Supermarkets and Digitalization, Part 2

Stephen DeAngelis

November 26, 2013

In Part 1 of this two-part series on the digitalization of supermarkets, I discussed the increased use of mobile apps, digital coupons, and the “click and collect” model for grocery shopping. I indicated that this post would be about another growing trend: groceries ordered on line and delivered directly to your home. One of the articles I cited in the first post was written by Brad Tuttle, who noted, “Despite the spread of options offering online groceries shipped to customers’ homes, consumers have largely been reluctant to jump on board.” [“The Grocery Store May be on Its Death Bed,” Time, 8 October 2013] Even though he is correct, many companies are still experimenting with the idea. For example, in an earlier article, Tuttle reported that Amazon.com was testing a grocery delivery service using a subscription model similar to its Prime membership. Tuttle writes, “Would you pay $299 annually if it meant never having to go to the supermarket? Amazon.com is testing a service with that idea in mind. And that’s on top of Amazon’s other services that already eliminate the need to go to the mall.” [“Amazon’s New Grocery Service: For $299, You Never Have to Leave the House Again,” Time, 12 June 2013] Tuttle continued:

“While there has been plenty of skepticism as to whether online grocery shopping can be a viable business, Amazon has been experimenting with its service, called AmazonFresh, in the Seattle area for years. As Reuters reported, Amazon is now pushing Fresh into the Los Angeles area, with a special twist: a ‘Prime Fresh’ membership is being offered to existing Prime members, who will get free same-day or overnight delivery of grocery orders over $35. Prime members in L.A. get a free 90-day trial of the service. After that, they’re on the hook for $299 per year for Prime Fresh, unless they choose to cancel the service. The original Prime helped subscribers eliminate many shopping errands, and now the bigger, grocery-based Prime aims to get rid of the need for the most typical shopping errand of all: the weekly trip to the supermarket. Fresh produce, milk, meat, bread, peanut butter: now all this and more is a quick one-click purchase away, right alongside batteries, coffee beans, extension cords, electronics and everything else sold via Amazon.”

Tuttle indicates that it is unclear whether Amazon will make a profit with Prime Fresh. Adam Bluestein notes that one of the first companies to get into the online grocery delivery business, WebVan, was “one of the biggest flops of the dot-com era.” [“Beyond Webvan: MyWebGrocer Turns Supermarkets Virtual,” Bloomberg BusinessWeek, 17 January 2013] Greg Bensinger reports, “Companies like FreshDirect LLC and Peapod LLC already operate grocery delivery services in major cities including New York, Chicago and Philadelphia.” [“Amazon Expands Grocery Business,” Wall Street Journal, 5 June 2013] Despite this sector’s shaky past, ZOG Digital reports that predictions indicate the online grocery business is only going to grow.

“In The Online Grocery Opportunity report from Hartman Group, they note that ‘while food remains one of the last few remaining categories of consumer products to “go digital,” there is growing evidence that several aspects of grocery shopping are trending to online.’ This means that the digital grocery experience will soon move past just initial product or recipe research into online ordering territory. Although only 18% of U.S. households are currently grocery shopping online, Nielson reports that digital shopping intentions specifically for food and beverage categories have increased by 44% in the past two years. For those in the food and beverage industry, the increased web presence of grocery-focused shoppers opens many new opportunities. Forrester research shows that U.S. online sales of food and beverage products are expected to grow to$15.4 billion in 2013.” [“Grocery Shopping Goes Digital,” 7 March 2013]

The article didn’t mention what fraction of those sales involves home-delivery of groceries purchased online. The article continues:

“The digital future success of grocery stores [is] based upon the online experience and shopping engagement. This takes into account factors such as coupons, ordering, delivery, in-store pick up and meal ideas. As the integration of the Internet and grocery shopping continues to evolve, those within the food and beverage industry should get ahead now in order to reap the benefits in sales. Both search and social play a part in the food and beverage purchase path, so you need to ensure your site and profiles are correctly optimized.”

Clare O’Connor adds to the growing pile of evidence that online grocery shopping is going to be big business. Todd Hale, Nielsen’s Senior Vice President of consumer and shopping insights, told O’Connor, “E-commerce is growing at 11% a year, but sales for consumer packaged goods online — food, groceries, everyday items — are more like high double digits, almost 20%.” He added, “This is the space Wal-Mart has to go after: perishable items. That’s where they need the infrastructure.” [“Wal-Mart Vs. Amazon: World’s Biggest E-Commerce Battle Could Boil Down To Vegetables,” Forbes, 23 April 2013] As noted in Part 1 of this series, traditional supermarket chains aren’t willing to relinquish this space to either Walmart or Amazon without a good fight. O’Connor continues:

“Today’s Wal-Mart isn’t ready to sell fruit and vegetables online. Same-day delivery is still only available in a handful of states. Its grocery hub on the web, Walmart To Go Delivery, remains in beta. Hale believes Wal-Mart should look to smaller regional businesses like FreshDirect and PeaPod as a blueprint as it rolls out its consumer goods delivery service. … Amazon is already a step ahead with its Amazon Fresh same-day delivery, currently available in the Seattle area but soon headed for California. ‘Amazon is already building an infrastructure for perishables,’ said Hale. ‘Groceries will be the battleground coming to the forefront.'”

Amazon’s Los Angeles operation actually began in June 2013. Ed Hudson, Senior Director of strategic insights for Kroger, told a group of real estate experts in Cincinnati, home to the company’s headquarters, that “Kroger is working to figure out the best option for urban locations.” Among the options being considered is grocery delivery. Hudson told the real estate experts that “technology has changed to the point where it would make more sense to deliver goods to customers, or have drive-thru options or personal shoppers.” [“Kroger working on multiple ideas for urban, downtown stores,” by Tom Demeropolis, Cincinnati Business Courier, 10 May 2013]

 

In the last post, I quoted an article written by Mark Hamstra in which he reported that David Dillon, Kroger’s Chairman and Chief Executive Officer, “remains convinced that while customers increasingly enjoy the convenience of … digital interactions, they overwhelmingly remain committed to shopping in their local bricks-and-mortar supermarkets — where they interact with their neighbors and store employees — for the bulk of their grocery-shopping needs.” [“Kroger Lets Customers Lead the Way in Digital World,” Supermarket News, 4 November 2013] For the moment, Dillon appears to be correct. Last January, Symphony EYC reported results of a holiday survey that showed that “68.7 percent [of respondents] said they preferred traditional store shopping for groceries with 40.2 percent wanting to order online with home delivery. When asked if they would also like to be able to order their groceries and select the relevant pick-up or delivery service through a mobile app, almost half said, ‘No.'” [“Shoppers Taking to Mobile Commerce More, But Not for Groceries at This Point, Survey Finds,” SupplyChainBrain, 16 January 2013]

 

There are reasons to believe this might change. One of my employees told me that his 90-year-old parents, who no longer drive but still live in their own home, rely on a local supermarket that offers online ordering and home delivery. They love it. They’ve tried to get their friends to use the service, but none of them know how to use computers! With baby boomers being the next generation to enter retirement, the percentage of people who know how to use computers will rise dramatically. As they reluctantly turn over their drivers’ licenses to their children or the state because of failing eyesight or other health considerations, they will likely become users of online grocery delivery services to help them maintain their independence. The companies that have established themselves in this sector will be the ones that reap the rewards.