BUILDERS
The outcome of this race is an existential issue for both supermarket banners
and companies like 7-Eleven and Circle K
A year ago, I was speculating about how the rise in e-commerce could lead to a restructuring in the food retail industry, see:
What’s happened since then? Much more than I expected, but nothing compared to what we will see in the next two years.
I was surprised to see the scale of investments made to grow delivery capacity, but supermarket chains are still having trouble meeting expectations. Add the barrage of new platforms that could disrupt their industry the way Facebook and Google have upended the legacy media.
On a personal note, I have stopped disinfecting my purchases before I put them away. I started going back into supermarkets last spring, since I have been vaccinated and, more importantly, unwilling to deal with late deliveries and unpleasant surprises.
An automated warehouse in the U.K., run by Ocado, Sobeys’ e-commerce partner
Canada is nearing the tipping point
I had anticipated a brutal restructuring in the food retail industry once online orders reach 10%. Here in Canada, we will be at that threshold sometime this year. After tripling in 2020, online orders at the major supermarket chains are expected to at least double in 2021, reaching 7% to 9%. Add on 1% to 2% for valet services such as Instacart and Cornershop, plus another 1% for specialized platforms like Goodfood, Cook It, Lufa and SPUD, as well as Amazon. Market penetration in the U.S. is expected to reach 12% to 15% this year.
Source: my estimates based on data published by retailers and trade publications
Improvement in supermarket banners
Canada’s ‘big three’ supermarket chains have invested hundreds of millions since last year, for fear of losing market share. I must admit, I was surprised to see how much they had improved. Sobeys’ launch of Voilà in partnership with Ocado, the U.K.’s grocery e-commerce leader, is a particularly bold move.
For more details on the efforts of the three major grocery banners in e-commerce, click below:
They certainly benefit from a strong competitive edge. Loblaws, Sobeys (IGA) and Metro account for 75% of Canadians’ grocery purchases. Their brands are trusted, and they have the funds needed to continue investing and making acquisitions.
The transition is challenging a century-old business model
The battle is far from won, however. These chains have inherited a 20th-century business model – centred on the in-store experience – and billions of dollars’ worth of real estate. The size of their franchisees’ future pension funds depends on the performance of brick-and-mortar stores and parking lots, in which they have invested millions. Their board members have little or no e-commerce experience. One notable exception is Daniel Debow, VP Product at Shopify, who was appointed to the Loblaw board in 2020.
They are investing in new systems and infrastructure for taking online orders, and then assembling and delivering them efficiently. They may, however, have forgotten to look back and check their blind spot.
Expertise needed in new technologies and digital marketing
Their success as online platforms depends on how fully they embrace and become adept at using new AI-based technologies for analyzing consumers’ habits, as banks and insurance companies have done.
They also need to learn the ABCs of digital marketing, rather than simply shifting old methods to a screen. Consumers on most e-commerce platforms are now in the habit of looking at other people’s ratings before making their choices. They also like being able to zoom in on images. None of this can be found on supermarkets’ platforms.
A partial screen shot of an Amazon listing for Kraft peanut butter
Unlike Amazon, Google and Facebook, where advertising is paid for on a per-click basis, the only way to buy keywords on Canadian supermarket banners is by spending $10,000 or more weekly on advertising packages. This translates into limited exposure for innovative items from the smaller suppliers, who must then look for other platforms to market their products.
This is a poor approach even for big suppliers, who are now using impressive analytical tools to launch targeted advertising campaigns on Facebook and Google.
Same-day delivery: the deciding factor
A variety of experiences worldwide have taught us that e-commerce penetration in the food industry is driven by level of service. Three criteria come into play:
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Same-day delivery
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Product availability: The order is filled 100%, with no unauthorized substitutions
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Delivery fee: No more than 5%
Same-day delivery is the deciding factor. Most consumers plan what they’re having for dinner just a few hours beforehand.
Despite their efforts over the past year, however, none of Canada’s three major banners hits the mark consistently – not even Sobeys, with its new ‘Voilà’ service. The situation is not that much different in the U.S.
Emergence of specialized native apps
The traditional banners are facing stiff competition, especially in the segment of natural, fresh and local products, which are over-indexed in online sales. Native apps (i.e., apps that have never existed outside of the Web) offering baskets of produce, meal kits or just natural foods are increasingly positioning themselves as online grocers. Examples in Canada are Lufa in Quebec and SPUD in Alberta, as well as Goodfood. A good example in the U.S. is Thrive Market.
Goodfood, one of Canada’s leading native apps, was the first to launch a same-day service called WOW in Toronto and Montreal.
All of these companies, founded by Millennials, have only done business online and now excel in digital marketing. SPUD subscribers have access to other subscribers’ ratings for every item, and the product offer is highly differentiated.
They have also firmly positioned themselves as upholding the values close to Millennials’ hearts. When buying a Lufa basket, the customer feels like they are contributing to a new model of local, sustainable agriculture.
These platforms represent a new strategic development opportunity for the most innovative food processors.
