Retailers are making big changes in a hurry — and need new technical solutions to help them manage the transition. Amazon opened its first Brooklyn permanent dark store in September to fulfill online grocery orders. Kroger had already announced its own home delivery initiative in 2018.
With this speed of change, this is a moment where tech innovators might get an audience from big grocery chains for new ideas. After all, tools that might have fallen flat with grocers a year ago — shelf sensors, inventory management software, grab-and-go stores, robotics, AI for better order personalization — will likely get more than a hearing today.
Solving a demand problem
Here’s why: As retailers rush to keep customers by meeting surging online demand, online grocery ordering has terrible economics — especially the way most U.S. stores do it today. The extra costs of picking and delivering items tend to crush retailers’ margins. Add to that P&L pressure from huge tech capital investments to support the online model.
Suddenly you have big money problems in search of big money innovation.
The most successful grocery chains will be those with the balance sheets and analytical insights to bend the curve on that margin compression through smart tech investment.
This creates a tremendous opportunity for venture investors and founders with the vision to help solve retailers’ online pain points.
How to pitch ideas to big grocery
The life-and-death metric that all grocery retailers will chase in this new world is units per hour (UPH), a measure of how fast online orders are processed. By that measure, U.S. grocery operators are still in the Stone Age of online ordering, averaging around 40 UPH. That compares poorly to operators abroad. U.K.-based online specialist Ocado, for example, recently reported its UPH was nearing 200.
Low UPH scores in the U.S. stem from retailers’ reliance on traditional stores to service both walk-in and online customers. Even before those one-way social distancing directional stickers were affixed to the front and back of every aisle, supermarkets weren’t designed to fulfill online orders. Employees working as pickers are competing with customers for items in the aisles, slowing things down and worsening the consumer experience. There’s also a big jump in labor costs when a store’s online orders suddenly make up 15 percent of sales, compared to less than 1-2 percent previously.
The ultimate solutions are tech-driven: automated picking, inventory management software that can help identify and stock higher-turnover items, and new supply chain models such as vertical farming. Much of this is already being tested: Walmart has robots picking out online orders, calling the effort “transformative” to its supply chain. Kroger has partnered with Ocado to leverage robotics and build up to 20 automated grocery warehouses.
Solutions that build loyalty
The reward is that online grocery shoppers buy more in each order, and are more loyal over time. Average transaction sizes online are 20-30 percent larger and online shoppers tend to stick with one provider, increasing their lifetime value to retailers. Maybe they can make it up on volume.
Retailers are seeking to optimize for the benefits of digital while managing the downsides.
In the short run, those with fewer resources are turning to service partners like Instacart to handle online fulfillment. But those services are only as efficient as the stores they’re picking from.
Transforming every store and building robot-driven warehouses will take years and come with tremendous costs. But those who can invest now know they will take market share later.
The software that can save supermarkets
When 15 percent of a business goes online, there are some big potential real estate savings on customer-facing stores that can be reinvested in things like robotics and specialized warehouses—or even part of a store’s footprint allocated for fulfillment, in a section of the store called a “wareroom.”
Think of all of the software needs to make this work.
First, more efficient inventory management is a big piece of the puzzle, and grocers will surely be looking to implement tech here. The online boom is resulting in more demand for high-velocity food items, and retailers might logically respond by getting rid of slower-moving products to optimize stores for online ordering.
Some stores and packaged foods companies have already reduced SKUs, trading broad selection for better stocking of high-volume items. Venture investors in the world of niche and differentiated healthy brands may suffer here, as shopping is no longer a browse-the-aisles function by consumers. They are more likely to type Heinz into a browser, and they might not find and try your artisanal ketchup.
Robots and battery-powered shelf sensors are being used to improve inventory management. Amazon’s cashier-less Go grocery stores are trying out a model that gives highly accurate inventory reads through the use of sensors and cameras.
Another area of need: Data analytics and systems integration. Even now, many aren’t thinking as intensely about it as they should. Retailers don’t suffer from a lack of data, but they do struggle to use it well. That’s where it can be valuable for them to partner with tech start-ups.
But, as promising as this sounds, integration must come before analytics. This is where the giant cloud providers such as Amazon, Azure and Google come in. They can amalgamate disparate data sources, as well as analyze and integrate data in ways that improve store plans and personalization for customers.
Which tech solutions rise to the top?
Raw data is valuable, too. Retailers can use data visualization and analytics tools to find patterns in online and offline customer behavior that they hadn’t seen. What creates an increase in basket sizes? What is the right inventory mix to keep in the wareroom, and what needs to stay on the shelves? How can retailers take care not to disrupt the more profitable impulse purchase at the checkout line? Those insights can be applied to any product category.
Grocers will be interested in tech solutions that can also improve personalization, helping retailers tweak consumers’ choices. If I’m on a Whole 30 diet, couldn’t that pre-populate my online basket? If I use MyFitnessPal to capture my calories and macros, why couldn’t that be integrated with my future supermarket purchases? Better yet, how valuable would it be if data helped apps avoid poor recommendations. After all, vegetarians shouldn’t get offers on fresh beef if they’ve indicated their dietary preferences in their profiles.
Think about the potential for ad serving models now that people are comfortable with click-and-collect: If Safeway knows your wife’s birthday is this weekend, they can serve you a reminder with a cake recipe. You can then click a button to have ingredients populate your online cart, ready for home delivery. Bonus points if Safeway offers you balloons, a card, and candles as well.
If the supermarket could help you with your dad bod, and save you from forgetting your wife’s birthday, well, you might not need the incessant discounting to stay loyal.
And I’d bet there is someone reading this that can code that feature in their sleep. Hey, save a marriage, pitch it to Kroger.