In this week's episode of Industry Focus: Consumer Goods, host Shannon Jones talks with the Fool's Dan Kline about what he's seeing at this year's Groceryshop conference. How is Target (NYSE:TGT) planning to grow its groceries? What are the biggest challenges facing smaller players, like mom-and-pops and convenience stores? How are the big guys, like Walmart (NYSE:WMT) and Target, using big data to improve their grocery operations? Where do Amazon (NASDAQ:AMZN) and Whole Foods fit into the picture? How can Beyond Meat (NASDAQ:BYND) really beef up its widespread appeal? What technologies are driving the most change in the grocery industry? What technologies are consumers rejecting? Tune in to find out more!
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This video was recorded on Sept. 17, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today, it's Tuesday, September the 17th. I'm excited about today's show for Consumer Goods. I've got Dan Kline joining us from Las Vegas. He is our boots on the ground for what is one of the largest, if not the largest grocery store, consumer packaged goods conferences out there. That's right, we're talking about Groceryshop. Dan, I can only say, I didn't even realize this was even a thing until you told me about it several weeks ago.
Dan Kline: [laughs] I have to be honest, I cover this industry, and this is year two of Groceryshop, and I spent most of my time here thinking it was the first year because I'd never heard of it. What Groceryshop is, is it's a convention for everyone in the grocery space. Major players -- Amazon, Target, Walmart, Instacart; mom and pops, and start-ups. And they're all dealing with the questions of, how are we going to get our groceries? How much is that is going to become digital? How much is going to stay brick and mortar? Where's the omnichannel mix? You're seeing a lot of solutions to a lot of questions. But we don't really know which ones consumers want yet.
Jones: Exactly. Just for some perspective, this is a massive conference, Dan. I was taking a look -- 33,000 attendees, over 200 speakers. You mentioned the long list of those high-end grocery store retailers, some e-commerce, some more big box retailers. You've also got start-ups coming as well, start-ups hoping to bring in some of that innovation. Truly a fascinating space.
Kline: It's big in that important people are here -- CEOs and top executives -- but it's small in that 3,000 is a pretty manageable amount. If you want to speak to someone, other than maybe the big keynotes, you can talk to them. You're seeing a real exchange of ideas. The challenge isn't for the biggest players. Amazon, Walmart, Target can all try everything and see what works. But if you're a smaller chain, even if you're a Publix, which is a pretty big chain, you have to decide where you're going to invest your money. Is it cashier-less checkout? Delivery? Drones? And I don't think anyone knows the answers because the digital part of grocery shopping is still a teeny, tiny part of the overall business.
Jones: Exactly. That's a good segue to talk more and set the stage for a lot of our listeners who may not be familiar. Can you just talk about where the market stands right now?
Kline: When you look at the big players -- and we'll keep talking Target, Walmart, and Amazon over and over again -- Target and Walmart are both using curbside pickup in a lot of markets. That's been a very successful driver for Walmart. We have a story coming out tomorrow that talks about how curbside pickup has actually driven traffic inside their store. Somehow, it helps. Target and Walmart are also both doing same-day delivery. Slightly different models. Walmart's rolling out a subscription service; Target bought Shipt, which is already in a lot of markets, so Target is leading by a little bit. Amazon, of course, is pioneering one-day delivery and same-day delivery from its Whole Foods stores, as well as some of its Amazon Prime Pantry. So, you've really got this push toward immediacy from the big players. That sets a bar for everyone else. But the reality is, everyone else has options. They can partner with, say, an Instacart, and the negative of that is, there's a cost involved with that. Everyone tries to downplay that. Walmart says, "Well, we charge the same prices in store and online, aside from a delivery fee," but the reality is, whether you eat the cost or pass it on to consumers, it does cost money to pick these orders. Instacart mentioned having 100,000 people. Walmart said they had 45,000 people picking orders. This is not fully automated, and maybe it won't be. We're figuring out where all of this is, and what consumers are going to want. That's sort of the question hanging over this. Is curbside pickup a real convenience? You still have to go to the store. Is it better to just get it delivered? Or, do people really want to put their hands on everything they buy, and they're only going to buy, like, kitty litter, water, other big things that are not all that fun to shop for?
