The Future of Grocery Retail
This quote by Vladimir Ilyich Lenin certainly applies to the way America shops for Groceries. For the longest time, Grocery e-commerce was considered a laggard with only 3-4% penetration compared to that of fashion and electronics with over 20%. And for good reasons - low margin, highly perishable, variable quality, and high last-mile cost as a % of order values, made grocery e-commerce a potentially large but economically unattractive market. Thus, retailers other than behemoths such as Amazon and Walmart didn't make serious investments in this space.
Today is different. Covid-19 has turbo-charged the demand for delivery of groceries and thus, overnight, created the potential economies of scale that would have taken years, if not decades. With the total market grocery e-commerce market expected to be ~$60B+ over the next 3 years, the stakes are high and the consumers are hungry [pun intended], for more variety, faster delivery, and more delightful experiences.
While the current and future service-innovations such as 2-hour deliveries, buy-online-pick-up in-store or curbside, autonomous/drone deliveries will continue to accelerate the growth, I argue that the future of grocery retail demands a much higher bar. The truth is that despite the size of the market and the order velocity, the grocery shopping experience leaves a lot to be desired. But, before we explore what retailers can do to design the next-gen experiences, let's focus on the consumers and understand why and how people buy groceries.
For all intents and purposes, I'll define grocery shopping as "food" related items for household consumption and focus on the e-commerce channel.
The Why: Grocery buying is a means to an end. And that end has different use-cases in today's environment. For instance, groceries are converted into foods, which can be a source of energy, happiness, social status, medicine, recovery, and connection. Then, why are the retailers still selling groceries just as ingredients, and not focusing on the value they create?
The What: Grocery buying is one of the most predictable, repeatable, and inefficient processes. No wonder, 85% of Americans don't like grocery shopping. I assume most grocery carts look the same, every week. It is estimated that an average American makes 1.6 trips per week and spends at least 60 hours per year buying groceries, not including the driving time. With at least 50M people shopping, that's 3 billion hours/year of collective human life spent on buying eggs, potatoes, cheese, etc. every week. Go figure.
Why do we have to go to each corner of the store or create an online cart every time? Why can't this be on autopilot? Some will argue that this will prevent the discovery of new products - I argue that it will leave more room for discovery if retailers can leverage digital technologies to personalize discovery. Heck, I don't browse the entire Spotify or Netflix catalog every week, but still consume more content than ever before. So why can't the Grocery catalog be more like Spotify?
The How: When most people buy groceries, they think of what meals they need to cook on the following attributes - 1) Time of day - breakfast, lunch, dinner, snacks 2) Diet - Vegan, Keto, high protein, etc. 3) Health restrictions - Diabetes, high blood pressure, Gluten, etc. intolerance, etc. 4) Age/life-stage - kid-friendly, elderly-tolerant, pregnancy, surgery, etc. 5) Risks - high sodium, mercury, GMOs, etc. 6) Price/Quality - Organic, Kosher, Frozen, Fresh 7) Convenience - Ready to heat, read to eat, etc. 8) Health benefits - anti-inflammatory, muscle building, immunity-boosting, etc.
So why isn't the grocery catalog tagged with these attributes? And why does the customer need to expend energy in searching for products matching these attributes? The obvious answer is that this is really hard to do,
You deserve better! And the retailers need to adapt and integrate
just as fashion retail has evolved from selling clothes, shoes, and accessories to selling style, status, and statement. This is the shift from "Transactional" to "Experiential" retail.
Here are 5 ways retailers can build a more delightful and integrated future:
Based on the 30 elements of value framework created by Bain and Co., below are the elements that could be relevant for the customers. While there are table stakes, i.e. fundamental elements such as Quality, Variety, Reduces cost, Saves time, and Rewards-me, the true differentiators could be elements in the emotional, life-changing, and social impact categories. Note: Which of these categories and corresponding elements you prioritize will depend on the type of target markets and consumers. For example, urban and rural consumers may value different elements and thus the strategy needs to be aligned with the target segments.
