The grocery business in the U.S. is about $675 billion. Virtually every household shops for groceries and over 90% of households shop for groceries once a week or more. Many products are now regularly bought online that were thought to be impossible to be converted to online shopping. Yet online grocery sales continue to be a small fraction of the industry. Depending on who you ask, online grocery sales this year will be 1-3% of industry sales. Compared to other product classes, it’s minuscule. So why aren’t more groceries sold online?
One Big Problem: Perishables
Consumers are understandably reluctant to have someone else pick out their fruits, vegetables, meats, fish and chicken. Anecdotally, you never hear a consumer talk about how an online grocery service picked out better products than they could do at the store. The best you’ll ever hear is that it was “pretty good.” You never hear better than that and you could hear worse.
The Other Big Problem: Price
The profit margins in the business of selling groceries in stores is as thin as it gets. And online shoppers don’t want to pay a premium. The problem is, when you go to the supermarket, you do the picking and then you bring it home yourself. When you order online, they do the picking and they bring it to your home and someone has to pay those workers so online grocers have built-in disadvantages. Cheerios or Russet potatoes are the same online as in store and if the delivered price of online groceries isn’t competitive, it’s not compelling to consumers. Consumers don’t like shipping and service costs, and they generally won’t pay for a shopper to pick their apples or tomatoes. So the online services are stuck doing their customers’ work of picking the products while being unable to charge for it. (There is an offset to the higher labor cost in the form of lower real estate costs but clearly the savings in real estate don’t offset the higher labor.) When you add in the cost of handling returns, it becomes impossible. That’s why you never heard of an online grocer making a profit — it’s much too hard to compete against the legacy retailers and their lower costs.
What Could Change All These problems? Technology
If online grocers could avoid the extra labor cost involved in picking, it would make a substantial dent in their costs. If they could simultaneously give consumers the confidence and trust that they will get produce and other perishables of the same quality they would pick for themselves and at prices that can compete with supermarkets, it will drive consumer adoption of online grocery shopping. The only way I can think of how to do that is to use technology to pick produce and other perishables. Theoretically, anyone could create that technology but when you think about who’s best suited to do that first, the answer is the technology leader in retail, Amazon.
Amazon has a big initiative for online groceries with Amazon Fresh. But when you look at what Amazon is doing in groceries, they are also building Amazon Go, a tech-enabled physical store. It is one of the few businesses that Amazon is developing in brick-and-mortar retail. That makes me think that even Amazon believes that big-time consumer adoption of online grocery sales is a long way off. According to Uwe Weiss, CEO Blue Yonder, a machine-learning software company that aims to help retailers optimize fresh food replenishment and pricing, Amazon will take the lead in innovating grocery business technology. “Once Amazon’s growing grocery business reaches critical mass, the shift will happen immediately,” Weiss says. “All other retailers will have no other choice but to make it work any way they can.”
One technology that will have a big impact is computer vision. There are already technologies that can look at a head of lettuce, see browning and manage stock rotation to avoid spoilage. The technology has not been widely implemented but it has important implications not just for groceries but for restaurants as well. It is coming.
Where Does Online Grocery Sales Work Best?
London has a combination of factors that make it the leader in online grocery. The population density is high, incomes are high, it has a lot of young consumers who work long hours, stores are not open late and deliveries are usually made in under two hours. Those factors make London an ideal market for online groceries and it is in fact the world leader in penetration.
The other factor that makes online grocery sales work so far is teaming up with an existing store. In London, Amazon delivers groceries from Morrison’s, a large chain with existing stores In Seattle, Amazon delivers health and beauty products from Bartell Drugs, a long-established, local family-owned business. That may be an important model because it doesn’t require a separate inventory cost for online sales.
What Won’t Increase Penetration: Apps
So many companies, both startups and established businesses, are developing technology to make it easier for consumers to order their groceries electronically. Oddly, that isn’t what’s preventing consumers from switching to online purchases of groceries; it’s the darn prices and the quality of perishables. Anyone who can get over those hurdles will see a massive shift in consumer habits to their site. Once that shift happens, apps will be important in determining winners and losers. But until consumers develop the trust to switch over, making it easier for them with apps won’t make the critical difference.
Where Does It Go From Here?
We have all heard over the years that certain products will never be sold online, but eventually consumers change because they like the convenience. I believe groceries will be no different and while it will take time before it will happen, it will happen; it’s inevitable and the need is there. If technology can solve the cost and quality issues, the business will explode. It has to happen over time.
My firm, Triangle Capital LLC, does mergers, acquisitions and capital-raising for companies in fashion, retail, apparel, accessories and consumer products.
Article Published in Forbes on 16th January 2017