The U.S. has 40,460 grocery stores. If you want to see how physical retail might look 20 years from now, you might want to watch the grocery store space over the next three to five years.
If, as I wrote in January, retail’s success in 2021 and beyond will be defined by logistics, grocery is where we will see clear evidence of this — and where grocery stores’ successes and failures will play out in real time.
In grocery, a small number of platforms at scale will emerge to influence the consumer’s relationship with buying food and will power the stores’ ability to serve a consumer who now thinks differently about how, when and for what she uses the physical store.
Of course, Instacart has already done this and has a big head start. Others, like Target with Shipt, are also in the fray. Meanwhile, Amazon and Walmart are leveraging their online and physical store scales, respectively. But there’s room for others to try, and it will be years before we see how it all shakes out.
But what we can say for sure is that platforms like these will become the food-buying hubs for a myriad of grocery stores and food-buying experiences. They will shape how consumers want to buy and fulfill those purchases (in-store, online and pickup), the products they buy when they shop with them (new brands, meals to go, related adjacencies) and, most of all, the stores they choose to shop with.
These platforms will eliminate another consumer friction: drive time. The once tried-and-true cornerstone of grocery stores’ competitive advantage will no longer be a given. Once thought too inconvenient to reach, grocery stores will become a viable part of the consumer’s consideration set and will change grocery’s competitive landscape — as they already have.
The 20 Percent-Plus Factor
Grocery is an enormous retail segment, with $658.1 billion in annual sales projected in 2021, the second-largest retail trade segment. Yet, its growth as a sector has been relatively flat since about 2016 — an average annualized growth of 0.5 percent over the period from 2016 to 2020. Grocery stores fight tooth and nail for the consumer’s share of wallet in their local markets. Until March of 2020, that battle was fought up and down the aisles of the brick-and-mortar grocery store closest to the consumer.
Nearly 100 percent of food purchased to consume at home was bought as part of the weekly Saturday trek to the grocery store, and maybe one or two smaller excursions to pick up a few things here and there during the week. Grocery stores outsourced ordering and delivery logistics to the consumer, and consumers seemed okay with taking that on — organizing one of their precious weekend days around the 43 minutes of in-store shopping time, plus the commute to and from. It wasn’t that online wasn’t an option — it just wasn’t a very good one.
Peapod introduced consumers to the idea of buying groceries online in 1989. As part of the Ahold-Delhaize supermarket chain, Peapod checked the logistics box, but at the start of that journey, the online ordering experience was largely a #fail. It’s probably not much of an exaggeration to say that it took less time to go to the store and back than it did to navigate the Peapod site to place the weekly shopping order. But since 100 percent of grocery store sales were made in-store, perfecting the online channel was probably not the chain’s highest priority — or anyone else’s, either.
The recently shuttered Amazon Pantry service, which launched in 2014, was also an attempt to chip away at traditional grocery store purchases that added bulk items to the store shopping experience — mostly things like cleaning supplies, laundry detergent and paper towels. It was also complicated for consumers to figure out how to get their boxes filled with just the right amount of stuff, and it was expensive to fill them.
Food delivery in urban areas via suppliers like Fresh Direct started to get traction in major cities, but neither Pantry nor Fresh made enough of an impact for grocery stores to feel a threat. Walmart remained the largest seller of groceries in the U.S. and Kroger remained the largest grocery store chain (and they still do today).
Food consumed away from home was eaten at a restaurant — and most of the time, those two bright lines and budgets were thought of as separate by the consumer, since even though they both involved eating food, the experiences were vastly different.
Since the pandemic, the lines between grocery stores and restaurant food started to blur considerably, as consumers turned to digital methods to buy food that was first entirely, then largely, eaten at home. Grocery stores sold more meals to go, meal kits came back into vogue, and restaurants ramped up their online ordering and turned to aggregators to acquire and serve customers who were eager to keep some part of their restaurant experience alive.
Today, in one of PYMNTS’ latest consumer studies on the grocery shopping habits of U.S. consumers, roughly 80 percent report that they still go to the grocery store to buy their food. What we need to focus on, though, is the 20 percent of consumers who are now buying more of their groceries online than they once did in the physical store — with nearly 60 percent of those digital shifters comprised of the highly coveted millennial and bridge millennial cohorts whose spending power supermarkets want to capture and grow.
When asked about the stickiness of those digital shifts, nearly 80 percent of all of these digital shifters now say that all or most of those habits will become part of their grocery shopping routine.
As consumers increasingly make ordering and logistics the supermarket’s problem to solve — not theirs.
My Time Is Your Friction
Just because consumers are buying groceries online doesn’t necessarily mean they are buying them online from their once physical store go-to — even as most grocery store chains have seen their digital businesses soar over the last 12 months.
