The Grocery Fulfillment Battles
A peek into the challenges and opportunities of the online grocery supply chain.
In an earlier article we talked about what we believe are the main physical, experiential, and behavioral headwinds that remain with Online Grocery. More tweaking is needed in how the physical supply chain, the consumer experience, and shopper behavior come together to reduce friction in grocery ecommerce. Today, we wanted to dive a little further into the state of the supply chain and how online grocery is fulfilled.
A Tale of Two Supply Chains
It’s difficult to look to the future of grocery without recognizing the pre-ecommerce state. The mundane weekly task of grocery shopping that we spend over 3,300 hours of our life on1, has been built, adjusted and enhanced over the course of the last 100+ years. The brick and mortar grocery footprint is made up of ~25,000 stores country-wide2 all tuned and tailored to their local and loyal customers—each with its own unique distribution, inventory, and pricing.
This is not that different than the state of mass merchandise retail 20 years ago; thousands of big box stores spread across the country all with slightly unique twists on experience, inventory, and pricing focused on in-store traffic. As we have seen, mass merchandise became the first patient in the ecommerce revolution and saw online sales rise from <1% in 2001 to 13% in 20193. Swapping or supplementing a trip to Walmart, Target, or Best Buy for the speed and convenience of product showing up at your doorstep has evolved quickly and executing it has been no small feat. But at the danger of oversimplifying an ongoing commerce evolution, this new omni-channel supply chain was accomplished in large part by utilizing mostly existing supply chain assets on the back end. Yes, investments in people, process, and information flow were made to pull it off, but the majority of the physical logistics infrastructure was largely unchanged. Heritage retailer & supplier warehouses specializing in the flow of dry goods, paired with established national to local logistics providers (UPS, FedEx, USPS) were leveraged to pull off skipping the store for the doorstep. In a nutshell, the surgery needed for omni-channel mass merchandise was fairly cosmetic. Seems simple enough, so why not reuse that game plan for grocery?
In short, it’s been a whole different ball game for online grocery. If mass merchandise ecommerce required cosmetic surgery, grocery ecommerce is still in the midst of reconstructive heart surgery. The nuance of the ecommerce grocery supply chain can largely be tied back to three areas of complexity: Perishability, Speed, and Service.
38% of the average grocery basket is perishable4, so temperature controlled transit and quality is a big piece of the puzzle–and it gets more difficult as the distance between fulfillment and delivery points increase. Local, regional, and national grocery fulfillment models are all being utilized today. While there is no formal definition, for the purposes of conversation we are defining national as warehouses placed 300-1000 miles from a consumer, regional being warehouses 20-300 miles from a consumer, and local being <20 miles from doorsteps (most often existing grocery stores).
While efficient and moderately fast (generally 24-72 hours), existing national ship infrastructure is hamstrung by the limited distribution available with the logistics precluding perishable and bulky items. It continues to be a part of the ecosystem of options, but only solves part of the puzzle. There are some intriguing temp-controlled innovations that could change the dynamics here, but nothing yet proven at scale.
Regional distribution, sometimes referred to as micro-fulfillment centers, continues to expand to additional markets. Amazon Fresh and Peadpod have commonly employed this strategy to power speed and efficiency. After an uncharacteristically cautious roll out that started in 2007, Fresh has recently hit the gas pedal on expansion, notching 15 additional major cities in the last six months alone, with its service now touching a total of 51 major metropolitan areas5. Meanwhile, in the last 5 years, Peapod went from being the largest online grocery service in the US12, powering 24 markets, to recently scaling back to just an East Coast service focus. Traditional grocers Kroger and HyVee are both testing micro-fulfillment models to execute home delivery with centralized scale and efficiency. However, these models are significant incremental capital investments especially when mechanized–$55 million a pop in Kroger’s case6. Lastly, all these regional models are tuned for home delivery not the fast-growing pickup/click & collect option popular with consumers.
