• With the growth of food retail expected to remain low inthe next few years, retailers must consider the potentialthat digitalization offers for engaging with customers andopening new revenue streams. However, digitalizationpresentsnewchallengesfor retailers,asthe logistics costsofe-commercethreatentoerodeprofitmargins.
• To increase grocery e-commerce penetration, companiessuchasAmazonandWalmartareadoptingstrategies thatcapitalize on their competitive advantages. Meanwhile,other retailers are partnering up with digital startups tooutsource the fulfilment of grocery shopping, mimickingsolutionsadoptedbythefoodserviceindustry.
• Inthefragmentedfoodserviceindustry,techstartupsserveto consolidate the front end. In grocery retail, which isalready consolidated in mature markets, tech startupsintroducecost-effectivesolutionsforfooddeliverythatcanbeusedbyretailerstocompetemoreaggressivelyonline.
• Digitalizationoffersapathforwardinalow-growthbusiness.Thefoodretail and food service industries are challenging and competitive inmatureeconomies.Withthegrowthoffoodretailexpectedtoremainlow in thenext fewyears,players thatwant toexpandmustconsiderthepotentialthatdigitalizationoffersforengagingwithcustomersandopening new revenue streams. However, digitalization presents newchallengesforretailers,asthelogisticscostsofe-commercethreatentoerodeprofitmargins.
• Retailers are developing solutions to increase grocery e-commercepenetration, using their respective competitive advantages. US-basede-commerceretailerAmazon,forexample,isencouragingcustomerstoset up home inventory systems such as Amazon Dash to increase e-grocery shopping frequency, while Walmart is capitalizing on itsextensive store network to offer free pickup services for e-groceryorders.
• The potential of new business solutions that are emerging from thestartup environment is so significant that Germany’s Metro Group iscultivating a portfolio of food service startups as part of its businessgrowth strategy. Food service startups that put restaurants andcustomers in touch give grocery retailers additional examples ofsolutions that can be replicated to grow e-grocery sales. Followingthesecompanies’lead,anumberofUSretailers,includingWholeFoodsMarket, Target andWalmart, have joined forces with Internet-baseddeliveryservicesforthefullfillmentofonlinegroceryorders.
INTRODUCTION
Digitalization has been revolutionizing service industries. In recent years,Airbnb and Uber have changed the dynamics of the hospitality andtransportation sectors, respectively, by providing consumers with greaterconvenience and choice when booking accommodations and car rideswithin a city. Now, the food industry—restaurants, delivery services,grocery retailers and food-relatedniche retailers—is feeling the impact ofdigitalization, as digital technologies, including e-commerce and service-relatedapps,havestartedtoflourishinmanymaturemarkets.
Ingroceryretailing,however,e-commercepenetrationhasbeenlimitedinanumber of geographies, as grocers confront difficulties not faced byretailers that sell nonperishable, higher-price-point items. Nevertheless,digitalization is here, and is already an inescapable trend in the foodindustry.
Inthisreport,weexplainwhye-commercepenetrationwithingroceryhasbeenslow,offeranoverviewofhowthefoodservicesector is leadingtheway indigitalizationwithinthe industryandactingasa“solutionspot”forgrocery e-commerce, and summarize how retailers are overcomingobstacles to e-grocery expansion. We also discuss technology’s role infacilitatingconsumers’ interactionwith foodserviceprovidersandgroceryretailers.
Forexample,appssuchasEAT24intheUSandDeliveroointheUKenablecustomers to order online and have food delivered from restaurants that
might not have their own Internet presence and delivery capabilities.Meanwhile,appssuchasInstacartintheUStellconsumersifretailershavewhattheyarelookingforinstock.Ifso,stafferswillgoandgettheitemsforcustomers,meaningtheappeffectivelyactsasanalternativetransactionalportalandasadeliveryarmfortheretailer.
E-commerce is a significant growth opportunity for grocery retailers andfood manufacturers—but from a still-small base. In 2014, the GroceryManufacturers Association (GMA) introduced the concept of the “1-5-10”scenario,which suggests that the1% shareof groceries thatwereboughtonlineintheUSin2014islikelytoturninto5%by2018,andthentoquicklyaccelerateto10%.Newtechnologiesandlogisticsmethodsareexpectedtomake delivery more straightforward, clearing the hurdles to grocery e-commerceexpansionandenablingrapidgrowth.
