Access computer. Pick a delivery service. Order groceries. Answer door. Retrieve groceries. Hello grocery delivery.

This cross between technology and convenience is a game-changing business with implications for manufacturers, retailers, and consumers. Grocery is a $600 billion a year industry and grocery delivery is projected to be about one-sixth of that by 2019. That type of growth will have far-reaching implications.

Chief among them are:

  • Delivery speed
  • Relationships between manufacturers and retailers
  • Retail shelf space
  • Workforce

“Online grocery is quickly evolving into same day grocery delivery. …Technology has caught up with our desire and Google Express will put just about every food retailer in the same-day delivery business,” Phil Lempert, ‘Supermarket Guru’ and a partner to the National Frozen & Refrigerated Foods Association, told Food Dive recently. “These advances will change the way we shop.”

Definition of grocery delivery varies

Grocery delivery generally fits into these three models:

  • Home delivery
  • Click and collect
  • Personal shoppers

John Stichweh, the director of interactive marketing for ConAgra Foods, mentioned the ship to home model as well when discussing these services, in addition to some emerging business models not quite as in the spotlight right now, including membership e-commerce and meal occasion providers.

“The complexity of this ecosystem supports the assertion that the larger theme is fragmentation,” he said. “The places where a family can source meals is expanding while the traditional venues remain as well.”

Manufacturers insist on product availability

On the manufacturing side, the biggest change could be the relationship with retailers. As increased opportunities to reach customers unfold, product demand will test the system currently in place.

Manufacturers say that grocery delivery may not allow them to meet all of a shopper’s needs. A possible solution to that is to adjust its partnership with a retailer.

“It is forcing us to be more flexible and nimble in how we serve our retail partners,” says Eric Ong, director of e-commerce at Nestle USA. “When certain items are out of stock in store, a shopper can easily choose a substitute product that works for her. When it comes to online grocery shopping, shoppers’ ability to make product substitution decisions is diminished. Not being able to deliver 100% of what shoppers ordered is thus a big issue, particularly for groceries where it could mean a shopper will not be able to make a certain recipe/meal for tonight. As online grocery delivery grows, it will force us to re-evaluate the assortment we make available online, how we plan production and how we deliver our products to our retailer partners.”

He added that grocery delivery is another channel to consider in demand forecasts. “There are opportunities to partner with retailers on this front to help us to predict future demand and inventory positions better so that we can meet consumer demand 100% of the time in a cost efficient manner.”

Out of stock items are likely to cause a negative experience for the customer. Ong said, “We are closely working with specific retailers to solve for this. One way we are addressing this is to ensure that shoppers are being provided appropriate product substitutes in case the specific sku they ordered is out of stock. As data capture becomes more sophisticated, online out of stock situations would ideally be factored into the demand forecast for products.”

Retailers could see shelf space upheaval

Retailers face a number of changes, including potential shelf space disruption and the workforce. Brick-and-mortar retailers do not face imminent trouble but could be challenged if cost cuts loom and stores potentially head for closure, according to Marc de Speville, the founder of Strategic Food Retail.

Currently in the U.S., some of the major players are Peapod (owned by Ahold, partnering with Stop & Shop, Giant Food Stores, and Giant Food), AmazonFresh, and FreshDirect. Wal-Mart is in the testing stage.

To find a pioneer, look to the U.K. where retail giant Tesco rolled out online grocery in 1997. Tesco has an approximate 30% market share and “ is the U.K.’s grocery market leader as well as Europe’s biggest online grocer,” according to Packaged Facts. While others were testing, Tesco rolled out full blown grocery delivery throughout the U.K.

“What we’ve seen in the U.K. is that it is pretty disruptive and it’s disruptive to the economics of food retailers because basically online adds costs and complexity for the retailer,” de Speville said. One disruption he mentioned at FMI Connect last year in Chicago, was the disparity between the lower cost of carrying stock in a warehouse versus on a grocery shelf.

