Is there a path to profitable grocery delivery?

Discussion
Photo: RetailWire
Jul 23, 2020
Oliver Guy

Through a special arrangement, presented here for discussion is a summary of a current article from the blog of Oliver Guy, senior director, industry solutions, Software AG. The article first appeared on Total Retail.

Despite dramatic growth in grocery deliveries due to the pandemic, grocers are not necessarily making higher profits.

The rapid acceleration in delivery demand has caused major delays, sold-out items and operational glitches — mostly stemming from siloed technology. At the same time, low-margin products and additional costs associated with hiring more delivery staff have eaten into profits. And online growth looks set to continue strengthening.

Addressing these challenges to drive operational efficiency requires becoming a truly connected retailer.

Below are three ways to move forward to a more connected, efficient and safe grocery experience:

  • Liberate data: Multiple silos of data from customers, products and inventories create multiple perspectives that are confusing and limit efficiency. They must be connected, aligned and made available in real-time regardless of the data’s location. This liberates the data and allows for improved process flow and decision-making.
  • Operationalize. Real-time access to data can then paint a picture of what is happening right now, giving actionable insight and the ability to automate decision-making — allowing retailers to respond to issues and opportunities. Combining real-time data from stores and supply chain operations, along with predictive models and emerging technologies like AI and IoT, can enable a truly connected store. Store associates can be proactively directed to where they are needed. Time-consuming tasks, such as inventory management or price and promotion execution, can be automated. Operationalizing data in this way can also improve visibility or shelf-level demand in the upstream supply chain, thus improving in-store availability.
  • Align processes: Leading grocers are becoming more process-centric, seeking improvements in operational efficiency by undertaking time and motion studies of store operational tasks. This is a great start, but there’s so much more that can be done, like enabling task-centric data collection that can be used for process mining to drive continuous improvement.

Data silo elimination is key as it becomes the foundation to unlock the potential of emerging technologies like IoT and AI. Together these will drive insight, automation and improve decision-making that can redefine operational efficiency for retailers.

DISCUSSION QUESTIONS: How critical will eliminating data silos be to driving grocery delivery profitability? What unique challenges does the grocery model face in reducing silos?

Please practice The RetailWire Golden Rule when submitting your comments.
Braintrust
"Is there a path to profitable grocery delivery? Yes, charge the customer for it! There is no such thing as a free lunch!"
"The myth that an incredible premium service, like grocery delivery should be, essentially, free has been mind blowing."
"... delivery by itself, unless you build a margin into it, isn’t necessarily about profitability."

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27 Comments on "Is there a path to profitable grocery delivery?"


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Neil Saunders
BrainTrust

I am sure that eliminating data silos will help. However, to move into sustainable profit territory retailers need to reorganize their operations. This means automating as much of the process as possible. Having robotic micro-fulfillment centers in stores, looking to use autonomous vehicles over the longer term, and automating central warehouses and distribution centers are all part of the mix.

What is also important, but more tricky to achieve, is trying to get consumers to shoulder more of the costs for online fulfillment. At the moment most grocers subsidize the fulfillment process to a great extent. Ideally that needs to be reduced.

Ryan Grogman
BrainTrust

Creating a common data repository for inventory availability, customer info, product info, and pricing is imperative for any retailer in any segment that wishes to deliver retail in real-time across multiple channels. Grocery has lagged behind traditional retail in the push for seamless omnichannel fulfillment, and it’s logical that the pains suffered by their cross-segment peers are now challenges they must address as well. The use of various third-party delivery partners and the reliance on CPG suppliers and their data does add several complexities for grocery as they look to consolidate these various data silos, but these can be overcome with the right approach.

Suresh Chaganti
BrainTrust

Grocery delivery is hard to do for good reason. More time and money for pick, pack, and cost of shipping. In an in-store environment, the customer does all three. Based on the data I see, each order needs an additional $7 in fees to get parity in profitability. And it also needs automated pick, pack processes and micro fulfillment centers.

Secondly, the volume needs to go up. As impressive as the recent run up is, it not only needs to be sustainable, but to also grow significantly. Without such volumes, the overall delivery model will not be profitable.

In short, this is for deep pockets and has a long road to profitability.

David Naumann
BrainTrust
David Naumann
CEO and President, Cogent Creative Consulting
4 months 3 days ago

Eliminating data silos and aligning processes will help improve efficiencies and profitability, but it will require more changes. The two biggest cost components are the labor to pick items and the cost to deliver. While these costs can be optimized, they will still be an added cost that someone has to pay for. Consumers can’t expect free delivery. Grocers must find the right pricing model that makes grocery delivery profitable in the long term.

