ECR in the e-grocery Business
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1 ECR in the e-grocery Business Johanna Småros TAI Research Centre Helsinki University of Technology Vesa Kämäräinen TAI Research Centre Helsinki University of Technology Abstract The Efficient Consumer Response (ECR) development movement has addressed issues such as supply chain efficiency and consumer value creation in the brick-and-mortar grocery industry for nearly a decade. Currently ECR is moving into the field of e-grocery shopping as well. An interesting question is, however, whether ECR actually can provide the support necessary for getting the e-grocery business on its feet, or whether it will, in fact, stand in the way of development. This paper looks at two of the main focus areas of ECR - supply management and demand management - and examines how well the existing ECR ideas and improvement concepts suit the e- grocery development. Keywords: Efficient Consumer Response (ECR), e-grocery business, electronic grocery shopping, category management Introduction At present, the future of the e-grocery business remains uncertain. This emerging business model is faced with two basic problems: attaining logistical efficiency and evolving from a niche market to a mass market. These problems are interrelated and should, therefore, be addressed simultaneously. Logistical efficiency is crucial for turning e-grocery into a profitable business, and for reaching a cost level that appeals to the consumers. However, a prerequisite for investing in the infrastructure, such as distribution centers, needed for attaining distribution efficiency is sufficient volume (see for example Yrjölä, 2000; Powell, 2000). Building sufficient volume, in turn, is based on giving the consumer value for her money by offering affordable prices, an appealing shopping experience, as well as meaningful products and services. In the brick-and-mortar world, similar challenges related to logistical efficiency and consumer value creation are being addressed by the Efficient Consumer Response (ECR) development movement. Although ECR has to date mainly focused on the brick-and-mortar, supermarket environment, it is currently moving into the field of e-grocery shopping as well (see for example ECR Europe, 2000a; ECR Europe, 2000b). However, an interesting question is whether ECR actually can provide the support necessary for getting the e-grocery business on its feet, or whether it will, in fact, stand in the way of development. In this paper we will review the different areas and ideas of ECR and discuss how well they suit the e-grocery business model.
2 The current ECR framework as presented by ECR Europe (2000c), has four focus areas: demand management, supply management, enablers and integrators (Figure 1) with related improvement concepts. Here we will mainly look at demand and supply management. Demand management Enablers Optimize assortments Optimize new product introductions Optimize promotions Consumer value creation Common data & communication standards Cost / profit and value measurement Supply management Integrators Responsive replenishment Operational excellence Integrated demand driven supply Collaborative planning E-business B-to-B Figure 1. The four focus areas of ECR (adapted from ECR Europe, 2000c). Understanding the differences To be able to determine the applicability of ECR in the e-grocery environment, we need to understand how the new electronic business model relates to the brick-and-mortar, supermarket business model. Obviously, there are many similarities since the products that are sold, as well as the customers that are served, remain the same. The business idea of selling daily products to consumers also remains largely the same. Still, it would be an illusion to think of the e-grocery business as merely a bunch of virtual supermarkets placed on the Internet. One important difference between the business models is the home delivery service offered by e- grocers. Home delivery means that the grocery supply chain that previously ended at the grocery store or supermarket, now reaches the end user - the consumer. As a result, supply chain cost calculations and optimization efforts need to take this final link into consideration. Furthermore, home delivery and Internet ordering allow us to create totally new supply chain configurations in which the physical stores can be replaced with a more efficient distribution infrastructure, such as distribution centers (see for example Macht, 1996; Jaakola & Holmström, 2000). Another key difference is a shift in focus from physical products to what we here call perceived products. The e-grocers deal with displaying information rather than physical products, and instead of optimizing shelf space they have to focus on organizing the information in a clear and appealing way to make shopping easy and interesting for the consumer. Finally, e-grocery shopping introduces a new dimension to the grocery business - services that support the consumer's purchasing process. Physical stores mainly offer their customers a range of products and an agreeable shopping environment. In the e-grocery world, however, the service offering can be much more extensive. Since the consumer is able to access the web store from home or from the office, e.g. while compiling a shopping list or order, the e-grocers can offer their customers planning services that make it easier for the consumers to determine what products they need. This increases the value perceived by the consumers, and may entice them to buy more. An example of a planning service is the searchable recipe databases that some e-grocers have embedded in their web stores (see, for example, S-Kanava, 2000). In fact, e-grocers can do even more for their customers - instead of having the consumer order all items needed, the e-grocer can automatically replenish regularly used products. Streamline s Don t Run Out service, where the consumer can select products to be automatically delivered every week or, for example, every month, is a first step in this direction. (For more about e-grocery services see Småros et al., 2000).
