Mary Shelman: The millennial perspective of grocery stores

  • Could millennials and the on-demand economy lead to supermarket extinction?
 
 
The following is an edited transcript of Luther Andal’s interview with Mary Shelman, former director of Harvard Business School’s Agribusiness Program.
 
 
To listen to our entire conversation with Mary, click on the player.
 
Luther:                        Mary Shelman is the former director and is currently an advisor to the agribusiness program at Harvard Business School. She is an internationally recognized thought leader on the future of the global agri-food industry. A native of Kentucky, where she still owns a farm, Shelman received her bachelor’s degree in chemical engineering from the University of Kentucky and her master’s degree in business administration from Harvard Business School. Thank you for joining us.
 
Mary:                          Thank you.
 
Luther:                        Do millennials really see the supermarket as a daycare center for the elderly?
 
Mary:                          You know, that’s a great introduction, isn’t it? It really gets people’s attention.
 
                                    If you stop the millennial walking down the street — and for those who might not know, a millennial is someone born between 1980 and 2000 —that’s not the answer they give to you, but the idea came from my good friend, Aidan Connolly of Alltech. He was running a training program in Lexington with a group of young people from all over the world in their early twenties, and he took them out on this visit to a number of supermarkets here in town. They went to Kroger, and Whole Foods, and I’m sure some others. And he came back and was doing a debrief with them. He said, “Well, what did you think?” “Oh, yeah, those were great. Those were really, really nice.” And then he asked, “Would you shop there?” “Oh, no, we’d never go there.” “Well, why not?” “Well, that’s not the way we would expect to get our food. We’re going to order it online. Somebody is going to bring it to our house, you know.”
 
                                    So, that led him to the question, “Well, then, there’s no future for supermarkets, right?” And they said, “No, no, we didn’t say that at all.” “Well, what is it then?” “Well, supermarkets are really important because, you know, old people need some place to go, and to get some exercise, and to have some interactions, and be able to get out of the house and move around.”
                                    Aidan just paused and said, “Oh, wow, it’s like a daycare for the elderly.” And that’s where that idea came from. This thing that we’ve been used to all of our lives might not be relevant for this next generation of consumers.
 
Luther:                        Speaking of consumers, those aged 18–34 are the largest buyers of organics, and they’re the most likely to consider themselves knowledgeable about their food. Is this the newly engaged and empowered food consumer you’re referring to?
 
Mary:                          Well, they do consider themselves very food aware. They are very interested in cooking and sharing what they eat.
 
                                    It’s also an incredibly large demographic group. It’s the largest demographic group now in the United States. There are 83 million millennials. There are only 77 million of us baby boomers.
 
                                    So, when you think about this millennial group, now they’re having families, they’re moving into some portion of their earning power. It’s a very compelling-sized group for the food industry to look at.
 
                                    However, that’s not the only thing that’s behind this engaged and empowered consumer. I think, overall, the whole country, and perhaps the whole world, is in the midst of this food movement. People want to know more. They care more about their food. They want to know where it comes from. They want to know where it’s produced. And the availability now of information and where they can get that from and how quickly they can get it has really changed their behaviors. I was just looking up the numbers before I came down here to do this with you. There are almost 4 billion internet users in the world now. There are almost 2 billion Facebook users in the world. So, information travels radically (fast).
 
                                    I was teaching in a program yesterday, and we were having this conversation about this one group that was having a lot of influence, and it sounds like a very rich population, but someone from Honduras was there. He spoke up and said, “No, no, no. In our country (which has very different socio-demographics in terms of economics), people get information very quickly now.” He talked about this idea of engaged eating. So, this consciousness is not just here in this young person group, but that is a group that’s very important because of their purchasing power.
 
Luther:                        So, we’re talking about millennials and how they’re rejecting the typical grocery store. Can you give us maybe just a summary of why they’re rejecting the grocery store?
 