Ralph Jacobson
BrainTrust

“Data is the new oil.” Interoperability across business functions is key. Take advantage of some great tools available in the market. Also, I believe this data management challenge is centered around logistics. Extracting costs from every element of the delivery task is critical.

Brandon Rael
BrainTrust

The grocery operating model has to undergo a transformation to respond to the increasingly changing consumer behaviors to digital commerce, as well as the competitive forces which require agility, flexibility, scalability and most importantly, data sharing. Eliminating data silos is a key part of the equation. By having one view of the customer in a convergence model, grocery retailers along with their wholesale distribution partners could collectively come up with an agile digital-first operating model, that will eliminate silos, reduce process redundancies, and leverage a data and analytics first strategy to drive delivery operational efficiencies.

To compete in the disruptive day and age of Walmart and Amazon, independent grocers and their wholesale distribution partners not only have to focus on assortment optimization, but also on strategies to drive experiences that enable consumers to choose seamlessly to have their grocery delivered or picked up in-store.

Carol Spieckerman
BrainTrust

One of the silos that need to be eliminated is the one between categories, particularly as more multi-category retailers see grocery as their ticket to more frequent visits (whether online or in-store). Yes, there are pure-play grocers out there, but even they usually carry some general merchandise.

As it stands, retailers’ grocery businesses tend to operate separately from higher-margin opportunities online. For example, why not suggest a crockpot when someone purchases beans (rather than just more beans)? And why not have the ability to load that crockpot in the car along with the beans when pick-up time comes? Retailers are seeing an uptick in e-commerce and surges in grocery and essentials. But how are those margins doing?

Evan Snively
BrainTrust
Evan Snively
Loyalty Strategist, Chapman & Co. Leadership Institute
4 months 3 days ago

The solutions being discussed by many who are much more grocery savvy than myself seem to be really leaning into tech and infrastructure changes that will be able to best leveraged by large chains due to economies of scale. Is it the opinion of those on the BrainTrust that local grocery chains are going to be adversely impacted by the need for these expensive investments?

Suresh Chaganti
BrainTrust

Mathematically, grocery delivery will not be profitable without certain volume, customer willingness to pay fees and reduction in operational costs using automation. All three require front-end investment with long payback periods. Hard to foretell, but I can’t see how local chains will be able to compete based on delivery. IMHO, they should pursue differentiation using other vehicles and not aggressively join the delivery bandwagon.

Ananda Chakravarty
BrainTrust

Currently, regional chains are at a disadvantage in part due to economies of scale. I’ll echo Suresh’s thoughts that volume is a critical piece to make it worthwhile. Local and regional chains operate at tiny margins of 3-5% and depend on huge volume to be profitable. Adding large tech CAPEX plus labor and delivery costs is challenging, and payback can take years without volume, making them non-practical and in many cases a drain on their regular business. These chains won’t be able to integrate the delivery capability with their day-to-day operations and will need outside cash (and possibly large debt burdens) to support their initiative.

Last point would be the chains may not see any profitability from their delivery operations at all without high efficiency or strictly local metro operations — cutting out parts of the market and limiting growth of their programs. Huge risk with little view of a reward. One of the reasons companies like Instacart will continue to thrive.

Perry Kramer
BrainTrust
Eliminating data silos is the most critical technical objective in front of every retailer. However, it has the potential to make the most immediate and impactful results in the grocery vertical. During the early phases of the pandemic, grocers and ultimately consumers, felt the impact of disparate data, lack of real time visibility into the supply chain and store operations. To stay ahead of the evolving home delivery and curbside pick up trends, grocers will need a single source of data that can be used to collaborate with suppliers, enable store picking, be used to create additional product locations to optimize new processes, connect category and space planning to the entire supply chain process, and take advantage of AI, machine learning, a common semantic layer in data bases, support for cognitive analytics foundations and all of these growing technologies that must be built on a single set of data to be most effective. Grocery already has one of the lowest margins in retail and the only way to protect it and remain competitive is optimize… Read more »
David Weinand
BrainTrust

All salient points that Oliver made. Our research shows that store-based fulfillment drives a negative margin ranging from 1.2% (3rd party delivery) to 1.9% (curbside). I see three things that need to change for profitability to turn to the upside: 1. The alignment of data as Oliver stated. 2. One view of inventory across the enterprise, and 3. Changes to the labor model, which include more automation and better training.

