Sweeping the Competition in the Digital Groceries Market

One of the reasons why I picked the future of the grocery delivery service industry to do my presentation on, is because I love grocery shopping.

When I was growing up we only had the 12 free channels you get if you don’t buy cable (I had a very deprived childhood). Besides PBS, if the channel-gods were with us, my siblings and I would stumble upon old reruns of the show Supermarket Sweep. The basic premise of this game show, which was originally shot in the 60s, was that three teams competed to accumulate the highest total value in groceries within a certain allotted time limit. When the time ran out, cashiers would ring up the items in each teams cart, and whoever grossed the highest value for their items won. This show entranced us.

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After seeing our first episode, my siblings and I’s relationship with grocery shopping changed forever. We would always want to go shopping with our parents, and we would insist on playing our own version of Supermarket Sweep, in which my parent would divide up the grocery list among the three of us, and we would race off down the aisles to try and complete our list first (which I now realize must have been incredibly obnoxious for other shoppers). This love of grocery shopping has carried into my adult life; only I now compete against myself (kidding!).

Digitalizing Groceries: the End of an Era?

So when I first learned about grocery delivery service startups, I was worried this spelled the beginning of the end for grocery stores. I thought they would go the way of Blockbuster and Borders, falling to the wayside of consumers preference for immediate gratification and Amazon-influenced delivery. But, through my presentation research I found something quite different.

Adaptation Instead of Elimination

According to a joint study on the digital food consumer conducted by the Nielsen Company and the Food Marketing Institute, grocery stores that can quickly adapt to the change in consumer purchasing behavior will be well placed to lead the online grocery industry. Reading the recommendations from the study, gave me flashbacks to our third class on “Digital Transformation of the Enterprise,” and the article we read about achieving digital maturity. Essentially what the study advocated for was both entering the developing market by creating a long-term strategy that would integrate all the major players throughout each chains channel, as well as the short term strategy to focus on making the early adapters experience pleasant, to make sure they are repeat customers.

The study also talked about how physical stores should be adapted to support the rising e-commerce. Brick-and-mortar stores should be reconfigured to emphasize perishable goods like bread, fruit, vegetables, meats, and dairy, and decrease the amount of retail space that “center store items” (i.e. canned goods, condiments, packaged goods, etc.) occupy, as these sales will move increasingly online. This also means that stores will have to adapt the back of the store, to make it easier for fulfillment of online orders.

Supermarkets that create an easy, pleasant experience for customers, supported throughout their supply chains, will perhaps be the most well placed for the move to digital shopping. While startups like Instacart are appealing for the Silicon Valley set, I think that traditional stores and companies like Peapod that establish partnerships with supermarkets will actually be the winners in the race to providing successful digital groceries. Because Instacart is a platform that connects consumers with personal shoppers, and is not working exclusively with a specific grocer, they will always struggle with the price they have to charge customers. In the tight-margin game that groceries is in, without forming partnerships with the stores themselves, Instacart will only ever be able to have added costs for delivery. Peapod meanwhile, is working in conjunction with Stop & Shop, which means they together can look to cutting costs throughout the supply chain to optimize delivery, which will lead to cost cuts for the end consumer.

This is not happening yet—both Instacart and Peapod are expensive and charge a premium for their delivery services, but down the line I believe Peapods’ model will be more successful than Instacarts’.

Amazon Enters the Fray

Another argument for the survival of brick-and-mortar supermarkets is Amazon’s purchase of Whole Foods. When Amazon bets on consumer behavior, it’s probably a strong signal to the rest of the market that customers will still be physically shopping for their groceries in the future. Through my research, I saw two possible routes developing (which can also be combined) for where Amazon takes Whole Foods. I believe that it will use these storefronts as ready-made distribution centers to support their Amazonfresh delivery (as well as provide consumers with the associated goodwill that comes with the Whole Foods brand), and I think in the future they will possibly use the pre-made stores to roll-out their Amazon Go models.

Amazon Go is a physical store the offers a new grocery shopping user experience. The store has no checkout line—you use your Amazon Go app to enter the store, you pick out your items, which are automatically added to your virtual cart, and then you just leave the store. Amazon then bills your account. This system is still in beta mode in one Seattle location, and only available to Amazon employees. Buying Whole Foods is a great way to acquire physical stores, without having to put in the large investment you would need to create all of those from scratch.

 

So while it looks as if the industry will be going through a phase of changes, I will still be able to play Supermarket Sweep for the foreseeable future.

