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dmitry_melnik
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SAP S/4HANA Retail Solution Article Series (Blog) for Grocery Retailers

By Dirk Dreisbach and Dmitry Melnik

This three-blog series focuses on grocery retail and the main challenges the industry is facing today. Using concrete customer examples, we describe key success factors such as customer loyalty, offering an attractive assortment, optimizing the supply chain, and the digitalization of customer interaction. With the help of SAP S/4HANA and other SAP solutions, modern grocery retailers can handle Big Data volumes, make the right decisions regarding the size and selection of their assortment, and streamline the most relevant end-to-end processes. Or, to sum it up – to do everything to satisfy customer needs!

We composed this article series (blogs) from the standpoint of the end consumer and organized them in this logical sequence: customer loyalty and assortment, differentiation from other retailers, and evolution of the omnichannel for retailers.

 

Part 1: How SAP S/4HANA helps retailers increase customer loyalty and offer an attractive assortment

Part 2: S/4HANA Grocery Retail Blog part 2 | SAP Blogs

Part 3: SAP S/4HANA Grocery Retail Blog part 3 | SAP Blogs

Situation

Friday afternoon in Chicago was sunny, but the first November snowflakes had already started circling in the area. With her husband, Benjamin, ill at home, Mia turned her car onto the main street and looked in the rearview mirror. Seven-year-old Jennifer and eight-year-old Thomas were chatting in the back seat about their homework and plans for the Thanksgiving weekend. The outlines of the local shopping center shined through the front windshield where the snowflakes started sparkling and reflecting the streetlights.

Mia lowered her speed, looking for the turn. Thomas glanced through the window and shouted, “Mom, let’s go to Walmart; I want that beef jerky we had last time! I loved it!” Jennifer grimaced at him, pouted, and said firmly, “No, Mom, we are going to Costco across the street. The ice cream at Costco is the best. All my friends love it!”

Mia smiled, thinking of the long shopping list her husband had left for her. In addition to her regular weekly grocery needs, she knew she should pick up some medicine for her husband, who had a cold. Furthermore, she had decided six months ago to become vegan and was conscious about the ingredients of the family food and the sustainability profile of the selected shopping locations. “Which shop should we go to?” Mia looked at her purse on the passenger seat, which held the Walmart membership card and the Costco membership card (link), and turned into the parking lot.

* * *


This situation illustrates some of the dilemmas that many modern grocery retailers face daily. How do you attract customers, how do you keep them, and how do you serve them in the most cost-effective way? In this blog, we examine grocery retail operations from the lens of a typical consumer, such as Mia and her family. This blog represents activities we performed with various SAP customers, and this approach proved correct given its customer centricity. So, what typical questions do grocery retail customers ask? In other words, what goes on in Mia’s head? Of course, she asks these questions:

 

  • What food does my family need this week? Do I have to consider some special needs?

  • Where should I shop? Or, described in a different way, where will my shopping be the most pleasant and effective?

  • Should I shop in person, or can we use an app and have the order ready for curbside pickup or home delivery?

  • Which retailer offers the best value for the lowest or the most reasonable price?

  • How can I reduce the overall carbon footprint, including the number of shopping trips, delivery services, and even recycling?


Customers face many other considerations, but these are clearly the fundamental ones. Some of these questions may seem too simple: after all, a typical family has a relatively stable nomenclature of their food and nonfood items, usually dictated by their cultural and dietary or health needs. And where they shop is typically determined by the proximity of the retailer. However, specific events, such as a Thanksgiving family dinner or an impulse purchase, may influence the standard grocery list as well as where the family shops. The same is true for online grocery shopping. Moreover, health preferences for products, the display of food and nonfood items, retailer campaigns, and promotions – not to mention different social events (for example, holidays, the Super Bowl, and so on) – can also influence consumers. These variables can affect the choice and size of the grocery basket, shopping venue, delivery methods, and so on. In other words, numerous factors complicate consumer choices, therefore generating respective retailers’ responses. Let’s examine some of these responses.

Retailers have evolved membership or loyalty programs into tools to incentivize consumers to shop at their particular stores. Not only do membership cards keep the consumer psychologically happy because of the discounts or redeemable points, but they also provide a wealth of information to the retailer about the purchase patterns. However, this immediately brings in the topics of Big Data and the need to analyze and act on the information collected from consumers.