Sometimes consumers are buying directly from specialty food purveyors, suppliers with sustainable supply chains, and/or those with a socially driven ethos and unique products that have suddenly become easy to buy online for delivery to their homes.
And sometimes those purchases are made from large CPG brands that also want to build a more direct relationship with the consumer.
As PYMNTS has seen in our various subscription commerce studies, consumers are also hip to the subscription trend for many of the 25 percent of the “center aisle” purchases that once took up a lot of space in their physical shopping carts. Pantry staples, cereals and snacks, which were a pain to lug to the car to load and then unload, now lend themselves easily to set-and-forget-because-I-never-want-to-run-out online purchases.
And sometimes those purchases are made from Amazon. Whole Foods sales were reported to be roughly $15 billion or $16 billion in 2020, but that doesn’t account for what is a very robust “Subscribe and Save” option for many center aisle items purchased as part of Amazon’s online platform.
Or those purchases are made from the once-too-inconvenient-to-drive-to supermarkets that are now accessible via the Instacart platform.
The Amazon Of Supermarkets
Buying food online is a tricky online shopping experience. Grocery stores carry roughly 40,000 SKUs, and grocery store shoppers fill their baskets with 30, 40 or 50 products at a time from all different departments. Mastering online ordering and logistics is a complex IT and logistics effort for any grocery store, and nearly impossible for smaller grocery store operations to do at scale while still driving profits.
Amazon’s purchase of Whole Foods in 2017 got the eCommerce gears spinning faster, as grocery stores feared that Amazon’s platform largesse — its mastery of online and logistics — would become a threat to supermarkets with its new brick-and-mortar focus.
That’s when they realized they needed a solution.
Wegmans inked a deal with Instacart that same year to power its eCommerce grocery store. A Wegmans spokesperson said the deal was about giving consumers back more of their time with delivery in less than an hour. The Wegmans announcement followed similar ones with Publix and H-E-B.
Today, Instacart powers eCommerce for 600 retailers, mostly grocery stores and nearly all of the big ones — including Kroger and Costco — across 45,000 stores with 500,000 shoppers who take online orders, then shop for and deliver them. The company reports that the stores on its platform reach 85 percent of the U.S. population.
Successful platforms find ways to eliminate friction that saves time for their stakeholders.
The Instacart platform saves consumers time because it eliminates the trip to the store to buy groceries. But it also saves the grocery store the time spent building and operating an efficient eCommerce site — which, to be successful, has to nail both ordering and logistics to get consumers to try it once, use it twice and continue using it.
In a way, Instacart’s become the Amazon of Supermarkets with a twist — enabling third party sellers to share in the benefit of their platform — but giving them the ability to have their own storefront, pricing and relationship with the consumer by linking their shopping via the Instacart platform with their store loyalty program. Instacart has recently added curbside pickup and lets grocery stores use their own employees as shoppers.
Instacart makes the bulk of its revenue from grocery stores — and that makes it unlikely that its strategy is to compete with them. It seems unlikely that Instacart will risk alienating its supermarket customers by buying a supermarket chain or otherwise competing directly with grocery stores. That’s unlike Amazon, with Whole Foods, Walmart, and Target with Shipt.
Of course, as with any digital intermediary, not everyone is happy. The grocery stores that reaped the benefits of digital shopping over the last year using Instacart’s platform now realize digital’s growing foothold, and worry that Instacart could become a threat to the economics of their business. Grocery is a thin-margin business, and the margins on Instacart orders are lower than for purchases made in-store. More of the consumer’s shift to digital and toward the Instacart platform could drive margins even lower.
Instacart has also leveled the grocery shopping playing field for consumers by eliminating the drive time consideration that once more or less kept competition at an equilibrium in those local markets. Giving consumers more choice has introduced new competition for grocery store food spend.
And that’s not all bad.
Giving consumers a choice gives grocers the opportunity to find and sell to customers who were once constrained by drive time. At the same time, grocers can focus on making the physical store part of the experience that consumers find valuable and worth their time.
A consumer with a newfound appreciation of her time, and whose work-from-home experience is likely to soon become a hybrid-work-from-home experience, is a consumer who is very happy to outsource both ordering and logistics to the platforms that make it easy and efficient to get grocery essentials.
Right now, that’s probably via Instacart.
But new tech could give grocery stores access to the microservices they need to power their own ecosystems using localized, automated fulfillment options, as well as access to ordering application programming interfaces (APIs) that meet the consumer’s high bar — potentially altering the competitive landscape once again and putting pressure on existing platforms to do more to keep the revenue side of their platform — the grocery stores — on board.
And as goes grocery, so will go the rest of retail.
If the future of retail is about logistics, imagine any one of the platforms today that have commerce and logistics mastered — and what their next moves might be.