Here is an example of one element in each category:
a. FUNCTIONAL - Reduces costs: by auto-applying coupons and offer bundles
b. EMOTIONAL - Badge Value: If Kroger or Publix is the Macys of grocery retail, then Whole Foods is Bloomingdales. If you shop at Whole Foods, it says that you seek premium and high-quality products, and are willing to pay a premium for them. It is a matter of positioning and the corresponding value proposition that creates an emotional value for the consumers.
c. LIFE CHANGING - Motivation: dedicated section, for athletes and fitness conscious people, that re-inforces healthy choices through tracking of macros.
d. SOCIAL IMPACT - Self Transcendence: According to a recent survey, 60% of the Millenials were aware of the implications of their food choices on the environment, and 50% of them considered factors such as packaging while making purchases. So, through education about farming practices, waste reduction initiatives, and local sourcing, retailers can appeal to the consumers' desire to be more socially responsible. Wegmans is the most loved grocery store in the US, and it has built customer-loyalty by investing in its communities.
If there is a shopping category that is ripe for personalization, it is Groceries. We have clearly defined preferences, restrictions, and affinities that don't change frequently, so it is a no-brainer (doesn't mean it's easy) to capture these attributes and personalize the offering. For example, if I'm a vegan than I should not be seeing meat or dairy as part of my feed, as that is wasted digital real-estate, but I do. And that's an annoying experience. [Image source: Whisk]
But to take this to the next level, imagine if your grocery shopping app could connect to your Apple Health app and detect that you run every day and recommend "coconut water" as a "Rehydrate after your run" in your personalized feed. Boom! The privacy evangelists may cringe at this, but trust me, it's coming.
This is the most critical step in enhancing the consumer experience. As a new breed of shoppers, especially those who are not digital-natives migrate to grocery e-commerce, the shopping experience needs to simplified - right from discovery to checkout. Carrying on the personalization theme, the landing page needs to show fewer, but more relevant products, need to provide the shortest path to checkout and make the process quickly repeatable on the next visit.
As an example, the Amazon Fresh landing page is overwhelming for me and the majority of the items listed are irrelevant. In contrast, Thrive Market knows me much better and provides me a simple and relevant landing page, which increases my odds and speed of finding products.
You may also have to search for new items every now and then. So a key element of simplification is multi-search capability, which allows the users to search multiple items at once or put the name of a recipe and get a list of items to be added to cart in one go. Ocado executed a part of this strategy and witnessed 30% more traffic to the multi-page search results page.
Automation of the customer journey can be achieved through lists and auto-replenishment services such as the "Reserved" service offered by Ocado. Using the Reserved service, Ocado customers receive a regular delivery day and time on a weekly or fortnightly basis, with a virtual basket of goods that can be amended, arriving automatically. I was thrilled to discover a new Silicon Valley Start-up -Jupiter, started by fellow Stanford Alums, who are trying to solve for this automation.
Food has a deep cultural and social meaning in our lives. We get inspired through blogs, videos on youtube, posts on Instagram, but very seldom that inspiration translates into a purchase at the Grocery store. Why? The journey from inspiration to the grocery cart is cumbersome. Grocery retailers can generate or source inspirational content such as recipes/ideas, and convert them into a shopping list, providing an easy path to purchase. [Image source: Whisk]
With food cooking getting increasingly outsourced, given the rapid rise of food delivery services, the Grocery retailers have already moved up the value chain through "meal-kit" and "pre-cooked meal" services. Since a large portion of the costs of these services is the raw material, the large Grocery retailers have significant economies of scale. In addition, they have a physical presence in most cities, which can be leveraged to create dark kitchens that service local consumers. Finally, the last mile delivery costs can be also be subsidized through the existing network for grocery deliveries. Overall, this vertical integration should give retailers a larger share of the consumer's wallet and build more loyalty over time. Both Amazon and Walmart offer such services but haven't yet cracked the customer experience.
Take Waitrose, in the UK as an example: it offers catering for "entertaining" as a service, where customers can order customized meals for various types of needs.
There is an opportunity here in the US to enhance the experience by addressing more nuanced needs such as food by type of occasion, diets, age group, or health factors. As long as retailers can strike the balance between costs and quality, the demand for such services will only grow.
Even though Grocery e-commerce is incredibly complex and poses several challenges that other categories such as fashion and electronics don't have, the size of the market, resurgence in consumer interest, and the opportunity to make an impact on our lives, make this category the next epic shopping-frontier. The retailers that have the capital need to obsess more about the customers and re-invent their operations to deliver joy and not just ingredients.
Amit Rawal is a Sloan Fellow at Stanford's Graduate School of Business. He has spent the last decade in building and scaling e-commerce ventures for 40%+ of the world's population. At Stanford, he is focused on bringing together tech, design, and data to create joyful shopping experiences. He is a data geek and loves tracking all kinds of health and wellness metrics. He can be reached at [email protected].