The importance of handling Big Data regarding membership and high transaction volumes

One trend we at SAP experience among our customers is membership. This is true for various types of retail, not just grocery. Amazon.com Inc., for example, claims some 200 million Amazon Prime members (link) and Apple Music almost 80 million (link). Costco Wholesale Corporation, a significant retailer with almost $192 billion in revenue (source: 2021 Annual Report), offers $60 (Gold Star) and $120 (Executive) membership cards (link). These cards, carried by over 111 million members, represent approximately 2% of Costco’s revenue (page 34 of the 2021 Annual Report) but 58% of the operating profit (income before income taxes), according to the company’s filings with the Securities and Exchange Commission (Form 10-K for 2021 SEC filings). This is why, among other reasons, grocery retailers offering loyalty cards can afford deeper discounting. SAP experts believe that various forms of membership and loyalty cards will continue to drive consumer behavior in the retail grocery space and, for some retailers, will continue to be a source of their competitive differentiation, especially for personalized consumer offers.

Managing members, markups, and pricing on thousands of items and millions of transactions requires amassing significant amounts of data and using it smartly. This is where the value of SAP S/4HANA shines: it is an in-memory database that effectively supports Big Data, provides “Customer 360” capabilities supported by analytics and powerful visualization, and integrates with the SAP Customer Activity Repository application (link) and various point-of-sale systems (example). On the back end, SAP S/4HANA supports subscription management, large volumes of receivables, and complex pricing and bundling scenarios, which are especially important for seasonal campaigns that retailers run constantly.

Offering the right assortment to attract and keep consumers

As we saw with Mia’s example in the beginning, the breadth of product selection is one of the consumer considerations for choosing a retailer. Some retailers prefer to limit their selection in order to keep the costs down and pass the savings on to consumers; others seem to grow their assortment in order to attract consumers of all segments. What is the right balance here? The jury is still out, but we see that SAP customers increasingly invest in assortment planning and related capabilities: inventory management, inbound and outbound logistics, and so on. One of the assortment dimensions is health and sustainability. Consumer perceptions of the quality of food and its packaging is becoming one of the most significant considerations in retail business. In addition to proper labeling and managing product ingredient disclosures, this also encompasses private-label versus branded items.

Furthermore, many retailers carry either private-label or store-owned brand items. Here, the range starts with private-label products on lower price levels addressing mainly price-sensitive customers in the classical discount segment, followed by higher quality private labels competing with established branded products. Some grocery retailers even offer private labels on a premium or luxury level, making clear that the complete assortment can be replaced with a private label if necessary.

The rise of private labels and the increase of further product launches necessitate the retailer’s own packaging and ingredient disclosure. Even branded items sold on retailer premises must comply with the ingredient disclosure laws and regulations – and the retailer is a key stakeholder here. Customers demand healthier, more-sustainable products and packaging, and this demand triggers a complex interplay of recipe management, packaging, disclosure, and advertising actions by consumer product group (CPG) suppliers and retailers. What does it mean for the underlying IT system? The system needs to track all the items, including input ingredients, as well as trace all of them throughout the value chain, such as production, transportation, yard management, and warehousing. The system must also not only help ensure compliance but also help the retailer avoid misleading packaging or erroneous labeling. With SAP S/4HANA, retailers can track and manage the path of their products from “farm to fork.” This process can be further supported by blockchain technology solutions such as the Green Token by SAP solution.

As an example, FroSTA AG, a leading European supplier of frozen foods, takes pride in finding the right products and ingredients and complying with laws requiring ingredient disclosures. With SAP S/4HANA and SAP Business Technology Platform and using SAP Fiori apps, FRoSTA transmits agricultural and other types of data from seed to field to bag. A customer-facing Web page allows consumers to view ingredient and sourcing information across FRoSTA’s entire product range (link).

This is one of the many examples showing how SAP S/4HANA and related solutions enable product compliance and marketability and, as such, allow better connection with consumers who seek healthy and sustainable food.

We just glanced at some typical challenges and emerging trends that shape the relationships between the customer and their grocery suppliers. These are only a few of the factors that determine today’s decisions on food purchases by consumers like Mia and her family. What food items will Mia buy for her family? We don’t know the answer to this question, but we know that SAP S/4HANA and other solutions help ensure the full assortment of food and nonfood items in most grocery retailers around the globe. Every day, SAP solutions work to satisfy our basic demands. Although in this blog we largely discussed the retailer-consumer relationship in the context of food selection, in the next blog, we will examine this topic further, analyzing how retailers differentiate themselves to “stand out” and redirect the consumer traffic.

 

 
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