However, online grocery business in UK and France seems to be thriving with many well-established operators, such as Tesco, Asda and Ocado. In UK the size of the market was 9,7 billion euros in 2014 and one third said that they have bought groceries from online in the past month.
Why online grocery shopping hasn’t taken off everywhere yet then? Even though online grocery shopping seems more convenient, consumers are not willing to give up broad selection, low price and quality that they might find in the closest supermarket. Neither has the inconvenience of the online buying process, as described later, helped the online grocery stores to thrive. This paper aims to explain how the successful players have tackled these problems.
Perhaps the main reason for online groceries’ misfortune has been the uncompetitive price due to high delivery fees. A survey conducted in US shows that high delivery prices (53 % of respondents) in online grocery stores are the main reasons why occasional online shoppers do not shop their groceries online more frequently.
Naturally, delivery fees can be lowered with efficient logistics, as described in the following chapter, but practices introduced here cover different ways of encouraging customer to make an extra effort in exchange for a lower delivery fee.
Usually delivery prices seem to depend on the delivery day and location. A UK online retailer, Asda’s deliveries cost £1 during the weekdays and £5 in the weekends.
However, more dynamic pricing is of benefit both to the customer and the retailer. Customers can be encouraged to place orders in time slots that match existing delivery times and routes consisted of other customers’ orders. For instance, Redmart, a Singaporean online grocer, offers lower prices for customers that are situated on the route where it already has customer deliveries. This is an efficient way both to offer discounts and reduce distribution costs.
Many online grocery businesses are offering free deliveries for orders that exceed a certain price. Often there is an additional annual fee involved, too. Low delivery prices attract customers and annual fee, which is usually in a moderate level even for an occasional shopper, engages customers.
For instance, Amazon.com offers Amazon Fresh account charging $299 (271 €) annual fee, which enables orders over $50 (45,33 €) to be delivered home for free. Also Tesco, a dominant player in UK, offers free deliveries for orders over £25 for those who have subscribed for £60 a year.
The click-and-collect service, where the customer orders groceries online and collects them from a store on the way home, is a convenient way to save in distribution costs and pass the purchase to the customer free-of-charge. In fact, according to Statista 67 % of consumers in US rated the free in-store pick-up as important or very important factor for shopping groceries online.
In addition to giving a customer a chance to avoid extra payment, the click-and-collect service has been perhaps the most straightforward way for an online store to reduce distribution costs. Indeed, the service has been a rising trend and, for instance, in France major online grocers have established more than 2000 sites for the service many operated as drive-throughs.
Many seem to prefer the brick-and-mortar to online because they perceive the assortment, pricing and product quality superior in the traditional stores. Online shoppers listed these factorsamong the main reasons why they do not frequent online grocery stores. As food is perishable, the distribution warehousing have to be organized differently than regular distribution of other goods and maintaining quality and wide assortment within reasonable cost turns out to be a difficult task for inventory and distribution systems to achieve.
Some online grocers, however, have proven that this is possible with clever delivery solutions and by choosing the right distribution model and enhancing the inventory management.
Research shows that operational costs of a distribution center can be lower than those of a supermarket if 25 four-person households per square kilometer buy 90 % of their food from the same online grocery retailer. This has implications on the way the distribution should be designed.
As the profitability seems to be dependent on the population density of the covered area, the distribution and coverage should be carefully optimised. Tesco, for example, started with a model where they collected the food from the store and then delivered the order to the customer. This approach, however, was efficient only when the online sale volumes were low. As the demand soared, they embarked on delivering the groceries from more efficient central warehouses. Furthermore, places where population is scattered an online grocer should opt for a regional warehouse model where groceries are situated close to the customer, which facilitates preserving the quality of food in distribution process while maintaining wide assortment and low prices.
Redmart has put a lot of effort to improve their distribution and inventory management. Firstly, the company has been automating processes in its warehouses by developing algorithms that optimize pick tasks and walking distances in the warehouse. Secondly, they have developed their own navigation application called Delivery Buddy to keep their drivers constantly updated whether the customer is able to pick up the delivery.
Automatic picking systems enhance inventory management making maintaining a vast product assortment with low cost possible. These efficient automatic picking systems are able to operate at a cost well below 10 % of sales. Even though they require substantial investments, the cost efficiency pays back in the long run or when the demand soars.
Some grocery services, such as Foodie in Finland, deliver groceries to the nearest “food boxes” that preserve the cold. But Amazon Fresh has begun to deliver food in bags that preserve the temperature and that can be left to customer’s doorstep. The customer can then collect the delivery at their convenience. This tackles two problems: the food is kept in the right temperature and the customer does not need to be home at the time of the delivery, which facilitates distribution.
Online grocery shopping is perceived expensive and consumers are worried about the quality of the ingredients, as described earlier, but it might also be due to the inconvenient purchase process together with consumers’ limited experience with the model.
It appears that it is not to blame the consumers. The online shopping experience has not been in adequate level enough to retain customers. Econsultancy’s review two years ago claimed that UK based online grocery stores Tesco, Sainsbury’s, Asda and Ocado all had poor online checkouts.
The key take-away here is that the online experience should be made even more convenient than the brick-and-mortar shopping to convert and retain consumers. Therefore, an online store should invest in a mobile application and online user experience. The online shopping has been perceived complex mainly due to the unclear and unintuitive UIs.
Today many online stores provide a list of favorite and most frequently purchased goods in one place. This makes re-ordering easy and works as a customer retention tool. Some stores, such as Foodie in Finland, display recipes online and encourage users to order the ingredients for the whole recipe at once. Redmart further facilitates the purchase process by offering a one-click payment method for online customers.
To take the Redmart’s practice even further, online grocers can leverage new digital channels, advertisements that can be brought closer to the final purchase than ever before. It is possible to add a ‘buy button’ into a Facebook ad, and perhaps more convenient approach for a recipe-displaying site would be to add the button to a Pinterest post – a feature that was just launched this year.
Your online store should be the first one to appear in Google’s results with food related searches to increase coverage. For instance, displaying recipes does not only work as a customer retention tool but actually makes your search engine visibility better. Tesco has excelled in search engine optimization and has been on the top of search results among e-grocers for a long time in UK.
After improving SEO, people should be offered incentives for them to try the service. Referral programs and offering first deliveries for free have been discovered as effective tools in online grocery business. Many online grocers, such as US based Peapod and Fresh Direct have used these for customer acquisition and a UK based online grocer Waitrose gives £65 (91 €) off for first five online purchases, which encourages customers to visit the online store multiple times.
Online store does not necessarily need to fully replace the traditional store but adapt to consumers’ life styles. For instance, large grocery chains have loyalty programs that offer benefits for their customers but also often follow customers’ behavior and preferences. By leveraging that information the online store could suggest recipes and ingredients that the customer is frequently purchasing and this way attract the customer, who might be having a busy day, to buy online instead. Recognize and serve the customers that are likely to buy both online and in brick-and-mortar.
Online grocery shopping is not thriving everywhere yet. The reasons include consumers’ price sensitivity and the complex distribution system that perishable groceries require. But as many best practices show the costs and prices can be decreased, and some online grocers have been able to turn a profit.
E-commerce is small but growing channel for grocery industry and early-movers are likely to gain the largest shares on the market. In addition, the traditional grocery business will face new threats when established players, such as Amazon Fresh, Tesco, Ocado, Asda, spread to other markets. Only well established players with strong foothold in the market, loyal customers and efficient distribution channels are able to cope with the competition.