Online Grocery Delivery Could Be An Oasis For America’s Food Deserts
Limited access to fresh food has left millions of Americans wandering a not-so-metaphorical desert in search of healthier food options close to their homes. These food deserts, often concentrated in low-income neighborhoods, also co-exist in cities where e-commerce players are experimenting with online grocery delivery.
Though delivering fresh food to customers is still a work in progress, online companies and established grocers are getting creative in their efforts to get food to more shoppers. This growing service could potentially ease the drought.
According to the U.S. Department of Agriculture, 23.5 million Americans live in food deserts. A food desert is an area where residents within a one-mile radius lack access to a full-service supermarket. Corner convenience stores often do not provide access to fresh produce, and residents substitute healthier options for nearby fast food.
“The costs inherent with delivering from a hub store to a food desert are so huge for a retailer that they don’t really do it very often,” FreshXperts e-commerce expert Heidi Chapnick said.
High operating costs and expensive cold storage facilities are but a few of the logistical challenges that prevent online food suppliers from scaling their operations to reach consumers near and far.
But Cushman & Wakefield Senior Managing Director and Practice Leader for E-commerce and Electronic Fulfillment Ben Conwell said the potential for market growth remains high.
“The share of total grocery [shopping] in the U.S. that is being done online is really small,” Conwell said. “Depending on whose numbers you read, anywhere from 2% to 4% of total grocery is online today. There is tremendous upside, there is tremendous opportunity to grow that.”
Corner Stores Everywhere, But Not A Grocer In Sight
Food deserts occur in both urban and rural communities. While cities like New York City may have upward of 68,000 food retail stores, the size, distribution and inventory of those stores vary greatly depending on the neighborhood. According to a Pratt study tracking food insecurity, which is the percentage of a population that does not have access to healthy food, Brownsville and Ocean Hill in Brooklyn have a 31% food insecurity rate, one of the highest in the city. Bedford-Stuyvesant has a lower rate, at 27%, but has a higher distribution of smaller stores.
Tight consumer budgets in low-income neighborhoods also keep major grocers from opening locations in poverty-stricken markets, for fear that low profit margins will stifle investment returns.
Using Existing Footprint For Online Fulfillment
Proximity to consumers is the logistics holy grail for e-commerce players venturing into fresh food delivery. Urban fulfillment centers have become necessary to meet same-day delivery demands on time-sensitive foods like meat, dairy or produce.
“They are all trying to chase share, they are all trying to get to some kind of scale, with the expectation that with scale comes stability and profitability,” Conwell said.
Since its expansion out of Seattle in 2007, Amazon has acquired cold storage fulfillment centers near major cities like Chicago, Dallas and the New York metropolitan area. But the infrastructure necessary to preserve groceries during last-mile delivery is expensive and hard to find. Cold storage facilities can cost $150/SF to $170/SF compared to $50/SF to $65/SF for conventional warehouse space, according to JLL. These facilities also utilize bulk refrigerators and complex freezer spaces that dictate how the building is designed. Retailers must also deal with government regulations that vary across states.
“Nationally, freezer/cooler industrial space is extremely in short supply,” Conwell said. “There is significant demand for this kind of specialized temperature-controlled space. I don’t see that challenge abating until there is more supply at the wholesale level.”
Online grocers could turn to existing brick-and-mortar stores to get closer to customers and cut operating costs. Following Amazon’s $13.7B acquisition of Whole Foods this summer, the e-commerce giant cut prices by 43% for bananas, butter, organic eggs and other staple items across the grocer’s 470 stores. Amazon prime members also get additional discounts and will be able to pick up online deliveries at the store, turning the pre-existing food retail network into a major distribution chain.
Physical supermarkets could become satellite cold storage facilities, expanding the retailer’s delivery network. With Whole Foods under its belt, Amazon has access to 75 million people within three miles of a physical supermarket. Whole Food’s equity investment in Instacart also puts the delivery service under Amazon. Instacart is an asset-less service, without fulfillment centers or inventory, allowing it to focus on last-mile logistics. Amazon could leverage Instacart’s larger distribution network for Fresh delivery.
