Calling out the great online grocery debate 2015
by Bill Bishop
There’s a major disagreement that continues to brew in the food and grocery business about how seriously to take online grocery.
There’s a major disagreement that continues to brew in the food and grocery business about how seriously to take online grocery.
On one side are the Doubters; they think there’s no reason to take it seriously since some of the best minds and operators in the grocery business haven’t moved into it. On the other side are the Promoters; these folks believe that online grocery has already established itself as a major feature of the retail landscape.
Okay – so I am sure that many of you fall firmly on one side or the other. I want to stir the pot up so to speak. From where I sit, there’s truth on both sides, yet neither side has the future completely figured out. Here's why.
The Doubters
The Doubter’s argument is shared by many senior food retail executives so it carries a lot of weight in the industry. The Doubters say . . .
- Where’s the evidence that customers are using the new capabilities? Where’s the evidence that it’s making a difference? When they visit stores, even at retailers like Macy’s and Nordstrom’s that have made big investments in ecommerce and omnichannel, they don’t see it making a big difference.
- Shouldn’t the effort be on keeping customers coming back to the store? More than 95% of the business is still done in-store, and the share of groceries sold online remains very small (1% to 4% depending on the study). Plus, some consumers are clearly enjoying the experience of shopping – and now even eating – in the beautiful new stores being outfitted today.
- Why go there when there’s no viable business model? As the Doubters see it, grocers who’ve moved aggressively into the online space may be generating sales, but they still aren’t making money. Their reality: There are many more pressing business problems/challenges to deal with.
The Promoters
The Promoters contend that the important thing to do now is to build an efficient technology platform to be able to profitably handle the online portion of the business. Promoters say . . .
- There’s solid evidence that digital is already an important part of the food business. They point to the rapid development of online shopping in the UK and France, and major shifts to online buying in China. Promoters say that this would be more obvious if the US wasn’t lagging so far behind other countries.
- Online offers are diversifying. Amazon’s sales of consumables continue to grow; organics, meats, fish and wines are now available online, as well as local foods; and, entirely new ways for consumers to get groceries have emerged, like subscription buying and ready-to-prepare meal kits.
Everyone's reality
Big changes are taking place in the market, and they can be used to support either side of this argument.
- Most retailers are experiencing slowing growth, and it’s not clear whether this reflects less demand or a shift to online.
- Spending power is increasingly concentrated in a small number of households. This is segmenting the market into those who have “plenty” and those who operate “paycheck to paycheck.”
- Mobile has clearly emerged as a preferred method of communication.
Until now neither side has been willing to move off its position, but there are signs this may be changing. The Doubters are beginning to see and feel online grocery as a threat to the core business, so it’s getting a more serious look. The Promoters are beginning to understand that being a leader in online sales doesn’t necessarily make the business invulnerable or invincible, as Tesco's experience in the UK shows.
So, there’s truth on both sides of this debate.
- It’s true that incumbents are sometimes less well equipped to compete successfully.
- But it’s also true that new business models are still struggling to establish their viability.
Moving forward
The right answer and course of action in the great online grocery debate seems to be for both Doubters and Promoters to accept the facts that support the other’s position, and to build on the lessons learned by successful online retailers of products like books, music and travel that have already moved deeply into ecommerce.
It's time for:
- Doubters to accept that online shopping appeals strongly to affluent shoppers, those with children at home, and millennials. Can retailers afford to lose even 1% of these high-margin sales?
- Promoters to recognize that most successful food retailers have driven growth by making major investments in brick and mortar. They can’t afford to walk away from these investments.
- Both sides to recognize that today’s consumers want the combined advantages of both online and in-store shopping – not just one or the other.
This means retailers need to recognize that how they communicate with and service their digitally connected shoppers will influence how fast spending shifts online. In some ways, traditional retailers have the advantage of established customer relationships – and their stores.What’s needed now is for each retailer to fine-tune its value proposition for its digitally connected customers.