9 comments

  1. Really interesting blog post! Even with Peapod, Amazon Fresh, Instacart & other grocery delivery services, I never took into account the effect of perishable foods. Your research that found perishable foods will be moved to the center of the supermarket while other canned, or foods that last longer on the shelf will continue to migrate to online delivery was interesting to read. I wonder if this will make the restructuring of grocery stores eventually smaller and more focused on selling fruits, vegetables, bread and other foods that do not have a long shelf life.

  2. fernanfu89 · ·

    Really Interesting article! I do believe that brick in mortar is dead, rather that stores will have to adapt to the digital age as you mention. I feel one of the most important things, as you mentioned, is how will these stores transform to cater to the new clients, but most importantly, use space in a thoughtful way, such as not waste all space on canned food, which you can order online, but rather use space for perishable food.

  3. s_courtney18 · ·

    The shift of grocery stores from prepackaged and perishable goods to majority perishable goods makes me wonder whether farmers markets and single-purpose stores (bakeries, meat shops, etc.) will have an upsurge as well. If only one stop has to be made, people might be more incline to stop at a specialty shop if they only have to purchase one type of perishable good. I would agree though, that increasing shelf turnover through perishable goods will be the best strategy for brick and mortar stores as they shift to online grocery retail as well.

  4. Nice post. I confess that the one household chore that I absolutely HATE is grocery shopping. I’d definitely go online for that whenever possible. We’ve experimented with several, though, and have had mixed results.

  5. Interesting post! You bring up a great insight about Instacart’s business model and its need to squeeze out whatever is left of the margins through delivery costs. I have tried ordering online groceries from both Instacart and Bfresh, the latter being a traditional brick and mortar grocery store that has launched its online delivery service. I have stuck to Bfresh, and I agree with you that traditional stores will most likely come up on top. Bfresh has no subscription fee, and does not charge a delivery fee as long as your order total exceeds a certain threshold ($35), and I assume it is able to do this precisely for the reasons you have mentioned. Having walked into a physical Bfresh store, I also noticed that they have been stocking more meat and other perishables like seafood. It will be interesting to see which store will be able to most quickly adapt and reconfigure itself in response to the changing industry trend.

  6. juliabrodigan · ·

    Great blog post and presentation! I loved how your presentation was unbiased and gave insight to both sides. I agree that all grocery stores will not be replaced with digital ones. A lot of people go to the grocery store everyday to pick up fresh ingredients or if they spontaneously decide they want to cook a certain dish that they do not already have the ingredients for. This idea reinforces your idea that grocery stores should focus on perishable/fresh items. Canned foods, snacks and other foods that have an extended shelf life are increasingly being ordered online. These foods can be stored in people’s homes and people tend to have a bulk of them. Thus, they do not need to go to the store on a weekly/daily basis to replenish these items.

  7. mattwardbc · ·

    An important post as this industry is going through so much changes especially with Amazon’s acquisition of Whole Foods. I was dreading going to the store this week and considered using a promotional code for a free delivery service but I always worry about someone else picking out Fruit, Veggies, and Meats which I feel like I can select better than someone else. I wonder if anyone else has felt this way?

  8. It’s funny to think about these adaptations – I lived downtown a few years ago (before Roche Bros opened in DTX) and used Peapod often, since I didn’t have a car and it was cheaper than Whole Foods. It drove me NUTS – the shopper would always use weird substitutions, and I’d often get lower quality produce. Instacart’s ability to text me directly has made a huge impact on my willingness to use tools like that.

    It’ll be interesting to see how all of Amazon’s products compete – Amazon Fresh, plus Whole Foods and Amazon Prime, which a lot of people use for bulk food, and then this Amazon Go. We wanted to check it out during Tech Trek, but it was just open to employees. I tried to peek in all the same…

  9. Yvette Zhou · ·

    I am looking forward to groceries digital shopping moving to a new stage. For me, it is very tired to go to stores every week and then have to carrying many staff even with a car. So I tried groceries digital shopping once it came out. However, the experience was not quite good. The fruits and veggies they sent me were not as fresh or good as I saw in the stores plus they charged me shipping fee. I was very disappointed and gave up. So I guess a big problem that need to be solved is how to standardize the qualities of fresh foods ( fruits, vegetables, seafood…) and how to keep them fresh during delivery. But I am still happy to see the development of supply chains because of digital shopping introduction. Hope we all will get a good experience of digital shopping in the near future.

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