In terms of the retail workforce, de Speville said of the U.K., “So far it has resulted in an increase in the number and variety of retail jobs. However, in the future if delivery becomes a much more significant part of the total market e.g. 15% (versus 5% today) then it will have a negative impact as stores will be under increasing pressure to cut costs and possibly close.” He added this could happen globally “if delivery proves popular enough.”

Stichweh said he does not see grocery delivery services impacting the manufacturing workforce, but that home delivery like Peapod has led to new jobs like pickers, drivers, and logistics professionals.

Grocery delivery popularity can also have a big impact on shelf space. Ong said, “We know that shoppers prefer to order heavier/bulky products online (e.g. big cases of soda/water, paper towels). So as more shoppers order those for delivery/pick up and less shoppers purchase them off the retail floor space, it is reasonable to expect that retailers will reduce the space allocated to those products in the selling floor and perhaps just have more inventory for those products sit in their backroom to facilitate servicing of online orders and maximize use of selling floor space. ”

Instacart: Not a manufacturer, not a retailer

In a space dominated by retailers, Instacart comes along as a personal shopping service — with people who go out and retrieve and then deliver items. Their model is to ‘hero’ the retailer.

“The niche that we’ve carved out is quite different than everything else that’s out there,” says Nilam Ganenthiran, Instacart’s head of business development and strategy, “and that’s why we don’t really believe that we’ve got a true peer or true competitor.”

He added that Instacart is “a retailer marketplace as opposed to a product marketplace, so unlike every other player out there that’s trying to tackle e-commerce grocery, Instacart is focused on hero-ing the retailer’s brand.”

Instacart doesn’t own warehouses nor delivery trucks. “Instead, by partnering with retailers, we are allowing them to drive more throughput and more dollars out of the existing capital that they’ve already invested in their storefronts,” Ganenthiran added.

According to Packaged Facts, Instacart may want to worry about future competition from the likes of Uber.

Instacart followed in Uber’s footsteps and announced surge pricing. The company also has been the subject of a lawsuit regarding worker classification.

Lempert highlighted Uber as one of the companies to keep an eye on as this space continues to grow.

“For me the ones that I’m watching the most is No.1 Uber, No. 2 Google Express, and No. 3 Blue Apron,” he said. “I think that what they’re trying to do is groundbreaking and gonna change the industry. Certainly, when we look at the business today, whether it’s Peapod or Instacart or FreshDirect, even AmazonFresh, those are the major players today.”

What’s next?

What’s clear is that the grocery delivery business model is in transition. And that means the  dynamic between consumers, manufacturers, retailers and personal shoppers will be shaped by what’s happening now.

Lempert said supermarket chains buying up delivery services might not be too far off.

“It’s easier to buy something like this than it is to build it yourself,” he said.

Here is what is likely:

  • There will be more players on the scene, as penetration levels continue to increase. Looking at the U.K. as an example, if it approaches around 15% there as de Speville said, it could prove a major shake-up.
  • People are getting busier, and convenience is a premium, so it is a safe bet that number will increase. Ong said, “There will be increased adoption from consumers especially as more and more retailers offer this option to more and more markets and as delivery fees go down (may be free for loyal/heavy shoppers) due to competitive pressure or economies of scale/efficiencies. It is reasonable to expect that shoppers’ expectations for speed of delivery will keep increasing (one to two-hour delivery windows will likely be the norm).”
  • Segmentation is the key. According to Lempert, “As long as you’re segmenting your population, your customer base properly and you’re meeting their needs and you don’t try to be everything to everybody, your path to success is gonna be much better,” he told Food Dive.
  • If success in Europe and other countries is an indicator, general online grocery sales are predicted by Packaged Facts to reach about $100 billion by 2019.

And yet, “No one has a clue how big the demand is gonna be,” de Speville said. “But what is clear is that the level of demand is very sensitive to the quantity and quality of supply, so it’s a sort of build and they will come.”

Source: Food Dive