Check This Out: E-Commerce Grocers
The shift to grocery e-commerce has retailers hungry for fulfillment improvements and supply chain efficiency gains.
If you're like most consumers, you probably spent a lot more time at home in 2020, and spent a lot more money online. E-commerce purchases rose in categories ranging from furniture and home improvement to bicycles and gym equipment.
One of the most acute shifts was in grocery e-commerce. Prior to the onset of the pandemic, 7% of grocery shopping was done online, according to a MasterCard Economics Institute report. The pandemic pushed online grocery shopping to 10% by the end of 2020. Going forward, Mastercard expects 70% to 80% of that shift to be permanent. This is great news for grocery merchants who are on top of their game, but it comes with a side order of supply chain challenges.
Accommodating a new deluge of orders left grocery retailers with a mountain of concerns to iron out, nearly overnight. "Prior to the pandemic, 52 cents of every dollar was going to food service outside the home," says Doug Baker, vice president of industry relations at the Food Industry Association. "COVID moved much of that business toward grocery. Online retail growth exceeded 300% in the first few months of 2020."
As a result, many of the usual grocery delivery challenges, such as temperature control and inventory management, were amplified as order volume ramped up.
Take omnichannel. Integrating products into one sales channel is something that grocers have been working at for years, but the pandemic forced them to accelerate its adoption. Grocers had to quickly grow the assortment of products that they sold online.
"Food retailers had to move an assortment that they previously sold only in stores into the omnichannel space, so they could offer everything to consumers," explains Annibal Sodero, assistant professor of marketing and logistics at Ohio State University. "This challenge existed before COVID, but the pandemic magnified it."
Ramping up e-commerce fulfillment also meant accommodating cohorts of consumers who did not engage in online shopping in the past. In its Beyond the Cart: A Year of Essential Insights report, Instacart notes a 9% rise in senior citizens who utilized its services between the first and fourth quarters of 2020.
"More people who weren't previously buying online are entering this space," says Sodero. "The challenge is serving more people with different tastes and preferences, and with different delivery requirements."
It can be a blow to the bottom line if grocery retailers aren't careful. "Depending on their strategy, estimates are that grocers can lose anywhere from $5 to $15 per order, based on order size," says Mario D'Cruz, senior director of strategic planning for Honeywell Intelligrated, a material handling automation and software engineering company based in Mason, Ohio.
The uptick in online ordering has forced grocers to grow their payrolls, but maintaining an adequate labor supply since the onset of COVID has not been easy. Grocery retailers added 500,000 new employees from 2019 to 2020, according to a Food Industry Association report titled Receipts from the Pandemic. If food retailers were able to hire for all of their open positions, they would add another 100,000 workers to the fold.
"What grocery managers are wrestling with most is scaling up labor," says Michael Keck, senior director of supply chain at DHL. "During the pandemic, they needed to add more resources at the store level to pick orders and bring them to the customers. They had to acquire the labor for those activities during the pandemic."
But managing e-commerce grocery deliveries isn't only about having the optimal number of employees. Managers are finding ways to maximize efficiency, regardless of headcount. One is utilizing the right order fulfillment strategy.
"The most rudimentary option is leveraging stores for fulfillment," says Jeremy Neren, CEO of GrocerKey, a provider of e-commerce grocery technology and in-store fulfillment solutions."Grocery retailers can design a pick-and-pack strategy, in which an employee traverses the aisles in the most efficient manner possible. They can also break the store down into zones, and reduce footsteps that way.
"They can even move fulfillment out of the store entirely, and into a "dark store" or a room with dedicated inventory," he adds. "That strategy is not disruptive to the consumer and it's wage optimized for fulfillment."
This strategy can help to reduce costs, but grocers are still limited by a worker's efficiency. Typically, a worker can pick only 60 orders per hour, according to data from fulfillment solutions provider 6 River Systems.
Microfulfillment centers offer maximum Efficiency
To maximize productivity even more, some grocery retailers are establishing microfulfillment centers. These mini warehouses tend to be located close to consumers and house popular items that turn over quickly. At 10,000 or 15,000 square feet, they may be smaller than your average fulfillment center, but the velocity gains are enormous.
