Online Grocery Is About to Get Its Second Wind

Online Grocery Is About to Get Its Second Wind

By Ian McCue, senior associate content manager at NetSuite
7-minute read


In short:

  • Food and beverage e-commerce sales have been slow to grow, partly because consumers ritualize the act of grocery shopping and value “touch and feel” with food products.

  • Amazon’s foray into grocery sparked big-name grocers to pursue better strategies for fulfilling and delivering online orders, like automation technology.

  • Speciality food retailers, meanwhile, face unique challenges in shipping their goods across the nation. Their wins are a lesson to us all.


As online shopping has exploded over the last decade, one industry has been notably absent: food and beverage, including grocery.

There are many reasons for this: 

  • There are obvious challenges to selling fresh, sometimes perishable goods online. Frozen or refrigerated products can limit a company’s delivery range or require ultra-fast shipping. 

  • Then there’s the profitability issue: 1 to 2 percent margins are typical for grocers, so they have little left over for the extra costs that come with picking and delivering customers’ orders. In fact, retailers lose between $5 and $15 on each online order, according to a report from Israeli automation provider CommonSense Robotics. 

  • There’s also a lack of demand for online food and beverage sales in the U.S. This is partly because trips to the grocery store are a ritual for many shoppers, and they may not trust someone else to meet their personal preferences. Do they like more marbling on their steaks or want an avocado that’s not quite ripe but will be in a few days?

  • There’s a sensory element to buying certain products, as well, that cannot be replicated through a screen. 

“I think one of the things that’s missing is the aromatics,” said Tommy Thwaites, co-owner of Coda Coffee, a Denver-based roaster that sells to consumers online in addition to its wholesale business. “When you buy clothes or some good like that, they don’t have that personal piece of the smell. A lot of people, when you’re in the grocery store you smell your fruit, you smell your coffee--people will want that freshness. I think that’s one thing you can never mimic online.”


“When you’re in the grocery store you smell your fruit, you smell your coffee … I think that’s one thing you can never mimic online.”


 

That helps explain why e-commerce accounts for only 5 to 7 percent of Coda Coffee’s $10-12 million in annual revenue. Wholesale orders from restaurants, cafes and grocers are by far the most important piece of the business, even though Thwaites and his brother and co-founder Tim once believed direct-to-consumer e-commerce would be the core of their sales.

Even so, the 14-year-old company sends between 750 and 1,000 shipments per month to individual online customers, many of whom are enrolled in its Coffee of the Month Club

Coda created another revenue stream by serving as a fulfillment house for several other brands, a few of which receive two to three times the number of orders that Coda does. (One of those is Victory Coffee, a brand run by an ex-Navy Seal that has been featured on “Shark Tank” and Fox News.) 

 

Online grocery gains momentum

Those physical connections that slowed the growth of online food and beverage sales are beginning to fade as people get used to buying just about everything online. 

It started with shoppers only opening their laptops to buy one or two hard-to-find products, according to David Bishop, a partner at a consultancy called Brick Meets Click that helps grocers develop digital strategies. 

Over time, these small orders started to chip away at the brick-and-mortar retailers, but it wasn’t enough to spark a reckoning. Even five or six years ago, customers who wanted to order groceries online for delivery had limited options. There were services like Peapod, FreshDirect and AmazonFresh, but they were only available in cities like New York, San Francisco and Chicago.

Online grocer FreshDirect delivers "quality, fresh-from-the-farms food and groceries."


Then Amazon shook up the entire industry when it acquired Whole Foods in August 2017. The $13.7 billion purchase instantly turned the e-commerce giant into a threat, igniting a surge of investment in online grocery.

“Whether [the acquisition] was a real or just perceived threat, at the time people thought, ‘This is going to be a game-changer. It’s going to allow Amazon to do all these things that we were afraid of,’” Bishop said. “ … That became the catalyst that said, ‘We can no longer wait and consider whether this is a fad or a trend, because what we know now is that it’s imminent that we’re going to lose even more business if we do nothing.’”


Amazon’s acquisition of Whole Foods “became the catalyst that said, ‘We can no longer wait and consider whether this is a fad or a trend, because what we know now is that it’s imminent that we’re going to lose even more business if we do nothing.’” 



By that time, retailers were able to partner with third-party delivery services like Instacart and Shipt that made rapid expansion possible. In 2018 alone, the number of U.S. retail markets with same-day grocery delivery surged more than 500 percent, per CommonSense Robotics. Similarly, the number of grocery stores with curbside pickup more than doubled, led by Walmart, Kroger and Target.

Online grocery grew exponentially in 2018, according to a report from CommonSense Robotics.    


Automation takes center stage

Bishop predicts these national chains will focus on automating  order picking and packing as well as delivery with the goal of increasing profit to counter the additional costs incurred with online grocery.

Walmart, Kroger and Albertson’s are all investing in automated warehouses that would make fulfillment both cheaper and faster. And last year, Kroger started testing an autonomous delivery vehicle from Nuro that can pull up at customers’ curbs with 12 bags of groceries.

Last year grocery chain Kroger began testing grocery delivery with self-driving cars.  

Since such automation strategies aren’t feasible for most smaller grocers, Bishop thinks personal service will become paramount for them.

“Rather than simply saying, ‘We’re going to move to autonomous vehicles because it allows us to decrease the cost of delivery substantially,’ what [smaller grocers] may do is really champion that we have a human contact,” he said.

“Brands have emotional connections with people ... If you remove the people and the store and the only interface that a customer has is an autonomous vehicle … what’s the emotional connection, what’s the bond that a customer will have?”


Not so fast 

Grocery chains may be betting big on online sales, but online grocery still accounts for just 3 percent of U.S. grocery spending, per a report by Bain & Company and Google. This is far behind the 20 percent e-commerce penetration in the footwear industry and 40 percent in consumer electronics. 

Estimates vary on how much online grocery will grow over the next several years--CommonSense Robotics suggests e-commerce could have 15 to 20 percent market share of the $800 billion grocery industry by 2023, while Bain predicts it will reach at least 9 percent over the next 10 years.

Predictions vary on how much online grocery will grow in the coming years. 


The plight of perishable goods

Chain grocers have to worry only about transporting products a short distance from local stores, but online selling is much more complicated for individual, specialty food shops like Coda Coffee and Murray’s Cheese, a New York-based cheese retailer.

The e-commerce history of Murray’s Cheese dates back to 1999, and online sales are a “good-sized portion” of the business, according to Elizabeth Chubbuck, the senior vice president of sales and marketing. (Murray’s has flagship stores in Greenwich Village and Grand Central Station along with mini shops in 400-plus Kroger stores nationally.)

Murray's Cheese ships its cheese and fresh goods nationwide.

 

Murray’s sends orders to all 50 states and Puerto Rico, no small feat considering its temperature-sensitive cargo includes cheese, meats and other fresh goods. All orders are hand-cut and wrapped, then shipped overnight the next day. The packaging is a work of art in its own right: a crush-resistant cardboard box lined to keep the cheese box cool, non-sweat ice packs that don’t leak moisture (which can break down cheese paper) and material to fill any extra space so the box stays at the desired low-40s temperature.

All customers pay for shipping, which Chubbuck said is inevitable given the speed and prep required. Murray’s is testing out two-day shipping--an alternative to its current overnight delivery--to see if it can use that method and still get goods to customers’ doorsteps in the condition it wants.

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Replicating a store, online

Although Chubbuck says “cheese is the opposite of the internet” because buying it is so connected to the in-person experience, Murray’s does everything it can to mirror the in-store experience online. Its site has rich imagery and lists the country of origin, age, milk type and more for every cheese. Many cheeses also have suggested drink pairings, and the site offers recipes and profiles of cheesemakers.

The Murray's website provides information on the history and origin of its cheeses.

 

“The ability to create video content quickly and just churn out photographs and information and blogs and emails with a level of speed and volume that is pretty high, it creates a sort of framework in which people begin to establish more trust in the quality of something even if they can’t pick it up with their own hands or see it with their own eyes,” Chubbuck noted.

 

🌱 The bottom line

There’s no doubt that food and beverage e-commerce will not only grow in the near future but will grow at a faster clip than e-commerce on the whole. It’s only logical that this industry will follow in the growth footsteps of so many others when it comes to online sales.

Food and beverage companies both large and small must find ways to support online ordering, pickup and delivery. It’s about meeting the shifting preferences of customers, and every business can and should find its own way to make it work.

“What you’ll eventually see in the market is not a one-shoe-fits-all but rather a customized shoe based on that retailer’s vision for what they want to be,” Bishop said, “whether they want to be in delivery or not, as well as what their business can support and what capability they either have or are willing to develop.”


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