The next horizon for grocery e-commerce: Beyond the pandemic bump

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Over the past 24 months, e-commerce in the North American grocery industry has continued to mature and scale. The pandemic served as an accelerator for grocery e-commerce, with much of the sector experiencing the equivalent of more than five years of growth in just five months.

We recently completed extensive research that included surveys of grocery CEOs, functional and operations executives, and consumers (see sidebar, “About the research”). Our surveys confirmed that consumers will continue to favor e-commerce as one of many ways to shop. However, many grocers don’t believe they have the necessary capabilities to manage this channel. In this article, we examine the actions organizations must take to win in e-commerce.

E-commerce takes hold

The industry is now on the edge of the next transformation in e-commerce: grocery executives expect e-commerce penetration to more than double for their own organizations in the next three to five years, to an average of 23 percent (Exhibit 1).

Surveyed experts expect grocery e-commerce penetration to double in the next five years.

Executives are even more bullish on e-commerce’s upside potential, noting that penetration could nearly triple to as high as 35 percent (nearly $600 billion versus about $150 billion at 11 percent penetration). Our research suggests continued support for e-commerce from consumers, who indicated a positive net intent to buy more groceries online (click and collect as well as delivery) in 2022 (Exhibit 2).

Online and delivery orders increased by about 50 percent during the COVID-19 outbreak and are expected to rise further in 2022.

The main drivers of e-commerce’s growth during COVID-19 were safety and convenience, but our research found consumers also value the channel’s unique features—such as product comparisons, assortment, and personalized promotions. In parallel, consumers increasingly prefer home delivery (a rise from 48 percent in December 2020 to 63 percent a year later, which translates to an approximately $100 billion market today) and appreciate its product and service enhancements, including speed, reliability, assortment breadth, and flexibility (Exhibit 3).

Consumers have shifted from click and collect to home delivery.

We are also seeing consumers demonstrate different preferences for how their digital orders are filled based on need and occasion, a shift that reflects continued maturity in consumers’ approach to online grocery (Exhibit 4). Their use of different options based on occasion (Exhibit 5) compels retailers to offer a full portfolio of e-commerce options (such as same-day delivery, two-hour delivery, instant delivery, and click and collect). As demand spreads across different trips, the result is smaller baskets.

Consumers are moving beyond convenience and safety, the primary drivers of online shopping during COVID-19.
Consumers are starting to demonstrate different behaviors by occasion and need.

This degree of channel shifting within the grocery sector has precedents. Over the past couple of decades, the emergence and adoption of new offerings and channels have spurred significant changes in consumer behavior. For example, the rise of mass merchants with 150,000-square-foot stores created a different in-store experience than the one offered by the traditional neighborhood store. The mass-merchant category now accounts for about 26 percent of the market. Similarly, club retailers encouraged consumers to buy in bulk, and the rapid growth of discount and value grocery, featuring a predominantly private-label offering, defied the conventional wisdom that consumers wanted only consumer-packaged-goods (CPG) brands. Each of these “new” offerings has been accompanied by changing consumer behavior.

Keeping pace with e-commerce growth

As consumers have shifted toward e-commerce, two-thirds of retailers don’t feel well prepared to meet the dual challenges of delivering on growth while achieving profitability. Our research revealed that retailers feel some trepidation. Two-thirds of respondents expect to lose some share in the shift to digital, and more than half believe it will be difficult to attract the necessary talent to support digital growth (Exhibit 6). Meanwhile, grocers are considering how to allocate capital across multiple parallel efforts, including supply chain resilience, store remodels, digitalization, and talent acquisition.

Retailers are not prepared for the shift to digital, and they are limited in their ability to attract the talent needed to capture this opportunity.

To enhance their capabilities in the short term, grocers have responded by implementing three specific strategies.

First, some grocers are building partnerships with technology companies. To expand fulfillment capabilities, grocers such as Ahold Delhaize, Wakefern, and H-E-B have partnered with microfulfillment center (MFC) technology players like Dematic, Takeoff Technologies, and Swisslog. Google and Microsoft are also working with grocers to introduce artificial intelligence in replenishment and commerce (for example, to enable consumers to build grocery lists while shopping online).

Second, grocers continue to rely on third parties to manage costs and expand their e-commerce offerings. Instacart became a leader through its early market entry, but it has been joined by players such as Shipt and DoorDash. The latter handles fulfillment for Albertsons, alongside Instacart and Uber. Grocers are also using partnerships to provide new and innovative value propositions to customers. In Europe, for example, Morrisons has partnered with Deliveroo to make deliveries in as little as ten minutes.

