Photo: Shipt
Should grocers leave delivery to third-party providers or do it themselves?
Through a special arrangement, presented here for discussion is an excerpt of a current article from Frozen & Refrigerated Buyer magazine.
Only the major players — Walmart, Safeway, Kroger, Amazon and Target (through its Shipt subsidiary) — along with a handful of others have brought grocery delivery in-house. But some industry observers think it might be time for others to join that club, citing the need to maintain control over the transaction from start to finish.
“The customer expects the retailer to support the entire order lifecycle, including last mile delivery,” explains Ken Morris, managing partner Cambridge Retail Advisors. If third-party delivery goes wrong, consumers will hold the retailer responsible — not Instacart or DoorDash.
Retailers also don’t get a lot of data on transactions that go through third-party providers, leaving them without valuable insights into a growing portion of their business, and they potentially share data with a future competitor, as well.
Despite the drawbacks, most retailers have partnered with third-party delivery providers at one time or another due to the cost of in-house delivery and the time it takes to develop. Third-party providers’ built-in infrastructure and staffing enabled many chains to launch delivery practically overnight during the pandemic.
And despite fears over delivery quality, many third-party providers have built in incentives for employees to provide excellent service. For example, the higher the customer rating, the more access associates have to larger, more lucrative orders.
Plus, after operating for several years now, these companies know what they’re doing.
“Third-party providers like Instacart and DoorDash have quite a bit of experience at this point,” says Carol Spieckerman, president of Spieckerman Retail.
Many retailers have adopted a hybrid approach, allowing consumers to order through either platform, doing the picking themselves but leaving delivery to a third party, or using the third party only for certain deliveries.
Explains David Bishop, partner at Brick Meets Click, “As the online segment continues to grow, it’s very challenging for a grocer to control their operating costs when relying only on a third-party provider.”
A third of online grocery sales in 2021 was delivery, versus pick-up (45 percent) and ship-to-home (22 percent), according to Brick Meets Click. While far from a profit center, delivery promises to grow, especially if newer models such as ultrafast delivery and Walmart’s InHome delivery service gain traction.
Discussion Questions
DISCUSSION QUESTIONS: Do you think an in-house, third-party or hybrid approach makes the most sense for grocery delivery now and in the future? How would you lay out the pros and cons of each approach?
Poll
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I do not think there is significant long term profitability to be gained from the delivery business. As a result, leaving it out of house is likely the better choice.
I’m torn on this one. For data and customer experience reasons, I think grocers should own the delivery aspect. However because of all the issues grocers are facing right now (supply chain causing inventory shortages, inflation, labor shortages) there may not be the bandwidth for grocers to do this well. I’d love to see it happen, I just don’t know that now is the right time for grocers to integrate this part of the process.
There is no right answer to this, it really depends on the situation of each individual grocer. In an ideal world, everything would be done in-house because of the ability to control and manage systems, processes and data. However given the capital costs and complexity, some retailers will make a trade-off by using third parties – especially in the earlier stages of development. The two things that are critical are to tightly control the customer experience and to provide future flexibility as online orders and fulfillment grows and evolves.
I agree. Each grocer has a set of challenges it faces. What is right for one may be wrong for another. All that being said, if a grocer can do it I believe they should handle it internally so they own the customer experience from end to end.
I would be sure to always own the customer and avoid giving any detail to the third parties. The last thing you want is to be taken out of the picture or disintermediated. As hard as it is to get and keep employees these days, it’s very important that retailers keep a foot in the door with home delivery. Not the kind of foot in the door where you’re just starting, but the kind where you’re keeping the door from shutting forever. This is the last mile and it is an important connection with their customers — they just can’t lose this part of their business to third-party vendors forever.
Maybe an idea floated in these articles last week about tipping the customer in the form of cash back for pickup is the answer. If you can convert customers to pickup it is a win for the customer and the retailer.
The U.S. has historically been the leader in specialization in most aspects of business. I am a proponent of outsourcing those functions which are not a core competency of the business. Outsource delivery and let a specialist worry about the details while providing quality service.
I believe if the retailer does not have the infrastructure and labor components to manage it correctly, it should be left to a third-party solution.
Spot on. See my comments, below.
I still can’t fathom how most grocers will ever do delivery at a manageable cost (to the grocer and the consumer) without help from third parties. However as an avid delivery customer these past two years, I can speak from experience that the hybrid model feels like the most effective option. When people who work in and really know the stores and the assortments do the shopping, results are almost always better than orders picked by gig shoppers who are built for speed. At that point, the impact of “hybrid” home delivery on store ops is basically the same as BOPIS, which seems much more manageable.