Mary:                          I think it’s very simple. It just doesn’t meet their needs, or it doesn’t meet their expectations. I mean, how do they get their food? They order it online. They have it show up to their house. It’s the same way they get their music. It’s the same way you get your taxi now to go to the airport. You call Uber.
 
                                    They have grown up in a different world, and they don’t understand why they should have to go and wait in line to pay for something, to wade through a store that has aisles and aisles of things that they don’t need.
 
Luther:                        I think many people view millennials as this enigma, right? “They’re demanding; they’re lazy” are a number of terms. I wonder if that’s your view or more the fact, as you said, the way they grew up is different than the way that you and I grew up. It’s really a generational difference, and the fact is that change is happening faster; it’s just that that change has happened faster than it has in the past.
 
Mary:                          I think that’s very true. What they have grown up with has been different. Maybe not the way they’ve grown up, but what they’ve grown up with.
 
                                    The Apple iPhone was introduced in 2007. So, think about how fast that’s changed our behaviors. They’ve just had access to this, a part of this digital economy there.
 
                                    My son, who is 25, so clearly in this group, is much more vocal in his beliefs, and his friends are as well. But I think what’s interesting is that there are some very good aspects about them. You use the term “kind of lazy,” and I don’t think that’s true at all. I think they just have a different idea about what’s important compared to maybe what you and I grew up with.
 
                                    Many of them seem to be much more interested in health than other generations. They’re very conscious of their diet and that link between diet and health. They’re much more likely to exercise. So, they’re making food choices based on what they perceive as being healthy, fresh, clean, “free from” these different ingredients. We’d like to go to farmer’s markets where we can see things and engage with farmers.
 
                                    I think they see food as adventure as well. I grew up in Elizabethtown here in Kentucky and in, basically, a very traditional family. My dad liked beef. So, we’d have beef four or five nights a week and then maybe have a couple of other things. But, you think about the diets now and the diversity that shows up, so one night it’s Chinese, the next night it’s Thai, the next night is sushi. I think these millennials would eat sushi five, six, seven, eight times a week if they could. You know, it’s Italian, it’s Ethiopian, it’s Moroccan. So, that’s just a fundamental change in what they consider as part of their eating habits. They’ve been described as “food thrill seekers.” Maybe you’re at a stage that you can’t travel because of family economics, but you can get some thrill out of your food, and you can share this thrill with your friends.
 
                                    Seventy percent of this age group takes pictures of their food before they eat it, and many of them put that on Facebook. They share it on Instagram. So, food has become part of their identity, well beyond just fuel for the body and something that’s linked to health. It’s actually part of who they are. And because of that, they want the food they eat to have the values that they have themselves.
 
                                    They want to be individuals. Think about the craft food movement, the craft beer movement, which was one of the first harbingers of this, how successful that’s been because, hey, if I can have on my iPhone exactly the music that I like, why can’t I have exactly the same kind of curation of food that I like?
 
                                    The other thing is, they want to buy products that share these values. They believe in the purpose of these companies. So, something like 37 percent of millennials buy products for a cause, so something like Rainforest Alliance. Even if they have to pay more money for that, that’s important to them.
 
                                    Forty-two percent of this group say that they don’t trust “big food” companies. They feel like those companies, even kind of “big farming” as well, have violated their trust, that they haven’t made good responsible choices, and they push products onto consumers that really have ended up not being good for them. Too much sugar, too much fat, too many unnatural ingredients in there.
 
Luther:                        So, hitting on that point, it sounds like there are some big implications for the food industry, as you said, that perhaps some of the power is moving to the consumer, where before it was in the producer’s hands.
 
Mary:                          Right. I’m not sure it’s ever been — So, a producer in the sense of a manufacturer, a big food company.  It’s never been in the farmer’s hands.
 
Luther:                        I think that’s important to clarify.
 
Mary:                          Exactly. The big food companies: the Nestlés, the Krafts, the General Mills.
                                   
