Why it's time to "think different" about grocery delivery

While pickup is now the dominant form of online grocery fulfillment, delivery is also growing fast. The latest Brick Meets Click research shows that delivery increased by nearly 300% on a sales basis over the period of the pandemic (Aug 2019 vs June 2021).

This growth of delivery is not surprising, since there are many times when a customer is happy to skip a trip to the grocery store. What is surprising, however, is the recent proliferation of delivery services like the ultra-fast 10-minute delivery in Kroger’s online-only delivery business in Florida.

Recent innovations raise the question of where grocery delivery is headed.

The prize for dominant players

Part of the answer can come from looking at the powerful players now competing in this space. One thing that’s already clear is the convergence of meal and grocery delivery. Together, they represent a huge financial prize for the dominant players.

Door Dash and Uber Eats, while primarily seen as meal delivery services, are competing toe-to-toe to serve a broader range of customer needs and spending, and they are making big investments towards that goal.

Instacart continues to grow, despite some “shaking of the foundation” in terms of retailer loyalty, and Amazon Fresh – the app and the store – continues to build out its grocery delivery footprint as the foundation for a more robust delivery system.

Navigating the costs of grocery delivery

It’s too early to visualize exactly what the delivery business will look like in 3 to 5 years, but it’s clear that three major areas of cost will be interacting to define the most efficient grocery delivery system, and that ultimately, these three must be in balance to yield the low-cost solution. These costs are:

• Order assembly
• Transportation
• Customer acquisition/retention

Order assembly

Today most online grocery orders are still assembled manually in-store, but the move to fulfillment centers and other forms of automation is lowering the cost of “pick and pack.” Some solutions require larger investments than others (as well as more space in which to operate), and this is where the need for balance comes in.

As increased investment drives down the cost of assembling each order, transportation costs must go up to reach the larger market needed to justify the investment in assembly.

Transportation

Transportation cost is generally defined by the distance needed to reach a market with the sales potential to cover the investment in automation – which is leading some operators to create “hub and spoke” delivery networks and/or to build delivery routes to reduce the cost per drop.

Transportation cost control has also increased interest in autonomous vehicles to reduce the labor cost. Up to this point, most of these have involved wheeled vehicles, but Walmart and Kroger, along with Amazon, are now beginning to work with drones.

Customer acquisition/retention

Customer acquisition and retention costs have always been an important part of the online grocery business model, and they’ll be even more important as competition increases for delivery.

Big financial incentives (like $25 off your first order) never prove effective at attracting customers. More recently, it’s become clear that the features of the online offering play a bigger role in acquiring customers. This includes features like [1] :

• Accessibility
• Attractiveness
• Acceptability

Customer retention costs are always lower than acquisition costs and are driven by the need to continue to update the customer experience. This means having the analytical capability to rapidly “read and respond” to household purchase patterns, and to identify which products to promote to trigger a purchase and/or bring a customer back into regular purchasing behavior.

The future of delivery: Balancing competing costs

Striking the right balance between these competing costs will require significant investment in technology – automation, robotics, and machine learning – as well shifting from a product focus to a customer-centric focus.

The increasing competition in delivery combined with continuous innovation likely means that consolidation will reduce the number of delivery services in each market and probably increase the need for “delivery as a service” (DaaS) that will do two things:

• Generate the needed high ROI through more intense utilization of assets.
• Operate with a focus on sustainability by reducing carbon footprint and packaging waste.

The other issue complicating the current picture is the question of customer demand for ultra-fast delivery. If this demand turns out to be significant, it will be much harder for any one player to profitably serve the entire delivery space.

We’ll check back in a year or so to update our thinking on this.

   [1] (See BMC Paper, Rating the seamless grocery shopping experience, November 9, 2018)