In theUK, the online channelwill be the fastest-growing grocery channelover thenext fewyears, according to researchorganization IGD. The firmexpectse-commerce’s shareof totalgrocery retail toalmostdouble, from4.4%in2014to8.3%in2019.
In the US, online consumer packaged goods (CPG) sales are expected tocontributemorethanhalfoftotalindustrysalesgrowthbetween2013and2018.Duringthisperiod,totalonlinesalesofCPGsareexpectedtoincreaseby $28 billion, while total CPG revenue is expected to increase by $52billion,accordingtodatafromIRIandWellsFargo.
Despite thisgrowthpotential,onlyasmallportionofgrocerye-commercesaleswillbenewbusinessforthegroceryindustry.Additionalsalescouldbegeneratedbybusyshopperswhodonothavetimetovisitstoresoftenandwhonowhave theoption to shopmore frequentlyvia the Internet,orbyshopperswhocouldbuyproductsonline thatarehard to findwhere theylive—for instance, because supermarkets with large product ranges arelocated far away. We believe, however, that the vast majority of e-commerce sales will be diverted from the traditional brick-and-mortarchannel,cannibalizingrevenue.
Still, the growing importance of grocery e-commerce in food retailing isinescapable,andcompaniesthatdonotadapttoonlineretailingare likelyto lose market share and miss the long-term opportunities thatdigitalizationpresents.
E-GROCERY:STILLANUNDERDEVELOPEDCHANNEL
E-grocerypenetrationisstillverylowinmanycountries,eventheoneswiththemost advanced grocery retail sectors. The US sees particularly low e-commercepenetrationlevelsforaWesterngrocerymarket.Accordingtoa2014 survey by A.T. Kearney, 26% of Internet-connected consumers
SpecificcharacteristicsoftheUSgroceryretailsectormayexplainwhytheUSlagsinonlinegroceryshopping.Thesector isrelativelyfragmentedandregionalized in the US, which may inhibit digital innovation by givingretailersofflineavenuesforgrowth,suchasexpansionandacquisitions.Buta bigger barrier is likely the cost of delivering in areaswith relatively lowpopulationdensity.
Countries where grocery e-commerce is more popular, such as the UK,FranceandJapan,tendtohavesmallerandmoredenselypopulatedareas,whichmakese-commercelogisticsmorecost-effective.
Othermarkets inwhich consumers buy groceries onlinemore frequently,suchasChinaandIndia,arecharacterizedbyascarcityofgroceryoutletsinmoreremoteareasandtrafficcongestioninlargecities—factorsthatmakeitharderforshopperstogettostoresandthatencourageonlineshopping.InChina,consumersliketobuyimportedproductsthatareoftendifficulttofind in local stores but that canbe found throughonline retailers such asJD.com,TmallandTaobao—whichhashelpede-grocerygaintractioninthecountry.
Asidefromspecific local factors,however,thechallengingeconomicsofe-groceryretailingareresponsiblefor itsslowexpansion,notonly intheUS,butalsoinothercountries,includingtheUK,wheregrocerye-commerceismoreadvancedbutuntappedpotentialstillexists.
E-commerce adds significant costs to a retailer’s operations. It costs UKgroceryretailers$17,onaverage,topick,packanddeliveranonlineordertoacustomer,accordingtoShoreCapitalStockbrokers.However,whenwecheckedanumberof the largestUKgrocers’delivery fees inMarch2016,theyrangedfrom$0–$10,whichimpliesacostburdenfortheretailerintherangeof$7–$17foreachorder.
Figure 4. UK:Online Grocery Delivery Charges,Week Ending March 27,2016(USD)
High fulfillment costs appear to have made grocery retailers in somemarkets reluctant to sell online, and that has slowed the expansion of e-groceryretailingincountriessuchastheUS.
Online grocery retailers need economies of scale in order to reachprofitability,andthoseoccurwhenthereisanincreasingnumberofordersper hour or per square mile. Picking costs, which in a nonautomatedenvironment function like fixed costs, ease with scale, according to theGMA. Therefore, grocery e-commerce is more economically feasible inhighlypopulatedurbanareasthatgeneratehighvolumesofordersthanitisinlarge,sparselypopulatedterritories.
Many brick-and-mortar grocery retailers are working to make their e-commerce operations more economically viable and, in turn, helping togrowtheirshareofgrocerye-commerce.Inanumberofcountries,leadinggroceryretailersthatoperatephysicalstoresalreadyholdsizablesharesofthe e-commerce market. For example, in 2015, French supermarketoperator Casino was the second-largest Internet retailer in France after
The solutions that various retailers have relied on to make e-groceryretailing more economically viable are largely based on their individualcompetitive advantages. Amazon has used its logistics and technology tofacilitategrocerye-commerce,whileWalmarthasadoptedaverydifferentsolutionthatreliesonitsstrongstorenetwork.
