Should Grocery Retailers Offer On-Demand Delivery?

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Prior to the pandemic, online grocery shopping accounted for just 5% of all grocery sales in 2019, according to data from Mercator Advisory Group. As of February 2021, online grocery shopping had increased 230% from pre-pandemic levels, according to Adobe research.

In 2021, consumers continue to shop online, but I’ve found that retailers are under pressure to deliver orders faster. This is no easy task for most retailers, as they don’t have a business model suited to making deliveries in several hours — let alone in minutes.

The desire for speed on the part of consumers has resulted in the creation of a new business model known as “instant on-demand delivery” whereby customers can place an order and receive their delivery in as little as 10 minutes.

New entrants like Gorillas, Fridge No More, Gopuff, Getir, Dija and Jokr have exploded on the scene and are attracting significant investor capital. An advantage of on-demand delivery companies is that they can often launch operations very easily due to lower-cost and lower-tech operating models.

Many retail analysts are claiming that on-demand delivery is the next big thing in retail. Is it? Should retailers embrace on-demand delivery? If so, how? I’ll answer these questions in the next section.

Grocery Retailers Versus On-Demand Delivery Retailers

Although all retailers can technically utilize on-demand delivery, I am using the grocery industry as an example of how retailers operate and the changes they will need to make for the purpose of this article.

With the growth of e-commerce, grocery retailers have invested capital into creating the ability to fulfill online orders themselves or by using third parties that perform most functions for them: Think Instacart or Shipt.

The biggest drivers of costs related to e-commerce for grocery retailers are generally the processes required to pick products from a store shelf or from a location in a fulfillment center, pack the items into grocery bags and totes, and deliver the orders to customers. A detailed example of the costs associated with fulfilling an online grocery order can be found on the MWPVL International website here.

Most grocery retailers operate stores that have their own costs related to store labor, utilities and additional costs associated with running and operating stores. Some grocery retailers fulfill all online orders from their stores, but many grocery retailers fulfill orders from large distribution centers. Distribution centers may employ associates or leverage automation to fulfill orders.

Based on my experience consulting for leading grocery retailers in the U.S. and globally, most grocery retailers are able to offer same-day delivery. Many grocery retailers aim to offer two-hour grocery delivery, but they may not be able to do this consistently without using third-party delivery companies like Instacart or Shipt.

Companies that offer on-demand grocery delivery operate with a completely different business model. For example, the average number of items carried in a supermarket is 28,112, according to 2019 FMI data. This means there can be tremendous variance in the number of products that customers order. The higher the number of products ordered is, the longer it takes to pick the items and fulfill the order. In my experience, on-demand grocery retailers tend to offer far fewer products.

Offering a smaller number of products makes it easier to fulfill orders, especially if customers are ordering fewer items from the on-demand retailer.

Unlike grocery retailers with lots of stores and large fulfillment centers and warehouses, on-demand retailers typically operate manual micro-fulfillment centers in the neighborhoods and regions they serve.

The biggest difference in the model is the way the companies utilize labor. On-demand retailers typically hire workers who can pick and fulfill orders quickly, place the items picked into a backpack, and walk to the customer or ride a bicycle to them. Some companies claim they can deliver groceries in as little as 10 to 15 minutes.

One of the leading grocery delivery companies, Instacart, recently announced that it would be offering an option called “Priority Delivery,” which offers delivery in as little as 30 minutes.

Should Grocery Retailers Embrace On-Demand Delivery?

Many grocery retailers are likely grappling with the question of whether or not they should offer their customers a separate grocery service for essential items. Yes, I think they should. Here’s why.

I believe consumers will continue to push retailers for faster deliveries with a goal of near-instant gratification. I often state in the articles I write that the future of delivery is delivering to people, not places. Gone are the days when retailers only need to deliver to a customer’s home. Instead, I believe retailers will have to deliver to wherever the customer is — and do so quickly.

Retailers should understand that the need for speed will likely only increase, and they should work to become experts at offering this service. As I’ve written about before, I strongly encourage grocery retailers to open micro-fulfillment centers to fulfill online grocery orders and supplement their network with nano-fulfillment centers to reduce the cost of fulfilling online essentials orders. (Full disclosure: My company helps retailers do this, as do others.)

I strongly encourage grocery retailers to leverage data to better understand the daily consumption habits of their customers, too. This requires collecting data to identify what products customers purchase to use and what products customers purchase and eat or drink by the time of day, day of the week, and week of the month. The more granular the data is, the better you can plan your offerings.

In turn, retailers need to build a dynamic pool of easily replenished inventory to meet the needs of their customers 24/7.

I also encourage grocery retailers to explore the use of mobile retail vans for essential items. The business model has been adopted in Japan, as Warehouse Automation explains, and some mobile markets have been developed in the U.S.

What I recommend won’t be easy for retailers to accomplish. However, without the ability to meet the demand for speedy deliveries, retailers may lose customers.