The Radical Changes Coming To The Grocery Business

The pandemic and shutdown have caused the online grocery business to explode with growth. Earlier this year before Coronavirus, the online grocery business was well below 5% of total grocery sales. Now it appears to be well above 10% and is steadily heading to 20%. Unlike other sectors of retail, the profitability in online grocery is substantially different from in-store sales. The grocery business has very low profit margins and if the store has to supply the labor to take the products off the shelves and bring them to the parking lot for waiting customers or deliver to consumers’ homes, then the business loses money. Figuring out how to make money in online grocery is the squeeze that the grocery business is confronting and how it will be resolved is not yet known. The explosion in online grocery has made the question an urgent matter.

The clear leader in online grocery is Walmart
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. It is the leader in grocery overall and has invested massively in online. Walmart has been leading in grocery app downloads and has hired tens of thousands of people to facilitate picking, packing and delivering. Walmart manages online largely by having employees pick products in its stores and deliver to customers’ homes or bring groceries out to their cars for pickup.

Supermarkets are not set up to maximize efficiency for multiorder picking, they’re set up for consumers to travel to conveniently, make in-store purchase decisions, pay and get out. Operating the online grocery business with store personnel from inside existing stores is unlikely to ever be efficient enough to make money. Systems built from scratch are more likely to have the efficiencies required.

Three Major Approaches

The industry has three major types of approaches to the issue. The first, automating in-store picking, is exemplified by a system Walmart has implemented in a Salem, NH store, called Alphabot (#3 grocer Albertson’s is also testing such a system [Disclosure: I own Albertson’s stock]). The system takes 20,000 square feet out of a supermarket to set up shelving and a robotic picking system estimated to work ten times faster than a human could.

The second system, building a huge, entirely automated warehouse, is demonstrated by a UK-based business called Ocado whose strategy is to maximize scale and automation. An Ocado warehouse has over 1,000 robots and can handle 220,000 orders per week. Today Ocado has about 15% of the online grocery market in the UK, has a market value of over $25 billion and is profitable (based on analyst-normalized earnings). Ocado has a number of joint ventures with other grocers, including US #2 grocer Kroger
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, to build Ocado-style warehouses in the U.S. to fulfill Kroger’s online orders.

The third system, small, flexible warehouses capable of fast, local delivery of a limited number of products, is demonstrated by an Israeli company called Fabric. Fabric builds fulfillment systems in densely populated areas (and inside existing stores) to facilitate pickup or delivery to consumers within one hour of a relatively focused range of products. The video below gives you an idea of how it works.

No one knows which one of these approaches will wind up winning. The industry discussions seem to favor the small, flexible approach because it facilitates faster delivery. But most likely, a combination of the three, customized to the resources of each grocer and their customer base, will win the day.

The Entire Approach Could Be Wrong

The way the industry has been approaching the problem has been to figure out how to bring the weekly shopping trip to the consumer instead of having the customer come into the store. But what if the paradigm of the weekly shopping trip itself comes to an end? What if the changes in technology mean that consumers no longer think about buying groceries in a once- or twice-weekly trip? What if being able to buy groceries electronically means that there’s no need to consolidate all food shopping into one trip? What would that look like?

Think about a supermarket as you know it having two components: core and periphery. In the core are staples, things you buy all the time on a regular cadence like condiments, breakfast foods and household supplies. In the periphery are less regular items, more discretionary, like bread/pastry, meat, fish, fruits and vegetables. What if there was an app on your phone that organized your core items, your staples, to be delivered on a regular basis? You could adjust the regularity for each item on the app, or cancel it completely if you went traveling. Your shopping trips would then consist of buying only those items that aren’t regular purchases for you.

Now take it even one step further. You’re already familiar with how Amazon
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facilitates your purchases from third parties and you may have experienced similar setups on Walmart, eBay or other sites. What if a provider gave you a great app that sourced groceries and other food and household items from multiple stores in your area? If the app worked well and the products were to your liking, you wouldn’t care that the app operator didn’t own the products it was offering. In that case, your meat might come from one butcher, bread from separate baker and milk from yet another place. Whoever had the best access to great products at attractive prices and an easy-to-use app would win.

It may be that the winner in the grocery business, an industry with sales of about $800 billion, could be the business that creates the most effective mobile app and logistic system behind it. Industry leaders laugh at that idea but I wonder what they think when they ride in an Uber and reflect on legacy taxi systems. The technology for it all exists today. You may say that can’t work but we are already seeing the signs of it. A company called Subziwalla supplies specialty Indian foods shippable anywhere in the U.S. It’s a small business right now but importantly, it’s profitable, growing rapidly, and owns only a small percentage of the groceries it sells. Subziwalla sources and leverages distributor inventories, which they purchase only after the customer selects the product. (Disclosure: I am an investor in Subziwalla and am an advisor to the company.)

If these changes happen, the weekly shopping trip is on the way out and supermarkets as we know them are endangered. That is the possible future that the grocery industry is looking at and no one is preparing for it. If it happens, we will see many dark grocery stores, just as we have seen in the fashion industry on virtually every major shopping street in the country. Some of the stores that go dark will be refitted to be distribution centers for online grocery orders but their locations were not chosen for that purpose and not all of them are suited to it. Grocery could become yet another retail sector, decimated by new thinking, online ordering and different logistics that no one dealt with soon enough.

If you listen to industry leaders speak in public, it sounds like they’re on a glide path to gradual and steady adoption of online grocery. But as the online business explodes and heads towards serving 20% or more of the customers, store economics will change. In an important way, the world of the grocery business is on fire. If that’s right, the leading players need to prepare now or find themselves displaced by new ideas.

— to www.forbes.com

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