with Ocado, which has two key implications. First, we’re going to have an automated warehouse where robots are picking the products, versus a store or dark store where picking is done manually. This means that you have more than twice the efficiency. The new automated warehouse will also allow for a long-tail assortment. The other element is the Ocado customer-facing platform, which is much better in driving profitability than the platform we have today. It can improve our margins by having proportionally more of our private-label and high-margin products, better promotions, and more efficient pricing. In addition, we are looking into media monetization levers as an additional source of income, leveraging our channels to advertise.

This increased profitability will be required to fund the further investments needed for the e-commerce infrastructure.

Question: Do you think quicker delivery models will play a major role going forward in contrast to classic, next-day, large-basket delivery models?

Per Strömberg: Recently, we have seen the average basket size going up on online. We also launched an alternative service in the countryside and to some extent in the largest cities, where we offer a more narrow assortment online, with a quicker delivery service as well as some ready-to-eat meals. This ICA Pronto service is used by some 100 stores and has been particularly popular with elderly people who couldn’t go to the normal stores during the pandemic.

Customers want to shop more frequently and they want faster delivery, which creates shorter lead times. In the short term, the huge increase in demand has made that challenging. Foodora, for example, established three small dark stores that are perhaps more like small supermarkets, with around 8,000 to 10,000 SKUs. They can supply customers within the Stockholm area in less than an hour. We will definitely need to meet this kind of instant service level; whether we do that with our ordinary service or with our Pronto service remains to be seen. There will also be room for alternatives like the picnic model, where consumers can sign up for a slot on a regular delivery route.

ICA was quite late to enter online. The market was started by two pure online players in grocery. Over the past three or four years, winners in the market have been mostly omnichannel. The pure online players have suffered, because they offer fewer alternatives and are more expensive. They don’t have the option of letting the customer get their groceries at a pickup point such as a store and they do not have the scale of the winning omnichannel players. That means when they offer home delivery, they need to have much higher prices for home delivery in a price-sensitive market.

We will continue to challenge the pure online players. They have a decent volume now, given the total demand, but they continue to lose market share. In cities, players like Foodora will compete too. For them, grocery is something more of a complement to the ready meals and the restaurant food they supply directly to customers’ homes.

Question: How do you see the big ecosystems like Amazon affecting grocery?

Per Strömberg: Amazon just launched last autumn in Sweden, but is not offering food to date. They will be very persistent, so they will probably get it right one day.

One of the things that we focused on the most is building an ecosystem around both our physical and online grocery offerings. We see that when people buy groceries online, they also buy other things like nonfood and pharmacy products or wine and spirits, and they want all the products delivered at the same time. We are working very hard to define what our future ecosystem should look like and how we can better complement our grocery offer with relevant products and services, so that it is unique.

The advantage we have is that we also have an extensive nonfood offering and are a market leader in pharmacy, for instance. Continuing to build that ecosystem will make us more competitive in the market, and it’s helping us build long-term loyalty with our customers.

The ecosystem will also make it easier to compete with Amazon or other strong local marketplace players. Questions we are asking now are, “How should we develop the physical ecosystem around our stores? What kind of neighbors should we target? And how can we extend our health offering?”

Question: Are you considering extending to a marketplace or any other partnerships?

Per Strömberg: When building our ecosystem, we will definitely partner up with other companies. We are actually starting a pilot next week so that people can shop for pharmacy products at the same time as their grocery online shopping. When we do nonfood, we will start with the products that we have in-house. But we will definitely also need partnerships with other suppliers, companies, and restaurants to continue to provide interesting offerings to our customers. There will be a marketplace, but we don’t believe that our marketplace will be as big or as broad as Amazon. We will be more focused on things that are more closely related to groceries and food instead of apparel or categories like that. People are not looking for a dress at the same moment they buy their groceries.

Question: What is your key learning looking back on ICA’s online grocery journey?

Per Strömberg: We did not put enough focus on the balance between scaling capacity and efficiency in our operations early enough. That has cost us from a financial perspective, and we have not been able to supply our customers in the way we wanted. Given our strong growth and the stronger growth than our competitors, we are still behind when it comes to the capacity side. I would say most of our learnings would be in that area.

This interview is a part of the Retail practice’s new annual report on the grocery industry, which summarizes major trends insights that are new and relevant for the grocery market, giving the reader a content edge and best practice guides. It is produced in collaboration with EuroCommerce, an organization representing the retail sector in the EU.

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