3 The e-grocery business thus presents several new challenges and opportunities. Next, we will discuss how they affect the ECR ideas of supply and demand management. Supply management In supply management, ECR emphasizes two things: systemwide efficiency, i.e. overcoming interorganizational barriers that reduce total supply chain efficiency, and demand as the main driver of the supply chain, i.e. consumer demand "pulling" the goods through the supply chain (Mitchell, 1997). The e-grocery business offers several opportunities to get closer to these ECR ideals. Currently, the grocery supply chain is often considered to end at the grocery store. Due to this, little attention is paid to the time consumers spend getting to and from the store, or the time they spend picking products or standing in line at the store counters. However, when goods are ordered via the Internet, and the orders picked and delivered by the e-grocer, efficiency becomes important - even in the last link of the supply chain. Performing these tasks more efficiently than the consumer, and thus increasing total supply chain efficiency, is not difficult. The problem is that since consumers are not used to putting a price on their leisure time, or even car costs, they are unwilling to pay for the service, although it saves them time and money (Yrjölä, 2000). E-grocery shopping also offers an opportunity to cut supply chain costs. Calculations indicate that by by-passing the expensive supermarkets and using distribution centers that are optimized for efficient picking and transportation rather than appealing presentation of products, operational costs can be cut significantly - potentially even so much that the cost disadvantage of this new way of operating (including home delivery and picking costs) disappears (Macht 1996; Jaakola & Holmström 2000). The e-grocery business model thus has the potential to increase total supply chain efficiency while at the same time offering added value to the consumer in the form of home delivery. Moreover, inventory levels are likely to drop in the e-grocery business model. This is because distribution centers can operate according to a flow-through material handling philosophy while supermarkets need to keep excess inventory to be able to display the products and due to difficulties in inventory control. In the e- grocery business model, the consumer demand signal, therefore, flows less distorted through the supply chain. The e-grocery opportunities are clearly in line with the ECR goals, but how well do the practical supply management improvement concepts suit the e-grocery development needs? When looking at the three groups of improvement concepts - responsive replenishment, operational excellence and integrated demand driven supply - it is clear that they continue to be very relevant in the e-grocery environment. Most of the practical improvement concepts organized under these headings also sustain their importance - synchronized production and integrated suppliers are just as relevant as in the supermarket business model, and the same goes for concepts such as continuous replenishment and efficient unit loads. However, the existing improvement concepts do not cover the whole e-grocery development need. Some important pieces are missing, especially in the areas of distribution center design and efficient home delivery. The knowledge about picking systems and product flow techniques that can found in other businesses has to be studied and tested to understand how it is best applied to the grocery business. Small shipments and delivery to residential areas is also something that needs to be further developed. In addition, methods for increasing home delivery reliability as well as the reliability of the electronic storefront are needed. Here, the ECR movement could be of much help by encouraging research and practical testing in these areas, as well as by packaging the results into best practice improvement concepts in order to distribute the knowledge and experiences.