                                    This is creating tremendous uncertainty for them, these changes in the consumers. The models they have used in the past — putting it on product shelves, getting distribution in every store, advertising on mass media, big promotions at the supermarket — they just don’t work anymore in order to drive sales. Those old models are broken, and they’re really struggling to find out what the new models are and what the new products are that satisfy this group.
 
                                    Just to give you some idea of how serious this is, in the last 10 years, big brands have lost share in 42 out of 54 product categories. Between 2005 and 2015, the top 25 firms have lost $18 billion in market share.
 
                                    It’s extremely difficult now for these firms to find growth. And so, what they typically do, the first thing they say is, “Oh, you know, our products don’t meet consumer expectations anymore, so let’s reformulate. Let’s take out the sugar. Let’s take out the salt. Let’s make them healthier.” Well, that’s great, but it doesn’t increase sales. It might stop a decline, but it’s not increasing sales.
 
                                    They say, “Well, let’s introduce our own version of organic, or GMO-free, or gluten-free.” But it’s not getting back to sales growth because when you look underneath, it gets back into this distrust of these companies. And so, that’s forcing them to look at who is being able to grow.
 
                                    The opportunities that these changes have created are actually for the younger and the smaller companies. These big companies are needing to look to them and say, “Well, I can’t do this myself, I’m going to go out and buy somebody.” So, General Mills bought Annie’s, the maker of all-natural mac and cheese. Perdue bought Niman Ranch. Campbell’s bought Bolthouse Farms just in order to get there.
 
                                    But think about the disruption that’s being created. Go back in your mind to the yogurt category in 2008. You had products like Trix yogurt and Dannon yogurt, and they were basically all of it. It’s either targeted at women on a diet or kids. The products, honestly, they were disgusting. I just thought they were either too sweet, or they had all these artificial sweeteners and artificial things.
 
                                    We’ve got this Turkish immigrant who comes in. Hamdi Ulukaya bought this old yogurt plant in upstate New York and introduced this product to the market after spending like two years working on packaging and product quality, but introduced Chobani and basically said, “Hey, we want this product. It’s going to be a great product. It’s going to be great-tasting. It’s going to be this Greek yogurt style. And I don’t want to have it as a special product. I want to make it very accessible to the masses.” So, he was on the protein trend. He was on natural even though it wasn’t organic. It wasn’t non-GMO, but it was natural ingredients. He was riding the social side of it, using social media. He didn’t have any money to advertise. And five years later, that company, Chobani, had $1 billion dollars in sales. In 2012, it was a sponsor of the U.S. Olympic team at the London Olympics. Now, Greek yogurt has gone from nothing to 36 percent of the yogurt category. Walk in the store, it’s almost all Greek yogurt. That category has doubled in size because you’ve got this better product quality there.
 
Luther:                        Well, I think that fits really well into another news item I saw that Whole Foods has had six straight declining quarters of revenue. In response, they created what they’re calling a 2.0 version: 365 by Whole Foods. They’re actually targeting it at younger, budget-conscious consumers. They claim that it provides easier use, a better grocery experience through a blend of design, technology and experience. Do you think there’s going to be some success out of that? 
 
Mary:                          I haven’t been in a 365. I’m really anxious to. But, just from what I’ve read about it and what I have read of other people assessing it, I don’t think they have the answer yet. I think they’re just reshaping.
 
                                    I think getting the size down is good. They can put it in more urban settings.
 
                                    We have young people now, they want to live back in urban areas again, where they can walk. A lot of them don’t even want cars anymore. So, it’s important that it’s some place that they can get to and shop easily and then get back again.
 
                                    The format that I think is much more interesting to watch is what Amazon is experimenting with out in Seattle. They started it just after the first of this year, a store called Amazon Go. Basically, it’s a store without lines. The worst thing about going to the grocery store is waiting in line to check out. The way that Amazon Go works is, you walk in, and you scan your phone over a reader. Then, you walk around and you put whatever you want into your basket, and you walk out of the store and go home. They send you a receipt afterward showing everything that you purchased. And there’s also a lot more prepared foods there, which is another aspect of what I think everybody is looking for now. It’s like we need help with thinking about what to eat. So, that’s a more evolved concept of 365.
 
