Amazon vs. incumbents: How the war to win online grocery will play out in 2019
Try as Amazon might, it’s not taking over the grocery industry overnight. Despite their sprawling store layouts, winding checkout lines and unpredictable inventories, traditional grocery stores — all the way down to small regional chains — are picking up tools from the e-commerce playbook and giving the Amazons and Walmarts of the world a run for their money.
As a result, $640 billion grocery market will look much different in 2019 than the typical stop-and-shop format we’re used to, thanks to a push to update store networks, delivery capabilities and customer service for the digital age.
At the end of last year, Kroger introduced its “Restock Kroger” initiative, which has since brought online ordering, curbside pick-up and delivery to 92 percent of Kroger customers; Ahold Delhaize, which owns 35 grocery retailers including Food Lion and Stop & Shop, launched a three-year “Leading Together” strategy in November, setting out to improve cross-channel capabilities and increase its online spend to nearly $8 billion annually by 2021. And Instacart, the online ordering and delivery service, expanded its retailer network this year to 300 partners, accounting for 15,000 store locations in the U.S., from Aldi to Costco to Wegmans.
Turns out, the friendly neighborhood grocer has a fighting chance against Amazon.
“Grocery chains have been pouring billions of dollars into new e-commerce and omnichannel capabilities at a speed we haven’t seen many other categories perform at,” says Cooper Smith, principal analyst at Gartner L2. “
Through these initiatives, grocery retailers are rapidly rolling out online-offline capabilities that are meant to make the shopping experience more seamless, including curbside pick-up, same day delivery and recurring online ordering. These undertakings have mobilized industry incumbents to update their offerings, and the mad dash to make it as easy as possible to shop for food is only going to get increasingly frantic in the next year, with Amazon and Walmart looming large.
Traditional retailers actually have Amazon’s interest in the category to thank for sparking action. The online retailer has punched its way into the category through delivery initiatives like Amazon Fresh and acquisitions, most notably Whole Foods, which is acquired in 2017 for $13 billion. Its attention on the category woke up a massive network of sleeping giants. Whole Foods may have nearly 500 locations, but that’s a tiny piece of the overall market. According to 2018 data from Chain Store Guide, there are 2,300 grocery players with 141,000 locations operating in the U.S. and Canada.
“Amazon acquiring Whole Foods sent a shudder through the industry, and that was a major turning point where grocery chains had to realize: Here is a major tech company coming into our space. It shook people to think beyond the status quo,” says Sylvain Perrier, CEO of grocery retail platform Mercatus.
Delivery services like Instacart as well as Peapod have played pivotal roles in helping regional chains bite off new customer service offerings, like same-day delivery and curbside pickup, that would otherwise be cost prohibitive undertakings. Even for Kroger, which saw its online business nearly double from $5 billion to $9 billion in the last year, it can’t win by going it alone.
“We are identifying partners that will help us deliver that customer experience value today and [in] the future,” Rodney McMullen, Kroger CEO, told investors at the company’s 2018 Investors Day presentation. “If we were depending on us to do all of it, it would take too long to get it done.”
Speed is essential, if only to simply ward off competitors with deep pockets and broad reach, like Walmart and Amazon. Increasingly, retailers have turned to their store networks as advantages to compete in a world where customers want to shop online and offline and through a combination of both.
“At the highest level, as we think about how customers want to get their groceries, we realized it’s not going to be any one way. She’s going to want to go and browse and take it home. Or she wants to order online and pick it up on her way home. Or she needs it at her door that same day,” says Nilam Ganenthiran, the chief business officer at Instacart. “So we want to be able to enable our grocers to meet those customer needs.”
Therein lies the incumbent advantage.
“Click and collect, buy online, deliver from a store, that’s where traditional retailers can beat out Amazon,” says Pallab Chatterjee, the CEO of Symphony RetailAI, an artificial intelligence solution for retailers and CPG brands. “You’ll be losing customers if you don’t have these capabilities, so we’re going to see even more activity on those fronts.”
Don’t discount Amazon, though. As competition heats up, the retailer could make more drastic moves. Smith says he can see Amazon Go’s cashier-less technology rolling out in all Whole Foods locations. More fulfillment centers could infiltrate to better deliver fresh produce.
But Amazon is facing a tougher fight than it has in any other category.
“Amazon is really good at global supply chains, but that doesn’t work as well in fresh food. You want to source things as locally as possible and move them around as little as possible. So it is a very different supply chain mentality buying produce from local farms in every region than buying huge amounts of something and putting it into an existing highly efficient distribution system,” says Jason Goldberg, the svp of content and commerce at SapientRazorfish. “It’s not Amazon’s strength. You know who does know how to do that? Grocers.”
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