- March 31st, 2017
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Can Supermarkets Profit From Delivery? The Challenges Of Groceries On The Go
Who ever thought so much choice can go into a banana?
Ripe or green? Organic or conventional? Pickup or delivery? These are the choices presented to shoppers who purchase groceries online. They also are the demands more supermarkets must meet if they want to remain relevant.
This intensity of service can be expensive, but increasingly non-negotiable when it comes to competing as a major supermarket chain. As online merchants — notably Amazon — offer fast grocery delivery, traditional supermarket chains are pressured to do the same or risk losing market share. The challenge, however, is not just in execution; it’s in cost controls.
Shipping groceries is generally more complex than shipping electronics, shoes and other items, largely because food is perishable. Every melted pint of ice cream or bruised banana nibbles at what are already cracker-thin margins. Add the expense of hand-selecting, packaging and delivering these products and even industry leaders face serious cost issues.
Yet major chains from Walmart to Meijer are exploring ways to deliver groceries while keeping expenses, and prices, down. These options range from third-party home delivery to curbside pickup.
Not all strategies are cost-effective, however. Indeed, it appears some merchants are willing to take the hit on some programs in favor of greater competitive appeal.
One In Five Bought Online
Testing various programs is one way to determine the least-expensive methods of overcoming the grocery-delivery challenge. At the root of that challenge is demand, complicated by expense.
One-fifth of U.S. shoppers bought groceries online in 2016, up from 16% in 2015, according to the Wall Street Journal, citing a Nielsen survey for the National Grocers Association. In Europe, the figures track slightly higher, while globally about one quarter of consumers purchased their groceries online, according to Nielsen’s 2015 “The Future of Grocery” report.
So there’s growing demand. However, the added expense of grocery delivery carves into a supermarket’s profit margin, which in the U.S. is estimated to be just 1% to 3%, on average.
There’s the rub: Despite the convenience, consumers aren’t necessarily willing to pay more for groceries that are delivered, especially with alternatives like Amazon at their fingertips. The online retail giant recently cut the subscription price to its AmazonFresh grocery delivery to $15 a month from $299 a year. (It also is reportedly preparing to open its first AmazonFresh Pickup store in Seattle.)
The hope for Amazon and others is that the delivery fees will offset the expenses. However, Amazon also has a vast inventory of cheaper-to-ship goods to help balance out the difference.
From Click To Shipt
Supermarket chains, at the same time, have been testing their own approaches.
Meijer recently entered a deal with the contract-delivery service Shipt to deliver orders to Shipt members from all of Meijer’s more than 230 stores. Shipt membership is $99 a year.
Whole Foods, in a similar vein, uses Instacart, which hires freelance personal shoppers to deliver groceries from the store. Instacart delivery starts at $3.99 an order.
Wal-Mart has doubled the number of stores from which shoppers can pick up groceries purchased online. The service is free with a minimum order of $30 and same-day pickup is available.
And Kroger is testing several options, including Uber delivery at select Harris Teeter locations, grocery pickup through its ClickList service and Shipt delivery. The cost for these services can be as low as $4.95 for a ClickList order.
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Of course, large chains have the resources and reserves to test such programs. Smaller supermarkets risk a greater compromise to profit and longer-term ramifications if efforts fail.
This does not, however, erase the fact that grocery delivery has reached the critical point of acceptance. Ignoring it will not make it go away, but addressing it does not mean a supermarket operator has to lose its shirt over bananas. Following are three cost-effective ways supermarkets can test online ordering.
Baby steps, with vision: Supermarkets should not feel the need to barbecue the entire online oxen at once. The grocery chain Tesco, of the U.K., entered the online fray in 2000 and progressed with patience and caution, favoring long-term vision over short-term tactics. It’s now a standard-bearer of how to do online correctly. Smaller chains can begin an online venture by first offering imperishable items that are less expensive to deliver and less prone to personal inspection, such as cereal, bread and snacks. When shoppers come to the store to buy produce and meats, the store can offer coupons for online purchases.
Let someone else build the infrastructure: Rather than construct a costly in-house delivery system, smaller supermarkets can test delivery through third parties such as Shipt, Instacart or Uber. Or they can go the full grassroots approach and set up local families of shoppers who could communicate via online social communities. The social platform would enable the supermarket to receive feedback from customers as well as the personal shoppers.
Use online rewards to educate: Reward programs can be essential to limiting delivery costs and deepening engagement, particularly online. Supermarkets can populate their websites with a broad range of product information, including nutrition, recipes and short-term offers. This information is likely to encourage more purchases. The activity retailers can track from these interactions (through the reward program’s unique identifier) can be parlayed into more accurate one-to-one customer offers. The more effective the offer, the more likely there will be repeat purchase, offsetting the expense of delivery.
In short, when it comes to online grocery delivery, supermarkets are facing a lot of choices, just like their shoppers. Some will work and some won’t. Until the industry finds a proven method (and it will), supermarkets just may have to split the difference.