Online Grocery : How the carrot is being sliced up

Grocery shopping is something that we all do. Well all of us, maybe except Bill Gates. While some aspects of that experience are enjoyable, for most people leading busy lives, it’s a chore which is inefficient. You have to drive to the store, navigate the endless aisles which always seem to be organized to make sure you cover every inch of the store. This becomes even more tiresome as you compare products on important attributes such as prices, nutritional information, organic or non-organic etc. Once you have your cart filled, you then wait an additional 10–15 minutes or more waiting in long checkout lines. Thus all-in-all, grocery shopping is a high friction, inefficient process that is an essential need of majority of the population. Moreover it forms about 20% of all retail spending. Thus the scale and the inefficiency of the user experience make grocery a prime opportunity for innovation.

This ripe opportunity is what players like Amazon, Walmart and Instacart are chasing. These companies are looking to improve the user-experience by moving the grocery buying process online and then allowing you to either get products delivered at your home or for you to just go to the store for pickup. In order to be able to understand how different companies are innovating in this space, lets first try to understand the concerns consumers have while shopping online.

• Price: Given how grocery forms a significant portion of a family’s budget, price matters. Consumers obviously value low prices, but increasingly consumers have started valuing price transparency.
• Quality: While groceries span the gamut of perishable and non-perishable items, consumers have a high expectation for quality when it comes to food products. This is made even more delicate by the fact that a lot of perishable goods have limited shelf life and become unusable beyond a certain time.
• Convenience: The central selling point for online shopping in general is convenience. For consumers it’s important to know how online grocery shopping will make their lives more convenient. This comes in the form of things like — knowing how far the pickup location is, what delivery windows are available for in-home delivery etc. Walmart has recently taken this up another notch by offering to deliver products not just in your house but in your fridge.
• Reliability: Groceries are essentials. While it’s not ideal to get your XBox delivered on time, for a family not getting their groceries reliably means extra expenses like eating out, or having to scramble at the last minute to put food on the table.
• Brand/Product Category preference: Grocery is a very personal shopping experience. I might prefer some products to be organic while I might be indifferent about others. For prepared foods, I might prefer a specific store v/s the other. Case in point, the cult following for Trader Joe’s. In fact a lot of people visit multiple stores for their weekly grocery shopping which is grossly inefficient.

Now that we have identified the concerns users have, let’s look at the innovations that is happening across the companies:

Walmart

Walmart is the big kahuna amongst US retailers. It has over 4000 stores in the US and are within a 10 mile driving distance for 90% of Americans. This reach is unprecedented and is a big part of Walmart’s ability to create convenient options for its customers. Walmart is leveraging its brick-and-mortar stores and is partnering with last-mile-delivery services like DoorDash to make speedy deliveries to people’s homes. This way it can use both its strengths and the existing strengths of its partners to provide fast, more reliable online deliveries to its customers. Also, by partnering with delivery services instead of an aggregator like Instacart means that Walmart can quickly ramp up it’s online delivery offerings without handing off the customer relationship to a third party. Walmart’s partnership strategy for fulfillment innovation doesn’t end here. In an effort to make deliveries more convenient for its customers, it has begun testing a new service that will allow customers with August smart home devices, like the August doorbell and security cameras, to have their packages delivered inside their home instead of left on the doorstep. In fact they are taking matters even one step further by offering a service to deliver groceries into people’s refrigerators.

Walmart is also utilizing it’s stores to offer easy and convenient pick-up options. With the final leg of a package’s journey being the most expensive, this option allows both Walmart and the customer to save money, at the cost of a modicum of convenience. In fact it is actively looking to pass on the savings to its customers, as in April 2017 it began offering its online customers discounts on thousands of products if they selected the option to collect their items in-store.

In addition to offering the pickup option, Walmart is actively trying to improve the full pickup experience. It has started to reconfigure its stores to install self-service kiosks called Pickup towers in some areas where customers can scan the barcode on their receipt and the orders appear on the conveyor belt. This change is far more customer friendly than their existing process where customers have to go all the way to the back of the store for pick-ups and wait for the employee to get their order from the back of the store.

Amazon

While Walmart is the king of the brick and mortar world, the online commerce space is dominated by Amazon. In fact according to Recode, Amazon could be responsible for nearly half of ecommerce sales. For online grocery, Amazon has dabbled for years with a service called Amazon Fresh which was only available in a few locations. Perhaps realizing that physical store presence is essential for the grocery delivery business, Amazon bought Whole Foods. Amazon has begun leveraging this acquisition already. It now offers grocery delivery from Whole Foods to its prime members. Moreover, Whole Foods gives Amazon the ability to quickly gather data about customers behavior when it comes to grocery shopping along with experience in handling of perishable goods.

Amazon is also innovating in the physical store space through an experimental concept called Amazon Go, which is a cashier free store in Seattle. Amazon is also bringing its your margin is my opportunity model to groceries as it has begun slashing prices at Whole Foods.

Instacart

Instacart is the smallest fish in the online grocery pond. It’s a startup that partners with grocery retailers like Kroger and Costco to offer delivery of items from its partners’ stores. This model works perfectly to satisfy the customer need for multiple product/brand options and gives Instacart the ability to scale in a hyper-local-market like groceries. It also alleviates a huge customer pain point of having to visit multiple stores for their weekly needs. Partnering with existing stores also means that Instacart does not need to worry about having physical stores and storage of perishable goods which is important for a startup without the endless resources of Amazon and Walmart.

But the no-store ownership approach comes with a few disadvantages. First and foremost: Instacart does not have much control on the customer experience when it comes to maintaining product quality and low prices, which are essential consumer need as we talked about above. Instacart’s competitors: Amazon and Walmart, are both known for cut-throat low prices and the inability to control pricing might prove fatal for Instacart. Secondly, real time inventory management and updates are a huge problem for Instacart, since physical stores aren’t setup for it and Instacart will have to convince each of its partners to upgrade their systems. Instacart is trying to work around this problem by asking customers for replacement options pre-emptively, even before an order is placed. While that approach is better than not delivering products, its still a poor experience to show customers products and not deliver them. Another area where Instacart has a challenge is store layouts. Stores are not laid out to aid the efficiency of Instacart shoppers, and every minute wasted has an impact on Instacart’s bottom line. Instacart is resorting to using Artificial Intelligence (AI) to speed up its shoppers’ workflow.

Overall, I believe we are in very-very early stages of online grocery shopping. In fact only about 3% of total grocery sales happen online.This space is challenging due to the perishable nature of products, extremely low margins and the complicated nature of last mile delivery. However we are two decades into the online shopping movement which has given retailers the footprint and the know how to make efficient deliveries. It will be exciting to see how different companies innovate in one of the fastest growing segments as more and more time-strapped consumers move online for their grocery needs.