Much has been said about the growth of e-commerce and its impact on traditional retail. What was once considered an opportunistic fad has proven to be a significant driver of growth within the retail sector.

e-commerce, Morgan Stanley, grocery, Webvan, Amazon Fresh, Pea Pod, Instacart, Google Shopping Express, eBay Now, Mariano’s, H-E-B Central Market, A.T. Kearney

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Inside This Issue - Opinion

Supers’ Omnichannel Challenge

April 20th, 2014
by Bob O’Meara, Andres Mendoza Pena and Vishwa Chandra

Much has been said about the growth of e-commerce and its impact on traditional retail. What was once considered an opportunistic fad has proven to be a significant driver of growth within the retail sector.

According to Morgan Stanley estimates, e-commerce is on track to cross $1 trillion in global annual sales by 2016, accounting for almost 10% of total retail sales.

An increasing proportion of these online sales are grocery. While many of the early online grocery players, such as Webvan, failed due to flawed delivery models, a number of players are expanding into the grocery sector. Grocery retailers and drug retailers selling grocery products have been cautious with online grocery sales, but these retailers are in a unique position to step up and take advantage of the online trend. It is crucial that grocery and drug retailers move forward with online strategies so as to not miss this opportunity.

The reasons for grocery’s slow and faltering adoption are well documented. There was the early belief that unlike competitors in other channels (for example, consumer electronics) it was not possible to profitably offer an online grocery option. In addition, there was the belief that consumers would be unwilling to break away from their weekly excursion to the grocery store. Early experiments with e-commerce in grocery were either failures or saw very slow customer adoption. These experiences served as a speed bump for traditional retailers, causing them to hold off from aggressively embracing e-commerce alternatives.

But this period was not without innovation. As format options expanded, new players — including nontraditional e-commerce players — entered to fill the void.

Emerging Online Players
Undeterred by the reluctance of large traditional players to jump into the e-commerce arena, others saw the long-term opportunity to provide a new or differentiated service to their ­customers.

These nontraditional players focused on correcting the mistakes that early entrants struggled with, and these corrections typically took two forms:
• Pure play (Amazon Fresh, Pea Pod). These players do not have physical storefronts; fulfillment of consumer demand is done through existing warehouses. Pea Pod has recently experimented with opportunities for customers to order online and then pick up their order at a drive-through location conveniently situated just off the highway, a model that has found traction in Europe.
• Last-mile delivery solutions (Instacart, Google Shopping Express, eBay Now). These players focus on addressing the challenge retailers have of cost-effectively delivering products to consumers’ stores. They rely on traditional grocery stores to source products and focus only on delivery.

These players recognized that, contrary to the initial popular belief, there was significant demand from consumers for enhanced convenience around an activity (grocery shopping) that many considered to be a chore. In addition, these companies found that a significant number of products were strong candidates for alternate delivery models, including subscription-based models for regularly consumed products.

While many of these companies do not currently have scale, they are investing for the future in the belief that as volumes pick up, their unit margins and overall profitability will grow as well.

These companies also increased intimacy and relevance by capitalizing on the proliferation of devices (mobile and tablet) along with improved high-speed connectivity to provide an engaging online customer experience for grocery. In addition, they have benefited from the growing comfort of consumers to interact with retailers virtually — online shopping has moved beyond the traditional early adopters and has become mainstream in many categories.

Tracking current adoption rates for an emerging crop of online providers suggests that if trends continue, this category of retailers could account for 20% to 30% of grocery sales within dense metropolitan markets. In a relatively flat growth environment, online gain is brick-and-mortar’s loss. The potential impact of this loss in sales cannot be ignored by traditional grocery channel ­players.

Risk for Traditional Chains
The emergence of alternative omnichannel options poses a significant risk for traditional grocery retailers, especially in the lucrative and highly competitive urban markets.

In an omnichannel world where consumers are able to fulfill the core of their purchases via alternative means, what remains for the traditional players are trips purposed around convenience or new experiences and ­exploration.

The challenge that exists for grocery players is that their operating model has been built on the foundation of a recurring “stock-up” trip. Traditional store layouts are structured toward maximizing choice and expanding consumers’ baskets. These layouts are not set up to facilitate convenience shopping (nor do they have the network density that traditional convenience stores or chain drug stores have to truly play a convenience

While some grocery stores are focused on providing a differentiated shopping experience to consumers (for example, Mariano’s in Chicago or H-E-B Central Market in Texas), the majority of traditional grocery retailers have not been able to provide consumers with a differentiated proposition. Walmart’s campaign around pricing advantage is an example of the power of a clear proposition on pricing efficiency.

