SKU’d Thoughts 11: Can grocers get a cut of online sales?
Currently, only 3% of groceries are purchased online but a Nielsen study shows change is on the horizon. The study predicts online grocery will capture 20% of the total grocery sales by 2025 to reach $100 billion in consumer sales. For grocers to win a major share in this pending growth, they need a well-optimized supply chain. This means nailing down the fulfillment and delivery components of the supply chain.
Fulfillment is the process of receiving, packaging and shipping orders. Traditionally, fulfillment happens at a large centralized warehouse (fulfillment center) but in the case of grocery delivery, this is just not feasible. Since these fulfillment centers are usually located outside of urban centers where a majority of online grocery orders will be coming from, it makes same day fulfillment at scale a nightmarish scenario. Fulfillment for online and physical grocery locations are two different operations and have to be thought of as such. Some keys to solving the fulfillment puzzle are micro-fulfillment centers and advanced solutions. Kroger is leading the charge with its plans to build 20 micro-fulfillment centers known as “customer fulfillment centers”, which will be highly automated warehouses for handling e-commerce grocery orders. But solutions are still not optimized for picking the perfect produce; produce preference will be a major huddle in fulfillment.
Once the grocery orders are fulfilled, they need to be delivered to the customer. As I mentioned in SKU’d Thoughts 9, delivery is the most important piece of e-commerce operations and likely the most difficult because it’s costly and inefficient at scale. Grocery deliveries are doubly difficult because of the perishable nature of some products. In my opinion, this is one of the reasons online grocery hasn’t taken off yet; delivery windows work fine for other product categories but when it comes to temperature-sensitive items like fruit and dairy, consumers desire exact delivery times. According to a YouGov and GT Nexus survey, 80% of more than 6,000 consumer respondents “will switch brands if their bought goods aren’t delivered on time or if they don’t have the desired level of visibility of bought goods in transit.” Grocers have been working on delivery to customers through investments and key partnerships. Walmart and Target bolstered their same-day delivery through the acquisition of Parcel and Shipt, respectively and Alberston partnered with Glympse for delivery tracking.
Online sales are becoming the table stakes for the grocery industry and to survive, grocers on their already razor-thin margins (1–2% average margins) have to continue investing in and partnering with logistics players who are working on leading-edge technology and techniques. Big grocers, like Kroger, Target, and Walmart, have been ramping up investment and partnership efforts in hopes of holding off Amazon. This logistics arms race is a positive for emerging companies working on perfecting the fulfillment and delivery of goods as they will become key M&A targets for grocers looking for an edge and a big share of the potential online grocery boom.
Cross-posted on Medium