How E-Commerce Will Change the Grocery Industry

Originally published in Internet Retailer.

As more young consumers go without cars, grocery delivery becomes more attractive. But grocers will have to change processes to track items beyond the store.

Look around the next time you’re in a grocery store and you’ll see that the category is changing in ways beyond screens and phones.

Two of most obvious upgrades are the additions of home delivery (HD) and click-and-collect (CnC) services. In the HD category, there are standouts such as Google Express, Peapod, and Instacart. For CnC, we have Walmart Grocery and Kroger’s Click List, as well as Amazon’s plans to add more physical stores.        

While these are often cast as competing models, they’re really not. They’re simply different ways to meet consumer needs. As a result, neither will win out over the other.  But both will be required components of any omnichannel strategy.

It’s important to note that there is not a single flavor of each. CnC, broadly speaking, involves any fulfilment process in which the consumer orders an item online and travels somewhere to pick it up. As you might expect, CnC does not have a fixed operational model nor is it necessarily tied to a traditional store footprint. It can involve going to a traditional store or picking up at dedicated lanes outside of one. It can even include getting items at lockers or drive-through convenience stores.

HD is similarly diverse. It can involve scheduled or unscheduled delivery with different time frames (including almost immediately). We’re also seeing personal shoppers and organized parcel delivery, with additional models coming soon. In the U.S. today, for example, Amazon is reaching a scale where it’s reasonable to expect the company’s own delivery vehicles may soon be making weekly rounds through a neighborhood, dropping off and picking up household items, just like the milk man of the early 20th century. Time will tell.

Factors driving growth

A number of factors are driving the growth of these models, many of which are inextricably linked to the new digital economy:

  • Costs of transport. Today, car ownership is declining due to changing preferences among younger generations and as more and more people take to new services such as Uber and Zipcar. That adds a big cost to shopping. Where in the past delivery was a somewhat luxury service, it’s now a cheaper option for many consumers.
  • Stress. Growing evidence suggests that today’s consumers are willing to pay more for lower-stress options. For many consumers, traffic and in-person shopping create stress. As a result, they turn to HD and CnC options.
  • Time. Many people today are also seeking ways to manage their tasks more efficiently. With CnC or HD, consumers fill up a virtual cart over several hours (often in mobile) rather than compress everything into a trip to the store.

Looking at these factors, it might seem that HD is the simplest option, and the only must-have for most retailers. After all, it features no travel, low stress, and much saved time. And, in truth, for many grocery retailers, HD should not be an optional service.

However, HD has a number of weaknesses that make CnC an attractive complement to it. First, CnC provides for timely handling of temperature-sensitive foods, while HD may not always be feasible for frozen or refrigerated goods. In addition, CnC may actually be more convenient for many consumers, as collection can coincide with other chores (for example, during a commute)—and not all consumers can set aside a time window for delivery. It’s also more secure for customers who lack a discrete, at-home drop off location.

In other words, depending on geography, security, and other factors, one may prove more popular than another, but to meet customer needs comprehensively, just having one won’t work.

The implications

These new capabilities may be necessary, but neither is easy. Each requires much bigger changes than might appear on the surface. In the “old” days it was sufficient for suppliers to manage and track products at the order, pallet, or truck-level. Once the items arrived at the retailer, the supplier didn’t need to worry about them anymore. And once the products left the store, the retailer was in the clear. Now, retailers and suppliers confront a reality in which every location is a possible e-commerce distribution node. They will increasingly need to track delivery of individual item not just to stores, but also to residences and intermediary locations.  

As a result, the supply chain is lengthening all the way to the consumer and becoming more convoluted than the traditional, linear factory-to-store model. Today, we need to think of it more as a consumer-supply system, with many different parts, rather than a linear chain. We need to track individual items as well as trucks, orders, and pallets.

Of course, this requires new infrastructure, both for HD and CnC—and that mandates big changes in the entire business model. The reason is that when you model the basic economics of the two, a few things become clear. First, the difference in variable costs as a percentage of sales between CnC and HD becomes negligible as the number of participating customers increases. It’s necessary to invest in a fleet and employees before getting to that level, but once there, the differences in transportation between the two aren’t relevant.

Second, both are heavily affected by picking costs, which are largely influenced by the number of units per order and picking efficiency. (I am simplifying. In this context I am assuming pick to an order and use picking to include pick, sort, and pack. ) This is very important because traditional grocery stores are not optimized for the latter. In fact, they’re designed for the opposite. For the most part, retailers have sought ways to keep consumers in stores and maximize their travel in order to expose them to more assortment. To be cost competitive, whether CnC or HD, this must be addressed.

As a result, new infrastructure and capital investments are needed to succeed in both CnC and HD. CnC requiresnew distribution sites and/or store models, as well as fulfilment systems. HD needs, of course, trucks and optimized regional distribution centers. Getting from here to there may be necessary, but it won’t happen overnight.

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