The following piece is a white paper written by Chris Walton and Takeoff Technologies that was first published on October 19th, 2020. It is now republished for Omni Talk with Takeoff’s permission. To download a copy of the paper, click here.
Oh, what hath a pandemic wrought? Online grocery sales this past summer increased five to six times over the previous year. Instacart has exploded (as has its valuation, which now stands at over $17 billion), and some experts now predict that online grocery sales will reach $250 billion by 2025.
However, figures like these only tell part of the story.
They gloss over the bigger picture of what the past six months mean for the future. Yes, grocery has changed, but the changes are much subtler and far more sublime than one might imagine.
Online grocery delivery has undoubtedly grown in importance, but, as re- cent research from Takeoff suggests (insert link to report), that importance should not be confused with what the American grocery business has always been about—the relationship between price and convenience. Online delivery is certainly one variable in this equation, but, if the pandemic has revealed anything, it is that the physical attributes of omnichannel grocery retailing may be just as important, if not more so, than delivery.
While consumers have and will always go to great lengths to save time and money, Takeoff’s latest research indicates that no grocer (or retailer for that matter) should ever assume that fast delivery is all that matters.
The real road to salvation is far more nuanced and intuitive, regardless of what pandemic-laced media jargon or what outrageous VC-backed investments may try to fool one into believing.
1 – Grocery shopping habits haven’t changed all that much
The most startling statistic from Takeoff’s new research report, conducted in partnership with Timothy Lasseter, Professor at the Darden Business School at the University of Virginia, is that the percentage of shoppers who shopped exclusively for groceries online pre- and post-pandemic barely moved at all.
In a survey of over 1,000 grocery shoppers, the percentage of primary household grocery shoppers who shopped entirely online and never went to a grocery store “only increased from 2% to 4%” during the pandemic.
Stop and think about that for a second.
During the greatest pandemic of the past 100 years and at a time when a store checkout lane has also been called the “most dangerous place in a grocery store” by CNN, only 4% of all shoppers have resigned themselves to shopping exclusively online for groceries. Or, said another way, 96% of Americans are still interacting with physical stores in some shape or fashion.
But, yet, all the reports are that digital grocery commerce is exploding? How is that?
Well, these reports, too, are true, which leads me to the next point.
#2 – Curbside pickup is the real story of the pandemic
Across Takeoff’s broad survey, nearly everyone increased their online shopping frequency.
24% of Traditionalists (aka regular store grocery shoppers) began shopping more online, while 13% of Online Shoppers (aka those who shopped online prior to the pandemic) also reported increased online activity.
And, yet again, only 4% of the total surveyed population stayed true to the online channel, so what gives?
To understand the answer to this question, Takeoff deployed a conjoint analysis to study the relative effects of price and convenience against the typical offerings of grocers over the last six months.
What the research found shouldn’t be a surprise but should still be quite sobering.
Given the choice between crowdsourced delivery, free curbside pickup, or still visiting a store, the overwhelming majority of the surveyed population still preferred to either shop in stores or to utilize free curbside pickup.
Startlingly, among Online Shoppers, free curbside pickup was the preference 50% of the time, while crowdsourced delivery was only desired 17% of the time. By a similar token, Traditionalists preferred to shop in a store 54% of the time and only elected crowdsourced delivery 5% of the time.
In aggregate, the conjoint revealed that, given the choices of free pick-up, shopping in store, or crowdsourced delivery fees, 45% of respondents (again, amid a pandemic!) would prefer to shop in stores, with free pickup still being the next most desired option by a wide margin over crowdsourced delivery.
Well, put simply, it’s cheaper (see below).
As seen above and as discussed in my last white paper on this same subject, consumers want their groceries the same day and don’t want to pay extra service charges for that preference. As a result, going to stores or electing
curbside pickup becomes the smart way to save money.
According to the conjoint study, with all things being equal, consumers actually prefer delivery to pickup, but once the service fees or higher product price premiums of same-day delivery come into play, it becomes tough for consumers “to cover the incremental costs” relative to a curbside pickup model or just going into stores.
