The pandemic and consequent shutdown have caused the online grocery business to explode with growth. Earlier this year, before COVID-19, the online grocery business was well below five percent of total grocery sales; now it appears to be well above ten percent and is steadily heading to 20 percent.
Unlike other sectors of retail, the profitability in online grocery is substantially different from in-store sales. The grocery business has very low profit margins and if the store’s staff have to take the products off the shelves and bring them to the parking lot for customers or deliver to consumers’ homes, then the business loses money.
Figuring out how to make money in online grocery is the squeeze that the grocery business is confronting and how it will be resolved is not yet known. The explosion in online grocery has made the question an urgent matter.
The clear leader in online grocery is Walmart. It is the leader in grocery overall and has invested massively in online. Walmart has been leading in grocery app downloads and has hired tens of thousands of people to facilitate picking, packing and delivering. Walmart manages online largely by having employees pick products in its stores and deliver to customers’ homes or bring groceries out to their cars for pickup.
Supermarkets are not set up to maximize efficiency for multi-order picking. Rather, they’re set up for consumers to travel conveniently, make in-store purchase decisions, pay and be on their way. Operating the online grocery business with store personnel from inside existing stores is unlikely to ever be efficient enough to make money. Systems built from scratch are more likely to have the efficiencies required.
Automated In-Store Picking
The industry has three major types of approaches to the issue. The first, automating in-store picking, is exemplified by a system called Alphabot which Walmart has implemented in a Salem, New Hampshire store. The system takes 20,000 square feet out of a supermarket to set up shelving and a robotic picking system estimated to work ten times faster than a human could.
The second system, building an entirely automated warehouse, has been demonstrated by a UK-based business called Ocado whose strategy is to maximize scale and automation. An Ocado warehouse has over 1,000 robots and can handle 220,000 orders per week. Today, Ocado has about 15 percent of the online grocery market in the UK, and has a market value of over $25 billion.
Flexible Warehouses for Faster Delivery
The third system — small, flexible warehouses capable of fast, local delivery of a limited number of products — is demonstrated by an Israeli company called Fabric. Fabric builds fulfillment systems in densely populated areas (and inside existing stores) to facilitate pickup or delivery to consumers within one hour of a relatively focused range of products.
It remains to be seen which one of these approaches will wind up winning. The industry discussions seem to favor the small, flexible approach because it facilitates faster delivery. But, most likely a combination of the three, customized to the resources of each grocer and their customer base, will win the day.