Read original article on Forbes.
A new report by CommonSense Robotics has identified several startling facts about the lengths grocery retailers have taken to increase their ability to meet customer demand for groceries ordered online. 2018 was a turning point for the grocery industry due to the massive amount of capital invested in e-commerce. According to the report, retailers like Target, Amazon, Kroger and others have invested $28 billion in e-commerce in just the last 18 months.
In many ways, food and groceries are the new oil. Of all the purchases made on an annual basis by consumers, food and groceries are purchased the most. Companies like Amazon, Walmart, Google (which has a woeful strategy for groceries) and Uber all have a desire to become a leader in groceries. With an annual market of nearly $800 billion, groceries are strategic hence the reason why so many companies are trying to win the grocery wars.
According to the report by CommonSense Robotics, in the zeal to become the leader in groceries, many retailers are not investing in the right initiatives and instead, are failing in three key areas: customer proposition, profitability, and online grocery penetration. I will add that grocery retailers continue to seek out solutions to solve individual problems vs. taking a holistic approach to their business.
A New Model For Online Grocery Fulfillment
Founded in 2015, CommonSense Robotics (CSR) has quickly established itself as a thought leader on the topic of how to efficiently fulfill and delivery online grocery orders. CSR believes that it’s impossible to transform a self-service business model (fulfilling online grocery orders) with single-digit profit margins to a full-service business model and still remain profitable.
That’s especially true when the picking of items for a typical $110 grocery order takes most of a precious labor hour, costing around $20 of fully loaded labor costs. Picking refers to the process of assigning individuals to roam through a store picking grocery items off of shelves that were ordered by a customer and placing the items inside a grocery cart.
According to CSR, retailers incur a pure loss of $5 to $15 on every manually picked online grocery order. The loss gets worse when the number of online orders increases. Sending more people to pick more goods from more stores doesn’t create an economy of scale; it actually only causes efficiency and effectiveness to further deteriorate.
To reduce costs and increase efficiency, CSR has perfected the use of robotics to select and retrieve the items requested by each customer. CSR recently opened its first fully automated fulfillment center which offers a stark contrast to picking orders manually.
CSR also identified that retailers have massively increased their investment in curbside pickup in 2018. Curbside pickup was available in 45% of Walmart stores, 58% of Kroger stores, 56% of Target stores (notably up from 0.6% at the beginning of the year), 30% of Ahold Delhaize stores, and 21.7% of Albertsons stores. And there’s no sign of curbside pickup slowing down any time soon. Walmart recently announced plans to have 2,140 online grocery pickup sites by the end of 2019, covering 69% of U.S. households, and for fiscal 2020, it’s targeting 3,100 curbside pickup sites according to the report.
A more startling was statistic is the fact same-day delivery increased by 500% in 2018.
Although the growth appears to be impressive, CSR believes that retailers are focused on the wrong things. Specifically, instead of offering curbside pickup as a way to maximize use of stores, CSR recommends that retailers focus their efforts on home delivery of groceries which is preferred four to one by consumers. According to CSR’s research, online grocery penetration will increase from 2% in 2019 to 15% to 20% of all grocery sales by 2023.
CSR is confident that grocery retailers are unprepared to meet such high demand of online sales.
World War Z In A Grocery Store
Assuming CSR is correct and online penetration reaches as high as 20% (or more) by 2023, grocery retailers that currently pick orders manually will find it nearly impossible to continue with the status quo. Among the options that grocery retailers are turning to as online sales increase are dark stores and automation.
Moving from in-store manual picking to a dedicated facility to solely support e-commerce is a model many retailers see as the logical next step. Known as “dark stores” because they have no physical customers, it’s assumed that dark stores make it possible to scale e-commerce operations in an effort to increase efficiencies and reduce costs. However, running a dark store means that entirely new real estate costs become overlaid on top of already-negative margins for manual picking. Dark stores in fact double the dollar loss for each order, the report estimates.
