Stunning Costs for Remaining in a Fixed State

Collective groans and head-thumps were heard in food industry c-suites this week after Kroger announced a supply agreement with Walgreens.

The meaning behind the headlines:

• Kroger morphed into a distributor
• Walgreens began transforming into a c-store
• Restaurants were intercepted with new away-from-home value
• Erosion of traditional supermarket traffic accelerated

Competitors will respond soon.

Amazon may be the one to beat but this week’s announcement is Kroger’s response to Aldi and Lidl.

We agree with Professor Jan Benedict Steenkamp as stated in his book, Retail Disruptors, that limited assortment deep discounters represent the largest disruption to grocery retailing in 50 years:

• They change every market they enter.
• They bought Walmart to their knees in the UK.
• When Lidl entered the North Carolina market last year, 5 Kroger stores closed shop, unable to compete with a new entity that conditions consumers to pay up to 55% less for quality food items.

Kroger is fighting back by leasing a small footprint of square footage real estate from a chain with over 9000 units in densely populated urban and suburban areas of America.

The agreement is not without pain for both parties. McLane supplies food to Walgreens now; their IT systems are compatible and service levels are excellent.

But Kroger and Walgreens decided to redefine value for money.

National food brands continue to underestimate the power and consequences of exponential big-picture changes like this in the operating environment …

… assuming that the rate of progress will remain constant and that they can save themselves from the cliff or getting whacked.

20 years of progress is emerging in under 3 years.

Food manufacturers’ business models are inadequate and slow.

Despite acquiring and divesting, their capabilities remain largely fixed, producing more and more linear versions of themselves and their products.

• The collective costs for manufacturers remaining in this condition will be $40-50 billion in sales per year over the next few years (Steenkamp). This figure does not include the $16B already ceded to early stage companies.

Competing in today’s environment requires that food manufacturers develop a different and faster kind of thought process around what’s meaningful and what’s not when a singular external event occurs.

Without foresight-driven assistance, CEOs can bet that their organizations’ 2019-2020 innovation, cost-cutting plans and decisions are already obsolete.

What’s taking place right now, and yet unreported, marks the end of the food industry as we all know it.