On The Future of Grocery

Self-checkout kiosks jam and purr for assistance. Robots stock and work the back-end supermarket shifts. Shoppers want one-click shallots delivered ASAP. The scene is chaos.

I love evaluating Grocery as a full vertical segment because there is so much to consider and — in the context of startups — the promise of massive disruption. If you have worked in a supermarket (or have taken a Microeconomics class), you’ll know it’s a category characterized by profit crunch. Groceries are a legacy 2–3% gross profit business, even by the best operators. Net profits are determined by labor costs and therefore squeezed by rising minimum wage, unionization, post-covid disenchantment, regulatory shifts to 4-day-work-weeks and immigration limitations. The current state of inflation will do nothing but press these levers unrelentingly.

Almost weekly, I will speak to a founder in the space who promise to plump margins by way of optimization: an automated fulfillment system, an AI-supplier database, a quicker delivery-matching algorithm. Efficiency will only improve a system that is already broken. Instead, I expect that by 2027 the grocery segment will be structurally changed, led by a few running very different business models. Models capable of delivering 6–8% net profit business rather than the historically anemic 1–2% rates.

New models will do this by innovating in three departments to reinvent the grocery business model:

#1: New Revenue Streams

No grocers outside of discounters will survive without an RMS (Retail Media Services) platform. Think: Target’s Rondel, Walmart Media, Loblaws Media Services, Kroger, etc. The premise is to accept dollars from brands in exchange for delivery adverts / promo to customers in retail spaces and on platform apps. Grocers need screens, AI, retained services and apps to monetize media (e.g. Raydiant, Visuwall). The trend will be no stranger across the pond at European equivalents (Mercadona, Carrefour, Casino).

Supermarkets will also lobby for loyal subscription customers. There is a need to make customers ‘captive’ through integrated services, such as health & wellness hubs, education centers, and banking services. Grocers can station partner services (e.g. a robotic frozen yogurt vendor) across their stores to boost traffic and spur impulse sales, but also provide an experiential incentive to shop in-store versus online.

#2: Massive Reduction of Store Labor

Store managers will eliminate a big slice of labor costs through investments in automation technology. The traditional front-of-store which — through stocking, cashiers and bagging assistants — comprises about 80% of store labor, will be serviced by self-checkout through robotics and edge compute vision AI (e.g. KanduAI, Pather.ai). Back-of-store, the remaining 20% of human labor, will be supported with robotics, cameras, edge compute, and autonomous inventory stocking (e.g. Vici Robotics). Some stores will adopt a zero-front-end model by employing shop-to-checkout smartcarts (e.g. Veeve, Supersmart, Caper).

#3: New Formats

I can rebuild my ’70 Chevy Nova with a Tesla Three battery, but that doesn’t make it a Tesla. At some point, all this new tech (Self Checkout, Micro-Fulfilment, Grab & Go, Vision AI, etc.) will require the fundamental re-design of its casing. The next few years will allow us customers to enjoy the novelty of a real estate overhaul in a segment where physical format hasn’t changed over the past 50 years.

We should expect:

1. More models with smaller, autonomous front-ends and dark-(or no-)backends. For efficiency, perishables and fresh produce will be stationed at the fore with very little mid-store replenishment items.
2. Overall store shrinkage will also happen, in the same vein, a massive shift to micro-fulfilment centers and away from self-managed / legacy distributors which deem back-ends and stocking space redundant.
3. Specialization of neighborhood locations, with a door by door distinction in assortment / offering to cater to local residents. Low-cost robotic labor and AI inventory management will make this type of personalization a lot more possible.
4. A lift in demand pressure from the B2B segment driven by grocery’s failure to serve SMB. For the global CPGs, this will be picked up by new players that can perform better than historical distribution channels. Such startups have already blossomed amongst the giants (e.g. Coke’s WABI, ABI’s BEES, PepsiCo’s snacks.com), and mimic Alibaba in that they serve as Point-of-Sales marketplaces with AI-suggested ordering. We will likely see more brand-agnostic indirect marketplaces.
5. Last but not least, stores will shrink by overrun of a preference for delivery. Last mile and ultrafast (e.g. Instacart, Getir) is growing at 13–15% per year in an industry growing at 1–2%. Within 5 years it will level out as the largest channel of grocery sale. The wise grocer will shrink flagship showrooms in favor of a network of fragmented dark stores.

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Are you building something in this space? I work with early-stage Retail and Consumer startups and would love to hear from you! My DMs are open on Linkedin or Twitter: @aylajeiroudi