The Grocery Ecomm Flywheel: Part III
The Delivery Providers
In this final installment of our three part series on the acceleration of online grocery (Part 1=Consumers, Part 2=Retailers), we recap the latest developments occurring across online grocery fulfillment providers. These providers are a critical cog in the ecommerce wheel, powering some or all of the final mile logistics; a combination of warehousing, picking, and transportation.
From a fulfillment standpoint, grocery is unique compared to the logistics of mass merchandise in three main ways:
These factors have shaped who the providers have been, who they are today, and what this looks like in the future. The perishable assortment of grocery requires a supply chain that can handle three temperature states: dry, refrigerated, and frozen. The upstream supply chain is well established and tuned to handle these, but replicating this on a smaller scale for the final mile to consumers’ homes can be challenging. Thus, the de-facto doorstep supply chain has relied on ferrying perishable product from stores to doorsteps using humans, speed, and an assist from insulated bags. Using the existing final mile parcel delivery industry (USPS/UPS/private/etc) has not been a viable option, primarily because of the temp-controlled nature.
Urgency is a big factor as well. 2 day shipping has become the measuring stick for mass merchandise ecommerce, while same day—or more specifically within 24 hours–has become the minimum expectation for grocery distribution. When we need food, we need it quickly. That level of urgency places limits on how execution occurs, since the logistics of moving perishable goods from more centralized warehouses to doorsteps is either cost prohibitive or impossible with existing infrastructure.
That leads us to the third main variable: decentralization. Arguably this one stands to go through the most innovation long term. The grocery ecommerce supply chain today has primarily leaned on using 14,000+ existing decentralized grocery stores as mini-warehouses. On top of the mini-warehouse model, gig workers are deployed for picking and transportation in most cases. The mini-warehouse/store model has begun to evolve already though, with both major and regional players experimenting with micro-fulfillment centers and dark stores to fulfill curbside and delivery orders. Automation and a dose of centralization (think city level centralization, not state level centralization) appear to be new avenues to wring out operational efficiencies for delivery providers.
There are two main types of grocery delivery providers today: ‘in house’ versus ‘third party’ operations. Examples of in house would include retailers like Walmart, Amazon Fresh, and Kroger (in some cases). They manage the logistics and supply chain from soup to nuts, piggybacking off existing assets and in some cases other smaller third parties. Instacart, Shipt, and Peapod would fall into the larger ‘third party’ operations category. These third parties specialize in bolting onto retailers’ existing store operations and product catalog, and provide an online platform—with multiple local retailer choices–for consumers to order their groceries (or alcohol, pet, office, drug-store, restaurant supplies, etc). These specialists employ their own technology to guide gig workers in their execution of in-store picking, curbside pickup operations in some cases, as well as final mile delivery to the customer’s doorstep.
A retailer the size of Walmart is bound to create a big wake, and they continue to press on the accelerator. Their massive store footprint gave them a significant edge that they capitalized on to execute grocery pickup and delivery that now reaches 96% of the US. They are in the midst of collapsing their popular and widely used Walmart Grocery app into their broader Walmart overall app, likely in hopes of simplifying and positioning themselves further as an Amazon alternative. In part one, we referenced their recent launch of Walmart Unlimited, another shot across the Amazon bow. With a tweaked subscription model and a broader full cart offering, Walmart has remodeled the consumer facing experience. Late last week Walmart announced hundreds of layoffs in brick & mortar-centric roles like store planning and real estate as it looks to further integrate it’s physical and digital businesses. Meanwhile Alphabot, Pickup Tower, and other technologies hint at Walmart’s interest in improving the operational efficiency and cost model for the final mile. Given their deep history in supply chain excellence, we wouldn’t be surprised if the next phase of their growth leans heavily on logistics efficiencies.
Instacart meanwhile, continues to pick up steam as the leader of third party players. As of our last analysis in May, Instacart covers 84% of the US population with grocery delivery, supplied by more than 5,000 local grocery stores. The pandemic has only accelerated Instacart’s coverage and popularity. A few weeks ago they added another 300 Food Lion stores in the east. While home delivery from retail stores is where they excel, they have more recently invested in providing curbside pickup operations for smaller retailers. Curbside as we noted, is becoming a pandemic favorite and has more market share than delivery.
The delivery providers that could stir up the most innovation in the coming months very well might be outside of those two giants however. Shipt has the third largest coverage of households in the US, and has impressive multi-store coverage—a key behavior of grocery shoppers, and a competitive advantage paired up with an “all you can eat” type subscription model. Kroger’s massive investment in micro-fulfillment centers is a long term bet that will surely give them differential operational efficiency, and a multi-year automation head start. And Amazon remains the innovative sleeper; their brick & mortar experiments, broad subscription base, and deep pockets cannot be ignored.
If history repeats itself, the leaderboard of fulfillment providers could look completely different a few years down the road. The newest arrival to the grocery delivery space worth noting is Uber. Uber, who has a current market cap of $53B, has seemed to set their sights on specializing in the gig/networked transportation space. In addition to their ride service business, their recent $2.65B food delivery service expansion, and their micro-mobility offerings, Uber officially entered the grocery fray in the last few weeks. Their acquisition of Cornershop last fall telegraphed their entry into the space, and Uber Grocery officially went live in July in Miami and Dallas. Uber has gained a reputation for industry-changing innovations as well as aggressive competition. The latter has already come to light as Instacart has accused Uber’s Cornership unit of IP theft in relation to product catalog details.
What remains clear is that final mile innovation will be a huge focal point in the coming years. After all, the margin and viability of online grocery depends on it.