The Challenges of Grocery Ecommerce
History of modern grocery stores
Prior to 1916, grocery stores were not self-service. A customer gave his/her grocery list to a store clerk, then the clerk walked the aisles to pick and pack the items on the customer’s behalf. This costly, labor-intensive approach led to higher operating costs, which translated into higher prices for customers.
In 1916, Clarence Saunders opened the first Piggly Wiggly in Memphis, Tennessee. This was the first self-service grocery store in the U.S. For the first time, customers could walk through the aisles and pick their own items, which significantly reduced the number of clerks needed. This reduction of operating costs allowed Piggly Wiggly to pass the savings on to the customers in the form of lower prices.
What started as a lone store quickly grew into a highly successful chain, peaking at over 2,600 stores in 1932. Grocery store chain Humpty Dumpty’s introduction of shopping carts in the mid-1930s further enhanced the Piggly Wiggly model, becoming the industry standard that is still widely deployed today.
Price competition and falling margins
Even after broad adoption of the self-service model, the U.S. grocery store industry has been a notoriously low-margin business. Ironically, uniform adoption of the self-service model has been a contributing factor. Walk into nearly any grocery store in the U.S. today, large or small, and both the layout and customer experience will be basically the same. The primary differentiator between stores has been price.
Customers, who benefited from reduced prices, have come to demand near 24-hour access along with high variety and ever-present availability. Group all these factors together with high operating costs, particularly for large supermarkets, and the net margins have become very low.
Ecommerce and changing expectations
Now enter online customers who expect the same variety and availability at little/no premium on price. As customer purchasing habits and expectations continue to evolve, trending more and more toward ecommerce, do online grocery sales forecasts truly warrant deviation from the tried-and-true self-service model?
It’s no secret ecommerce sales in the U.S. are growing. According to U.S. Department of Commerce estimates, online sales increased from $390 billion in 2016 to $453 billion in 2017, then to $517 billion in 2018. That is an increase of nearly 33% in just two years.
While consumers continue to grow more comfortable placing orders online, certain market segments have benefited more than others. A report by Deutsche Bank Securities stated that 30% of computer & electronics sales now happen online. For apparel, over 27% of sales occur online. Consumers are now skipping store visits by taking advantage of subscription services to automatically place periodic orders for all kinds of products ranging from pet food to laundry detergent to nutritional supplements.
Approaches to online grocery order fulfillment
With consumers trending toward ecommerce, where does grocery fit into the equation? According to a report by eMarketer, only 2% of U.S. food and beverage sales will happen online in 2019. Although this percentage is low relative to other market segments, it represents nearly $20 billion in sales. This same report estimated that U.S. food and beverage online sales will grow to over $38 billion by 2023.
Although grocery retailers cannot ignore the opportunity these forecasts represent, there is not yet a Piggly Wiggly-type uniform approach to recognizing these sales. Numerous approaches are being explored by grocery retailers and their new partners. What follows is an overview of some of the more popular methods along with advantages and disadvantages of each:
Curbside Pickup (aka Click-and-Collect)
- Placing the Order: The customer uses the store’s website/app to select a specific store, then places an order. The customer chooses a date and timeslot for picking up the order.
- Fulfilling the Order: A store employee gathers items for the order directly from the store shelves. The items are then staged in a temperature-controlled area inside the store until the customer arrives.
- Picking Up the Order: The customer will receive a notification (i.e. phone call, text, or email) when the order is ready. At the store, the customer will drive to the designated parking area. A store employee will deliver the prepared order and load it into the customer’s vehicle.
- Who Does This: Walmart, Kroger, Meijer, Wegmans, and Target are a handful of the large grocery retailers offering this service.
- Advantages: Retailers utilize existing brick-and-mortar infrastructure to service online orders. Through this approach, retailers offer free pickup (often with a minimum order value). Many provide same-day pickup within a few hours after order placement.
- Disadvantages: Stores must manage and operate an ecommerce platform. Stores must add dedicated employees to collect, pack, stage, and deliver orders. The entire process requires labor that had been removed by adopting the self-service model. Moreover, these employees navigate through the same aisles as the in-store customers, which risks souring the experience of those customers. Finally, introducing the indoor staging and outdoor parking/pickup areas to pre-existing stores requires construction renovation projects and/or reclaiming spaces at the front of the store that were previously leased to external vendors.
