Grocers Are Partnering For Digital Growth
The last few months have been a watershed of new deals around grocery fulfillment. Walmart is partnering with DoorDash, Kroger is investing in Ocado, Target is acquiring Shipt, and Amazon is delivering groceries to consumer vehicles. Fulfillment has become the key parameter for grocers to grow their digital business. Why? Digital grocery is still small, and grocers are unable to justify fulfillment costs. Digital grocery is growing at a CAGR of 17% globally but remains less than 3% of the US retail grocery market. The lack of comparable ROI data in the small digital grocery market has made it difficult for grocers to make the case to invest in digital expansion, especially since grocers expect rapid payback on investments. With the exception of large grocers such as Kroger or Walmart, most grocers have little ability to invest in broad-scale digital initiatives given average net margins for retail grocery of 1.62%. Tiny margins, combined with delivery costs and cold chain requirements for perishables, make profitable eCommerce solutions for grocers very difficult. To make eCommerce investments economical, grocers are:
- Fulfilling through third-party store picking and delivery services. Grocers that haven’t mastered the eCommerce supply chain are offloading tasks to third-party store picking services such as Instacart for key capabilities like web presence and order fulfillment. Store picking is a service through which third-party shoppers review a customer’s online order; find, select, and purchase the items on the order from preferred stores; and finally deliver these items to the customer. As the dominant player in the US, Instacart partners with over 160 grocers and warehouse clubs, including Ahold, Albertsons, Aldi, BJ’s, Costco, H-E-B, Publix, and Sam’s Club. By contrast, companies in the order fulfillment space — such as AmazonFresh, Deliv, DoorDash, FreshDirect, Peapod, Postmates, Shipt, or Uber — offer primarily delivery services from select grocers. With delivery services, grocers avoid the hassle of delivery and typically push the service premium (e.g., delivery fees, service fees, and tips) to the customer.
- Building an in-house eCommerce picking and delivery service. Walmart has actively pursued developing its own associates to do store picking. The retail giant has expanded its grocery delivery service to 1,200 stores, starting with a three-week training program and employing over 18,000 shoppers. Currently, more US consumers select Walmart than other online grocery services. At Walmart, the effort to launch store picking and delivery is not exclusive: Walmart also uses other services such as DoorDash and Postmates for the delivery part of its customer solution. More importantly, to maintain a continued customer relationship, Walmart executives keep both product picking and selection in-house.
- Automating their supply chain for eCommerce parcel delivery. UK-based Ocado opened its automated warehouse and launched the Ocado Smart Platform, which hosts 1,100 robots that function as an automated storage and retrieval system (AS/RS) for baskets of grocery products. Although many grocers such as H-E-B, Publix, Stop & Shop, Wegmans, and others have implemented AS/RS systems, these systems were designed for pallet or case shipments, not individual parcels. Kroger is now partnering with Ocado to fund and build 20 automated parcel fulfillment centers in the US. The partnership automates Kroger’s eCommerce fulfillment and supply chain and allows Ocado to expand into the US. Ocado provides end-to-end routing, scheduling, and delivery services for automating warehouses in the eCommerce supply chain. Despite Ocado’s advanced capabilities, it only manages 1.2% of the UK grocery market and has over 12,600 employees, making automation very human-intensive.
The market will continue to see investment by grocers in third-party fulfillment, in-house omnichannel, and supply chain automation to develop digital solutions. Those grocers who can provide an economical, sustainable solution to digital fulfillment will be the ones who are left standing in the digital grocery space.
 Source: Forrester Data: Online Grocery Retail Forecast, 2017 To 2022 (Global). US online grocery sales make up 2.9% of total US grocery sales, per 2017 forecast. See Forrester report: “The State Of Global Online Grocery Retail, 2018″ and “Sector Spotlight: Grocery”
 Source: Industry retail net margins provided by Aswath Damodaran, NYU Stern School of Management, Aswath Damodaran, January 2018 (http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html)
 Source: Interview with Andrew Nodes, VP, retail accounts, Instacart, August 2017
 Source: Walmart press release, March 14, 2018 (https://news.walmart.com/2018/03/14/walmart-to-expand-online-grocery-delivery-coast-to-coast)
 Source: Holly Godwin, Ocado Technology, May 9, 2018 (https://www.ocadotechnology.com/blog/step-inside-ocados-next-generation-warehouses/index.html)
 Source: Heather Haddon and Saabira Chaudhuri, The Wall Street Journal, May 17, 2018 (https://www.wsj.com/articles/kroger-turns-to-u-k-online-grocer-to-lift-its-digital-business-1526564898)