4 Table 1. Current ECR improvement concepts and their relevance in the e-grocery business. Improvement concepts Importance in the e-grocery business Missing pieces Automated store ordering - Responsive replenishment Continuous replenishment Product flow techniques Transport optimization Just as relevant Increased importance due to role in distribution center design Increased importance due to increased amount of small shipments Increased opportunities for consolidation Distribution center design (use of product flow techniques, automation etc.) Planning and control tools for efficient home delivery Efficient unit loads Just as relevant Operational excellence Reliable store operations - Reliable distribution Just as relevant Reliable production Just as relevant Reliable home delivery Reliable electronic store front Integrated Synchronized production Just as relevant demand driven supply Integrated suppliers Just as relevant Completing the ECR toolkit with some new practical improvement concepts is not enough, though. What is often overlooked is that the e-grocery business brings with it some completely new elements to grocery supply management, of which running two business models in parallel and the opportunity to offer the consumer logistical services are two of the most important ones. So far, e-grocery shopping is for many grocery retailers a complement to their main business, the brick-and-mortar grocery business. This means that many retailers run both business models in parallel. The challenge here is to avoid duplicating efforts and instead striving to share resources between the operations. Important questions are, among others, how the existing grocery store infrastructure can be used in e-grocery operations, and whether some parts of the new emerging e- grocery infrastructure can replace less efficient parts of the traditional grocery supply chain. Rebuilding supermarkets to contain picking areas for e-grocery orders is, for example, a concept that could present a low-investment solution for grocery chains that want to get into the e-grocery game (Yrjölä, 2000). However, the current ECR strategies and concepts completely lack support for this type of development. Another interesting new dimension is the e-grocery opportunity to offer value added to the consumer in the form of services, such as planning and replenishment services, that support the consumer's purchasing process. These services make it possible for the consumers to choose between different ways of purchasing, as well as to choose how much time and effort they want to spend selecting different kinds of products. These services can also benefit the e-grocer by increasing consumer loyalty. In addition, by extending continuous replenishment to the household, the e-grocer can get more time to react and in this way increase its own operational efficiency. (Småros & Holmström, 2000). Unfortunately, the service aspect of e-grocery shopping seems to be very far apart from the very product centered ideas and methods of ECR. Therefore, significant effort is needed if ECR is to be of any use in this area of development.
5 Demand management The e-grocery discussion often focuses on supply management, but demand management is, as mentioned earlier, just as important a piece of the puzzle. ECR demand management focuses on: optimizing assortments, optimizing new product introductions, optimizing promotions and on creating consumer value in general. E-grocery shopping affects all of these areas. In the brick-and-mortar grocery business of today, there are significant problems related to new product introductions. Despite the incredible amounts of new products, or new variants of existing products introduced each year, only a small amount of these introductions can be considered successful. (ECR Europe, 1999). The e-grocery business model cannot solve all of the problems, such as lack of communication between retailers and manufacturers, but it can make some things a bit easier. One e-grocery opportunity is test marketing. Since the e-grocery store, as opposed to the physical grocery store, does not need to look the same for each consumer that visits it, new products can first be made available to a small, chosen group of consumers before a general product launch takes place. This makes it possible to analyze some initial consumer reactions before deciding on how to continue the launch, or whether to continue it at all. Another opportunity that arises in the e-grocery business is gathering comments and feedback on-line from the consumers. This information can then be used when developing new products. Furthermore, some of the risks related to product introductions can be diminished in the e-grocery environment. For example, when launching a new product in the e-grocery business model, there is no need to fill up supermarkets with a lot of stock for displaying and marketing reasons - instead the products are allowed to flow through the distribution centers according to real demand. This diminishes the risk of an introduction failure leading to high amounts of unwanted stock being left in the supply chain. Efficient promotions are a somewhat controversial part of ECR. Although many would like to get rid of promotions altogether due to the disturbance they cause in the supply chain material flow, promotions are still very much used. However, regardless of promotions being good or bad, the e-grocery business offers some opportunities in this field as well. The electronic environment makes it possible to target the offerings more precisely - not all promotions have to be made accessible to all consumers. Furthermore, the e-grocery business makes it possible to compare different promotion tactics by making one offering to some consumers and a different one to others, and analyzing the results. This, however, requires much data analyzing capacity to be of any use. In addition to the opportunities, there are also some challenges. Displaying promotions and making them stand out in the eyes of the consumers becomes more difficult in the e-grocery environment, where products are displayed mainly as lists. Although the discussion concerning e-grocery effects on demand management has mainly focused on promotions and product introductions, the most radical changes will take place in the category management process that is the heart of demand management and assortment planning in particular. Category management is based on the idea of managing product categories as strategic business units (ECR Europe, 1997). The category management process defines the categories, gives them business roles, assesses their performance and sets performance measures. The process also defines strategies for realizing the category's performance objectives, as well as tactics for carrying out the strategies. Finally, the tactics are implemented and the results reviewed, which starts another round. (See Figure 2.)