Automation is being utilized by some retailers to solve for scale and economics. However, the challenge is that most automation vendors can only enable next-day delivery propositions. Given that same-day delivery rollout increased by 500% in 2018, this seems like a solution for 2017 and not the future, according to CSR.
I agree with both points raised by CSR: Dark stores are a “neat idea” but they’re not the best solution. Automation designed to fulfill online grocery orders without the ability to meet the increased demand for same-day delivery is a waste of capital.
What consumers dislike the most about retailers that pick grocery orders from its stores is that it increases congestion in the aisles as customers and pickers navigate around each other to pick products off of shelves. If online grocery sales reach 20%, picking orders and shopping inside a grocery store will be like a scene out of World War Z.
Micro-fulfillment Is Not Enough
Executives from CSR are convinced that the optimal solution for meeting customer expectations for online grocery ordering and same-day delivery is by building a network of automated Micro-Fulfillment Centers (MFC) in dense urban areas that combine the speed of local delivery with the efficiencies and scale of robotics fulfillment. The MFC is capable of picking any volume of online orders to meet demand. Orders are delivered in as little as one hour.
To simplify the process of grocery retailers transitioning from their current state in-store picking, CSR has created the following business model: Retailers do not have to make a down payment, there are no set up costs, nor is any capital required. Retailers only pay a price per item picked.
Whereas CSR builds micro-fulfillment in different locations to fulfill online grocery orders for retailers, TakeOff, a provider of automated micro-fulfillment, works with grocery retailers to identify 8,000 to 10,000 square feet of underutilized space inside their existing stores, and converts that space to a complete, automated micro-fulfillment system to perform in-store automated grocery picking.
Tompkins Robotics has introduced a new robotics system referred to a t-Sort for unit and parcel sortation. Analysts I spoke with believe Tompkins Robotics has the most potential for becoming the go-to provider of robotics to grocery retailers, CPG companies and companies in multiple industries because Tompkins Robotics is a division of Tompkins International. Tompkins International (and its divisions Monarch Fx and Nexus Fx) is a leader in providing strategy, robotics, automation, supply chain, digital, logistics and value-creation solutions. As I write later in the article, grocery retailers need a holistic solution to increase the customer experience and create a competitive advantage.
If given the choice of building a micro-fulfillment system inside a grocery store or at an offsite location, I recommend the offsite location strategy utilized by CommonSense Robotics. If a grocery retailer has 8,000 to 10,000 square feet of underutilized space in its stores, the retailer should introduce an increased assortment of products, expand its bulk/raw food aisle (the most underutilized section in a store) or increase the ability of the store to prepare and cook meals for its customers. Meals generate nearly 40% margins, much higher than groceries. Installing a micro-fulfillment system inside a store will not generate the most value per square foot.
The optimal strategy for grocery retailers is to maximize sales per square foot inside its stores and leverage an offsite micro-fulfillment center to fulfill online grocery orders. However, is micro-fulfillment the answer or only part of the solution? I believe micro-fulfillment is only part of the solution. Here’s why.
In discussions for this article with executives from CSR, I asked this question: I understand the argument that micro-fulfillment centers can reduce the cost of fulfilling online groceries. However, I see no evidence of any kind that using micro-fulfillment increases online grocery sales. Do you agree?
CSR responded: “This is a broader question (and a good one) about grocery e-commerce in general regardless of the fulfillment model. Though only micro-fulfillment can allow you to both enjoy positive unit economics and offer fast delivery times.”
I believe there are far too many zealots writing articles, giving interviews and shouting from the mountain tops that micro-fulfillment or automated fulfillment (Ocado, for example) solves everything for grocery retailers. False. Micro-fulfillment only reduces costs while increasing the speed of delivery. However, micro-fulfillment in and of itself does not increase sales. And therein lies the problem.