"If you have 10 people collecting groceries on the floor today, microfulfillment can bring their rate up to 75 orders per hour, which reduces the cost of the basket," explains Matt Inbody, chief disruptor of micro enterprises at Dematic, a materials handling systems, software and services supplier. "With microfulfillment, about 6,000 to 7,000 items move through at such a rate that in three days a grocery retailer can turn inventory over 100%."
To achieve these speeds, microfulfillment centers utilize automation. In many centers, shuttles run up and down aisles to retrieve goods. From there, a conveyor brings items to warehouse workers, who then sort them into individual orders. Some shuttles have the capability to scale shelves.
The goal of automation is to reduce a worker's movement through a facility. "Automation brings the items to the pickers, instead of having pickers get products from the shelves," says Inbody.
Overcoming the Last Mile
Another source of stress on e-commerce grocery delivery is the last mile. Notoriously expensive and unwieldy, the journey from a warehouse to a customer's doorstep has caused headaches for retailers for years. And during the pandemic, when many consumers couldn't venture into a grocery store, final-mile strategies had to keep pace with e-commerce orders.
Problems like complex routes and high costs have only accelerated."On top of the usual challenges, the newest last-mile challenge is keeping up with pace and volume," Baker says.
To meet these challenges, some retailers turn to third-party delivery services. Companies such as InstaCart, Shipt, or UberEats can take some of the pressure off grocers to operate their own fleets in-house.
"Third-party delivery services are able to scale much quicker because they use their driver communities' assets," explains Keck. "This shifts the financial burden away from the grocer."
Another option has been not to deliver groceries to the customers but to bring the customers to the groceries. Buy online pick up in store, or BOPIS, lets customers pick up the groceries they order through the web, thus eliminating concerns about temperature control or delivery windows. In March 2021, BOPIS grocery sales reached $7.1 billion, according to a Brick Meets Click/Mercatus grocery shopping survey.
BOPIS offers a slew of advantages to grocery retailers. "Drive-up is the most effective and important fulfillment method for many grocery retailers," says David Bishop of retail consultancy Brick Meets Click. "It removes the last-mile issues created with delivery or ship-to-home methods. It also creates an opportunity for an unplanned trip into the store."
Ensuring an adequate number of pickup windows is essential to BOPIS success. There are a few ways to do it.
"The main way to resolve the capacity constraint is to increase the ability to fulfill more orders during the same time period," says Bishop. "Retailers can accomplish this by either adding more staff to assemble orders or by improving labor productivity with enhanced assembly practices."
The next grocery frontier lies in new technologies. For example, in December 2020, Walmart announced it would operate fully autonomous vehicles to deliver orders in certain middle-mile routes in 2021. Leading up to that announcement, the retailer had piloted test runs of autonomous trucks in partnership with Gatik, a driverless vehicle startup. Currently, Walmart plans to operate driverless vehicles between a dark store and a Walmart location in Arkansas.
More recently, Kroger announced that it will test drone delivery at a location in Centreville, Ohio. Working with drone company Drone Express, the grocer will deliver small packages (weighing less than 5 pounds) to local residents, using customers' GPS coordinates. Customers have the option of ordering individual items, or pre-packaged bundles in categories such as S'Mores or Baby Care. Orders could reach the consumer in as few as 15 minutes.
"Once the order is placed, Kroger sends it to our order management platform, and we see a GPS coordinate identifying where the customer's house is," explains Beth Flippo, chief technology officer of Drone Express. "The customer receives real-time tracking and they can change the location if they want.
"Let's say they want an order delivered to the driveway, and not on the grass," she adds. "They can change it and it's saved forever."
This new development will enable customers to order groceries any time and at any location. "The best part about drones is that they are one package at a time, so you aren't anchored to your house anymore," Flippo says. "You can place an order and it will know where you are based on where your phone is."
Grocers have a lot on their plate navigating the world of online retail.