Home delivery is one of the biggest challenges for grocers, beyond the obvious labor and supply chain issues. Ideally, in-house delivery makes the most sense from a quality control perspective, but it is very difficult to execute profitably, especially for small chains. A hybrid approach may be the best approach, as long as the grocer can develop product picking processes that are more efficient than third-party services. The ongoing challenge is efficiently handling substitutions, that is why improving inventory accuracy is so critical for grocers.
Like a lot of things in retail, it depends. Smaller retailers that don’t have the resources to pull together owned services benefit from tapping third parties. Third-party providers can also drive awareness for regional retailers. For the big guys, data ownership and maintaining a direct line of communication with customers can’t be overestimated. I always see it as a missed opportunity when Instacart makes a delivery or picks a curbside order, for example. The follow-up feedback requests come from Instacart and presumably, stay within Instacart’s ecosystem. Retailers forfeit the opportunity to learn from mistakes and track successes.
Like with any adoption process, use outside resources while you scale and learn and then bring it in-house once you have an understanding.
At this point grocers need to focus on their core business, product in-stocks and focused assortments. Trying to stand up another capability right now is probably not a good use of their time or resources. The good news is there is competition in this space for grocers to be choosy about which provider they select. They need to make sure the provider they use provides their customers with a branded experience that their customers demand.
Until a grocer has critical mass and volume, it is difficult to build an in-house delivery capability and hence many have gone for third party services as they build their online business. However once they reach that mass, they really should be looking at taking back control of their own destiny. Being in control of your brand is important. Managing the quality of the delivery service, and also not supporting a potential competitor, is vital. If you have a good coverage of stores then you have a better capability of managing home delivery by picking in-store with locally located distribution capability as Iceland Foods did from a very early stage in the UK. They have made this a major part of their online business, building their brand in the process.
I like it when companies stick to their knitting and grocers are inbound, not outbound supply chain specialists. Right now the inbound isn’t going so well either so, if I were them, I would put plans to do their own delivery on hold and let the pros do it.
When I can actually get cream cheese consistently, and the shelves don’t have weird holes where products are supposed to be, then they can think about their outbound supply chain.
Grocery stores should do it themselves, but it’s WAY easier said than done. The learning curve and cost (losses) initially would be daunting, and that’s exactly why it’s being outsourced. But ultimately it will be much more profitable doing it yourself, to say nothing about control of your own brand to the final hand off. Just ask Amazon.
The question is, who will get blamed when something goes wrong? The retailer must have control of the process, order to delivery. While that suggests that the retailer should have their own delivery business, it largely depends on the resources of the retailer. Moving into delivery is a perfect domino move for a larger corporation.
That would suggest that for those with less resources and structure that they should partner with a delivery service as described in the discussion. DoorDash, Instacart, et. al. is not the answer. With the breadth of their customers, focus would be difficult for the grocery retailer.
I may be playing with words but, if a retailer is using an outside resource, it should be a tight contractual agreement and not a partnership where the partner has a myriad of other interests.
For cost structure and efficiency reasons, retailers need to use the right third-party provider. Grocers do not have delivery competencies in systems, processes, equipment, and the necessary volume to make it work. Focus on the core!
Once again, one size does not fit all. It all depends on the retailer, the competitive market, the geography, and consumer demand. The pros and cons are more or less self evident. Pros include access to data, direct links to the consumer, and control of your brand. The cons include the need for building delivery infrastructure, labor availability, and being able to absorb last mile costs.
Should retailers “own” the entire delivery aspect of the customer experience? Likely not, given all the costs. But they should be “accountable” for the delivery and not simply wipe their hands clean of any issues and force the customer to have to deal with the third-party delivery provider. If there are any customer service issues related to the delivery, retailers should have all the right mechanisms in place to solve the issue without the customer having to take any additional steps.
Managing all the parts of the delivery process in every location is a major challenge requiring planning, hiring, monitoring of employees and the process, and collecting consumer data. If a retailer can not do the whole process well, a third-party provider is a viable option. However the contract with the third-party provider must be negotiated and managed well to maintain the integrity of the delivery and data collection process.
One of the challenges of building a delivery capability into a retail business is the lack of competence in the specific type of logistics that is involved in a one-to-many delivery structure. Small retailers will struggle to scale delivery capabilities with high performance due to a lack of technology, staff and procedures. As a result, third-party delivery services, who have surmounted those obstacles already, seem to make the most sense. Permitting customers to purchase and pick up curbside or shop in-store fits right into the retail framework and should be continued.
I recently experienced a delivery from Walmart in Florida.
The advertising shows a nice uniformed employee in a refrigerated van bearing the Walmart livery. However, the reality was something completely different. A guy turned up with the food in a beat up, 40 year old, rusty pick up truck, looking like he had just finished a shift in a coal mine. All my food, including chilled and frozen food, was on the back of his pick up. The temperature was 85ºF.
This was a third party delivery company. Clearly they have no minimum standards or vetting process. I clearly wouldn’t order from Walmart again. They need to take this service in-house before they suffer irreparable reputation damage.