Jones: Such a good point. When you think about the logistics involved with same-day delivery, even curbside pickup, it's still an expensive undertaking, no matter how you look at it. Of course, with grocery chains in general, many of them already are operating on razor thin margins. So, for a lot of the smaller players, it does become much more difficult, much more expensive, to think about offering similar services that these big names can do.
One thing I want to go back to is on Target. Target, I think, is so interesting in the grocery space. Compared to some of the other bigger players, Dan, Target has not really carved out a name for itself just yet in the grocery space. It's got the grocery section, but there's not necessarily a brand or anything that lures me there other than the fact that I just happened to be in the store for a pair of shoes for my daughter, and I realize I need to pick up something. But, that's changing, right?
Kline: That is changing. A story that's on fool.com today is, Stephanie Lundquist, the President of Food and Beverage for Target, was one of the keynotes. And she talked about exactly that. Target was a place that had groceries, but they didn't have a Target approach to groceries. The headline of her speech, and of my article, is How Target Plans to Bring the "Tar-zhay" Magic to Grocery. What they're doing is they're launching a company-owned brand that pulls together a whole bunch of other brands they have, and has a quality standard. They're looking at their shelves and saying, "OK, this is why people like shopping at us for other things. How do we do that in grocery? How do we make it more distinctive?"
I'll say that the store redesigns -- we've talked about on the show before -- there is a completely redesigned Target near my second home in Davenport. That sounds better than it is. Davenport, Florida, near Disney World. That Target is optimized. You walk in, and the things you need right away are right up front. Because it's a vacation area, there's a lot of grab-and-go vacation stuff. The wine section is amazing. The liquor store. All of the produce looks good. Everything is Target-ized in a nicer way. That's where the whole brand is going. They're putting a distinct Target feel on grocery. And they're not there, but they clearly have a strategy for it.
Jones: Yeah, a lot to watch there. Going back to the conference as a whole, Dan, what would you say from a high level is the overarching theme of this conference?
Kline: There's two things. One, I would say, the democratization of technology. What I mean by that is, you remember when a few years ago, it was a completely unique thing that Starbucks had mobile order and pay. Now, there's white-label mobile order and pay. If you and I open a coffee shop tomorrow, that could be an option we could integrate, and we could use Square and essentially have most of what Starbucks has without investing the money Starbucks put in. Well, there's companies here offering things like cashier-free checkout. Now, when Amazon first launched that at Amazon Go, it was 1,000 stories. It was, "Oh, my God, you can just walk in and it knows what you're buying? And it charges your credit card?" Well, that's something a local convenience store can offer.
The biggest challenge with all of that is, if I'm a local convenience store, is that where I put my money? Is it delivery? Is it some sort of next-generation driverless technology to deliver orders? Is it high-end coffee? We don't know the answer. That's what everyone is talking about. As we're making investments, what should it be? Yep, I could automate my whole back end. I saw this technology at a show put on by the same people, Shoptalk, earlier this year. At Shoptalk, what we looked at was a 10,000 square foot unit that could automate picking of a lot of these orders, get rid of some of the human part. That's being used by some grocery chains. Now, is that where it makes sense for them to invest their money? Or, should they be automating delivery? Or, do they have to do both? So, there's really an open question. That boogieman of getting rid of people from some of this, which takes out cost in the long run -- not in the short-term -- that's hanging over everything, and nobody really talks about it that much.
Jones: Yeah. Big investments being made in this space. We talked a little about a lot of the infrastructure and investment needs to take the grocery store model to the next level. Dan, from this conference, what do you think is the biggest problem or opportunity a lot of these grocery chains are investing in right now?
