August 27, 2020

US online food retailers make a breakthrough

A Walmart self-driving delivery vehicle (photo: Walmart)
Walmart: The world's largest retailer is experimenting relentlessly with technology in order to find the Holy Grail of online retailing – a profitable food delivery business
When it comes to buying food online, America has long been a slow starter. Other economically advanced countries such as Korea and the UK have far higher penetration levels. This is puzzling when one considers that the US is home to Silicon Valley, Amazon, Instacart and God knows who else. 

The old argument that there is an awful lot of chimney pots in Seoul and London won't rub. There are also quite a few in NYC, Los Angeles, Chicago etc., if one cares to count them.

This year, however, and despite what Citizen Trump may say to the contrary, the coronavirus has hit the land of the free harder in terms of total infections and deaths than anywhere else on the planet. In most countries, home office, furlough and short-time work have created a sudden spike in demand for door-to-door delivery or click & collect in the stores. In the States e-commerce sales have positively exploded.

So, is this a watershed moment for the US online grocery industry? We asked Bill Bishop, 'chief architect' at Brick Meets Click; retail industry consultant Michael Sansolo; and Jon Springer, executive editor at Winsight Grocery Business, for some enlightenment as to the new American normal…



"This is a new world"

Gentlemen, where were we before corona and where are we today as regards the food online penetration of US retailing?

Bill Bishop: We like to work more with total spending online versus penetration since the latter can be ambiguous. We estimate, at the beginning of the pandemic, online grocery sales were about $1.2 billion per month and that that number increased to $7.2 billion per month in June 2020.

Michael Sansolo: I would guess the online penetration continues to climb incrementally. But as the 2019 versus 2020 comparison shows, the big gain has already happened.

Jon Springer: My guess would be somewhere around 11 to 15 per cent of the market today. There were definitely spikes in demand much higher than that in the early stages of the epidemic. Who knows where levels would have gone had retailers truly been capable of fulfilling demand?

Walmart BOPUS (Buy Online, Pick Up in Store) and Instacart are a big part of this. Some areas of the country (those that had more online food shopping coming in like New York City and other cities) have more penetration generally.

Why has online and home delivery penetration in US food retailing been so low historically compared with many other countries?

Bill Bishop, Chief Architect, Brick Meets Click (photo: Brick Meets Click)
Brick Meets Click
Bill Bishop: "We've passed through an inflection point"
Bishop: Many US grocers just didn't believe their customers were interested in online grocery shopping. Part of this traced back to the spectacular failure of WebVan in the 1990's. Another consideration was that Amazon struggled for years to get any traction with Amazon Fresh.

As a result, there was little or no investment by retailers in online capability, which led to very low penetrations. Coronavirus, lockdown, furlough etc. have since created a global boom in online sales, forcing even older people to learn how to order online.

Sansolo: The geographic mass of the U.S. makes many parts of it challenging for online shopping since delivery is so hard in the huge rural counties. What's more, the competitive landscape in retail – especially food retail – meant there weren't many places to beat stores on price.

Springer: Other than in the densest cities, like New York and Chicago, the U.S. is an automobile-centric society that at once makes it expensive for food retailers to fulfill online orders, and generally convenient for shoppers to visit a nearby store and provide the labor themselves.

While parts of the typical supermarket shopping trip have been going online for years (pet food, paper goods etc.), few retailers made real progress in an online fresh-food operation that makes sense for the shopper and the store.

Also, when it comes to the convenience of food home delivery, U.S. shoppers were sooner finding cheap meals delivered from local restaurants or even meal kits as an alternative to fresh ingredients they would then need to prepare. So, convenience favored online shopping but not necessarily online shopping for food ingredients to cook.

Finally, the U.S. consumer was very used to 'shopping around' at several stores for food (a discount store for some items, a specialty store for others, weekly trips to the supermarket, fill-ins at the drug store, consolidated food shopping at mass stores when other purchases are made, etc.). So, the whole basket going to one place, as it would with a real online supermarket, didn't exactly align to how local shoppers behaved.

In Q2 Walmart doubled online sales compared to the same time last year. Target and others have grown even more. Why was there a disproportionately large digital boom in the US compared to other advanced global economies?

Bishop: By early 2020, most grocery retailers offered online shopping, but the capability was significantly underutilized. When the pandemic began in mid-March, there was a lot of fear that kept people at home. This caused many to start buying groceries online, which dramatically accelerated the growth, and which was enabled by the substantial underutilized capacity.

Michael Sansolo, Retail Industry Consultant (photo: Sansolo)
M. Sansolo
Michael Sansolo: "The world has changed and new habits have been born"
Sansolo: There was more to catch up on, and it happened thanks to the virus. Also keep in mind that a lot of the growth came thanks to click & collect models that helped bring shoppers to a lower cost form of e-commerce. Essentially the U.S. jumped years ahead in just a few months.

Springer: Yes, I agree, smaller base, faster growth. Also, it came at a time when retailers were getting more and more comfortable with an omni-channel offering. Only a few years ago there would not have been the infrastructure to support growth this fast.

As it was, especially at the peak of the pandemic in March and April, delivery windows sold out quickly. Nobody had the labor to absorb as much demand as there was, and execution for BOPUS was lacking (missed items, congestion at pickup). That also forced people into stores.

Who really won during the coronavirus crisis? Amazon or omnichannel retailers like Walmart and Target?