“The most efficient way for grocers to execute their last-mile delivery or online fulfilment is not through massive dedicated online fulfillment centers,” Conwell said. “Rather the best way for conventional grocers to fulfill that business is through their existing store network. Because they have inventory, the infrastructure, labor and proximity to the customer.”
Testing The One-Hour Rule
Supermarkets could help extend the chill chain required to make same-day grocery deliveries possible, and by doing so could also extend the radius of online services.
An ideal travel time to feasibly deliver fresh food is between 30 and 45 minutes, Conwell said. Sixty minutes from a last-mile fulfillment center or a grocery store is the maximum travel time.
“In a dense metro area, you’ve probably covered most of a market,” Conwell said. “When you start to get out to the suburbs and the rural areas, it becomes more of a challenge.”
Several distribution centers near urban food deserts already fall under the theoretical hour maximum without accounting for existing food retail locations. In Seattle, 55% of Rainier Valley residents live below the poverty line and 21% have low access to healthy food, according to a study from The Congressional Hunger Center. The closest Amazon Fresh distribution center to Rainier Valley is in Kent, Washington. The center is a 20-minute drive away and could potentially service the community.
Low-income households near Downtown Dallas can receive deliveries from the Fort Worth center in 39 minutes. In Chicago, Amazon Fresh’s location in Wood Dale, Illinois, can reach the South Side in 47 minutes.
In New York, Fresh Direct, a competing online grocery delivery service focusing on short supply chains, operates distribution centers in Long Island City and the Bronx, closer than Amazon Fresh facilities in Carteret, New Jersey, and Bethpage, New York. Fresh Direct can reach Brownsville in under 30 minutes.
Food As Medicine
A partnership between retailers and healthcare institutions could make online grocery delivery to low-income communities more feasible, FreshXperts' Chapnick said. Treating healthy food options as medical prescriptions could provide e-commerce retailers with funding similar to tax incentives for affordable housing development while educating the public on a healthy diet.
“We’ve got to get the large healthcare companies backing the delivery of food to these areas. People in these food deserts tend to be the ones who suffer from obesity, diabetes and these major issues,” Chapnick said. “If the retailers can get backing and doctors can write a prescription which dictates what they need to order online, there would be funding flowing and an ability for a retailer to expand and do this without losing money.”
According to the USDA eating healthier diets could save $87B per year in medical costs. Nonprofit, asset-less food delivery services have experimented with food as prescription. In Boston, Fresh Truck launched in 2013 as a mobile grocery store for underserved neighborhoods. Co-founder Josh Trautwein, a former health educator at MGH Charlestown Healthcare Center, started Fresh Truck after hearing that families had difficulty accessing healthy food. The program also hosts block parties to educate communities about making better choices.
Shrinking the U.S. food deserts requires a balance between education, convenience and accessibility.
“A poor area is not as likely to go online as a wealthy area,” Chapnick said. “You need a mix of physical retail and online. It is about convenience. Convenience dictates choice, and you need to have choice of channel to make it easier for the particular customer.”
Convenience Does Not Always Dictate Choice
Delivery speed and convenience are not the only barriers to entry for grocers expanding their online presence. Consumer pricing also remains a hurdle. In 2010, the City of New York provided retailers with a tax incentive program to improve grocery access in food deserts. The city paid 40% of the construction costs for a 17K SF supermarket in the Bronx. But residents still chose less expensive, processed food over more expensive, healthier options, according to a study from the Robert Wood Johnson Foundation.
Back in Seattle, price convenience is a determining factor in consumer choice. Across Rainier Valley and the more affluent Queen Anne neighborhood, the price difference for fresh fruits and vegetables is $0.33. In Rainier Valley, there is more than an $11 difference between fresh and canned produce. Amazon Fresh shows a similar price disparity. Packaged foods are 15% to 30% cheaper than fresh items.
Online grocery services have had to grow their share of the market with the promise of free shipping. Retailers would have to operate at a deeper loss to lower prices while maintaining an expectation of free delivery.
“Right now, it’s about building customers, and you don’t build customers by making them wait,” Conwell said. “You try to build customer loyalty by free or near free delivery, but eventually it is not sustainable to give delivery away for free.”