X5 Retail systematically sourcing innovation

Russia’s leading food retailer is employing a systematic approach to finding innovative new technologies to integrate within its business because it believes future survival for all companies will be determined by their successful adoption of myriad IT solutions.

Vadim Kapustin, head of strategy at X5 Retail Group, says: “Within 10 years all companies will be technology companies. If they are not [one of them] then they won’t survive.” 

The company’s commitment to technology began with the launch of its ‘Innovations’ initiative 18 months ago, which highlighted five areas of focus: Products and goods; business processes; customer-facing services; business models; and technologies such as those for manufacturing.

Start-up innovation

Across these areas the grocer has systematically sought to investigate a wide array of start-ups that have innovative solutions. Kapustin says this process has involved a tie-up with the Russian start-up accelerator Internet Initiatives Development Fund that has 600 start-ups in its eco-system which are all prospective partners for pilots. These young companies have been supplemented by access to various venture capital funds and Israeli-based operators.

At X5 it was recognised that a truly systematic approach required resources, which Kapustin says led to the company’s first accelerator fund with $5 million ring-fenced to invest in the various pilots the company chose to embark upon from the hundreds of start-ups it was evaluating.

With this system in place Kapustin reveals that 68 pilots have been undertaken encompassing video analytics, automation, big data, robotics and blockchain. The pilots have been across X5’s various formats that cover 13,600 stores and comprise the brands: Pyaterochka, Perekrestok and Karusel.

“The individual businesses look at what’s been offered [from the start-up technologies] and if it’s of interest then we evaluate it for them and can make a quick decision about making an investment. We can fast track things and have a pilot funded in a day. Once we launch a pilot then we decide on its complexity and other criteria and pick whether it runs in one, 10 or 100 stores,” he explains.

Video analytics and smart shelving

Among the areas where pilots are being deployed is video analytics where 15 start-ups are being tested: “There are trials for on-shelf availability, watching and recognising customers, and reducing queues. There are multiple usages of the technology.”

These initiatives will improve customer service, which is certainly high up the agenda for X5 as Kapustin says this will be a key differentiator in the future as well as potentially improving the company’s cost base. To this end the business has also installed self-checkouts that have included tests of barcode scanners and also mobile phone scanning and payment that he says will be rolled out next year.

To improve the availability levels at the company a smart shelving solution is also being piloted that uses light emitting diodes within the shelf that can detect if a product has been removed from the shelf. This feeds into the supply chain and drives replenishment.

Electronic shelf-edge labels are also being seriously investigated by X5 as Kapustin says “it’s the future, no doubt about it” as savings can be made from reducing manual price changes and on top of this is the massive opportunity from dynamic pricing.

But the issue remains pricing of the shelf edge labels. Retailers around the globe are in negotiations with suppliers about the unit cost of the technology. Kapustin says there needs to be a reduction before there is any serious roll-out at scale, with the price needing to fall from the present $5 – with certain Chinese and Korean suppliers – to around the $3 to $4 level.

Taking such a systematic approach to innovation is rare for traditional retailers but it is a route that has been taken up by Walmart in recent years, according to Kapustin, who spent almost five years at the US retailer where he helped develop it digital strategy and create its innovation labs.

It is this experience that he has brought to X5 Retail and which he believes will over time enable the business to not only look outside its walls for technology innovations but also develop in-house solutions too.

“We knew we had to initially search outside for innovations, then pilot and implement. But once we’ve built a critical mass of recognising the technology [required] then we [recognise we] could develop it in-house. We are going to try some of this next year,” he says.