While the COVID-19 pandemic appears to have accelerated trends for much of the retail industry, with e-commerce giants like Walmart and Amazon taking share and many predominantly brick-and-mortar retailers damaged by a drop in foot traffic, the impact on the grocery world is not so clear-cut. Adoption of online grocery has appeared to increase during the pandemic, but it’s not clear whether the changes will be long-lasting and whether the online adherents will remain a niche group.
Darden Professor Tim Laseter, who has studied and written extensively on a range of retail and operations issues, recently completed three papers for Takeoff Technologies (see parts one, two and three) on the topic of “How to Win in Online Grocery.” He recently spoke about his research and the state and future of the grocery industry.
You recently published a trio of papers called “How to Win in Online Grocery.” How do you summarize the takeaways?
Number one is that grocery habits are hard to change. People are very particular in the way they shop. They don’t easily change grocery stores or formats. That means change is very difficult for the industry.
Another important takeaway comes from the history of online grocery and its struggles. Grocery is behind in terms of adoption compared to other online retail formats, but the history of grocery writ large tells an interesting story. Ultimately, a dominant model does take over, and it can change an entire industry, but it takes a long time. A&P was the world’s largest retailer but went bankrupt because they were slow to respond to the self-service style that is the dominant supermarket model of today.
In our research, we looked specifically at what matters to the consumer, and if you’re looking at the mass of consumers, cost is the most important variable. People prefer low-cost. I think the most surprising thing was that variety was not as important in online grocery shopping as it is in other categories.
Grocery is a different opportunity than other categories because of current habits, because of variety not being as important and the prevalence of grocery stores in every neighborhood. Incumbents have an advantage in grocery, unlike in other categories where incumbents are in decline. It is an area where we think that incumbents can win against Amazon, whereas in almost any other category, it has been a struggle to fend off Amazon.
The last takeaway is that the delivery model is the clear preference of consumers over a curbside pickup for groceries. However, because cost matters and delivery costs a lot more, most consumers are hesitant to pay the extra cost for that delivery.
Do you expect habits picked up during the pandemic will remain and accelerate changes in the industry?
It’s pure speculation on whether habits will stick. We did a second survey in August and we asked people about their changing habits, and the largest share of consumers did not change grocery shopping patterns during the pandemic. Forty-three percent of traditional shoppers who did not shop online continue to not shop online and continue to go to the store the same amount as in the past. Only one-fourth of the people who had never shopped online started shopping online.
Of those who were already online grocery shoppers, 55 percent didn’t change their mix of in-store versus online, and just 13 percent increased their frequency of online ordering.
So, at one level, the change in grocery shopping behaviors are about what you would expect: people going to the store less frequently. In short, we see a shift in the mix rather than a fundamental change in the way they shop.
In the papers, you suggest the gig economy model, in which someone does the shopping for you and then delivers, is not the long-term solution for those hoping to compete with Amazon. Why is that?
The crowdsource shopper experience is the least cost-effective model. It has the advantage of speed, as I can place an order and get it in an hour or so. That removes one of the major inconvenience factors of scheduling a delivery, but it is a higher-cost option. Curbside pickup removes that cost of delivery, and then the cost issue becomes picking efficiency: Is it done by personal shoppers wandering the store, which is a fairly inefficient model, or is it done with microfulfillment technology that can dramatically reduce the cost? Microfulfillment built into the back of a grocery store can be competitive with the picking process of an Amazon-type company that works with a dedicated fulfillment center. An automated microfulfillment center can enable a picker to pack 600 items an hour versus 60 items an hour if you’re wandering the store.
So, given that cost is the most important variable for the mass of consumers, ultimately, we don’t think the crowdsource model will be the dominant one.
There will be lots of different segments, but the way to get the convenience of online shopping at the lowest cost might be the curbside pickup model with a microfulfillment technology in the backend.
Amazon’s grocery efforts had not been a huge success, and then they bought Whole Foods. What did that mean to the industry?
It woke up the grocery industry and made competitors realize they needed to do something. The grocery industry in the United States had been very slow to respond to online shopping. There was a sense that Amazon might not be a threat because of the Webvan failure 20 years ago. This startup —probably long forgotten by many — was going to disrupt the grocery industry with online delivery, and instead went bankrupt 21 months after going public. Webvan also scared away venture capitalists for a long time.
Then Amazon buys Whole Foods and suddenly has 400 or so locations — and many more nodes to ship from. And they have a brand, including a trusted private label. Plus, they have people who know groceries.
What do you think the grocery model looks like in the near future? Will there be a shakeout among chains?
I think the near future and long-term are probably different. Traditionally in the U.S., we keep adding new grocery stores because most people will travel less than three miles to go to a grocery store. So as long as the population is growing and new suburbs are being built, there is going to be a justification to put a store there. And once you’ve sunk the costs into a store, it takes a long time to make that fundamentally unprofitable so much that you want to shut it down. So in the near term, I don't think we're going to see much partial restructuring, but I think eventually, yes, you'll see some entire chains shut down.
Suburban stores in small or medium-sized towns are probably where you’ll see the impact of changing consumer habits first. The crowdsource model will appeal to a niche group who are willing to pay for it. But that is not going to put anyone out of business if some small percent start to buy online. The shakeout will come if a new dominant model comes into play as happened to A&P when the self-service model became dominant over its behind-the-counter stores. I do think that when the new backroom technology of microfulfillment comes together, it will provide a combination of speed and low cost. Those players who invest in that will be better positioned to win. Then we’ll see the A&P story repeat.
The players in the industry are making critical decisions now about how they want to compete, whether they want to train consumers for a curbside model, and whether they are trying to change behavior in all of their consumers or strictly serve a niche segment. Despite the pandemic growth, online shopping still only accounts for a small percentage in grocery. A fundamental change requires coherent strategic bets.