Last, the shift to e-commerce is also challenging how retailers think about capabilities across the e-commerce value chain, from in-store digitalization and pricing and promotion to trade spending and media and advertising. The role of the store will continue to be significant, with grocers investing in digitalization to improve the in-store experience for consumers—for example, through self-checkout and grab and go.

How grocers can win in e-commerce—delivering on both growth and profitability

To excel in the next horizon of e-commerce, grocers need to develop an integrated value proposition that meets consumer needs while protecting their own profitability.

Our research found consumers are looking to save money, be healthier, build on their (rediscovered) joy of cooking, and find the best promotions more easily. For each of these needs, an evolved digital presence (both app- and web-based) can help grocers highlight their assortment, personalize their promotions, and engage consumers in a more meaningful manner—something that a purely brick-and-mortar offering cannot do. Organizations, especially retailers that have underinvested in the past, are planning to make aggressive investments in their digital capabilities to support these tasks.

However, simply redefining the value proposition will not be enough. To draw more consumers to e-commerce, retailers must offer lower costs, reduce minimum order requirements, protect quality and freshness, and enhance the breadth and discoverability of their assortments (Exhibit 7).

Cost, quality, and merchandising authority are the keys to increasing grocery e-commerce.

To deliver on the dual objective of growth and profitability, grocers need to take a range of simultaneous actions:

Engage customers meaningfully in their omnichannel journeys and invest in user experience

Omnichannel has become table stakes. After spending the past few years building this core offering, grocers are now focusing on retention efforts by forging personal relationships with customers to increase basket size through upselling and increased frequency of trips, both online and in store. Grocers are also experimenting with new ways to engage shoppers in omnichannel. For example, mobile scan–based product information and scan-and-go commerce are changing the way shoppers interact with grocers in-store and on apps. Establishing and maintaining a social connection with consumers and reaching out daily will be important for grocers hoping to move from share of stomach to share of mind. A social-first, video-rich capability will also be a must-have. E-grocer Weee, for example, which specializes in products for Asian and Hispanic shoppers, uses gamified, video-rich social media offerings to nurture a highly engaged customer base.

To draw more consumers to e-commerce, retailers must offer lower costs, reduce minimum order requirements, protect quality and freshness, and enhance the breadth and discoverability of their assortments.

The convergence of value propositions across the industry is raising the bar on user experience in e-commerce. Consumers increasingly value the ability to find products quickly and build their baskets while shopping online. Grocers are responding by investing in e-commerce capabilities and forming partnerships with technology companies to improve the user experience. For example, Albertsons and Google have partnered to create in-store shoppable maps with dynamic hyperlocal features, AI-powered conversational commerce, and predictive grocery-list building.

At the same time, retailers must enhance the in-store experience through continued investments in store technology. Solutions include self-checkout, digital shelf tags, and payments innovation to improve personalization and efficiency.

All of these offerings will have the dual objective of enabling growth while increasing profitability. However, focused investments will be needed to build both the talent bench and the core technology infrastructure. Successful grocers will seek to attract the right talent to their organizations and address the legacy technology debt from the past couple of decades.

Successful grocers will seek to attract the right talent to their organizations and address the legacy technology debt from the past couple of decades.

Build a distinct—but connected—capability in e-commerce category management

Because e-commerce is set to account for a significant share of overall business, retailers are starting to be more deliberate about standing up channel-specific management capabilities and getting sharper on assortment choices (breadth and depth, online versus offline), pricing, and online-only promotions, among other factors. Grocers need to make investments in data, analytics, and IT infrastructure to get a deeper understanding of their online business performance—for example, the effectiveness of online promotions and digital shopping trends by consumer segment. They must also dedicate resources to building their organizational muscle through efforts such as upskilling merchants. These capabilities should be integrated into a broader omnichannel category management strategy, which can provide a holistic and thoughtful merchandising experience anchored in a single view of the customer.

As consumers continue the shift toward buying through mobile apps, grocers are starting to use the full suite of e-merchandising levers—such as product placement, product recommendations, personalized promotions, and digital media—to monetize their digital assets with consumer goods companies. The launch of retail media networks (such as Instacart’s new Carrot Ads platform) allows retailers to capture a greater share of marketing spending from brands beyond what they have traditionally captured. This source will be a key driver of profitability for grocers in the coming years.