                                    I think that it’s really hard if you’re an established player in an industry to disrupt yourself. When Whole Foods came in, they came in from outside the industry, brought in something new. What they brought in were all these natural, specialty and organic products. Those have all rolled out into Kroger. You can buy almost the same product quality there, but Kroger wasn’t the one to introduce that to start with. So, I think the format’s like that.
 
Luther:                        So, what about ClickList? Do you think that’s enough to appease the millennial?
 
Mary:                          I think it’s definitely a piece of it, online shopping, being able to pick it up. I think that’s helpful, but I think that evolves.
 
                                    With ClickList, I still have to go to the store to get it. If I click AmazonFresh, it shows up at my house.
 
Luther:                        I probably should have specified. Kroger ClickList allows you to shop online and then go and pick the groceries up. They’re ready for you.
 
Mary:                          That’s right. So, you order online and then you make the trip there, and they put it in your car. That’s been successful.
 
                                    Again, that next evolution of it that’s playing out is where it comes to your house. In this case, it could be Kroger making that delivery, even though I think they’ve chosen not to, but in the Northeast, it’s Stop & Shop, and Peapod is part of a division of Stop & Shop that makes the delivery.
 
                                    Or is it Amazon? I mean, everybody’s very comfortable now with Amazon. So, do you trust Amazon more to bring you fresh produce than you trust Stop & Shop?
 
                                    If you look overseas, if you look to the U.K., there’s a supermarket company called Ocado that you buy from online. It shows up at your house. It’s the largest online grocery company. They have no stores at all. So, it’s basically the supermarket without the store. And because of that, they can manage their inventory better because the products make one stop.
 
                                    Think about fresh foods. They come into the Ocado warehouse. Or you think about fresh foods coming to Kroger. Often they come into the Kroger distribution center. They get split again, and they go out to the different Kroger stores. You go in as a consumer and maybe it’s been sitting there for a few days, but you buy it and take it home. It spends another few days in your refrigerator and then maybe the quality is not so great. With Ocado, it comes into their distribution center. You order it. It immediately comes to your house. So, it’s bypassing that trip to the supermarket plus sitting on that supermarket shelf. So, Ocado says we actually have a higher purchase of fresh products even though here we typically think, “Oh, I’ll never buy a fresh product from an online experience because I can’t see it myself.”
 
Luther:                        So, continuing the theme of convenience, the millennial doesn’t look at food the same way we do where you go to a grocery store, you buy the parts, you go home and then you have these variable parts that you can assemble via a recipe into X, Y or Z. Are the millennials actually also potentially looking at just skipping that part and going straight to, “I just want a meal sent to me and I’ll choose what meal I want and it’s already assembled, or maybe all the ingredients are there and I just put it all together at that point?”
 
Mary:                          I think there are a couple of different cuts at that that are very interesting right now.
 
                                    First, we see the rise of these meal kits that you can order online, and it shows up at your door. And, in many cases, it shows up at your doorstep, and what you’re getting in that box is exactly the amount of ingredients that it takes to prepare the meals. So, if you have a recipe that calls for two stalks of celery, you don’t have to buy the bunch of celery and then have the other six stalks rot in your refrigerator until you throw it away because you have no idea what to do with it.
 
                                    One in four households in the U.S. have tried meal kits now. There’s like 150 companies operating in this space. Unilever just made a $9 million investment into one of these companies earlier this month. So, they’re getting some serious traction. The retention rate is very high once you try because it turns out the product qualities are good.
 
                                    You think, “Well, wait a minute, this seems all very expensive to have this come to your house,” but the cost of that meal that they’re sending you is $10–$12. It’s not really that much. Maybe if you have a family of six or eight or 10, that’s too high, but certainly there’s a lot of one- and two-person households out there. So, you get the convenience that it shows up at your house.
 
