Grocery e-commerce is never going to work, so I started an online grocery business!
“If you’ve invented something new but you haven’t invented an effective way to sell it, you have a bad business — no matter how good the product.”
Peter Thiel
$7 trillion, the value of the global grocery market. $48 billion, the portion of this market online today, give or take. Doesn’t seem like a lot does it?
Well, that’s because its not, it’s less than 1%. So why is it, that in a market that has less than 1% penetration, do people speak as though the race has already been won, or lost depending on who you ask?
Not many people know, but 2016 was the centenary of the modern day supermarket. In 1916, Mr. Clarence Saunders opened up the very first Piggly Wiggly in Memphis Tennessee, giving birth to the very first self service supermarket.
I find this pretty interesting, because in over 100 years, the supermarket model hasn’t really changed that much. The Piggly Wiggly was the last great innovation in grocery, and it was a very simple one. “Let the customer do all the work”, and boy did the industry run with that one.
Today, we just take it for granted that we all have to go to a big warehouse regularly, where we spend, on average, 6 days of our lives every year trying to find and pay for food so that we can……you know, survive!
We have to sift through the fruit and veg to make sure we get the best ones, we have to walk to the furthers reaches of the warehouse, because thats where they stash the bread and milk. After all you wouldn’t do much impulse purchasing if it was at the front of the store now would you? We have to bend, lift, seek and find, not forgetting that now you can check yourself out, but don’t forget to return that trolley, because they’ll keep your €1 coin if you don’t.
So in the last 100 years, the grocery industry, as a whole, has managed to actively remove any hint of true customer service, or experience of any kind. The labour, effort and outright HASSLE has been heaved upon the customer, ultimately stripping away all possible metrics of value.
Now, any economist will tell you that when you strip away all metrics of value from a consumer, one will always remain…..price. And so it goes, the industry has officially raced to the bottom, where retailers today are lucky if they can squeeze out profit margins above 4 or 5 percent.
This approach has unfortunately now put the industry in a rather tricky predicament, because demand for online groceries is only going up. With it set to be the fastest growing channel, almost doubling in the UK alone by 2020 to £17.2bn.
http://www.igd.com/Research/Shopper-Insight/The-growth-potential-of-online-grocery/
This poses a HUGE problem for retailers, because now, they not only have to deal with razor thin margins, but they also need to find a way to pay for the added infastructure required to provide an effective and efficient online offering.
I know what you’re thinking, “If retailers are only making 4–5%, and more and more consumers are demanding ways to do their shopping online, how will each retailer build a commercially viable online offering?” Well, the answer is…….they can’t.
So that’s it, online grocery will never work, at least not the way the “experts” have done it.
“Hell, there are no rules here — we’re trying to accomplish something.”
Thomas Edison
So at this point, I have to come clean with you, the title of this article is a tad misleading. It’s misleading because grocery e-commerce will absolutely succeed, and for 1 simple reason;
Because it can.
I don’t think anyone will disagree that the grocery industry is a pretty commoditised business. When you take quality of fresh fruit and veg out of the equation, all customers really want, is to buy their favourite brands at the best price, but in the most convenient way.
So until we have the days of self cleaning floors and meals in the form of a pill, access to groceries is as vital as having electricity in our homes.
And that’s why I know grocery e-commerce can work.
For the same reasons everyone can afford to have light in their home, every grocery retailer can have a commercially viable online offering.
Let’s take a quick look at the history of how we came to have home lighting. The very first person to have electric light fill their home, was none other than John Pierpont Morgan, otherwise known as J.P.
Not many people know, but Morgan was the Steve Jobs of home lighting. Originally an investment banker, J.P partnered with Thomas Edison in 1881, and set out to disrupt the gas lighting industry, monopolised at the time by John D Rockefeller.
J.P. created a small company called Eddison Electric, you might know it now as General Electric or GE. Upon it’s founding, their first port of call was to demo the wonders of electric home lighting to J.P’s wealthy community of friends. I think you can guess how things went from there.
The key take away here is, why in 1881 only the extremely wealthy could afford to have the luxury of electric lighting, but now it’s as ubiquitous as the air we breath.
Well, it’s because today, every single person, business and organsiation shares the generation, transmission and distribution costs associated with having electricity. It’s literally the only reason everyone can afford to have easily accessible and affordable energy. Without this structure in place, it would be prohibitively expensive to have electricity in your home or business.
So with that in mind, WHY? In an industry that is nearly as commoditised as energy, can retailers not achieve the same cost efficiencies?
We can answer this question by looking at the corner stones of modern day economics, the key theory in question being Bruce Henderson’s “experience curve” otherwise known as economies of scale, and how it relates to traditional linear business models, such as Tesco, Sainsbury’s, Asda etc.
The nail in the coffin for retailers is that they only benefit from economies of scale and a lowering of costs up until a certain point. As they grow, they eventually hit a wall, whereby information and transaction costs stop decreasing and begin to climb as the business increases output. This results in retailers capping out at a level far lower than the total size of their market, hence the reason we have 9+ billion pound grocery retailers across Ireland and the UK.
What this ultimately means, is that unlike de-centralised, non-linear businesses such as Google, Uber, Deliveroo etc, who sit atop their entire respective markets. Each of the 8 or 9 online grocery networks, currently operated by the retailers themselves , will be unable to reach the levels of volume required to generate enough profit to support the linear structure of their traditional and operationally expensive business models.
So where does this leave us? Who knows, but with more and more articles like the one below, and a global market with just 1% penetration, this game is only getting started, and in my opinion, everything is still to play for.
For anyone interested in diving a little deeper into the ins and outs of the economics discussed in this article, check out Modern Monopolies: What It Takes to Dominate the 21st Century Economy by Alex Moazed & Nicholas L. Johnson.