Making this shift will not be easy, and our survey indicates that retailers recognize this challenge. Retailers and CPG companies have deep and complex ways of optimizing trade promotions and advertising in the brick-and-mortar channel. There are dozens of mechanisms through which CPGs and retailers invest in advertising and trade, and ROI is often hard to track and measure. Both retailers and CPGs will need to lean on digital capabilities to optimize their investments for greater impact on revenue and profitability.

Develop a portfolio of fulfillment options that are aligned to individual markets’ needs

As demand for online grocery continues to scale, grocers are going to have to revisit how and where they fulfill orders. The network of the future for grocers will encompass a mix of automated MFCs, manual dark stores, and store fulfillment. Matching the right fulfillment option to each specific location based on a market’s demand profile and service promise will be critical.

Retailers are conducting pilots with automated MFCs and manual dark stores. Many grocers are now locating MFCs close to their customers to improve speed at a lower cost. Both aggregate demand and consistency of demand are key factors in ensuring ROI. Grocers are also implementing centralized fulfillment centers to handle larger order volumes and support next-day delivery in highly concentrated geographies.

In parallel, grocers are experimenting with new last-mile models (for example, autonomous vehicles with precise delivery slots) and tech-enabled logistics optimization to lower costs while maintaining service levels.

While automation will be a key lever for retailers to increase efficiency and speed, grocers will need to make at-scale investments to build out a comprehensive network along with a focused effort to drive volume at each node. Since the benefits of automation will accrue to all participants in the industry, there is an opportunity for collaboration among grocers, technology companies, marketplaces, and CPG companies to rapidly scale these networks.

Use e-commerce as a way to innovate and harness the broader ecosystem

Grocers are approaching e-commerce as an opportunity to push the boundaries of their current offerings. Some retailers are deploying e-commerce to strengthen their current assortments (for example, to push private brands and prepared meals) and to promote new offerings (such as meal kits, partnerships with dark kitchens and local restaurants, and expansion into catering services to capture new meal occasions).

In response, grocers need to define their operating models to fully harness their own capabilities while participating in third-party ecosystems to serve customers through different missions. Retailers should also seek to engage consumers where they are spending their time; whether on social channels, on content sites (for example, Eater magazine online), or in the metaverse, grocers need to be there.

Grocers must also quickly determine which components of their end-to-end e-commerce value chain they want to fully own as a core capability and what partners can provide. The answer will vary across the value chain as retailers assess where they can compete with distinctive offerings and where they have the requisite capabilities and resources. Efficiency and speed will be critical factors in deciding whether to invest in in-house solutions or partner with a third party. The market is likely to be segmented into large retailers with the resources to develop efficient in-house capabilities and smaller companies that must rely on third parties.

Implications for other industry players

While many of these recommendations are applicable to all grocery players, the rapid growth of e-commerce has significant additional implications for various players within the broader ecosystem. Besides Amazon, players such as Cornershop by Uber and DoorDash also offer marketplaces for shoppers. Investments continue to pour into instant delivery, with multiple players including Instacart, Gopuff, Gorillas, and JOKR now testing and offering delivery in less than 30 minutes. More first-party services are also emerging: Gopuff and DashMart by DoorDash are now playing in this space with their own warehouse-based grocery-delivery models.

Digital-native third-party marketplaces have notched significant growth in the past few years. They now have an opportunity to use their technical capabilities to ensure their retail partners have access to the best digital technology and user experiences. Another priority will be improving efficiency and reducing costs to customers through the accelerated adoption of technology (such as microfulfillment), increased batching of grocery e-commerce orders on delivery milk runs, and shared resources in delivery across vehicles and drivers. Marketplaces can also unlock additional value pools (such as advertising) that used to flow to media players outside the sector—for example, by luring spending from traditional media channels such as television ads to grocery marketplace advertising via retail media networks.

Pure-play, first-party online grocers have the opportunity to make headway by deploying different delivery models (such as a scheduled, milk-run approach), expanding their offerings to address more need states and occasions, and further distinguishing themselves from traditional competitors (for example, through subscription models). They can also differentiate their offerings by assortment authority (including breadth, depth, and brands covered) and experiment with adopting social-first, video-first offerings to engage consumers.

Despite the substantial growth of online grocery and the increased number of players, the market truly is on the verge of its next transformation. Executives should recognize that the leaders of today are not guaranteed to be winners tomorrow. Retailers that take decisive action and make strategic investments today will be well positioned to carve out a profitable position for the future.

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