6 Category review Category definition Category role Category assessment Category performance measures Category strategies Category tactics Plan implementation Category definition: to determine the products that make up the category and its segmentation from the consumer s perspective Category role: to assign a role for the category based on a cross-category comparison considering consumer, market and retailer information Category assessment: to conduct an analysis of the category s subcategories, segments etc., by reviewing consumer, market, retailer and supplier information Category performance measures: to establish the performance measures and targets Category strategies: to develop the marketing and product supply strategies Category tactics: to determine the optimal assortment, pricing, shelf presentation and promotion tactics Plan implementation: to implement the category business plan through a specific schedule and list of responsibilities Category review: to measure, monitor and modify the category business plan on a periodic basis Figure 2. The category management process (adapted from ECR Europe, 1997). Currently, e-grocery category management seems to be done according to a similar process as in the physical store environment, or even more commonly, not done at all. In many cases, the categories are just copied from the supermarket environment. However, e-grocery shopping will bring changes to every level of the category management process. In the short term, e-grocery shopping mainly affects the lower level category management activities. In the e-grocery business it is easier to change category contents and layouts than in a physical store, which means that modifications based on the results of the category review can be made faster (Pramataris & Doukidis, 2000). Other, even more significant, short-term changes affect category tactics and performance measurement. Some of the old performance measures, such as profit in relation to shelf space or inventory turnover, become irrelevant in the new electronic environment, and need to be replaced with new ones. Category tactics such as shelf representation also change. Instead of focusing on how much space should be allocated to each product, or how the products should be placed on the shelf, new aspects need to be dealt with. Important things to consider are, for example, how many products per category or subcategory the consumer can grasp, and whether the order of the products makes any difference (currently products are usually displayed in alphabetical order). Displaying the products in an enticing way is also a problem. A significant challenge is thus to understand the rules of this new electronic environment, and to use this knowledge in order to create an agreeable shopping experience. Here again, ECR support could be of great value. In the long run, changes that are even more radical are to be expected. Category roles will need to be reconsidered, especially when new services, such as planning or replenishment services are developed. Categories that in the brick-and-mortar environment are those that get consumers to visit stores may be automatically replenished in the e-grocery business. This obviously affects the way categories should be managed. The most radical changes, however, take place in the category definition step of the process. Getting rid of the physical restrictions means that it is no longer necessary consider aspects such as storage temperatures when creating categories. Also, since having the same product in two categories does no longer mess up inventory management, it becomes easier to create solution based, rather than product group based, categories. This means that the consumer can be offered new categories, such as healthy snacks or breakfast ingredients, in addition to traditional categories such as dairy products or frozen goods.
