The Grocery Ecomm Flywheel: Part II
The Retailer Response
In Part I we discussed the consumer momentum powering the share growth of online grocery in the 1st half of the year. Today we focus on the equally dramatic retailer responses to COVID-19 behavior shifts that occurred in the weeks and months following the pandemic declaration.
Defense: 0-4 weeks
The initial weeks in the grocery industry were primarily defensive. The health and safety of workers and shoppers, out of stocks due to pantry stockpiling, and a rush towards delivery and curbside pickup became the focal points. Consumer spending at restaurants fell off a cliff, immediately transferring to the grocery industry and adding further demand and stress. Grocery retailers were suddenly in the spotlight, and took an all hands on deck approach to responding to a myriad of challenges.
As the weeks went by and the pandemic-era of grocery shopping started to set in, new consumer behavior and trends began to develop that retailers were forced to respond to. The frequency of trips dropped precipitously, but the basket size increased, clearly reflecting the stock-up behavior1. Stores saw their curbside pickup operations elevate in importance–likely a result of the safety (low contact), the convenience (less time in store), and economics (it’s free). In March, curbside pickup accounted for 60% of all online grocery purchases, compared to 56% pre-COVID2.
Checkers: 1-2 months
The widespread out of stock issues started to subside as resilient supply chains caught up. One study showed 12% of items ordered through online grocery in late March and April were out of stock or substituted, but quickly improved to 7% in the May-Jun period, bringing it closer to Jan/Feb levels showing 4.5% voids3.
Retailers also started to parlay their early learnings and protocols into longer term measures. Low contact shopping measures put in place as stop gaps started evolving into long term solutions that consumers are now expecting. Nearly 60% of grocery executives polled expect their customers to continue to expect no touch payment or cashier-less checkout—pandemic or not. The importance and efficiency of curbside pickup has only grown as customer traffic has risen; 71% of grocery executives indicate an increase in IT spending in 2020 to fortify their pickup offerings for customers4.
As shoppers suddenly consolidated trips, responded to severe stocking issues, or moved online—all retailers were suddenly opened up to an environment that shook up shopper loyalty. A significant number of shoppers were given a reason to trial different stores, shift their patterns, and wade into online experiences. The aperture created to capture and please during the initial shopping trip is an important one, as witnessed by a report from BMC studying online grocery habits. The average purchase frequency after the first order date is 1.4 times/month. If the experience is smooth and they order again, their frequency continues to rise. After the 2nd trip the frequency rises to 1.8 times/month. After the 3rd trip the frequency starts to level out at an average of 1.9 times/month5. The takeaway is that having a superior experience from the starting blocks, whether it’s in store or online, yields loyal customers that stick around. And the effects of the pandemic on grocery are creating plenty of new trial opportunities between customers and retailers.
Chess: 3+ months
In the last month or two we have seen retailers emerge from defense and operations-improvement mode to a more offensive posture. Some of these moves were likely in the works and were put on hold due to the pandemic, but it signals a new phase for retailers. In June Target rolled out fresh pickup in the midwest, and as of this week has now expanded it to 1,000+ stores6. Target’s acquisition of Shipt gave it home grocery delivery capabilities, but a full basket pickup option was a gap until now. In addition, last week Walmart announced the launch of Walmart Unlimited, a $98/year subscription program—ala Amazon Prime–giving subscribers access to same day delivery for all grocery and general merchandise in addition to fuel discounts and other perks.
With online grocery now reaching over 98% of the US, one could surmise that it’s reaching a point of saturation, but there are no signs of it slowing up. We believe multi-retailer and multi-modal shopping behavior are significant themes that will continue to drive investment. 87% of US grocery shoppers use 2 or more stores in a 30 day period, illustrating the fragility of grocery store ‘loyalty’7. 66% of Generation Z and 61% of Millennials have shopped both online and in-store in the last 30 days8. With such a high percentage of the population now shopping online and being flexible with the retailers they use, not having robust curbside and delivery capabilities is a liability. Expansion and automation will likely continue to be big themes across retailers of all sizes. Just this week Food Lion announced the expansion of curbside & delivery operations to 300+ stores9. Kroger continues it’s bullish approach into micro-fulfillment centers with partner Ocado, recently announcing another 650,000 sq ft of automation, which would arm them with 9 automated fulfillment centers10.
The torrent of online grocery news at times can overshadow the continued investment in physical stores. There is no shortage of innovation in brick and mortar, signaling the importance of satisfying the bi-modal grocery shopper. As of June, over 50% of grocery shoppers are now shopping in both formats11. Amazon continues to roll out additional brick and mortar grocery locations–showing their interest in establishing a physical store footprint. They have also emerged with a myriad of in-store technical innovations that are transferable to other retailers, such as the Dash Cart, and their Just Walk Out cashierless technology, both of which have potential to grease the tracks on further automating and reducing friction in the in-store experience. Aldi is also in the middle of an ambitious $5B expansion program, and plans to open 70 more stores by the end of the calendar year.
Follow the Money
Consumer offerings and capabilities aren’t the end of the story though. There is a looming profitability challenge that must be addressed with online grocery. When online share was in the low to mid single digits and consumers were only taste testing the capability, the P&Ls of the various ways to execute digitally were likely looked at as only early stage indicators with lots of runway ahead. Now that share has doubled and consumers like the taste, there will be growing pressure to solve this profit and convenience conundrum. A study by a consortium of partners led by Bain & Company illustrates the P&L challenge well in the visual below. Brick and mortar grocery is a low margin business as it is, but online fulfillment pulls it underwater despite various approaches. The economics are challenging to say the least. As we look ahead, we expect retailers will take a keen interest in operational efficiencies like micro-fulfillment, and a heavier emphasis towards on click and collect versus delivery.
In our final Part III coming up next week, we will recap some of the moving pieces and news on delivery providers, who have played a big role aiding the ecomm acceleration.
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2&3: Brick Meets Click / Mercatus Jul 2020 webinar
4: July 2020, Agilence / Date Check Pro COVID-19’s Impact on Retail Grocery study
5: 2019, BMC eGrocery Sales Performance Benchmarking Report
7: December 2019 Basketful survey of 400 US Grocery Shopping Adults
8: July 2020, Retail Feedback Group
11: July 2020, Retail Feedback Group