Kline: It's really figuring out your infrastructure and supply chain. We've moved from a model where you were bringing in pallets of stuff, putting it in a storage room, then moving it to shelves in pretty big numbers. Now, alongside that, you have to have an operation that does picking for individual orders. And in some cases, those orders are going two different ways. One of the things Walmart talked about is, the person picking an order does not know if it's for curbside pickup or for delivery. You have to figure that out, put in a system, and know what you're going to need. And that's a really high-end inventory thing. There's a lot more choice for consumers. I don't know about you, but I'm not going to be happy if they don't have the exact kind of almond milk I buy, or whatever other very specific thing it is. Companies that operate on a very gross level are now having to operate on a very, very fine level.
Jones: Yes. And almond milk is important. I stock at least two cartons in my refrigerator at all times. I think another area, too, Dan, just think about fresh produce. Even as I've tried some of these curbside pickups and even same-day delivery, that's just one area where I still want to go into a store and literally go and look at the produce, or even meat, then actually pick it up and pay for it. Do you see that being broached in a conference like this?
Kline: Walmart talked a lot during their keynote about training people to pick stuff. I will say, I use Instacart, I've used Amazon's service, and I find some things a little bit difficult. Sometimes you order something -- like, "I want a pound and a half of salmon." And maybe the piece of salmon you get is really thick on one end and really thin on the other, it's hard to cook, it's not what you would have picked. The other thing I've had real problems with is samples. I think I've told you this story personally. I ordered gluten-free rotini, and they were out of it. And now, Instacart actually has technology to pick replacements, but this didn't exist a few months ago. And they went, "Oh, we're out of gluten-free rotini. I'll make the substitution. I'll get regular rotini," which, of course, is a terrible substitution. They would have been better off getting a different pasta shape. So, you're seeing technology fix some of that. But, yeah, they can't really figure out if you're going to want an orange that's a little more orange or a little less orange or exactly what it is or what you want your raw chicken breast to look like. Those are things that I'm not sure we're there yet, as far as the technology goes.
Jones: Also, with any conference, especially as an investor, one of the things you always want to keep an ear out for is, what's the buzzword that keeps on coming up the most? No different here with Groceryshop. Dan, what is that one word with this conference?
Kline: It's data. The one thing you know as a grocery chain is what people are buying, when they're buying it, how they're buying it. What they're analyzing is, are quantities changing for home delivery? Is curbside pickup different than in-store? They're absolutely crunching it so they can figure out, what goes on the shelf? What stays in the back? What don't we need anymore? Can we cut out certain SKUs? Do we need to stock more? Really, everybody talked about data and AI and different types of learning, all driven by the information they have collected.
Jones: You hear a lot of companies even outside of the space talk about the importance of data. Sometimes they'll even try to put a dollar figure on that. But, it's one thing to have access to data; it's a whole 'nother thing to actually utilize it in a way that gives you some sort of advantage and makes you better than the competition. Of course, we're in the information age right now. Information can be a competitive advantage if you're using it in a way to adapt faster. I happened to see some of the start-ups that were at this conference. There was one that was intriguing to me. Basically, after you make that purchase decision, they'll actually start tracking how often you use the product when you're at home. Dan, I don't know how I feel about that.
Kline: [laughs] Yeah. Look, I think some technology, there's pushback. If you remember, when Amazon used to have the Dash button, where you could put it next to, say, your washing machine when you ran out of Tide, you could push the button and it ordered more -- those didn't work. It felt invasive, or maybe unnecessary, for customers. Some of the auto-replenishment -- there been various tools. Amazon had a wand where, when you threw something away, you could run the barcode through the wand, and it would reorder for you. People have largely pushed back against that stuff. I like passive refills, like Dollar Shave Club. Every quarter, they send me a quarter's worth of razors, and I get an email a couple of weeks before asking if I want to add to my order. They're not looking at my shelf to see how many razors I've used. They just roughly know I use one a week, and that's a good cadence.