7 Furthermore, if the opportunity to customize or personalize stores according to consumer preferences is exploited, this can lead to the consumer defining her own categories. Of course, the e-grocer always has to organize the products to some extent, but the consumer can have the final saying about which products belong together. In fact, this is already happening in a small scale, since most e-stores make it possible for their customers to create personal shopping lists for different occasions. The consequences of personalization are mind-boggling - if the consumer defines the categories herself, what will happen to "managing categories as business units"? Is it even possible to manage a category that exists in many versions, and that keeps changing all the time? This presents ECR with the toughest challenge so far - adapting category management to a world without clear categories and without stability. The last demand management focus area, consumer value creation, seems to be too loosely defined to be of any real value. However, if this field is further developed, it can provide the support needed for developing the new e-grocery services. Conclusions Based on the previous discussion, it can be concluded that ECR can be very useful, but also harmful to the e-grocery development. The mission of ECR, as defined by ECR Europe (2000c) - "Working Together to Fulfil Consumer Wishes Better, Faster and at Less Cost" - is just as relevant in the e-grocery business as in the brickand-mortar business. Many of the practical improvement concepts also sustain their importance. Instead of re-inventing the wheel, the e-grocery business should, therefore, take advantage of the development efforts of ECR. Furthermore, the ECR movement provides the grocery business with a development framework that enables different supply chain members to get together and discuss improvement needs and co-operation - this is needed in the e-grocery business as well. Furthermore, ECR can bring forward new concepts that need to be examined and encourage the testing of new ideas, which is very important in this emerging electronic business model. ECR can also be used for packaging working concepts into best practices so that the knowledge can be spread. ECR can thus be very useful. However, due to its somewhat narrow perspective, ECR can also hinder e-grocery development. ECR's focus on products rather than services, and savings rather than increased value, may turn existing ECR companies into slow movers in the e-grocery business. If the ECR companies blindly go for taking the current ECR ideas, such as category management, and using them as such in the e- grocery business, they will not be able to realize the full e-grocery potential. ECR can be a working development vehicle if and only if it is flexible enough to manage a change of focus, as well as incorporate totally new elements, such as multi-channel operations and services. If not, a new development movement is needed to get to the real core of e-grocery shopping instead of placing supermarket duplicates on the net.
8 References ECR Europe / The Partnering Group, Roland Berger & Partners (1997), Category Management Best Practices Report. ECR Europe / Ernst & Young Global Client Consulting (with the support of AC Nielsen (1999), Efficient Product Introductions - The development of value-creating relationships. ECR Europe (2000a), ECR in the Third Millennium - Academic Perspectives on the Future of Consumer Goods Industry, Brussels. ECR Europe / Roland Berger & Partners (2000b), Consumer Direct Europe - Shopping in the New Millennium. ECR Europe (2000c), [visited 06/13/2000]. Jaakola, T. & Holmström, J. (2000), Local distribution center for e-grocery, working paper. Macht, J. (1996), Errand boy, Inc., Vol. 18, Iss. 16, pp Mitchell, A. (1997), Efficient Consumer Response - A new paradigm for the European FMCG sector, Financial Times, Retail & Consumer Publishing, Pearson Professional Limited, London. S-Kanava (2000), [visited 06/02/2000]. Småros, J. & Holmström, J. (2000), "Viewpoint: Reaching the consumer through e-grocery VMI", International Journal of Retail and Distribution Management, Vol. 28, No. 2, pp Småros, J., Holmström, J. & Kämäräinen, V. (2000), "New service opportunities in the e-grocery business", forthcoming in the International Journal of Logistics Management. Powell, M - Distribution Director, Tesco plc. (2000), "A perspective on the key issues in the development of food home shopping in the UK", presentation at the CIES conference Supply Chain for e-commerce and Home Delivery in the Food Industry, Berlin, May 18 th - 19 th, Pramataris, K. C. & Doukidis, G. I. (2000), "The Category Management Process in the Virtual Retail Environment", ECR in the Third Millennium - Academic Perspectives on the Future of Consumer Goods Industry, ECR Europe, Brussels. Yrjölä, H. (2000), "Physical distribution considerations for electronic grocery shopping", working paper.
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