The Right Approach
In order for grocery retailers to achieve an optimal operating model capable of meeting the needs of customers while improving store operations, removing complexity, creating a competitive advantage and reducing costs, retailers have to have the right approach. This means instead of focusing only on micro-fulfillment, automation or online grocery delivery, grocery retailers should take a holistic view to understand its needs. For example:
- What is the optimal supply chain and logistics strategy for meeting customer demand across our retail stores and online?
- Should we manage our supply chain and logistics or outsource?
- How do we leverage our supply chain to enable growth and achieve a strategic advantage?
- What is the optimal solution for leveraging robotics and micro-fulfillment? How do we become profitable at online grocery? Are we maximizing the potential of every square foot of space in our stores?
- What is the optimal last-mile delivery strategy? How de we increase order density?
- What digital strategy will generate the highest levels of customer satisfaction and sales while providing a competitive advantage?
- How do we design, manufacture and provide customers with exceptional private label products?
- What is the optimal pricing strategy by category and product? How do we lead in quality?
- How do we leverage data and analytics to create a better customer experience, optimize operations, increase velocity across the enterprise, increase revenue and achieve a competitive advantage?
- What is our differentiating capabilities? How do we design and implement a capabilities-based strategy?
See the difference? Instead of focusing on only one topic, micro-fulfillment for example, grocery executives should take a holistic view to identify every possible opportunity for improving the customer experience, improving performance, reducing costs, increasing velocity and increasing sales. Introducing micro-fulfillment only solves one problem: reducing the cost and complexity of online grocery fulfillment. The issues facing grocery retailers go way beyond online grocery.
A recent report from Dunhumby illustrates my point. Grocery retailers are under increased pressure from multiple sides. Short-term strategies aren’t the answer. This is why I recommend executives at grocery retailers contact a company like Tompkins International, which is capable of addressing all of the questions I listed while designing and implementing strategies for robotics and private label products. (I do not have a business relationship with Tompkins International.)
(Note to CommonSense Robotics: I believe you should speak with executives from Tompkins International about a merger or strategic partnership).
Conclusion
Based on my experience working globally with the largest grocery retailers operating today, and based on in-depth discussions with industry analysts and consultants, grocery retailers continue to seek solutions that offer short-term value vs. designing and implementing holistic solutions that offer a long-term strategic and competitive advantage.
Micro-fulfillment is a solution to a problem. But implementing micro-fulfillment without understanding the holistic needs of the grocery retailers ecosystem will generate little if any value. Grocery executives would be wise to call a halt to their current capital investments and instead invest the time, money and effort to identify the optimal strategies and solutions for meeting customer demand and generating long-term value.
Let me be clear: like grains of sand falling inside an hourglass, time is running out for grocery retailers to transform from a tactical approach to a strategic approach regarding how they run their companies. A holistic approach that leverages strategy and tactics is the only approach that will create the most value for a grocery retailer.
Over the next 12 to 36 months, the grocery industry is going to be hit with a massive increase in M&A that will significantly drive disruption. Amazon’s acquisition of Whole Foods was a transformative moment. What if Amazon acquires Target and opens Whole Foods Markets inside Target’s stores? What if Facebook or Google acquire Costco and significantly increase the focus on groceries? The possibilities are endless.
The need for on-demand meals, an increased desire for immediate customer gratification, and an expectation of providing an increased immersive and content driven experience in stores will become a reality. Grocery executives that focus their attention on finding the right puzzle piece instead of solving the puzzle of their business will fail.
Grocery executives need to begin thinking differently about how they run their companies—and fast.
Related posts:
What Is The Best Micro-fulfillment Solution On The Market In 2022?
Retail Stores Should Become Large Vending Machines By Installing Micro-Fulfillment Centers
A Look at the Micro-Fulfillment Model and the Future of Grocery Retail
Micro-fulfillment as a Service (MaaS): Is it an Option Retailers Should Pursue?