AmazonSendsYouaBoxofHomeEssentials
Amazon is becoming a grocery shopping destination for US consumers,thanks to the firm’s astute deployment of innovative strategies andtechnology.Bymakinggrocerye-commercemoreprofitable, theseenablethecompanytogainmarketshareingroceryretail.
Amazon addresses the problem of shipping low-price-point SKUs withsolutionssuchasAmazonPrimePantry,aservicethatallowsAmazonPrimecustomers to buy a 45-pound box filled with packaged groceries andhouseholdgoods.TheservicehelpsAmazonreducefulfillmentcostsby:
• Bundling low-price-point items to increase the valueof theorder andhelpyieldamarginthatcoversorexceedsfulfillmentcosts.
• Partially passing delivery costs along to the customer, in two ways:through a fixed, $5.99 fee per box and through the annual Primemembershipfee.
Source:Amazon.com
AmazonWantsYoutoSetUpaHomeInventorySystem
Amazonhasintroducedothersolutions,too,notablyAmazonDashandtheDashButton,toencouragerepeatedpurchasesandgrowthesizeandvalueoftheaveragebasket.AmazonDashisascannerthatenablesthecustomertoscanthebarcodeoftheproducttheywanttoreorder.Thatitemisthenautomatically added to their cart on AmazonFresh, Amazon’s full-rangegrocerye-commerceservice.Theusercanevenspeaktheorderthroughamicrophone embedded in the device. The solution was launched in April
2014 and it is currently available in selected US urban areas whereAmazonFreshoperates,includingNewYork,LosAngelesandSeattle.
Source:Amazon.com
In2015,AmazonlaunchedtheAmazonDashButton,aphysicaldevicethatlookslikeakeyringwithabuttonandthelogoofaproductonit.Whenthecustomerpresses thebutton, therelatedproduct isautomaticallyorderedon Amazon. Users can conveniently store the device close towhere theykeeptheproduct,suchasinacupboard.
Dash Buttons can be bought by customers via Amazon, but can also beembedded by manufacturers in the hardware of electronic appliances,thanks to collaborations between the individual appliance makers andAmazon.Whenthetechnologyisembeddedintheappliance,theusercanreordersuppliesmanuallyviatheAmazonDashButton,butthereordercanalso be triggered automatically through a service called Amazon DashReplenishment,asthetechnologytrackshowmuchproducthasbeenused.
By cutting the time between the customer’s need occurring and an orderbeingplaced,AmazonDashandDashButtonsminimizethepossibilitythatthecustomerwillshopelsewhere,procrastinateorforgetaboutneedingtomakethepurchase.
Assuming that Amazon Prime customers are frequent buyers at Amazonandthatthecompanygroupsmultipleordersprocessedinashortperiodoftime into one single shipment—which is, in fact, the default option—AmazonDashandDashButtonsshouldencouragelargerbasketsperorder,whichreducetheimpactoffulfillmentcostsone-commerceoperations.
Walmartoffersanotherexampleofhowretailerscanreducetheimpactoffulfillment costs in grocery e-commerce. In the US, the company uses itsmassivebrick-and-mortar footprint (75%of theUSpopulation liveswithinfive miles of a Walmart store) to bring down delivery costs and expandonline grocery services by focusing on local pickup as an alternative todelivery.
Walmart gives customers the option of collecting groceries they haveboughtonlinefromoneofitsstores,freeofcharge.In-storecollectionhelpsthecompanysavesonfulfillmentcosts,because:
• Part of picking and packing can be carried out by existing staff,limiting the number of extra people the company needs to employforfulfillment.
• Walmartdoesnot incur indelivery costs, as customersdrive to thestoretocollecttheirowngroceries.
Walmart successfully tested its pickup service in 2014 in its hometownofBentonville, Arkansas. In September 2015, it announced a significantexpansion of the service into a number of US cities. By April 2016, theservicewasavailableatWalmartstoresinmorethan20UScities.
