Digital disruption at the grocery store

E-commerce has changed the customer shopping behaviour and transformed the retail landscape from brick-and-mortar to omnichannel. Grocery purchase had largely remained immune to this trend - until recently.

Powerful trends, competitive pressures, tech advances, consumer attitudes and behaviours will disrupt the groceries market in the coming years. It has already started happening. Some grocers recognising the trend in the retail sector have started moving in this direction.

The well established and well funded online retailers are likely to invest in automation and innovative operating models to solve the challenges in order fulfilment and last-mile delivery.

The speed of technology adoption is startling and it is accelerating faster than ever. Many established companies, startups with venture capital funding are making major investments and acquisitions that would change the landscape quickly.

The disruption in online groceries market is a global phenomenon and five powerful trends will shape the industry transformation, especially in the US.

The fight is on

Until recently, the shopper's options were limited to what was available with the local shop. But today shopping online from the comfort of your home and getting the goods delivered at home has become accepted and is catching up fast. Even fresh vegetables, fruits, milk, meat and other perishables are being delivered quickly by the online companies. Many companies are innovating by offering ready to heat, ready to eat meals and vending machines for fresh products. Some are expanding into health and wellness products that provide more opportunities for growth and customer delight. Most of these companies are looking for new ways to partner with packaged goods companies to engage more deeply with customers. The new companies have more agility, a culture of innovation to offset the disadvantage of lack of brand equity and scale.

Early movers have advantages

this market is supply-driven and consumers do not know what they want. Many first time shoppers expect to get their groceries seamlessly than when going to stores. Changes that are taking hold

• Order tracking and delivery slot notification.
• Expanded assortment.
• Online and in-store parity.
• Low per order fees and attractive subscription models.

While convenience attracts the first time customers, it may not keep them coming back. Some miss the sensory experience and feel they miss out on discovering new items, new ideas. The winners will be those who deliver a great and consistent experience. 

Scale matters

Various factors affect the investments in order fulfilment - demand density, fragmented requirements in terms of home delivery vs pickup, timings, etc. This makes it difficult to justify investments in storage, delivery fleets as it may be difficult to cover the costs without adequate utilization. Many companies are their existing stores as order fulfilment centres rather than make new investments. This can lead to better utilization of employees as they can fulfil online order when customer traffic is low. Some companies may tie-up with non-competing companies to create a seamless experience for customers. 

Economics improve with automation innovation

The two pillars of e-commerce fulfilment - picking and last-mile delivery add significant costs to an already low-margin business and so automation and robotics is the answer. This requires heavy investment and it has to be justified by scale and demand density.

Other constraints like regulations which are not yet in place may slow down the investment in automation, till they are in place. However, automation is evolving rapidly drawing from experiences from different industries

Talent gap could be a major bottleneck

Every industry is struggling to recruit and retain digital talent, given that demand outpaces supply. This is a major issue as it can become the most important determinant of the companies chances of succeeding in the market. These companies should take additional steps to compete against the demand from large technology companies 

• Hire a chief digital officer with technical knowledge and business vision.
• Form positions for data scientists, tech engineers and experts.
• Develop a clear digital strategy.
• Breakout from rest of organisations and rethink location if required.
• Rethink traditional recruitment practices. 
• Offer more of the benefits millennials seek.
• Create an innovative environment.
• Prepare to pay market rates and reward employees for attracting talent.

Online grocery on its own is not new but the investment and innovation are unprecedented. This will continue to be a supply-driven market and the action taken by the players will determine what the industry becomes in future. Consumer expectations are high and are still evolving. here are a few concluding suggestions to the companies striving to win.

1. Set an aspirational vision for your customer proposition which is data-driven.
2. Build a robust demand forecasting model.
3. Determine an optimal fulfilment model.
4. Design your tech stack and build your IT system.
5. Modify the organisation and operating model to embed digital t the core.

Digital disruption at the grocery store

by Steven Begley, Eric Marohn, Sabah Mikha, and Aaron Rettaliata

McK February 2020