Recent financial results from companies like Walmart, Target, and others bear out this rationale.
For instance, Target’s last financial quarter was its strongest in history. It delivered +24% comp store sales growth and cited its Drive Up program as a key reason, as the program grew by an astounding 700% over the year prior. And, Target now says that it also plans to add additional fresh, frozen, and refrigerated products to the service to capitalize on the zeitgeist of the moment.
#3 – Stores will always be a part of the equation
As just mentioned, even amid a pandemic, the overwhelming majority of those surveyed still prefer to shop in stores or to utilize order pickup, with on average 45% of people still preferring to shop in stores.
Combine these points with data from overseas markets, where online penetration has been significantly higher historically, and another important pattern emerges that gives even more credence to the conjoint statistics just discussed.
For example, online shopping within the U.K. peaked at 49% years ago, and, in China, Alibaba has reported that 60% of the revenue from its renowned Freshippo grocery stores originates online.
In other words, nowhere is grocery shopping just about delivery.
No matter the environment, no matter the virulence, stores have always and will continue to matter. It is just that the mental exercise of what convenience means has changed.
Historically, the identification of needs and the fulfilling of said needs was an exercise solely grounded in the physicality of convenience. Now it is also an exercise in speed of delivery calculated against a willingness to pay.
Some will elect to fulfill via delivery, but, for many, stores will still remain the inherently cheaper alternative, either to shop directly or to utilize for pickup.
So what does it all mean?
Taken together, the above assertions are important because they show that the future is as much physical as it is digital. The pandemic has shifted shopping behavior to digital in nuanced ways but not in the 1990 Webvan ways to which one’s mind might be drawn.
Stores still, at the end of the day, are the most important tool grocers have in their ongoing price and convenience battles with their competition. Stores are generally closer to consumers for delivery, pickup, and in-store shopping, the prices of their products come with no service fees attached, and, most importantly, they already exist as nodes in the supply chain network to be leveraged for economies of scale.
Play the game forward, and it is easy to see where the puck is headed.
Amazon is getting into physical grocery fast. In just the past month, Amazon has opened up a second Amazon Go Grocery store in Seattle and a new Amazon Fresh grocery store in Woodland Hills, CA. Would Amazon be taking these steps if it didn’t already understand what is posited above?
Instead, Amazon is rumored to be using automated technology in Woodlands Hills to decrease its cost of picking and packing, opening its stores close to consumers to lower last-mile costs and to facilitate order pickup and returns, and implementing Just Walk Out technology to raise the bar against the competition for the 40% to 50% of consumers that will always still choose to shop in stores, but who just may choose to shop at Amazon because they will never have to wait in lines again.
That is where the future is headed.
It isn’t a future predicated upon relying on stop gaps like pricey third-party delivery services that come into stores and pick products off grocers’ own shelves. It is instead a future about controlling one’s own destiny. It is about putting into place the flexible systems of infrastructure, like microfulfillment automation, checkout-free technology, curbside pickup, and onsite concierge services that give consumers what they really want — flexible convenience at competitive prices — and that give grocers the return on invested capital they need in the long-run.
Great omnichannel retailing is the blend of smart physical, digital, and human design choices. The right systems will enable it all in the moment and capitalize on existing inventory and labor without additional costs getting passed onto customers or to grocers’ bottom lines and without third-party services clogging up aisles.
Delivery is a white label service at this point. The myriad of players in the game prove that out. There’s nothing special or different about it. Everything will gravitate towards the mean over time.
But, what is special and what no one can take from any grocer is what happens inside the four walls of a grocery store. That is where the real magic happens.
That is where picking, packing, in-store service, and more can all come together in a way that shapes an entire new expression of grocery retailing in an image that the pandemic-hardened consumer now demands and that leaves behind the eventual shackles of green-vested, aisle-clogging pickers that couldn’t care less which warehouses — sorry, stores — they pick from next.