What Is the Biggest Opportunity for U.S. Grocery Chains?

Grocery stores used to operate supply chains designed to keep shelves stocked. Now, they also have to deal with fulfilling individual orders both for curbside pickup and same-day delivery. In addition, the chains have to deal with how to get produce and meat that matches customer expectations into their baskets. That's being handled on a very human basis now, but it may eventually be automated.

In this segment of Industry Focus: Consumer Goods, host Shannon Jones talks with Dan Kline on the occasion of the Groceryshop convention. To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 17, 2019.

Shannon Jones: 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?

Dan 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.