Industry benchmark: State of digital transformation in grocery

New report outlines how grocery retailers can compete today

by Michael Colaneri, AT&T VP Retail, Restaurant, Hospitality

The pervasiveness of digital experiences in our lives is such that we don’t compartmentalize our expectations anymore. The expectations grocers must meet are now set by consumers’ best experiences across all categories, from on-demand movie streaming to seamless ride-sharing services.

As shoppers embrace digitally driven experiences in all aspects of their lives, they expect efficient, transparent, and personalized experiences from their favorite grocers, including:

  • More online ordering and fulfillment options
  • Same-day delivery, real-time order tracking, and easy returns
  • Shorter, more accurate time ranges for in-store pick-up

Grocers no longer just compete with other grocery stores

Not only do grocers have to contend with elevated customer expectations, they battle for consumers’ stomach-share with an increasingly expanding and complex ecosystem, which includes:

  • Pure play online grocery (AmazonFresh, FreshDirect)
  • Grocery delivery by retailer (Walmart, Kroger)
  • Third-party grocery delivery (Instacart, Shipt)
  • Food delivery by restaurant (Panera Bread, Pizza Hut)
  • Third-party food delivery (Uber Eats, DoorDash)
  • Meal-kit subscription (Blue Apron, Plated)

As shoppers embrace online grocery, new winners and losers will emerge

The big players - Amazon (Whole Foods Market), Walmart (Jet.com) and Target (Shipt) – have placed multi-billion-dollar bets on online grocery. And, a new set of digital upstarts such as Ocado (robotics-led automation) and Subziwalla (hyperlocal ethnic assortment) are quickly addressing market gaps.

Leading insights firm Incisiv conducted a study commissioned by AT&T to benchmark the state of the grocery industry as it relates to online ordering. Incisiv’s study spanned:

  • 107 respondents via a quantitative survey.
  • 10 qualitative interviews.
  • 1,000+ data points from Incisiv’s industry data pool.

Below is an executive summary preview of the key findings of the full report:

Online grocery ordering is delivering greater than expected, net-new revenue growth

  • Grocery retailers who have offered online delivery for at least 12 months report an increase of 15.8% in incremental revenue, 30% higher than their pre-launch estimates.
  • Further, most of this growth is net-new addition to the top line, with only 18% of retailers experiencing cannibalization of in-store sales by offering online delivery.

And, online grocery ordering will drive most of the growth over the next two years and beyond.

  • Digital grocery sales will double over the next two years, breaching $50B by 2021 before accelerating further to $150B+ by 2025, at which point they will account for 14% of overall sales.
  • The number of grocers who offer Click & Collect and Third-Party Delivery will grow 150% between 2019 and 2021.

But, online grocery delivery is largely unprofitable.

  • Profit-per-order has worsened for 3 in 5 retailers who offer online ordering.
  • Other than fulfilling from distribution centers or vendor drop-ship, all other forms of online order fulfillment are margin negative or neutral.

Therefore, the business case for online grocery is based on creating value beyond the original online order.

  • Online orders that drive store visits – either directly through in-store pick-up or returns, or indirectly through increased loyalty to the brand – give grocers the opportunity to add new revenue to the original online order and increase their share-of-wallet at little to no marginal cost.
  • Buy Online, Pick Up In Store (BOPIS) and Reserve & Collect offer grocers the greatest opportunity to attach additional value to the original online order.

Creating value relies on increasing wallet share and improving profitability

Grocers have two clear drivers for unlocking value from online grocery delivery: increase wallet share by converting one-time online orders to loyal, repeat customers, and improve profitability by reducing cost of operations.

Wallet-share value drivers:

  • Increasing online order basket size
  • Improving in-store attachment
  • Increasing purchase frequency
  • Enhancing product curation

Profitability value drivers:

  • Improving pick accuracy
  • Improving picking speed
  • Real-time inventory visibility
  • Optimizing last-mile fulfillment

Grocers must evolve their business operations to compete in this new landscape across 4 key dimensions.

Imperative #1: Inventory visibility

Accurate, real-time inventory visibility is the lifeblood of online grocery. Without it, retailers are flying blind into the unknown.

  • 81% of grocers do not have a real-time view of inventory.
  • The grocery industry loses $2.5B in revenue and $800 million in profit every year due to inaccurate inventory visibility and inefficient fulfillment processes.
  • 57% of retailers say managing inventory levels is their topmost supply chain challenge.
  • 65% of retailers say ensuring inventory data availability and accuracy across systems is their topmost technology challenge.

Imperative #2: Workforce transformation

As grocers offer new experiences and fulfillment options to shoppers, it will lead to greater operational complexities via an increase in the volume, variety, and velocity of tasks store teams need to perform. Grocers must reimagine store processes and empower associates to more effectively support online operations.

  • Only 1 in 2 retailers have provided their store associates adequate training to support online operations.
  • 9 in 10 retailers are dissatisfied with their labor utilization for online order picking and their online order picking efficiency

Imperative #3: Partner collaboration

From third-party delivery-to-shopper location tracking and voice-based assistants such as Alexa to automated replenishment through connected devices: grocers will have to go beyond their four walls and integrate with a large ecosystem of third parties to be able to deliver a great online ordering customer experience.

  •  3 in 4 retailers plan to integrate with third-party delivery platforms such as Instacart by 2021.
  • But, 82% rate their current partner collaboration maturity as “poor.”

Imperative #4: Technology enablement

Grocers are clearly focused on the two key business outcomes that will help them extract value from their investments in online ordering: share-of-wallet improvement and increasing pick efficiency. Process automation will be the single biggest driver of new technology adoption in the store.

  • 100% of retailers plan to use advanced analytics to increase basket size.
  • 8 in 10 retailers plan to use mobile tools to improve picking.

Online ordering is a double-edged sword for grocery retailers. It offers revenue growth and increased competitiveness while putting further pressure on grocers’ wafer-thin margins.

Grocers must turn customers who make one-time online orders into loyal customers and reduce the cost of operations by improving real-time inventory visibility, empowering store associates and enhancing partner collaboration. They must prioritize technology investments accordingly: re-architecting IT to be agile (cloud-native and API-first), using insights to improve decision-making, and implementing automation to transform operations.

Dive deeper with detailed findings and additional analysis by reading the full report.

All findings in this article are based on Incisiv's State of the Industry Benchmark study focused on online ordering in grocery, commissioned by AT&T.