                                    You get the fact that you’ve really cut down on food waste, both on the ingredient side, but also you don’t have all these leftovers that then you have to throw away.
 
                                    The other thing it cuts down on is choice. We always think choice is good. But if you’re pressed for time or if you don’t know how to cook and you’re looking maybe to learn, then you want a recipe already there rather than having to look to a cookbook, right? Everybody says, “Oh, we’re offering all these recipe solutions.” Well, I don’t want to have to look through those recipes and decide. Here, it just shows up, and you’re getting your cooking lesson on top of it. So, I think there’s a lot of interest in that space.
 
                                    Blue Apron, the biggest player, is now delivering 1 million meals a month. It’s a big number, right? At $10 a meal, it’s about a $1 billion-dollar business. Valuation is probably $2 billion. And they work directly with the farmers. So, an interesting piece of their model is how they decide what recipes to offer. Some of it is based on what consumers want, but some of it is based on what’s available. They can find out from their farmers what’s in season right now and what the prices are at different times of the year. They basically come up with what they’re going to offer based on being able to meet their price points.
 
Luther:                        Very interesting. So, to bring this back home to supermarkets, how do they meet the expectations? How do they have authenticity, and transparency, and traceability from the producers, holding manufacturers accountable, and at the same time maintaining the convenience at a price point and profitability through all of this?
 
Mary:                          It’s a huge challenge, isn’t it, especially if you already have a big business model and a big footprint that operates in a certain way. It’s just like death by a thousand cuts.
 
                                    Think about the impact of, you know, certain categories moving online. So now people buy their diapers online. So now your supermarket is too big because you don’t need to have as big of a diaper stock anymore. Well, you have supermarkets that are too big, but yet you can’t lop off a supermarket because it still means that the supermarkets that you have left are still too big. So, how do you repurpose that space? I think it’s a real challenge.
 
                                    But, some of the things that I think that really need to be done are — one of them is a mindset shift. We see some of this going on. I think for a number of years, supermarkets really considered themselves as, basically, “Our role is to rent real estate to manufacturers of food products. We just display it. You work on your products and bring it in, and we’ll display it. If it happens to sell, that’s great. And if it doesn’t, we’ll kick you off the shelf. And by the way, you’re going pay us for the right to be on that shelf because we’re taking a risk putting you there because we’ve had to take something else off.” That mind shift has to shift back to, “As a supermarket, my role should be as a gatekeeper to this set of products that my customers really want. And not only am I giving them the products that fit their needs, but I’m also working in that store to create experiences for them,” because this young group now — and many of us, right? — we have too much stuff. So now we’d rather invest in experiences than we would products. So, how do you make food an experience? How do we make sure in that supermarket it is going to have to tell a story of the food product? That’s the important piece of it.
 
                                    In Milan, a couple of years ago, there was the World Food Expo, and there was a supermarket of the future there. And, basically, you walked around the store and you had augmented reality where every time you looked at a category, you could see visually the product information and where it came from, who grew it, whatever. I don’t think shoppers want to see that every time. To me, I’m not sure that’s the supermarket of the future. I do think people will want the experiences, the authenticity, the stories, the engagement, but at the same time, this convenience piece is really important. So, supermarkets are going to have to be omnichannel. So, you’ve got a store that has some elements of this, but it also has to come to the house. And analytics. Data analytics. You know, being able to really dig in and understand what sells, what doesn’t sell, what price points.
 
Luther:                        Mary Shelman is former director and is currently an adviser to the agribusiness program at Harvard Business School. Thank you for joining us.
 
Mary:                          Thank you.
 
Mary Shelman spoke at ONE: The Alltech Ideas Conference (ONE17). To hear more talks from the conference, sign up for the Alltech Idea Lab. For access, click on the button below.
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