Source:Walmart.com
THEDIGITALIZATIONOFFOODSERVICE
Digitalization is also visible in food service, where numerous startups areunleashing the potential for restaurants to increase their sales. Many ofthesestartupsrunappsthatcustomerscanusetoordermealsonlinefromrestaurantsforhomedelivery.Localrestaurantsthatarefeaturedinsearch
results run through the apps can win new business. According to food-ordering serviceDeliveroo, restaurants that appear in searches on its appcan generate an increase in sales of up to 30%.Moreover, someof theseintermediaries act as delivery agents for the restaurants, offering a newchannelofdistributionforthem.
The business model of these mobile apps and online aggregators iseffectivelytoconsolidatetheconsumer-facingelementof thefoodservicesector.Therestaurantsector—likemanyservicesectors—remainsrelativelyfragmented,andsmall, independentfirmsareprominent.Byconsolidatingthe front end, firms such as EAT24, Just Eat and CaterCowmake finding,choosing and booking food service providers much simpler amid afragmentedlandscape.
Therearefourmaintypesofservicesthatdigitalstartupsoffertothefoodservice industry: home delivery and reservation services, subscriptionservices,eventsandofficecatering,andexperientialserviceagents.
HomeDeliveryandReservationServices
Delivery and reservation services are intermediary booking services thatconnectconsumerswithlocalfoodservicefirms.Thesecompaniesprovidea portal that aggregates independent food service providers, and majornamesincludeEAT24(US),Delivery.com(US),GrubHub-Seamless(US),JustEat (Denmark, UK) and Deliveroo (UK). Uber also runs a food servicedeliveryapp,UberEATS,whichwaslaunchedinMarch2016intheUSandinJune 2016 in London. The app enables users to ordermeals from nearbyparticipatingrestaurantsandhavethemdeliveredinaslittleas12minutes.
Subscription servicesprovide scheduleddeliveriesofmeals,usuallywithafocusonhealthyeatingandnutrition.MajornamesinthecategoryincludeFreshology,FreshDietandPowerSupply intheUS,andTheDetoxKitchenintheUK.Thecompaniesoperateonlineportalsthroughwhichcustomersselect their menu according to their specific dietary requirements; themealsarethendelivereddailyforaspecifiedperiodoftime.
Source:Freshology.com
EventsandOfficeCatering
Startups operating in the catering space provide intermediary bookingservices that connect clients with local, often independent, food servicefirmsthatcatereventssuchasbusinessmeetings,weddingsandparties.Bignames in this space includeCaterCow (US),CityPantry (UK)andEATClub(US).Fooda(US)offersamoredistinctivespinonat-workcatering:itbringspop-uprestaurantsintolargeroffices.
Experience-focusedfirmstendtogobeyondsimplyactingasbookingagentsordeliveryfirms,offeringpremiumornovelexperiences.InnovatorsincludeGormei (HongKong),aplatformthatenables restaurants toofferdinersauniqueexperience thatmay includeexperimentingwithanewmenuor aspecial event. Other companies focused on experiences include EatWith(Israel),whichallowsgueststobookdinnerinachef’shouse.
The potential of new business solutions emerging from startups is sosignificant that German retailer and wholesaler Metro Group is actuallycultivating a portfolio of food service startups. The initiative aims to findinnovativewaystohelpMetroGroupclients—independentrestaurantsandhotels,inparticular—gainacompetitiveedgeinthehospitalityindustry.
Metro Group started investing in startups by acquiring a 15% stake inEmmasEnkelinDecember2014.SimilartoInstacart,EmmasEnkelisaB2Cdeliverybusinessthatshopsforgroceries,householdgoodsandrestaurantmealsinlocaloutletsandthendeliversthemtocustomers.
In October 2015,Metro Group launched the TechstarsMetro AcceleratorprograminpartnershipwithUSstartupacceleratorTechstars.MetroGroupdescribes the initiative as the world’s first hospitality and food techaccelerator. Its goal is to create “an unfair advantage for hospitality andfoodtechstartups.”
While the accelerator is part ofMetroGroup’s strategy to find innovativeways tohelp its clients run theirbusinessesmoreefficiently,we think thecompany could also draw on the participating startups as a source ofsolutions for its retailing operations (which include consumer electronicsretailerSaturnandtheRealhypermarketchain).Inparticular,wethinkthestartupsmighthelpMetroGroupfind innovativewaystogaincompetitiveedgeinthefulfillmentofonlineorders.
