In a two-part series entitled “Supermarkets and Digitalization, Part 1 and Part 2,” I cited an article 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] Regardless of such reluctance, there are a number of companies that now offer this kind of home delivery service. A study released earlier this year by ecommerce service provider Fluid found that “New York-based FreshDirect was rated to provide the best customer experience.” [“FreshDirect offers best online experience: Report,” by Mark Hamstra, Supermarket News, 14 April 2014] Hamstra continued, “FreshDirect beat out Google Shopping Express, which not surprisingly, offered strong searching and sorting features, but was considered weak on grocery-centricity. The other sites tested, in order, were Safeway, AmazonFresh, Peapod, Walmart to Go, Harris Teeter and Whole Shopper, the online offering from Whole Foods Market.”
Despite the reluctance of consumers to use home delivery services, Tuttle reported, that another online option — online ordering and customer pickup — seems to be gaining ground. “The need for the weekly 30-minute expedition browsing up and down the aisles of the supermarket is being eliminated,” he writes. “Instead, many shoppers are taking advantage of new services, in which they place an order online and hit a convenient pickup location to retrieve their groceries — often without ever having to leave the car.” One of the giants in the industry, Walmart, certainly believes this business model has a future. Earlier this year Kim Souza reported, “Wal-Mart is wasting no time in deploying its latest grocery format — a stand alone pick-up center where shoppers can drive up and retrieve their online orders and never leave their car. It’s a new format concept for Walmart U.S. who continues to up the ante for convenience in the highly competitive grocery sector.” [“Wal-Mart to build online grocery pick-up center in Bentonville,” The City Wire, 30 April 2014] Souza continues:
“The concept was introduced by Bill Simon, CEO of Walmart U.S., on March 4 during a speech he gave at the Raymond James investors conference in Orlando. He said Wal-Mart has tested drive-through pick-up options for online orders in 11 stores in the Denver area with a 90% approval rating. But, Simon also said the success of the drive-through test prompted the retailer to consider stand-alone depots or modulars that are used as mini fulfillment centers for online grocery orders. Simon described the concept modular as ‘Sonic-like,’ but he gave no timeline for this launch.”
Sumit Chandra insists, “A battle is brewing in the online grocery space between traditional retailers and online only retailers.” [“Online grocery: Strategies to win within and beyond the store,” Supermarket News, 24 March 2014] Kellie Peterson, Director of Marketing at iinside, agrees. “The supermarket business has never been more competitive than it is today,” she writes. “In any given geographic location, supermarkets compete with traditional rivals including local, regional, national and international stores, as well as farm shares, farmer’s markets, and specialty retailers. Big-box retailers are, of course, also getting into grocery, and then there’s the increasing threat of online retailers.” [“Grocers Meet the Online Threat,” Chain Store Age, 20 May 2014] Chris Biggs and Julian Suhren, analysts with Boston Consulting Group, insist that many food industry executives and consumers are out of step when it comes to the future of online grocery shopping. “Ask most industry executives about the prospects for online grocery shopping,” they write, “and you’ll encounter hesitancy, if not skepticism. Ask consumers — especially younger, more affluent consumers and families — and they’ll tell you that they are excited by the idea. They wonder why the industry has been slow to deliver.” [“Omnichannel Alchemy: Turning Online Grocery Sales to Gold,” bcg.perspectives, 2 October 2013]
Biggs and Suhren indicate that food industry executives have good reasons to be skeptical. “Online grocery shopping has yet to take off in most countries for many reasons,” they write, “cost, logistical complexity, and the prospects for profitability key among them. There’s also the fact that many of the business’s early pioneers went bust.” In the posts mentioned above, I discuss some of the reasons why early pioneers failed. Biggs and Suhren insist that many of those challenges have been addressed and they predict, “The prevailing doubtful view is about to hit its expiration date. We expect the global online grocery market to reach $100 billion by 2018.” They continue:
“We believe that grocers in most markets can establish profitable, substantial online businesses with positive returns on investment and healthy margins within a period of a few years. Companies as diverse as Tesco and Fresh Direct have done it. And even if a grocer does not believe that it can drive incremental profits through an online service, it nonetheless needs to act or risk losing out in a race for omnichannel sales.”
Biggs and Suhren go on to outline “four fundamental imperatives for building a successful online grocery business” and they believe these imperatives “can be applied to most markets and company circumstances.” Those imperatives are:
- Don’t wait. Seize the opportunity now to lock in core customers and drive share.
- Avoid the costly last mile. Start out with the “click and collect” model, in which a customer chooses goods online and then picks them up at a store or a dedicated facility, and add home delivery in selected areas only after sufficient local scale has been achieved.
- Target affordable differentiation. Invest in the drivers of online satisfaction. Focus on the elements of the customer value proposition that will attract and retain shoppers while keeping a careful eye on the economics of execution.
- Evolve and adapt. Whatever model a grocer begins with will need to evolve over time as the market and customer base — and the company’s own capabilities — develop. Plan a journey with a realistic timetable and return targets.
As you can see, the business model that seems gathering the most band members onto its wagon is the “click and collect” model. Chandra concludes, “Brick and mortar food retailers who develop innovative delivery and/or pick-up models be well positioned to retain the majority of trips and share of wallet.” In spite of all the hype associated with online grocery purchasing, a recent PricewaterhouseCoopers survey “found that only 1 percent of consumers said online shopping is their primary way to purchase groceries. That’s despite the fact that the vast majority of the 1,000-plus respondents have access to the option.” [“Online grocery a tough sell despite all the buzz,” by Krystina Gustafson, CNBC, 10 June 2014] Steven Barr, PwC’s U.S. retail & consumer practice leader, seems to agree with Biggs and Suhren that despite the slow start for online grocery sales, the numbers are likely to grow. He told Gustafson, “When the major retailers start to mass adopt a concept, then that certainly acts as an accelerator for changing consumer behavior. However, we’ve been tracking a number of macroeconomic ‘megatrends’ that we see slowly reshaping the grocery landscape. Specifically, the changing technology landscape, increased urbanization and changing demographics create the perfect recipe for online grocery retail.”
According to Gustafson, Forrester reports that “grocery accounts for only a minuscule 2.2 percent of online sales;” but, the megatrends noted by Barr will likely result in that percentage creeping up in the years ahead — especially in urban areas.