Disrupting the Future of Grocery Retailing
The concept of an online grocery auction is simple but the implications to the retail industry are enormous.
Uber has extensive ambitions to become a major player in groceries. A recent report indicates that Uber is hiring a head of grocery product with the goal to"build the organization and globally scale a brand new product offering which will fundamentally evolve how people purchase their groceries."
Uber understands the value of establishing a leadership position in the grocery industry. With sales in excess of $641 billion in 2017, the grocery industry is attracting considerable interest and investment.Amazon’sacquisition of Whole Foods in 2017 was done for one reason: to transform the company into a leading grocery retailer.
The business model that Amazon and grocery retailers like Walmart and Kroger utilize is primarily focused on customers shopping for groceries insidetheirstores and ordering groceries online to be delivered to the home or picked up at the store. The model is fairly basic. The model Uber will create to achieve its grocery ambitions remains to be seen. What’s certain is this: Companies other than traditional grocery retailers can and will severely disrupt the future of grocery retailing.
Direct to Customer in Office (DTCO)
Google "grocery retailing" and thousands of articles will appear advocating the importance and growth of online grocery sales. Currently, online grocery sales account for around 5 percent of the market. Most retail analysts predict that online grocery sales will increase to 20 percent or more by 2025.
Articles on Google make the counterargument that online sales will grow very little due to consumers experiencing continued package thefts and lacking a safe and secure methodology for receiving groceries.
What’s fact and what’s fiction?
We need a new retail model for grocery shopping. Instead of continuing to fight porch pirates and poor delivery economics associated with online grocery shopping—and online shopping in general—change the business model. How? By going to where the most customers are.
Direct to Customer in Office, or DTCO (pronounced Dit-co), is a business model I created to reflect the reality of life for hundreds of millions of Americans. During the day, most Americans are working at an office building, an office complex, a hospital, a university, or a manufacturing plant.
The word I use to describe the reality of corporate America is density. Executives and associates are concentrated in specific areas of cities and towns across the United States. Companies such as Amazon, Google, Tesla, Facebook, Microsoft, and Salesforce have large campuses where thousands of associates work daily.
I use the word density also because of its importance in reducing logistics costs. Why is online grocery retailing unprofitable? A lack of density in orders. Delivering a small number of grocery orders to homes located miles apart is a recipe for high costs and low efficiency. A truism in business is that unit economics associated with e-commerce don’t improve with scale.
However, delivering a large number of grocery orders to a massive number of customers located on the same campus or in the same office building/office complex greatly increases order density and reduces last-mile delivery costs. Unit economics improve. A company called Byte Foodshas alreadyfiguredthis out.
When asked by a reporter why he robbed banks, American bank robber Willie Sutton replied, "Because that’s where the money is." The phrase morphed into what is now referred to as Sutton’s Law and is taught to medical students in schools globally. Instead of testing for every conceivable ailment, go straight to the most likely diagnosis first.
Sutton’s Law applies to commerce. Instead of trying to make last-mile delivery of groceries to the home profitable and building more supermarkets, go to where the most customers are: on campuses and universities, inside office buildings, and working at large office complexes.
Tech Companies Can Spark a Movement, Corporate America Will Follow
I am on the record as stating thatFacebookandLinkedInhave the potential to become e-commerce leaders. I also believe that tech companies are most likely to create a new business model for grocery retailing. Why? Tech companies are more innovative than other industries. I focus on grocery retailing for this article but make no mistake, the concepts I present apply to e-commerce in general.
Google is a recognized leader in innovation. The company has the ability to massively disrupt grocery retailing.
When tech companies create new products, corporate America incorporates those products into its various industries. If tech companies take the lead in implementing the ideas I outline in this article, corporate America will embrace the concepts and implement them where possible.
At a high level, associates that work for the tech companies buy groceries specific to their needs as individuals. Executives and associates with families purchase groceries to meet the needs of each family member, but the order is still placed as an individual order. Millions of associates in other industries buy groceries in the same manner.
Uber, Microsoft, Amazon, and other technology companies clearly understand that the current process for how consumers buy groceries can be improved. Uber wants to create an entirely new model for how people buy their groceries. So do I. The following model is an example of how I believe we can achieve the goal of revolutionizing grocery retailing.
Apply the Concept of Pooling To Grocery Retailing
Using simple math, assume that the average individual spends $100 on groceries weekly. At the end of one year, that person spends a total of $5,200 on groceries ($100 x 52 weeks = $5,200). One thousandconsumers spending $100 weekly on groceries amounts to more than $5 million ($5,200 x 1,000 = $5,200,000). See where I’m going with this?
