Online Grocery Shopping: Is That Your Supper in the Mailbox?

Stephen DeAngelis

October 3, 2014

In an article entitled “Online Grocery Shopping Continues to Grow,” I noted that the online grocery business model that seems to be garnering the most attention is the “click and collect” model. But that doesn’t mean that grocery home delivery services are going out of business. Greg Bensinger (@GregBensinger) and Laura Stevens (@laurastevenswsj) report, “Fresh grocery and meal delivery has become a hot battleground, with competition in same- and next-day service from Wal-Mart Stores Inc., Safeway Inc., Peapod LLC and startup Instacart Inc., among others. Amazon is testing its own same-day delivery network in some markets.” In one of the most recent twists in this area, Bensinger and Stevens report that Amazon has announced that its AmazonFresh unit is going to team up with the U.S. Postal Service to deliver fresh food. [“U.S. Mail Delivers Amazon Groceries in San Francisco,” The Wall Street Journal, 4 September 2014] They explain:

“Now the letter carrier will deliver groceries. Amazon.com Inc. and the U.S. Postal Service, already partners in Sunday deliveries, have launched a trial to shuttle insulated containers of meat, dairy, produce and other groceries to San Francisco customers’ doorsteps. The test could presage a broader national rollout, giving Amazon’s grocery drop-off service a much wider reach. Through its AmazonFresh unit, the e-commerce giant today delivers groceries in its hometown Seattle, as well as Los Angeles and San Francisco. It is expected to introduce Fresh to additional markets in the coming months. … If successful, the two-month test could provide a boost to the Postal Service, which has aggressively chased a bigger piece of the e-commerce pie as the Internet chips away at other parts of its business. Its package business is up 20% over the past five years to 3.7 billion packages. The Postal Service said it is testing AmazonFresh deliveries ‘to determine if delivering groceries to residential and business addresses would be feasible from an operations standpoint and could be financially beneficial for the organization.’ A spokeswoman said the USPS is making the drop-offs between 3 a.m. and 7 a.m.; few of its trucks are in use at those hours. Because Amazon uses insulated tote bags for perishable groceries, the agency can make deliveries without the benefit of refrigerated trucks.”

Martinne Geller (@MartinneG) indicates that despite the growing interest in online grocery sales, “Grocery manufacturers are struggling to adapt to the online world and need to invest in smarter packaging, presentation and supply chains to reap the long term benefits.” [“Food makers feel their way towards online future,” Reuters, 1 July 2014] She continues:

“E-commerce accounts for just 3.7 percent of sales for fast-moving items like food, drinks and personal care products, market researcher Kantar Worldpanel says, forecasting a rise to 5 percent by 2016 as supermarkets develop their web sites and online only retailers like Amazon and Ocado take them on. Greater e-commerce could save money with more targeted marketing, including via social media, and lower product development costs, but industry insiders say manufacturers are put off innovation by the so-far small volumes of goods sold over the internet.”

Admittedly, food manufacturers have to walk a fine when selling more of their products directly to consumers through online channels because a significant increase in such sales could upset their best customers — traditional grocery stores and supermarket chains. Brick-and-mortar stores could retaliate against online competition by reducing available shelf space or featuring competitor’s products. Nestle’s is certainly aware of this. Geller reports, “Nestle’s Nespresso coffee brand is unusual in that it gets 60 percent of its sales from its own websites, but the company said the plan was not to bypass retailers. The world’s largest food maker, which gets about 3 to 4 percent of its sales online, says it has created ad hoc online product name and descriptions, advanced images and how-to videos that link to retailers’ websites but was proceeding cautiously.”

 

Nevertheless, some people believe that food manufacturers are being too cautious. Geller reports that during a recent meeting of the Consumer Goods Forum (CGF) in Paris, Amazon Vice President of Consumables Doug Herrington berated food manufacturers for not doing better. “This is a space you should have been a leader in and instead I find we have to innovate on your behalf,” Herrington told his audience, Geller indicates that Herrington told participants that “items often arrived leaking or in unattractive bubble wrap. He concluded, “The first moment of truth for the customer is not what’s on the site, it’s what arrives at their home.” At the same Forum, John David Roeg, an analyst with Rabobank, agreed with Herrington that food manufacturers were “seriously unprepared for online retailing.” He believes there is tremendous upside to increased online grocery sales. Geller, however, explains that the picture is mixed:

“An online migration would ultimately lead to better consumer data and therefore less product inventory throughout the supply chain, Roeg said, reducing working capital and new product development costs by allowing for small, targeted trials. Fabio Vacirca, global managing director of Accenture’s consumer goods & services practice, also said margins would improve, despite a wider offering. ‘A digital shelf is virtually infinite, so we will probably see more (product) complexity.’ But cheaper digital marketing, unlimited shelf space and the elimination of slotting fees paid to retailers could narrow the gap between them and start-ups that appeal to younger consumers. Analysts from Bernstein Research warn this could ultimately eat into the earnings power of companies like Campbell Soup and ConAgra Foods. And while makers of frozen foods like Iglo, Nestle and Unilever could gain from the convenience of home delivery, candy makers such as Mars and Mondelez International could suffer as online shoppers resist impulse buys.”

Erin Hunter, Facebook’s global head of consumer packaged goods strategy, told Geller, “Online marketing driving both online and offline sales helps traditional companies make the transition to a new era.” She added, “That change doesn’t have to be as complex and scary.” For traditional brick-and-mortar stores, online sales do look scary but also inevitable. That’s why they are developing new online services as well as using online strategies to get consumers into traditional stores. Publix, a southern supermarket chain, for example, recently rolled out an online/mobile deli ordering system. “The system allows users to place deli orders 15 to 20 minutes ahead of pick-up using a computer, smartphone or tablet. It is accessible through the ‘deli selections’ section of the Publix website.” [“Publix completes rollout of online deli ordering system,” by Margaret Cashill, Tampa Bay Business Journal, 12 May 2014] The San Antonio-based grocer H-E-B, which operates 337 stores in Texas and Mexico, has also announced plans for an online-sales operation this year. [“H-E-B exec spills beans on possible new plants and an online-grocery service,” by Sanford Nowlin (@SanfordNowlin), San Antonio Business Journal, 30 April 2014]

 

At the same time that traditional grocers are trying to get a handle on online sales, organizations already in the business are also continuing to innovate. Mark T. Fahey (@marktfahey) reports, “The social-recipe website Foodily [has] teamed up with digital grocer FreshDirect … and launched a new service called Popcart. It allows users to order deliveries of food ingredients directly from online recipes, and will operate exclusively with FreshDirect for an undisclosed time period. Once a customer has installed the free Popcart bookmarklet, they can highlight any online recipe and access a pop-up window with the ingredients required, which can then be bundled together and delivered the next day by FreshDirect.” [“Foodily, FreshDirect start recipe delivery service,” Crain’s, 5 August 2014]

 

It certainly appears that online grocery shopping has a bright future. As Baby Boomers age and desire to remain in their own homes, they will find the convenience of online ordering and home delivery very attractive. How fast the sector will grow remains to be seen. But it does look lie we are on the cusp of new era in the grocery business. One remaining question: Does the postman always rings twice when delivering groceries?