The head of the international retailer explores what it means to have a global family of local brands, the Internet’s impact on grocers, and how supermarkets can focus on the customer experience of fresh foods.
By Klaus Behrenbeck, director in McKinsey’s Cologne office.
In recent years, grocery retailers have had to adapt to drastic changes in the consumer’s behavior and expectations, the encroachment of new competitors luring away once-loyal supermarket shoppers, technological advances reshaping the retail landscape, and economic uncertainty that threatens to reduce already-thin margins. One retailer navigating these shifts is Netherlands-based Ahold, which operates approximately 3,000 stores—mainly supermarkets—across Europe and the United States.1 Dick Boer, who took the helm as CEO in March 2011 from his previous post as chief operating officer of Ahold Europe, recently sat down with McKinsey’s Klaus Behrenbeck at Ahold’s Amsterdam headquarters to discuss the company’s strategy.
McKinsey: What are the key elements of your strategy?
Dick Boer: The company has gone through a number of phases, and it would be wrong to highlight only our strategy over the past two years. I think the turning point for Ahold actually came in 2006. At the time, the company was a mixed bag—different brands, different structures, even different businesses, with food retail in Europe and food service in the United States. So the board asked us to do a full review of our business.
That review led to a clear statement, at the end of 2006, that our focus would be on food retail, and our focus would be on markets where we were—or could become—number one or two. We sold the wholesale division, US Foodservice, in mid-2007. We started moving toward continental strategies, with a clear delineation between Ahold USA and Ahold Europe. Essentially, we laid the groundwork for regaining credibility among our stakeholders, both internal and external. But we also needed to show the market that we had a strategy for growth. We started working on our next phase, and that led to our current strategy: “reshaping retail.”
We had a few things going for us, already, at that time. We’d decided in 2008 and 2009 to close down our hypermarkets and focus on supermarkets, convenience and smaller-store concepts, and the online channel—all mainly to help fulfill the daily needs of consumers. We felt that was our domain, what we were good at. We also had the benefit of a diverse and highly skilled team, both in the United States and Europe, that we’d built over the past few years.
McKinsey: Please say more about the decision to focus on supermarkets, convenience stores, and online. How do those three things work together—or do you think of each one as a separate business?
Dick Boer: To understand global trends in retail, you have to look at things from the perspective of a customer who can get everything via the Internet. Ten or twenty years ago, you had to go to a hypermarket. I opened my first hypermarket in the Czech Republic in 1998, and it was a big event. We had traffic jams outside the store. We had 50,000 to 60,000 SKUs2 in one store, from electronics to food. Today, you can get many of these things online, so you don’t need to go to the store.
What we’ve learned over the past ten years is that supermarkets ought to focus on the experience of fresh foods. That’s the name of the game for supermarkets because it gives the customer a reason to go to the store. I also think convenience—having your goods readily available and near the customer—is important. Supermarkets are convenient for weekly shopping trips, but smaller stores are a great opportunity to get closer to the customer. On top of that, you have to have an online offering as an extension of the store. Customers want to be surprised at what they can find online—maybe the authentic Tuscan olive oil isn’t on the store shelf, but you can find it online. So that’s my view on food retailing today: freshness, convenience, and a large online offering are key.
McKinsey: All three elements are evident in what you’re doing in both Europe and the United States, but you’re doing it under several different brands. Do you think you’ll continue to manage your portfolio on a brand-by-brand basis?
Dick Boer: We know some global retailers that have been very successful in pursuing a one-brand strategy, but I think that’s more logical in nonfood areas than in food. Our brands have a local heritage, and customers have a long relationship with those brands, so changing them into one global brand is not in our plans. Our local brands are strong assets. What we’ve done, though, is to give our local brands a common language. We are a global family of local brands, and it’s a global family that views things the same way.
We’ve defined three promises—to be a better place to shop, a better place to work, and a better neighbor—with the simple overarching message that we should be “better every day.” For each of the three promises, we have a clear understanding of how we’re going to measure ourselves, both in “hard” key performance indicators and in perceptions. We’re looking not just at the real price difference between us and our competitors—say it’s 3 percent—but also at the customer’s perception of the price difference, which might be 7 percent. Or if we believe we are strong in fresh food, but the customer gives us an average rating of six on a scale of ten or three on a scale of five, then we would say we’re still not good enough.
McKinsey: How do you see your online channels like Albert.nl, bol.com, and Peapod evolving?