Groceries are big business and grocery retailers benefit immensely from the current model individuals use to shop for groceries.
Now let’s assume the following business model is utilized for buying groceries:
A commerce platform separate from Amazon and all grocery retailers is created (LinkedIn and Facebook are the two companies most capable of creating such a platform but I give the edge to LinkedIn). The platform allows tech company associates to select groceries from thousands of products. Associates place grocery orders utilizing the platform and the orders are pooled to identify the totals of all products selected. For example:
10,500 gallons of milk
1,750 bottles of ketchup
6,000 jars of peanut butter
15,000 loaves of bread
1,650 packages of chicken breast
1,200 packages of ribeye steak
When thousands of grocery orders are placed, the total volume of products by individual category can become quite large.
A New Model For Grocery Retail: The Online Auction
Unlike established e-commerce platforms from Walmart, Kroger, Amazon, and other retailers that list the prices for each product sold, the platform concept I refer to only displays products available for purchase. Why? Because in the new business model for grocery retailing, each tech company will have the option to open the platform daily or weekly to accept bids on each product from grocery retailers and wholesalers.
I want to make this point clear. I advocate that associates (consumers) will select the products they want to buy; all grocery orders submitted will be pooled; and select wholesalers and retailers that offer grocery products will be invited to bid on every product. However, in order to win the bid, a wholesaler or retailer will have to be able to meet the demand for all products and do so at the lowest price.
I advocate a model for grocery retailing that doesn’t exist today but, if implemented, would significantly disrupt the status quo. Requiring grocery retailers and wholesalers to bid on products versus allowing retailers and wholesalers to set prices on individual products maximizes the purchasing power of a dollar for the consumer.
Consumers who purchase groceries individually have little to no power in reducing prices as retailers set the prices. Collaborative or pooled grocery retailing, whereby thousands of grocery orders are pooled and then bid on, maximizes the value to the customer as the lowest price will be achieved on all products. For example:
Retail price of a one-gallon container of whole milk = $2.50
Retail price of 10,500 one-gallon containers of milk purchased in bulk = $1.65 per gallon
When conducting research on this topic, models I’ve run identified extensive price reductions when items are bid on in bulk. Reductions in price of more than 50 percent per grocery order are achievable especially when private label products are purchased.
I developed this model for several reasons; among them was a desire to create a model that would result in prices on all grocery products (brand and private label) being lower than the products sold by Aldi and Lidl. Based on my research, I believe the model achieves the goal.
Wholesalers and Retailers: Who Has the Advantage in an Online Auction?
The concept of an online grocery auction is simple but the implications to the retail industry are enormous.
I reviewed these concepts with grocery analysts and management consultants, including operations research scientists with PhDs who I worked with at Amazon. The combined feedback helped me make adjustments in several areas.
I also spoke with four grocery executives about the concepts I outline in this article. The executives asked to remain anonymous but each provided an opinion. The consensus among the executives is that everything I describe can be implemented. The executives also agreed that they hope corporate America does not move forward with what I recommend.
"I’ve never heard of such an idea but this would be devastating to the grocery industry," one executive from a leading retailer said. "I agree that customers would reduce their grocery bill and logistics costs would be less."
On the surface, it would appear that an online auction favors wholesalers—Costco, Boxed, BJs Wholesale—that buy and sell products in bulk. However, this is not necessarily true. Grocery retailers on average stock 50,000 products and Walmart stocks 100,000 products. Costco only stocks around 4,000 products.
The purpose of an online auction for groceries isn’t to limit product selection. In order for the concept to be successful, consumers will need to be able to order the same type, size, and assortment of products available in the average supermarket.
This means that either wholesalers/warehouse clubs will need to greatly increase the number of products they stock or grocery retailers will have to change their business models to buy more products in bulk. The latter point is among the reasons why I recommended to Kroger that it acquire online warehouse club Boxed. Grocery retailers should create a hybrid model to expand into bulk sales and distribution.
Boxed can become a leader in implementing a solution to meet the needs of companies that want to utilize an online grocery auction for their associates. Boxed has extensive technology and logistics expertise. In addition, Boxed has a growing focus on private label products.
One issue associated with an online auction is that CPG companies such as P&G, Unilever, and Kimberly-Clark would resist having their name brand products—Tide and Dove, for example—go through a bid process. The relationship between grocery retailers and CPG companies is complicated. An online auction would severely disrupt the relationship and business model between the two.
