Digital transformation drives omni-channel growth and more lucrative customers at Albertsons

Profile picture for user slauchlan By Stuart Lauchlan April 27, 2021 Audio version
Summary:
US grocery giant Albertsons has seen its investment in digital transformation pay off during the COVID crisis; now it needs to extend that into the Vaccine Economy and beyond.

supermarkets

Almost every critical capability in our company is now enhanced with or enabled by technology.

So says Vivek Sankaran, President and Chief Operating Officer at Albertsons Companies, the second-largest supermarket chain in North America after Kroger, owners of brand including Safeway, Pavilions and Vons. In common with grocery retailers the world over, Albertsons has seen a hefty uptick in online activity over the past year as the COVID pandemic accelerated e-commerce purchasing and delivery demand.

For its part, Albertsons saw 258% digital growth year-on-year as a result of the online shift, ending fiscal 2020 with three times the number of omni-channel customers as it had a year previously. That’s a big deal, says Sankaran:

These households spend more with us and are more profitable. We also saw that, as customers moved into omni-channel, they also increased their spend in our stores with a net growth of 20% per household and a total spend rate two times that of an exclusively in-store shopper….Our most loyal households early last year purchased two times the number of categories in our stores than the prior year, for example, in paper goods.

To service those customers, the firm has focused on its Just For U digital loyalty program, seeing a 20% year-on-year rise in memberships, with 25.4 million people now signed up and a retention rate of 93.1%. Again, these are high-value buyers, he says:

These members have been a key driver of market share gains as they spend 2.6 times more than non-registered customers. We've also increased the number of actively-engaged customers almost 10%, who spent nearly five times more than a non-active customer. We know our retention rate is 34% greater when a household is actively engaged in our loyalty program.

We closed 2020 with almost 11 million more identified households shopping our stores than in 2019, allowing us to understand which categories they are purchasing with us for the first time, how often they're coming back to re-purchase, how they're progressing up the loyalty ladder and their incremental spend levels as they migrate from in-store to omni-channel engagement with us.

The firm is also able to use the data coming out of this loyal demographic to quickly reward new category buyers with personalized deals to retain that category spend with the retailer, he explains:

All our promotions are made on one platform across the company and it's a platform that our merchants can access. Because it's all [the same] technology and we can see the data, our pricing team can look at the totality of the promotions and get a sense of where people are heading. What that does, is it allows us to maintain that local nature of being reactive and appropriate in a market, yet being able to see the full picture from here because we're now on one technology platform.

We now have 25.4 million people on Just For U and those 25.4 million people get promotions targeted to them. They can access it digitally, we access them digitally, so all of these promotions are a technology capability.

Digital focus

That said, there’s still a lot more to do to bolster further the omni-channel offering, argues Sankaran:

Digital continues to be a key growth driver for us as we achieved over 200% digital sales growth in each quarter this year, demonstrating the strength of our digital offerings to capture consumer demand for more convenient shopping experiences. Drive Up & Go (DUG) grew over 1,000% in Q4 and 865% during fiscal year 2020. We launched 343 new DUG locations in Q4  and DUG is now available in 1,420 stores.

This puts us ahead of schedule and we now expect to have DUG in approximately 2,000 stores with 98% coverage by the end of fiscal year 2021, above our prior target of over 1,800 stores. We're also extremely pleased about the profit curve in our digital business, particularly in Drive Up & Go. We are seeing our incremental DUG sales driving flow-through of mid- to high single digits. And we expect that to continue improving as our DUG business continues to scale.

It’s also all about meeting consumer expectations, he adds, and that means investing in tech:

In 2020, we saw significant acceleration in consumer preferences toward digital and we drove a step change in our digital offerings to meet this demand. During the year, we invested over $300 million to accelerate our offerings and launch new capabilities. To enhance the customer experience, we've improved our on-time filling and delivery to 95%, enabling consistent on-time delivery and DUG pickups.

And there some innovative initiatives underway to add to the mix, he says:

We began a trial of an automated electric delivery robot, powered by Tortoise, and continue to pilot a number of walk-up and go options, including walk-up counters, pickup lockers, and stand-alone kiosks. We're testing in market an integrated loyalty and e-commerce app, offering an effortless ordering experience to a single interface. And to improve the profitability of the business, we shifted delivery at many of our locations' third-party logistics providers to improve speed and lower costs. We improved our picking software, optimizing, and standardizing the picking process to drive cost reduction through increased picks per hour and improved order prioritization.

Expect also to see more attention paid to Albertson’s Micro Fulfilment Centers (MFC) rollout, with plans to open 7 new operations during the course of this year.  Each center is able to service up to ten local stores and can reduce the cost of fulfilling e-commerce orders significantly. Sankaran says:

From our two [existing] MFC installations, as in-stock commissions have improved, we have learned that the labor cost-per-order can be dramatically reduced, without compromising the breadth of assortment and the customization a customer can get from our store. We're opening our third MFC this week and have plans for an additional six before the end of our fiscal year, bringing our total to nine MFCs.

While the company has stated that it believes up to 20% of its business will ultimately come from online, that still leaves a lot of physical store business and for that to return to normal, safely, vaccine programs need to be as effective as possible. Albertsons is playing its part here, working with the Department of Health and Human Services to have its pharmacy teams administer 3.1 million COVID vaccine doses as of Friday last week. This has involved hiring 1,000 new associates and training 2,000 pharmacy technicians to support this drive, as well as investing in tech, including handheld devices, to make it possible to meet demand.

But it’s worth the effort. Sankaran says:

We are emerging from this crisis more digitally-focused, both in-store and online, and elevating the service our customers expect…Our mix of e-commerce has improved dramatically, but we're still behind some others. That's why we are going to continue to invest in this business, because we know that it's resonating...We are excited about the growth rate, we know who [the omni-channel customers] are, and we're going to continue to invest so the e-commerce business becomes a bigger mix.

My take

A company that’s ‘had a good war’ during COVID and is shaping up to improve its position in the market in the Vaccine Economy with some sensible omni-investments.