Bishop: The winners were the large retailers who had already begun to make big investments in online infrastructure before the pandemic hit. They were in a better, if not good position, to handle the business growth driven by the pandemic and they never took their foot off the gas pedal. These retailers also benefited as customers consolidated their business among fewer retailers.

Sansolo: My suspicion is that all of them have won in some form or another. My bias is that Walmart probably won biggest long-term because it demonstrated an ability to make inroads in delivery and might have been best prepared for click & collect, which can be a better long-term model in terms of profitability.

Jon Springer, Executive Editor, Winsight Grocery Business (photo: Winsight)
Jon Springer: "Nobody had the labor to absorb the huge demand that came"
Springer: We're still figuring out the winners now, and the list is fluid. In a broad sense those companies with omnichannel capabilities were best positioned to benefit. So, yes, Walmart was a big beneficiary because it already had a developed click-&-collect biz.

But in terms of food sales, growth and profits, chain supermarkets fared better than even Walmart and Target as businesses. The reasons are simple: They are close to home; half their competition closed down, lunches and breakfasts increased, which were typically eaten at work or school; they gained from price inflation because fewer items were sold on promotion to a less-price sensitive shopper who values availability above price; and an inability for the whole market to absorb a virtual alternative.

Look at Albertsons for example: Profits are skyrocketing, online sales growth is in triple digits. Target's food business has really improved, but only now are they adding the convenience of pick-up for food, and, like Walmart, they are typically not as close to consumers' homes.

I suspect this dynamic will change, though, as the economic wreckage eventually favors pricing strength again, the restaurant business comes back, and promos become more important again (we're already seeing this in some areas) etc.

At that point it'll be a matter of supermarkets that have developed e-commerce and good execution in online to hang with the Walmarts. I think a portion of the cash and profits they're capturing in this extraordinary period will go toward supporting that: Lots of retailers are already devoting more resources to omnichannel than they would have without the pandemic, and/or faster than they might have planned to do.

What will happen to the online penetration of US food retailing after corona has subsided or a vaccine has been found?

Bishop: The uncertainty around this question is why most big retailers won't forecast their near-term results. We're still in the middle of the pandemic, and it feels like the current conditions will apply for at least six to twelve months after the release of a proven vaccine. Online grocery sales are continuing to grow but at a slightly slower pace, and that's due mainly to the larger base.

We believe that we've passed through an inflection point and online grocery growth is likely to soon grow at an even faster rate than in the past.

There are two big drivers of this growth: One is the competition for increasing online business, and retailers are making big investments to improve the online grocery shopping experience. This is a growth driver that's expected to continue.

The other is that after just six months, a significant portion of the U.S. shopping population, e.g. mainly older folks, have become more averse to shopping grocery stores. They feel it's less enjoyable and in a somewhat risky environment, so they are minimizing their exposure to it.

Sansolo: If we get a vaccine (let's hope), online penetration will drop back some, but will remain close to where it is now. People have learned how to do things online, and how to appreciate it. The world has changed, and new habits have been born.

Springer: This is a total guess, but I'd venture to say it'll find a 'new normal' somewhere around 11 per cent or so. I also believe that the gradual rate of growth will continue at the level we had pre-pandemic. Industry wisdom expected that the chasm separating 4 per cent and 10 per cent would be covered in three to five years and not one week. So, retailers were preparing for 2024 when it arrived in 2020.

Any other prognoses for the future?

Bishop: The big impact of the pandemic has been to accelerate a number of trends that were already in motion before March 2020. A lot of conversation is focusing on what things will look like when they get back towards normal. For me, the question is, however, what are things going to look like, as several of these new trends converge to change the grocery world as we know it? When this happens, things will get really interesting.

Sansolo: I think traditional retail needs to consider that whatever comes next won't be the world we knew in February. The 'new normal' is a new place. For traditional shopping to resurge, retailers need to create experiences that will pull shoppers off their sofas and computers and back into stores.

Right now, people are dying to return to life as it was, but they've experienced the convenience of online shopping, so they'll never be who they were before. This is a new world no matter in which direction we go.

Springer: It's been a fascinating few months, but there's more to come. Traditional supermarkets just saw explosive growth. Coming into the pandemic, it was estimated that the $1.5 trillion spent annually on food in the U.S. was divided equally between restaurants and at-home. Restaurants then almost completely vanished!

But, because the dollar share on a per-meal-basis was so different, and entertainment spending options were so curtailed (no sports, movies, travel), it wasn't like the U.S. shoppers' spending power declined. So, supermarkets could really go for profits and inflation passed right through for most.

The forthcoming unwinding of all this will be a different era amid a recession and with more and more online sales. Food stores that survive will have to be more flexible and capable of serving shoppers in a way they want to be served.

Maybe they will absorb cross-channel competitors like restaurant brands. They'll have to drive down the costs behind automation, in order to be competitive on pricing, and also support omnichannel investment.

N.B. The order of the above questions has been partially changed, and some of the answers have been condensed so as to enhance readability for a non-US audience. In case of doubt, the original statements, which are available to readers on request, pertain and shall be the only authorised version.

Lebensmittel Zeitung with its online sisters (photo: LZ)
Our German retail B2B newspaper, Lebensmittel Zeitung, in print & digital
Read in German: 'Food-Online-Handel schafft den Durchbruch in Amerika' by international editor Mike Dawson on page 10 of Lebensmittel Zeitung, no. 35, 29.08.2020

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