The answer to the problem is for retailers and wholesalers to maximize investments in introducing as many private label products as possible and reduce the relationship with large CPG companies. Private label brands are growing in popularity and in an online auction, they would be able to be purchased at a lower price than a name brand product.
Online CPG company Brandless would find great success taking part in an online auction for groceries as its high-quality brands could be purchased at much lower costs than name brand products. Brandless has exceptional growth potential.
Albertsons, Ahold-Delhaize, Publix, and many other grocery retailers would struggle to adjust to an online grocery auction model. Kroger, with its private label brands, relationship with Ocado, and increased focus on improving operations, would be able to adjust eventually, as would Walmart.
Amazon, however, is the company that has the best ability to create the necessary adjustments in its grocery ecosystem to take part in an online auction for fulfilling groceries in bulk. Amazon has a robust private label program for groceries as well as extensive technology, and supply chain and logistics capabilities to design and implement a strategy to serve large numbers of customers on campuses and in offices.
Distribution and Logistics
DTCO and collaborative grocery retailing have massive implications for tech companies and other corporations.
Microsoft, for example, plans to build a new campus in Redmond, Washington, which will have 131 buildings and employ 47,000 people. Without an optimized logistics network and a comprehensive strategy, it would be chaos on the Microsoft campus if packages and groceries started to be delivered in large quantities.
Amazon plans to build two new headquarters, one near Washington, DC and one in New York City. An estimated 50,000 associates will be employed between both campuses. Think of the improved economics of being able to deliver packages and groceries to 47,000 customers located on the Microsoft or Amazon campus. See the positive impact of customer density?
To make DTCO more effective and manageable, I recommend that a new logistics model be introduced. Specifically, I recommend facilities I refer to as R&R (Receive and Retrieve) be built on campuses and inside office complexes to manage the receipt of packages and groceries from the winning bidders.
The facilities would be automated to receive products in bulk (pallets) but build individual grocery orders (each pick). Technology from CommonSense Robotics, TakeOff, or KNAPP is ideal for managing order receipt and fulfillment.
Grocery distribution and logistics would have to change significantly if tech and other companies introduce the concepts described in this article.
Associates will have the option of either retrieving groceries and packages from R&R facilities before departing from work, or packages and groceries can be placed in their cars as part of a service the R&R provides.
(Note to car manufacturers: Create temperature-controlled trunks or provide an option for consumers to have temperature-controlled receptacles/coolers installed in a trunk by the manufacturer. Make the containers foldable and retrievable inside the trunk for ease of use.)
Companies that provide mass transit options for associates can introduce buses capable of storing groceries and packages, allowing associates to retrieve their groceries/packages from the bus when they arrive at their destination.
Associates will also have the option of selecting groceries to be delivered to the home, but the model I advocate significantly decreases last-mile delivery costs as order density is maximized. In addition, porch piracy will virtually be eliminated by introducing products such as the eDOR to consumers.
Don’t Predict the Future, Create It
Unless something like the models I introduce in this article are implemented, the grocery retail status quo will remain, with grocery retailers having the advantage. Grocery retailer executives who read this article will make the argument that they do not have an advantage due to the notoriously low margins (average of 1 percent) inherent to grocery retailing.
I’ve provided consulting services to the largest grocery retailers around the world. That argument is false.
Consumers win when innovation is unleashed and, based on my experience, grocery retailing needs to be transformed on a massive scale. Online grocery ordering and delivery to the home isn’t enough. Removing cashiers inside grocery stores isn’t enough. (I wrote in June 2017 that Amazon will introduce technology similar to the technology in AmazonGo inside Whole Foods to eliminate cashiers. I believe this will occur in 2019 to early 2020.)
The majority of changes I see taking place in the grocery industry are incremental, not transformative. If customers still shop in stores, order groceries online for home delivery, or pick up groceries at the store, the grocery retail business model effectively remains the same.
Changing the Status Quo
What I recommend will drastically alter the status quo, increase efficiency, and reduce costs.
The retail grocery model has remained virtually the same for nearly one century. The majority of innovations introduced by grocery retailers have produced incremental changes only. Corporations pooling grocery orders and inviting grocery retailers and wholesalers to take part in an online grocery auction is innovative and transformative.
Leveraging DTCO to deliver groceries and packages where the most customers are to reduce logistics costs and introduce a new business model is innovative and transformative.
The purposes of this article are to present ideas and stimulate discussion. I do not presume to have the best ideas. The need to reimagine and revolutionize grocery retailing, however, is real.
Let the innovation and transformation begin.
ABOUT THE AUTHOR
Brittain Ladd is a globally recognized expert in strategy, digital supply chain management, operations and M&A.