Dick Boer: I believe we have to give customers multiple ways to do their shopping. My vision is that wherever you are, you should be able to order and buy our products. We always kept our online business—even in the most difficult time, in 2003, when it would have been easy to get rid of the loss-making stuff and just focus on the things that were making money. But we always believed in the online channel.
Our goal is to reach €1.5 billion in online food sales in 2016. We want bol.com, for example, to continue having double-digit growth, and there are many opportunities to do that. One opportunity is to build our infrastructure of pickup points. We now have about 60 bol.com pickup points in Albert Heijn stores, and this will expand rapidly in 2013.
McKinsey: You’re opening more pickup points not just for bol.com but also for your other chains, right?
Dick Boer: Yes. We concluded that home delivery is great but has limitations. Although you can say, “I want to have my order delivered between two and four in the afternoon or between six and eight in the evening,” you still have to be at home to receive the delivery. Last year, we identified pickup points as something we needed to test. So far, customer reactions have been very encouraging.
We’re thinking about different options. For example, we’ve opened stand-alone pickup points near highway exits. It’s a very simple thing: a 20-square-meter box with a small parking lot. You place your order online or on your mobile phone; then you get a message that it’s ready for pickup, along with a code. You punch in the code when you get to the pickup point, we tell you which parking space to park your car in, and an employee comes to your car with your groceries. You’re done in two or three minutes, and that includes the payment process.
The orders are prepared in special warehouses dedicated to online sales; then they’re brought to the pickup point. So this looks to be a promising initiative that fits very well with our strategy, as it helps increase customer loyalty and broadens our offering. By the way, I think pickup is a great opportunity for the United States because people there travel so much in their cars.
McKinsey: Among the innovations you’ve introduced, both in Europe and the United States, are mobile applications. Do you see these new technologies generating meaningful sales in the near future?
Dick Boer: I think the features on mobile devices—whether tablets or smartphones—will soon be the same as the features on your home computer. Take our Appie application: it allows you to share recipes and shopping lists with your friends or your partner or your children, and they can add to the shopping list when they’re on their devices. You can order groceries and specify delivery times. Appie has voice recognition and a bar-code scanner. Mobile devices will only become more important, especially with 4G and a faster Internet.
And the devices can go even further. One thing we’re testing in the United States is mobile payments. Right now, you can pay using an NFC3 chip, but you have to put the chip in your phone and load it and reload it, so I would say it needs to become more convenient. We also need to better integrate our loyalty cards with smartphones. Today, you can place orders on Appie and it has all your customer data, but if you go to the store you still have to identify yourself with a loyalty card. I think eventually the cards will be replaced by new technology—but it might take longer than everybody thinks, because there are people who will never use one or the other, so you need to offer both loyalty cards and smartphone apps. In any case, as an industry, we can’t stay out of mobile devices and technology.
McKinsey: To what extent is corporate social responsibility part of the value proposition of your brands?
Dick Boer: First, it’s important to note that CSR—or “responsible retailing,” as we call it—is an integral part of our strategy. Of course, we have our organic products: Pure and Honest in Europe and Nature’s Promise in the United States. But I think CSR is more than just organic products.
We think about CSR in four areas. First, we need to be transparent in our product sourcing. At the end of the day, our sourcing should be good for society. Second, we want to help our customers and employees live healthier lives. We want 25 percent of our products in the stores to be healthy products, marked with one of our “healthy living” logos. Third, we want to decrease our climate impact—for instance, carbon dioxide emissions. We’re doing things like changing our refrigerators and coolers to save energy. Fourth—and this may be the most important—we want our supermarkets to really be part of the community. For instance, most of the time, retailers with stores in depressed or low-income neighborhoods start thinking about moving out of those communities. But we believe we should rebuild those stores and help them become the social center or the heart of those communities that are in a bad situation. These four themes are part of our promise to be a better neighbor.
One challenge is that there are conflicting demands, and they all need to be considered. For example, on the one hand, on a global scale we will have nine billion people to feed in 2050. On the other hand, there are concerns about animal welfare, the production of raw materials, and so on. We can’t focus on just one or the other; we somehow need to balance them all.
We as an industry, and at Ahold, have to prove that we can be better every day. I strongly believe that to be able to meet the needs of nine billion people 40 years from now, we must take even more fundamental actions together to be sure that we fulfill our responsibilities—in water conservation or sustainable production or obesity. There is a role for us as an industry to help people use the things we sell in the best way: for their health, for the community, and for future generations.