Source:Metroaccelerator.com
Figure8.MetroAcceleratorStartupsPortfolio
Name BriefDescription
Zenchef
Enablesrestaurantmanagerstocreatetheirownwebsite,manage restaurant bookings, check reviews and engagewithcustomers
CoffeeCloud
Helps restaurant managers monitor the use of espressomachinesbycountinghowmanycupsofcoffeearemadeinrealtimeandsavingthedatainthecloud
FlowtifyWorkflow management system with a focus on HACCPreportingforthehospitalitybusiness
PoshPackerTravel booking site for booking creative and affordableaccommodationsworldwide
Roomatic
Hotelmanagementplatformthathelpsmanagersimproveguests’ experiences by providing real-time guestintelligence data during the stay and enablingmanagersto address negative feedback before guests leave thehotel
Rublys
Provides an advertising solution based on virtual scratchcards on smartphones, which allow users to win prizesimmediatelyandcompaniestoraisebrandawarenessinawaythatisnotintrusive
Wynd
Software that helps independent hospitality businessesmanage their omni-channel structure by integratingonlineandofflineretailchannels
Source:Metroaccelerator.com
ISFOODRETAILINGLEARNINGFROMFOODSERVICE?
Somegrocery retailershave similarly cooperatedwith third-party servicestartups. But while food service companies often use intermediaries toconsolidate the front end, grocery retailers often collaboratewithdigitalgrocery order and delivery startups to reduce fulfillment costs and givecustomersmoreoptionswhenshoppingonline.
Internet-baseddelivery service InstacartworkswithanumberofgroceryretailersintheUStoprovidesame-daydeliveryofgroceryordersprocessedonline. Instacartwas founded in2012 in SanFrancisco, and initiallywasaC2C platform that enabled private service providers to pick up groceriesfromstoresforcustomersforanaddedmarkup.Asthebusinessdeveloped,Instacartsetuprelationshipswithretailersdirectly.Theretailerssharetheirexisting markups with the deliverer, enabling Instacart users to pay thesamepricesthattheywouldfindinastore.
Large retailers that Instacartworkswith includeWhole FoodsMarket andTarget. Instacart started to provide delivery services to Whole FoodscustomersinSeptember2014.ByMarch2016,theservicewasofferedin17metropolitanareasacross theUS,and the twocompaniesareplanning toextend it tootherareas.Targetannounced itscollaborationwith Instacartin September2015.At the timeofwriting, the service is availableonly tocustomers inMinneapolis,Target’shometown,butthecompanyhasplanstoexpandittoothergeographies.
Otherorderanddeliveryappprovidershavecollaboratedwithretailerstofulfillonlinegroceryorders, too. In June2016,Walmartannouncedthat itwill begin testing grocery delivery with ridesharing companies Uber andLyft, after having tested delivery for Sam’s Club orders using Deliv—adelivery tech startup—beginning in March 2016. Through this service,Walmart’scustomersplacetheirorderonlineandselectadeliverywindow.Walmart associates prepare the order and call an Uber or Lyft driver tomakethedelivery.ThecustomerpaysWalmarttheregulardeliverychargeonline, andmakes no payment to the driver. In a press release,WalmartstatedthatthecollaborationwithUberandLyftispartofitsefforttomakeonlinegroceryshoppingeasierforitscustomers.
Muchremainstobedonetoconfronttheeconomicchallengesofe-groceryretailing and encourage the rapid growth of grocery e-commerce. Theresearch retailers are undertakingwill likely spur progress in logistics anddigital technology, transforming the industry according to the 1-5-10scenario.Thekeytransformingfactorsforretailerswillbeloweringthecostof delivery as a proportion of sales revenue, increasing speed of deliveryandprovidingaseamlesse-groceryshoppingexperience.
The dynamism of the digital startup world is helping companies in foodserviceandgroceryretailexpandtheirbusinesses.Uber-style intermediarysolutions are promising, and likely to bring further developments in thenear future. Cooperating with third-party startups will likely reducefulfillment costs for grocery retailers and bring greater convenience tocustomers.
However, it is important to acknowledge that there is amajor differencebetween the food service and grocery retail sectors: namely, the formertendstobemuchmorefragmentedthanthelatter.Independentcompaniescontinue to be strongly represented in food service,while food retail hasbeen consolidated by major chains building scale, especially in maturemarkets.ThisinevitablymeansthevaluethatUber-stylestartupscanbringto retail differs from the value they can bring to food service. Theconsolidating effect that these startups have on the front end of foodservicecannotbetransferredtogroceryretail: itistheseinnovators’morecost-effective approach to offering services that will be most valuable toretailersastheyattempttocompetemoreaggressivelyonline.