The Lufa Farms distribution centre
Instacart repositioning itself
Instacart and Cornershop (an Uber subsidiary) have been offering deliveries within 2 hours, with employees manually preparing orders in-store and using their own vehicles to deliver them. DoorDash offers something similar. These are emergency services, provided to this point in conjunction with supermarket chains because of the pandemic. They are convenient, but too expensive (15% to 25%) to be a viable long-term solution.
Instacart, however, has just partnered with Fabric, an Israeli-based company, to offer a less expensive delivery service. Shipments will be made from automated mini-warehouses to be located in every neighbourhood. The company still positions itself as a solution for supermarket chains. Because consumers always place their orders through its app, however, Instacart could move away from the major banners and source items independently.
Start-ups offering ‘ultrafast deliveries’ – in 10 to 15 minutes
Venture capital funds all over the world have been investing billions in ‘ultrafast delivery’ services during this time. For now, they only offer staple goods – items found at the local convenience store. They promise delivery within the same short time that it would take a customer to come into the store – in certain cases as little as 10‑15 minutes!
This is not such a crazy idea. Softbank (which initially kick-started Alibaba and WeWork) is one of the biggest investors. The best-known companies in this space are GoPuff, Fridge No More and Food Rocket in the U.S., as well as Getir, Gorillas and Flink in Europe. They launch neighbourhood delivery services from phantom mini-warehouses, which are often spaces abandoned due to the pandemic. Orders are delivered using bicycles or motorcycles, and these companies’ sophisticated technology platforms can run targeted ads for suppliers.
A Gorillas promotional video, in German
Amazon is lagging behind in groceries
Amazon was one of the big winners in the pandemic, but sales of patio furniture and electronics were apparently more strategic and better paying than organic bananas. Little has been done, to date, to achieve synergies with Whole Foods, which has posted even lower sales. Amazon Fresh offers same-day – and even 2-hour – service in a few U.S. cities, but deliveries are often late. Customer service leaves much to be desired. Amazon ranks 25th among online grocery platforms in the U.S., based on consumer ratings👎. Amazon Fresh is not available in Canada.
Observers have speculated that the company may also start using automated mini-warehouses soon, to improve its level of service. If that happens, the company is a little late to the game. Catching up to competitors like Kroger in the U.S. will be a challenge.
In-house transactional websites now out of the race
The challenge faced by in-house transactional websites is just about insurmountable. Consumers will soon be expecting same-day service and an online experience that comes close to what major platforms provide. This can only be achieved through dedicated teams and major recurring investments. ROI was disappointing for most companies that put in the funds required. No brand in China runs its own transactional website. Any attempt to replicate the Alibaba or JD.com platform is deemed futile.
I am not saying that an in-house website cannot generate online sales, but it is highly unlikely that this type of platform will help increase market share and yield markedly improved results in the grocery business.
The only exceptions are specialty product brands, such as Nespresso and Camellia Sinensis, the specialty tea retailer in Quebec, which run their own retail outlets and do not use big-box stores for distribution.
The Camellia Sinensis platform was named the ‘World’s Best Tea Website’ in 2017.
Quick delivery is an existential issue
We can speculate about the various players’ chances of success, but the fact remains that a lot of determined people – backed by the funds needed – are looking for a viable quick-delivery model for Europe and North America. China already has a lot of successful examples, so we should expect to see this goal achieved here sooner rather than later. The outcome of this race is an existential issue for supermarket chains, as well as for convenience store operators like 7-Eleven and Circle K, whose value proposition is that they save their customers time.
What we should expect to see
The fast rate of market penetration in the online grocery space will continue to grow post-pandemic. Things did not return to normal, once lockdowns were over, in any country or region that managed to tame the pandemic early. If investment continues, market penetration could reach 20% to 25% by 2025.
Canadian supermarket chains were nimble and remain financially sound, so the restructuring may not be as sudden and brutal as it threatened to be last year. It will certainly happen in the next two years, however – and it could be far-reaching.
Which players in the grocery business will benefit most from the digital transition? That remains to be seen, but we can safely predict two things:
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A dramatically improved customer experience: Deliveries in just a few hours that are affordably priced, with no unpleasant surprises; smart, user-friendly interfaces, with a configuration customized to the customer’s specific habits.
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Platform consolidation. E-commerce calls for a large capital outlay and a lot of R&D, which gives the big players an advantage. China’s transition to the digital economy has helped create two oligopolies whose ecosystems control 90% of e‑commerce. We can, for the same reasons, bet on a similar scenario in Canada and in each region of the U.S.: market dominance by two or three online grocery platforms that will be making the rules.
Will Goodfood be bought by Sobeys or Loblaws? Or will it absorb other specialized native apps? Will Couche-Tard acquire an international group that does ultrafast delivery? Or would Kroger in the U.S. buy Thrive Market?
So the big supermarket chains have not lost the battle, but they can only win if they are as daring as the younger companies now threatening them.
What does this mean for small food companies? They will have to learn how to perform on large platforms, where they are competing with major brands. In my next post, I will discuss some ways they can achieve this: