A new report offers fresh insights into what online grocery shoppers value most and how grocers can compete profitably against online leader Amazon.
“Recent shelter-in-place orders have spiked demand but have also exacerbated the profitability issues which plague online grocery,” writes Timothy Laseter, a professor at the University of Virginia and author of the report How to Win in Grocery, commissioned by the microfulfillment technology company Takeoff Technologies.
“Competing with Amazon’s variety may be a losing game, but traditional grocers can leverage their existing footprint to serve online shoppers faster than Amazon. And by leveraging microfulfillment automation, they can do so at a lower cost than current crowd-sourced models,” says Takeoff Technologies.
While Amazon Founder Jeff Bezos built his online empire on the premise of low prices, fast delivery and vast selection, Amazon now offers a grocery value proposition that is distinct from the original strategy, observes Laseter, pointing to the Amazon Go format, which carries only 5,000 items, as compared to the 50,000 items in a typical grocery store.
“Amazon’s relentless pursuit of speed has forced a tradeoff contracting its positioning on both expansive variety and low cost. The shift reflects an inherent challenge: Retailers need to be close to the end customer to achieve fast delivery,” says Laseter. “While the tradeoff presents a challenge for Amazon, it offers an opportunity for the rest of the grocery industry.”
The online giant’s network of some 200 fulfillment centers is relatively small in comparison to the approximately 40,000 grocery stores across the country. “Grocery stores are able to serve as fulfillment nodes, shortening the 'last mile' to distribute groceries to shoppers’ homes faster than even Amazon could achieve,” says Laseter.
However, further challenging grocers’ profitability is the high cost of the crowd-sourced shopper model in partnership with third-party online grocery delivery companies. The model offsets the savings of a shorter last mile from the grocery store to the consumer, he adds.
Takeoff says its microfulfillment centers used by grocery chains, including Ahold Delhaize, Albertsons and Wakefern, break the old paradigm between low-cost, automated distribution center and the high-cost manual picking from a store.
“Centralized, automated fulfillment versus crowd-sourced shoppers saves picking labor but increases last-mile shipping. The microfulfillment center built into 10,000 square feet at the back of a grocery store provides low-cost picking and low-cost delivery,” asserts Laseter.
What Online Grocery Shoppers Want Most
Conducted prior to the shelter-in-place advisories, the Takeoff survey found that despite steady increases in online shopping overall, 48% of households never shop for groceries online. However, far more younger consumers are shopping online.
Among millennials, ages 18 to 34, only 27% never shop online—even though 48% still visit a grocery store weekly. The most common pattern—representing 18% of these households—is a weekly store trip coupled with a monthly online order.
Takeoff’s survey further sought to quantify the importance of four key tradeoffs within the leading online offerings: service, speed, variety and price.
Price ranked the highest, contributing 44% to the respondent’s decision. Variety ranked second at 21%, slightly above service model at 19%.
“Speed, the variable that has been the focus of startups such as Instacart, Shipt and PrimeNow, matters the least at 16%,” Takeoff asserted. Additionally, a grocer charging a service fee of $4.95 would have the most negative impact of any decision, while offering a 5% discount would have a large positive impact.
“Clearly, a grocer charging a fee must deliver value along multiple other dimensions to offset the negative impact,” says Laseter. The incremental cost of delivery is $9 to $18, depending on the travel distance, while staffing for curbside pickup at scale costs less than $2 per order, which may justify accepting a lower utility score, he adds.
“Since nearly half of our respondents never shopped online prior to the COVID-19 outbreak, using pricing as an incentive to reinforce a new online shopping habit could be a worthwhile investment,” says Laseter.
The survey also found that while a narrow, curated selection of grocery items scored significantly lower than a full-store selection, an expanded selection offers little incremental value. With regard to speed, Takeoff’s survey results indicate very little advantage to “1 to 2 hours” versus “same day.”
“Rather than attempting to match Amazon Prime’s expansive variety and next-day delivery,” says Laseter, “grocers should exploit the opportunity to provide faster service at lower cost to a broader group of consumers than PrimeNow.”