COMMENTS
There is no question that online grocery captures disproportionate mindshare relative to its share of the market. Many of the doubters have seen previous cycles of investment from retailers large and small as well as 3rd party technology players and correctly point out that there has been no obvious watershed moment that signals online grocery's mainstream arrival from a consumer point of view. And of course there remain doubts about the economic viability of many online grocery models.
A lot has changed since earlier attempts self-destructed. We're on mobile, not desktops, and 75% of the country is connected all the time. (Broadband, not dial-up.) Membership programs lock households in; labor is flexible and lightweight; and logistics are optimized in real-time.
You correctly point out that the households that represent a meaningful share (if not the majority) of *growth* in the industry expect ever-higher levels of convenience and service.
We're in a phase of trial and error. But on a 5- or 10-year horizon, it is tough to imagine online grocery being altogether irrelevant as the most dogmatic doubters claim.
The key choices are whether to lead or follow and how much to invest.
Online grocery may not make sense for some retailers, and it's no silver bullet. But I admit to being exasperated by the doubters that claim online grocery won't ever happen. It already has!
"We're in a phase of trial and error" - Keith
There is no doubt in my mind that both of these statements represent the current state of play, and it is why I would concur with the analysis above. Whilst in the UK we have had online grocery from some retailers for quite some time, the model and the pricing regimes have not been static. They will continue to evolve as retailers work out just who is using what, when and how, and whether they as retailers can make money providing these services. The huge challenges in the UK grocery sector make this a necessity rather than an option.
Whilst not strictly grocery, you may have seen the announcement last week by John Lewis of its intention to charge for small orders provided through click and collect via its Waitrose food outlets. The Guardian has the story as well as some figures on investments and the like - http://www.theguardian.com/business/2015/jul/01/john-lewis-to-charge-for-click-and-collect
Reactions from competitors and customers are polarised, so it will be interesting to see how this settles down. But settle down somewhere between the promoters and the doubters it will.
Leigh
First, I haven’t heard much about retailer’s primary research with their customers on exactly what customers want and need in the features and tradeoffs in online and in-store experience. There is (rightfully) neither a shortage of consultants’ opinions nor a shortage of solution provider-funded research that typically touts new systems and services. I’d like to hear more of what the shoppers say when asked by the retailer or agency with no commercial stake in the answers.
Second, the debate seems to center on convenience, such as time savings and ease of shopping. Not much is said of the social elements, a critical aspect of the shopper experience.
Living, learning, and sharing are enabled by both channels, but in different ways. Cooking classes, wine tastings, a conversation with friends and neighbors in the store’s restaurant or seating area by the deli enrich the experience. Recipes can be shared and civil causes funded effectively through digital touch points. I believe these aspects are at least as important as whether you pay with a card swipe or a wave of the phone.
1. Customers don't "want" to order online; instead, they want you to help them solve their problems.
2.Different customer problems require different solutions.
3.Online solutions offer retailers a powerful way to love the customer by helping to make their lives better.
4.Fulfilling customer needs is the foundation of any business.
As a conclusion, I think it's important to note that fulfilling online orders is clearly profitable to those who know how. However, the lack of personal/institutional expertise may impair a proper reading of the market opportunities.
In my opinion, online grocery shopping really must be treated as a service and not live and die by trying to turn a profit or draw new shoppers. Think of it like the service desk does with stamps or banking- you making no money on it but it helps drive customers to your store. It provides a convenience to your existing customers and we all know it's more profitable to retain your best customers than spending to attract new ones or discounting to appease the cherrypickers.
Granted the audience is becoming more mobile but we all know shopping online is best done on a desktop and most transactions occur between 8-5 when people are at work on their PC's/Desktops. If you feel mobile is critical, go with responsive design and avoid the mobile app world.
Finally- if a grocer is looking to get into the online arena, put a long term plan together. Like a loyalty program, don't expect to see results in the first year or two and make a decision on whether or not to keep it- let it run for at least 5 years and get a pulse for what is driving your customers to want to use it. Is it to complete all of their shopping needs or just a filler in place of the normal weekly visit.