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Supermarkets Readying For Battle In E-Commerce War

E-commerce shares of total retail sales doubled to 8.4% in the nine years that ended in Q3 2016, and grocery retailers are itching to get a piece of the pie.

At least a dozen e-commerce players have successfully cracked the food delivery game in select markets throughout the country, including Amazon Fresh and FreshDirect, but online grocery delivery remains in its infancy.

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Last year online grocery sales accounted for 4% of total grocery sales, according to Cushman & Wakefield. Offering full online-to-door delivery is a difficult task to manage for grocers, considering the challenges and risks associated with delivering perishables coupled with the arduous task of fulfilling orders for quick delivery.

“Consumers are so much more comfortable today than they were even five years ago with the convenience of the online experience, but buying grocery online is a very different experience for shoppers than buying a TV or a pair of trousers,” Cushman & Wakefield national e-commerce practice leader Ben Conwell said.

A Risky Model

Ben Conwell, Cushman & Wakefield/ James Cook, JLL

There is great risk associated with e-commerce. Often, online players are assuming much of the shipping costs and taking hits from returns; these are risks most grocers do not have the luxury to take.

JLL head of retail research in the Americas James Cook said grocery stores average about a 3% profit margin, which means any additional overhead costs incurred will be transferred to customers in the form of higher prices. To put this into better context, in 2016, e-commerce players ate a cumulative $95B in sales due to online returns, according to CBRE. How much additional annual cost might a mere cracked egg, bruised banana or incorrect product incur for the grocery industry?

“Anything they do that costs money they have to pass that along to the customers. They have no wiggle room," Cook said. 

Delivering food all over the country would require an impeccable supply chain that includes warehouse space and distribution centers dispersed all across the country within markets with dense populations. Even those online grocers that do deliver to consumer’s front doors are expanding their services to new markets rather slowly. Grocery delivery requires keeping food at the right temperature and ambient conditions required throughout the entire distribution process. Unlike apparel, furniture and appliance delivery, this is not something that can travel by ground and arrive in good condition; proper care must be taken to prevent spoilage.

Because of this, grocery delivery has mostly been limited to urban areas that make economic sense and in affluent areas where consumers are willing to pay for the privilege.

"Grocers like Kroger realize they can't win this delivery [game], so they're doing click-and-collect," Cook said. "It's a great compromise and it's not costing them as much."

The Success Of Click-And-Collect

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Click-and-collect, where consumers order groceries online and pick up from stores, is a much less risky way for grocers to get into the e-commerce game. Grocers are even eliminating the need for shoppers to leave their vehicles. Walmart and Kroger are leading the way in curbside pickup initiatives that may soon become the new standard for online grocery shopping.

“It’s a very hot trend that gets a lot of buzz in the industry,” Conwell said. “What we see today is consistent with where I see us being in the next few years — fulfilling online orders directly from an existing grocery store.”

This model is proving successful and less expensive in a number of ways, especially because grocery stores are already close to shoppers. One reason the industrial sector is thriving and breaking net occupancy records is because e-commerce users are gobbling up warehouse and distribution centers near customers so they can fulfill same-day and two-day orders. Grocery stores looking to expand their online business already have a supply chain and delivery network in place. In addition, these stores have existing infrastructure, such as on-site freezers and refrigerators.

What has changed under this new delivery model is the amount of inventory needed on-site. Conwell said grocers could once predict how much of a certain product was needed any given day of the week, but online orders have thrown a wrench in that.

“There’s huge pressure to improve and make more efficient the e-store replenishment ... so that stores have the adequate inventory they need throughout the week to meet both walk-in demand as well as online demand that would be fulfilled from there,” Conwell said. “For all retailers and grocery it’s no different. There’s a tremendous pressure to not let inventory levels balloon or get too high in-store because that could negatively affect their margins and profitability.”

Adapting Pre-Existing Real Estate

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What online order and curbside pickup has not disrupted is grocers' real estate needs. Industry players are not expanding their current sites, nor are they investing in larger plots when they open new stores, Conwell said. Instead, they are making good use of their existing locations, and adapting parking lot space for curbside pickup. In more innovative cases, big chains are taking portions of their stores and devoting them to staging order pickups, even converting some parking spots into grocery drive-thrus.

“You don't need new warehouse or distribution [space], you just need more employees to pull the goods and the technology to set up all the processes,” Cook said. “Everybody sees this as the future and [is] getting on board.”