Local fulfillment through existing store infrastructure has been the most visible and predominant to date. Utilizing labor through 3rd party shopping and delivery networks like Instacart and Shipt has been a fast and low cost way for retailers to build an ecommerce capability without massive capital investments, powering both click & collect as well as home delivery. Click and collect appears to be undergoing a massive expansion in 2020, with recent announcements from both Instacart and Target. Walmart Grocery has built their own impressive click & collect and delivery capability that is helping propel them in their fight against Amazon for the #1 position in grocery ecommerce.13 45% of their stores offer delivery, and 84% now offer Click & Collect.7
The average American family shops for groceries every 4.6 days8— a just-in-time pantry replenishment strategy. Waiting 24-48 hours for national ship fulfillment for the entire basket has not been practical for consumers. In the last five years we have seen same day pickup and delivery become the de facto grocery standard, balancing fulfillment logistics as well as consumers preferences.
Aside from the shelf-stability problem, heritage grocery fulfillment networks simply aren’t physically capable of hitting a vast majority of US doorsteps with <24 hour grocery delivery –let alone 2 hour– with existing warehouses and delivery methods. In order to accomplish this standard, the aforementioned Regional and Local grocery fulfillment options emerged as the offense of choice.
In addition to warehousing changes, another evolving element of fulfillment speed is final mile delivery. We will go into further depth in a future article, but suffice to say there is plenty of action and experimentation playing out in the logistics of both grocery delivery and pickup.
Retailers continue to experiment and innovate with different hybrids of Regional and Local fulfillment to maximize speed—Amazon alone currently has four grocery formats they are experimenting with, each fulfilled differently10. In a somewhat ironic twist, the speedier grocery fulfillment capabilities employed by Target via Shipt as a defense for online food & bev, are now being used as an offensive capability for mass merchandise to compete against the king of hyper-fast fulfillment: Amazon Prime.11
Our weekly grocery decisions are highly personal—they power our bodies, balance our nutritional needs, and create daily moments of delight. Whether we notice it or not, we put a lot of thought into what produce we like, our choice of meats and seafood, constant product substitution decisions, or the time of day we need our groceries available. Outsourcing that process –even if it’s just the fulfillment of it– is tricky. A fulfillment system has to execute white glove service for a myriad of unique personas and preferences–all while being fast and efficient.
Executing against diverse service goals is challenging within a new and evolving supply chain, but to make matters more difficult it must also be done while maintaining consumer trust. National players like Amazon Fresh have to laboriously build a reputation with grocery customers. Local grocery retailers have a head start on established reputations, but they then have to uphold that with completely new logistics in place.
Outsourcing our personal grocery shopping takes trust, and the bar for good service seems like it is four dimensional. Elements of service that we used to delegate to shoppers–grocery timing, seamless product substitutions, speeding through the aisles, solid produce selections, bagging, last mile delivery, etcetera–are suddenly the retailers responsibility and powered by unique labor, processes, and technology injected into the grocery supply chain. Maximizing service for online grocery is a big opportunity, and one of the more significant headwinds to consistent consumer adoption.
The Fulfillment Battles ahead
We predict the heart surgery that is occurring in online grocery fulfillment will only continue. Those who are willing to adapt, experiment, and invest in new flows will prevail. It will be critical for those supply chain blueprints to balance perishability, speed, and service to succeed. And it’s important to remember that fulfillment is just one piece in the online grocery puzzle.
12013 University of Pennsylvania Wharton study
22019 Nielsen TDLinx; Progressive Grocer Market Research
3United States Census Bureau, 2001 to Q4 2019
4United States Census Bureau, 2012 Economic Census
5Basketful Internal Tracking, Feb 2020. Metros defined as Metropolitan Statistical Area via US Census.
82015 Food Manufacturers Institute, US Grocery Shopper Trends Study
122015, Information Technology for Managers, George Reynolds13https://www.digitalcommerce360.com/2019/12/24/2019-ecommerce-in-review-online-grocery-sales/