WHY RETAILERS ARE (SLOWLY) DEMOTED BY GROCERY DELIVERY APP | OPINION
Briefly about the author:
?My name is Damon, and I have 5 years of experience working with retailers in Vietnam - one of the fastest-growing retail markets in Southeast Asia and the world. From my experience and research, today, I want to share my opinion about the hidden competition between retailers and grocery delivery app, specifically in Canada, where I newly relocate to work.?
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In Canada, retail is highly consolidated into the biggest chain players like Loblaws, Sobeys, and Walmart. The fact that retailers are at the tail-end of the distribution and have direct access to end-consumer allows them to be almighty and have superior power over manufacturers. Yet, in the last two years, that position has been changing.
It's the rise of Food Delivery App. With the growing urban busy lifestyle and higher digitalization literacy, moon-shot by the pandemic, food retail online sales in Canada jumped to represent close to 3.3 percent of all sales in 2020, compared to 1.7 percent in 2019, according to recent Nielsen numbers (1).?
There is no specific breakdown of retailer-owned online channels vs. third-party app. Still, when it comes to affordable and fast home delivery experience, many sites rank third-party solutions on top, namely Cornershop by Uber, Grocery Gateway, Instacart, etc. This made retailers demoted into "just another vendor" and sacrificed their hard-earned thin margin to another player.
Why is it so hard for Goliath retailers to catch up with David delivery apps, specifically in delivering groceries to customer's doorstep and a great user experience in today's digital era? Specific shortfalls make retailers shake hands with delivery apps to serve a sizeable and growing customer segment, who would prefer to shop grocery on the cloud.
Different investment models lead to opposite management perspectives.
Retailers invested millions of dollars into brick and mortar stores, bearing the risk of managing billions of merchandise and employing thousands of retail employees. All of these have well earned the all-mighty position of retailers over manufacturers. In retail, one typical project has to go through thorough research, testing, pilot until the perfect model is found and all senior stakeholders are satisfied. The implementation of building a new physical structure, loading new merchandise, training staff, and promoting for sales will also take months to complete.?
Because of this CAPEX-heavy model, innovation in retailers is generally more risk-averse and lengthier.??
On the contrary, delivery apps have a highly flexible cost structure. The cost grows (almost) proportionally to revenue. Upfront investment is minimal. They have Infrastructure as a Service (Amazon Web Service and alike), Employee as a Service (partners that accept in the gig economy), and the instant cash flow fueled directly from customers in each transaction. Although huge cash burned at the early stage is often called investment, that is considered customer acquisition cost similar to every business.
Because of this cost-flexible nature, Delivery App shares the same characteristics of digital products. Their management welcomes initiative and risks associated with them. Therefore, the innovation cycle is more frequent and quick to implement and adjust, typically last every 2 weeks, as the Scrum Method dictates as a "Sprint."??
People's core competencies are widely different between the two industries.?
Retail has been the long-standing industry whose core competency is BUYING STRATEGICALLY and OPERATING EFFICIENTLY. For an industry famously known for thin margin, only 2.2% pre-tax profit margin for a chain store in Canada(2), it all comes down to getting the best deal from suppliers and optimizing operation cost. Money comes only WITH SCALE. A buyer buys at scale and improves 0.1% in supplier discount worth millions. Operation Director changes a simple policy, at scale, will save thousands of hours, equal other millions.?
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Because of the scale-powered business model, people have learned to develop core competency DEEPLY IN EACH FUNCTION. This, however, creates the siloed nature in many retailers with whom I was able to work. People enjoy being left independent when it comes to their function's work, and cross-functional collaboration is hard to foster. This again reinforces changes to be low-risk, small incremental, or highly innovating but will take years to get buy-in from all stakeholders.?
Meanwhile, Delivery App has only one Core Competency: Product Management. They hire engineers and product managers to only focus on what matters most: User Interface & Experience. As the product grows more complex, it can be segregated into different teams, developing various features. Each team has the complete capacity to complete a specific feature from research, engineer front end, back end, and business side. Horizontal structure deletes silo and fosters collaboration, which we all know is key to a successful business in general, not just retail.?
Lastly, different data flow leads to diverging speed to innovate?
Data is king. Everyone knows that. Whoever captures data more complete, granular, and faster will access a vast pool of insight for constant business innovation.
Because of their nature operating in the physical world, retailers do not have data over customers' entire journey, except when they already buy the product. Many solutions like cameras and AI have been proposed to monitor customer flow, heat map, consideration, yet still represent a fraction of their behaviors. Even worse, many still have to bear with a legacy system that is slow and full of flaws. The basics of syncing data correctly and in time have already been a great challenge. Management only knows an initiative fail or win when final sales data come after a few weeks. To break down why it is that way and what to improve seem to be a daunting task. Couple this with the siloed nature mentioned above, responsibility segregation renders quite impossible.
Picture: POS data, although powerful, might not be good in pre-purchase behavior
Delivery apps, on the other hand, were born on the cloud. Therefore, they have complete intelligence over when customers login, pause, click this link, come back, stop for 2.5 seconds, then log out, then 2 days later log in to finish the purchase finally. All of them are data in almost real-time. They can conduct advanced A/B testing, targeted customer feature release, small-scale test, etc. That all not just inform but confirm if a change is ready for wide release, in just matter of days.?
To deliver or not! That is an existential question.
Every retailer has a website, sometimes an app. They offer choices to pick up or deliver to home. Yet, the interface, the pricing, the accuracy of fulfillment, or the speed might not be reasonable to resonate with consumers fully. It is no surprise that customers keep coming back to the reliable on-demand delivery app like Uber Eats and Instacart. Some choose to invest to entirely change, like Sobeys with their Voilà platform in GTA, or some simply leave things as-is with old-fashioned pick-up or costly and slow home delivery. The key difference in behavior is their vision towards the future of home delivery.
Will online grocery always be a niche, already peaked at 3.3% in Canada in the pandemic, or will it grow exponentially to South Korea's level of 20%? If it is the latter, failing to innovate will lead them to the famous downward path of Nokia and Microsoft failing to realize the smartphone revolution Apple's iPhone started in 2007.?
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