The digital disruption of food retail is taking hold
Dec. 1, 2015
Food retailers are at the point where business models are on the cusp of significant disruption from e-commerce and other digital platforms. Analysts have talked for years about the pending disruption, but consumer comfort purchasing food and beverages on-line only now is reaching a point sufficient for various e-commerce models to begin taking root.
The level of investment in on-line shopping by retailers is staggering, and the investments are prompting food and beverage companies to review supply chains to better serve the marketplace of the future. Wal-Mart Stores, Inc., for example, plans to make $1.1 billion in e-commerce and digital capital investitures in its next fiscal year. The investment will support same-day click-and-collect programs at Wal-Mart outlets as well as expansion of the retailer’s direct-to-consumer efforts.
Kroger is investing in a variety of models, ranging from click-and-collect to its investment in the on-line retailer Vitacost.com, a marketer of natural and organic products. In Denver, the retailer is testing a hybrid platform that features implementation of click-and-collect with a web site branded under its King Soopers banner that allows local residents to shop on-line for natural and organic products, based on learnings from Vitacost.
Amazon.com is the most advanced in the on-line sales and distribution of food and beverages. The retailer has a variety of food-specific models, including Prime, Prime Now, Prime Pantry, Subscribe and Save and Fresh.
Prime Pantry allows Amazon Prime subscribers to order snacks, soups, beverages and other consumer packaged goods. The model is designed to replicate the stock-up trips consumers make to brick-and-mortar retailers on a regular basis.
Industry participants have attributed the slow adoption of e-commerce in food and beverage to the inability of vendors to replicate the brick-and-mortar stock-up trip on-line. Retailers appear to be nearing the development of platforms that achieve this goal, and their success will put significant pressure on food and beverage companies to accommodate these on-line ambitions.
Analysts for Strategy&, an arm of the consulting firm Pwc, wrote in a recent business category review that retailers have become much more nuanced in their e-commerce efforts. Where once they focused on getting a small selection of goods to consumers relatively quickly, today trade-offs are made related to speed, variety and convenience. Achieving success is a set of compromises that depend on product type, consumer segment, shopping occasion and retailer positioning.
In their analysis, the Strategy& consultants measured the “costs-to-serve” consumers by evaluating the costs involved in different retail business models to deliver 23 grocery staples that cost $100. For the traditional retail experience, the additional cost to serve totaled $21 and included overhead, labor to manage a physical store and other incidentals. For click-and-collect, the costs rose to $32 primarily due to the extra costs related to a store employee who is needed to pick the ordered items from shelves, pack the order and have it ready for collection at the designated time.
The cheapest option identified in the analysis at $19 is the pure-play e-commerce model where the consumer orders on-line, the order is assembled at a fulfillment center and is shipped.
“As this model expands, grocers will see sales of many goods that make up the ‘center of the store’— shelf-stable items such as cereal and pasta — move on-line,” the analysts wrote. “Such a shift would have huge implications for the grocery category, particularly among established grocery chains, which compete primarily on price and the convenient locations of their stores.”
It remains to be seen which retail business models consumers will embrace. What is clear is retail category disruption is well under way and food and beverage companies face tremendous uncertainty as they strive to collaborate with their customers.