I’m squarely in the camp that advocates for own control of all customer-facing services by the retailer. High delivery costs remain a challenge, but this factor must be accounted for in a comprehensive manner. What do you really risk when you put digital moments of truth in the hands of an outside solution provider?
Third-party services intermediate the retailer’s service experience and divert essential data about shopper behavior. I could never agree to hand over control of my brand relationships to gig-workers employed by a company that is angling to become my competitor.
It is a competitive necessity for supermarkets to offer digital selling. Once they make that omnichannel commitment, imperatives follow regarding order-taking and fulfillment. Shoppers will choose home delivery, in-store pickup and curbside pickup according to their momentary convenience. This new complexity is daunting enough that many retailers have “partnered” with 3rd parties while they learn the ropes.
I say they should not renew those contracts, but apply early learnings to define a more permanent solution which integrates with their own loyalty programs and operations.
So if you’re working with a 3rd party delivery service, start planning your exit now. Don’t even consider inventing your own systems! There are numerous vendors competing fiercely for your business who have worked out the end-to-end solution. License a white-labeled platform and focus on creating a total online shopping experience that gains share of wallet and cements loyalty.
Delivery is essential, but it is not the most important element of this transition for grocers. If you do build a strong delivery network, however, consider offering it to other local retailers as a “common carrier” for their deliveries. Heck, you could even step up as a last-mile delivery vendor for Amazon. Once your vans are passing through the neighborhoods anyway….
Maybe they should get rid of it altogether (Just kidding! 🙂 well … sort of).
I suspect it will be a mix: the very large and perhaps, paradoxically, the very small (e.g. a single neighborhood store) will do it themselves, while mid-sized companies will outsource it. Like any other process, there can be cost saving internalizing delivery, but you have to have sufficient resources to do it right.
Trick question for sure. With tiny margins, most grocers don’t have the resources to manage up and down the full chain — especially delivery — and have turned to 3rd party vendors to manage this segment. However, what many have learned is that this method is expensive, resource heavy, and requires expertise to carry out effectively. Smart grocers will hand this off to partners until they can manage it themselves and smarter grocers will eventually own the whole fulfillment process over time. It’s not an either-or question, but a now-later question.
The big chains will keep it in-house for maximum control. Everyone else will either go fully third party or have a hybrid model due to lack of sufficient resources. For the third-party approach, retailers would be wise to invest in the right partner; that is, one with a solid track record as opposed to a new service offering an attractive lower cost.
It’s all volume related, isn’t it? Any grocer (if they do their own picking) has the outbound volume from their store, but the closer to the customer door they get, the less efficient becomes their delivery service. There are plenty of days when I can watch Amazon, USPS, Safeway, UPS and Fedex all following each other down the same street, each one dropping something off at different houses and wondering how we arrived at such a wasteful situation.
I think the bottom line is that the retailer should be able to control the last mile quality and price. Whether it will be achieved by having multi-delivery vendor operations or having a hybrid (own delivery and third party), it’s a matter of having access to delivery infrastructure and technology. Data privacy is also a key to consider while dealing with third-party delivery services!
In an ideal world, keeping it all in house would allow complete control over all aspects of the program and customer experience. Unfortunately, that’s not likely viable for everyone. So, I’d opt for owning as much of it as possible while outsourcing only those things that are not core competencies for each organization, and as others have pointed out, that’s different for everyone. But I’d keep the focus on learning as much as possible with an eye to owning the whole program at whatever point that is possible.
At the end of the day, shoppers want the retailer to be responsible for their delivery experience. This resonates with a personal purchase I made from Whole Foods via the Amazon app recently. I received some “expired” produce and chose to return for fresh items. The manager of the Whole Foods where I made the return acted as if they had nothing to do with the delivery order. Yes, I could have saved myself a trip and just rejected the items from my order online, but I needed the replacement ingredients. This emphasized how disconnected the channel experiences can be, even when one company owns them.
Building in-house delivery from the ground up sounds ideal, but it will be hard and won’t happen overnight. So, as an alternative to in-house delivery houses, grocers can go for either acquisitions or partnerships with multiple delivery houses to give an edge to customer experiences.
Though, I believe the best strategy would be to go for acquisitions. For example, Boxed recently acquired Max Delivery’s and plans to leverage its tech to:
-expand dark store fulfillment
-offer rapid on-demand delivery of fresh groceries
-scale same-day grocery service across additional and unnamed markets.
However, there are myriad reasons other than delivery experience to consider while acquiring delivery partners. Since delivery houses have direct interactions with their customers, they have a large amount of customer data. Using that first-hand knowledge, many delivery houses have even established their own marketplaces which can be a threat to the grocers. Acquisition is a prominent way to avoid this situation.