- Placing the Order: The customer places an order through the retailer’s website/app. The customer chooses a date and timeslot for delivery.
- Fulfilling the Order: The order is routed to a local fulfillment center based on the customer’s zip code. Fulfillment Center employees pick, pack, and ship the order directly to the customer.
- Delivering the Order: Orders are delivered by the retailer’s dedicated fleet of refrigerated vans/trucks. A driver delivers the order to the customer’s door and, in some cases, unpacks the items onto the customer’s kitchen counter.
- Who Does This: Amazon, Peapod, and FreshDirect are three retailers offering this service.
- Advantages: Through this approach, some retailers offer free delivery (with a minimum order value). Many provide same-day delivery within a few hours after order placement.
- Disadvantages: Retailers must manage and operate an ecommerce platform. Retailers must invest in dedicated infrastructure ranging from chilled/frozen warehouses and all the equipment within them to specialized vans and trucks. Fulfillment centers are typically located outside of urban areas, which limits the effective range delivery drivers can service. Delivery routes must be managed strategically to limit fuel costs and avoid traffic congestion while achieving promised delivery times.
- Placing the Order: In this hybrid of Curbside Pickup and Direct Delivery, the customer places an order from a local store through the provider’s website/app. The customer chooses a date and timeslot for delivery.
- Fulfilling the Order: The provider’s employee visits the store selected by the customer to pick and pack the order.
- Delivering the Order: The employee who picked the order from the store also serves as the delivery driver. Employees use their personal vehicles, much like UberEats and DoorDash, to deliver the order to the customer’s door.
- Who Does This: Two companies providing this service are Shipt and Instacart. Shipt is partnering with retailers such as CVS, HEB, Smart Shop, Kroger, and Target. Instacart is partnering with ALDI, Sam’s Club, CVS, HEB, and Kroger.
- Advantages: For the grocery retailer, this service allows their stores to be available for ecommerce without adding an ecommerce platform, brick-and-mortar infrastructure, or delivery equipment. No additional store employees are required. For the service provider, operating costs are limited primarily to managing the website/app and paying the employees who pick, pack, and deliver the orders.
- Disadvantages: Service providers must maintain accurate, current inventories and product locations for items within many physical stores for every participating grocery retailer. Employees of the provider walk the aisles of the stores while to fulfill orders, potentially adding congestion that might sour the experience of other shoppers.
Micro-Fulfillment Centers (MFC)
- Placing the Order: The customer places the order directly on the retailer’s website/app. The customer chooses a date and timeslot for pickup or delivery.
- Fulfilling the Order: Rather than pick the order directly from the shelves of a store or from a large fulfillment center using its own employees, the grocery retailer partners with the MFC operator to fulfill online orders. MFCs, which may be located in urban areas or within existing brick-and-mortar stores, hold inventory specifically allocated for online sales. When an order is received, it gets routed to an MFC based on the customer’s zip code. The MFC leverages automation and robotics to pick and pack the order quickly and efficiently.
- Delivering the Order: Both curbside pickup and partnered delivery are options.
- Who Does This: CommonSense Robotics and Takeoff Technologies are two companies offering to partner with grocery retailers on this approach.
- Advantages: MFC providers offer high-speed, low labor order fulfillment by using robotics and automation. The micro-fulfillment centers require a small footprint relative to traditional fulfillment centers (e.g. 8,000-10,000 sq ft), which means they can be located in urban areas or in underutilized space within an existing store. Order fulfillment is part of a broader turnkey package offered to grocery retailer, which also includes an ecommerce platform, online inventory management, customer service, reporting, and analytics.
- Disadvantages: Grocery retailers must maintain separate inventories outside the stores and fulfillment centers operated internally. If the MFC goes into an existing store, that space could have been used for other purposes. Infrastructure for curbside pickup and/or delivery is still necessary.
Grocery retailers, who had been somewhat insulated from the ecommerce boom until recently, are now clambering to position themselves for success in the ecommerce channel. Many approaches can be taken to fulfill online orders and recognize these sales. With razor-thin margins on one side of the equation and evolving customer expectations on the other side, each grocery retailer must determine which approach, or combination or approaches, best suits its unique position in the marketplace.
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