As we look at which categories will transition first to an e-commerce environment, general merchandise, health and beauty, and personal care will experience significant e-commerce growth (for example, is positioned to be one of the largest single retailers of diapers in the United States). This is in line with what we are observing in other channels as well.

Traditional grocery assortments are generally established to provide a full breadth of offerings (from core food to in-house florists, banking services, coffee areas and dry cleaning) to increase convenience for consumers and establish stores as ­destinations.

The risk to the core categories highlighted above also spills over to the periphery of the store, specifically to such higher-cost areas as the pharmacy. Many of these pharmacies subsidize low script counts with the front-of-store purchases, however, to maintain viability and justify the required fixed pharmacist cost they need to generate volume. With reduced in-store traffic, there is a risk that these services become unviable.

Opportunities for Chains
While slow to move into the e-commerce arena, traditional grocery retailers have an opportunity to embrace e-commerce and take advantage of key differentiators. These include:
• A network of stores that will always be more conveniently located than when one-off independent warehouses or dark stores are established. This allows traditional retailers to meet the increased demand for responsiveness and quicker
• The ability to provide a true omnichannel experience to consumers by establishing an e-commerce offering to go along with their existing in-store ­experience.
• Existing infrastructure and capabilities that can be utilized (for example, cold chain, fresh prepared sections and pharmacy) to provide a range of products and services without significant incremental investment.
• Existing customer loyalty and insights (from loyalty programs) that can be used to customize and target offerings to consumers while driving profitability.

Leveraging these differentiators will allow traditional retailers to stay relevant to consumers while retaining and retaking market share. Furthermore, this is an opportunity to position for a future where e-commerce penetration goes beyond dense urban areas.

While not all traditional grocery majors have embraced e-commerce, select players like Walmart and Safeway have announced plans to ensure that e-commerce plays an increasingly important role within their portfolio. While these plays are in limited markets right now, the insights and experience will only accelerate the innovation. As expected, there are aggressive plans to expand these islands of innovation into fully integrated continents of customer-centric excellence.

Future success is dependent on grocers’ ability to focus on a consumer-centric experience. This concept, while not new, is more important than ever. The question many retailers are asking is where and how to get started.

As grocery retailers look to embrace the digital opportunity there are three areas on which they need to focus: clearly defining their value proposition to consumers, determining the required capabilities to deliver on that value proposition and choosing how those capabilities will be acquired.

There are multiple options as retailers look to refine their consumer value proposition. Be it around experience (convenience, discovery), service promise (delivery speed, assortment offering) or value (price, promo, points), it is essential to ensure a consistent proposition throughout the entire customer purchase cycle. It will be crucial for traditional retailers to capitalize on their inherent understanding of consumers to customize and tailor their value proposition to meet consumers’ needs across their purchase cycle.

Once retailers have defined their value proposition, they need to ensure they have identified the right capabilities to deliver (for example, managing microdeliveries and food safety during the last mile) while not losing sight of their core operations. The required omnichannel capabilities will vary depending on the value proposition. For instance, a grocery retailer emphasizing a discovery experience will develop digital capabilities that allow for browsing discoveries while creating a pull into its stores to further delight its customers. A price player will require strong e-commerce capabilities to compete head to head with pure e-commerce players.

Finally, developing a strong set of omnichannel capabilities requires several key decisions on how to acquire those capabilities that can impact the overall success of the digital endeavor. From organizational know-how to fulfillment capabilities, retailers need to assess the current capabilities and determine the most appropriate approach to bridge the gaps. Third-party or independent subsidiaries present a viable alternative that should be considered seriously.

Grocery retailers will need to determine how they will balance between these three (defining value proposition, identifying capabilities, acquiring capabilities) as they compete going ­forward.

There is also an opportunity for grocery retailers to be creative and think differently about the services they provide consumers. We think the emergence of viable and scaled digital offerings will mark a period of continual innovation in the grocery space. And when the core innovates, the rest of the store will reap the benefits.

In our view, the role of digital in grocery is not a question of if, but a question of how. Retailers that are proactive in establishing these capabilities and defining their customer value proposition will be in the best position for the future, while those that continue to sit on the sidelines will find themselves disadvantaged in the very competitive grocery market.

Bob O’Meara is a partner with A.T. Kearney and is based in Chicago. He can be reached at Andres Mendoza Pena and Vishwa Chandra are principals with A.T. Kearney. Both are based in Chicago and can be reached, respectively, at and