I do think you have to figure out what the line is. There might be some areas -- let's say, pet food -- where you totally want them to monitor it because it's heavy and you don't want to run out, and you don't have to go in the middle of the night to find your brand. On the other hand, there might be some things where, maybe you don't want them to know exactly how many pints of ice cream you've eaten in the last couple of weeks.
Jones: [laughs] Fair point there, Dan. What do you consider right now the biggest challenge facing any grocer that's not named Walmart, Target, or Amazon?
Kline: Where do you put your money? You're looking at all these different things. Curbside pickup is an investment. Delivery is an investment. Something we haven't talked about is RFID tags. That's literally little, tiny microchips that let you know where all your inventory is so you can automate ordering and the process. Which of those are going to win? We don't know the answer. If you're a smaller chain, and you bet it all on delivery, or make a big bet on one of these areas, that could turn out to be something customers don't actually want. We might see that it's 10%, 15% of the market for delivery and curbside pickup, and that most people are still comfortable going inside, and they want to pick most of their stuff. They might pick and choose when they get deliveries. I use delivery all the time, but I still go to the grocery store two or three times a week. It's a very fine line if you don't have the endless sums that the big players do.
Jones: Exactly. It's really about figuring out, what is it that you're going into the grocery store for? What is actually appealing to consumers? And then also, figuring out, what is it that I don't mind just having sent directly to my house? A lot of questions there.
To close us out here, Dan, if there was one thing that surprised you the most from this conference, what would that be?
Kline: I'm going to talk about a company that I've been very negative on, not so much because of their product, but because of their valuation: Beyond Meat. Beyond Meat is a meat substitute. Their famous product is a burger, it looks like a burger, it bleeds like a burger. I can attest, because they were cooking them on the show floor, it smells like a burger. But, I felt there was a limited market for this in that, they're going to put these things on fast food menus, it's going to be a fad for a while, and then, kind of like a lot of places with gluten-free, it's going to fade away.
But one of the keynotes was the chairman of the company. And he got up and, for his opening example, he talked about how, in the 1960s, when you went to the milk section of a grocery store, mostly what they had was whole milk. And certainly, the only thing they had was cow milk. Now, if you go to the average Whole Foods, not only do you have 2%, 1%, skim, heavy cream, all different types of milk; you're almost at about 50/50 between cow milk and other forms of milk. Plant-based milks, nut-based milks, and all sorts of other things. That's their goal. It isn't so much just to get penetration of people accepting their substitute. It's for their product to be alongside meat, and to stop thinking about where the meat comes from. Is this a cow-based meat? Is this a plant-based substitute? And saying no, it's all meat, it doesn't really matter what the point of origin was. That's a fundamental change to how these products have been displayed. I actually think that's a really smart idea. If I'm searching for burgers, and their burger is right there alongside and it's competitively priced, there's a chance I might buy that. To be fair, there's no chance I will buy that; but, there's a chance many people will buy that. He's really looking at changing how we think about food. And that's a bigger market than just launching a substitute product.
Jones: Yeah, that's a very good point you make, Dan. Anytime I'm looking at an investable opportunity, I'm looking for visionary CEOs who really are thought leaders and are thinking 10 years ahead, 20 years ahead, about, how are we changing? How are consumer preferences and habits changing? Where does the company fit in? And I think that's a fair point. I'm like you; I'm not really sold on the Beyond Meat idea. But it sounds like there's a vision that is much grander in scale, and hopefully a market opportunity that can support that meaty evaluation.
Kline: If I get a chance, I'm going to try it on the show floor today.
Jones: Please take a picture and post it on Twitter, Dan! Tell me what you think!
Kline: I will do my best!
Jones: Alright. That'll do it for us and the Industry Focus: Consumer Goods show! Thank you so much for tuning in! As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For Dan Kline, I'm Shannon Jones. Thanks for listening and Fool on!