Lisa Goller
BrainTrust

With margins as razor-thin as beef carpaccio, grocers can no longer afford operational inefficiencies. That’s why smashing data silos is imperative to drive grocery delivery profitability.

Now, successful grocers around the world are evolving from a territorial mindset to a collaborative one. They recognize the long-term payoff of investing in digital information-sharing across their supply chain.

Modern grocery information systems are more like an open concept home than a siloed rooming house. For non-proprietary data, their systems are inclusive, allowing data to flow freely among internal functions, external partners and even consumers.

Sharing a single online source of real-time data prevents relevant information from remaining trapped in fragmented emails, spreadsheets or offline communications. This transparency and unity streamlines communications and boosts efficiency for efforts ranging from private label innovation, to delivering to consumers’ doorsteps.

Bob Amster
BrainTrust

The answer to this particular question is no different than the answer to similar questions: most data available to the retail business have to be highly coupled or integrated. There are very few pieces of available information that are not needed. It used to be very difficult to accomplish such integration or data repositories, but today we have real-time updates, APIs, services we can call, and scalable databases that function well under great loads and activity.

To the answer to the headline: Is there a path to profitable grocery delivery? Yes, charge the customer for it! There is no such thing as a free lunch!

Jeff Weidauer
BrainTrust

Profitable delivery has been hampered from the outset by consumer expectations of cheap or free delivery. Supermarkets have spent the past 30 years pushing more of the labor burden onto shoppers. The two sides are clashing as shoppers expect free delivery while retailers don’t have the technology to overcome the logistical challenges and reduce cost to serve.

Tony Orlando
BrainTrust

Unless you raise your prices, and charge a delivery fee, forget about making a profit. Amazon doesn’t give their groceries away, and their meats are sky high, but because they are Amazon, consumers will still buy it from them.

Restaurants are giving away most of their profits to third party delivery services, and for the life of me, it makes no sense. Providing a service should be something you are compensated for, but with unrealistic demands for free delivery, it makes it difficult for supermarkets to make any money on this service. I’ll leave it at that.

David Slavick
Guest

Shocking that grocery sector remains constrained in these three areas. What are they paying for?

W. Frank Dell II
BrainTrust
Some time ago I was asked to model home delivery cost structures using the Direct Product Profit (DPP) models. We looked at in-store picking, hybrids of in-store for slow movers, and warehouse for fast movers and a small warehouse. In-store picking has little or no chance of being profitable. First, there are the costs of getting the product on the shelf. Then you replace the checker with picking, packing and delivery cost. Store pickup gets closer by not incurring the delivery expense. The hybrid showed promise, but increased inventory and holding cost limited the success. The small warehouse was the best model. Depending on store density, one small warehouse might support 5 to 10 stores. Manufacturers deliver directly to the small warehouse when economics work. Slower movers are back filled from the chain or wholesaler’s distribution center. Layout supports packing, using case flow rack and pick to light technology. Ideal delivery uses a least travel model to reduce cost. Conclusion is, without practical logistic investment and a plan to minimize costs, home delivery will never… Read more »
Sterling Hawkins
BrainTrust

Eliminating silos is not just critical to profitability, but to the operations themselves. With siloed data it’s hard (if not impossible) to get the right product to the right person at the right time on any sort of consistent basis. Scott Taylor, the data whisperer, really has the keys to this kingdom.

But I also see another aspect of this conversation: automation. There are today countless robots, autonomous tools and drones from the warehouse to the last mile that are going to be a huge piece of delivery profitability. I’ve heard that one of the biggest ecommerce delivery companies has contracted for quite a few automated fulfillment centers specifically for home delivery. Reducing data silos is just a necessary starting point to a much bigger game.

Joe Szala
Guest

This is a great discussion. Eliminating data silos and incorporating technology for operational efficiencies will certainly be steps forward. However, as some commenters point out, shoppers have grown accustomed to certain standards of speed and cost for delivery that will make raising fees difficult.

Quite a few retailers that I have spoken with recently are taking a multi-faceted approach that incorporates the above improvements as well as working to improve their curbside experience and it’s share of their eCommerce business.

Doug Garnett
BrainTrust

The myth that an incredible premium service, like grocery delivery should be, essentially, free has been mind blowing.

The path to profitable delivery is to charge enough for it to make it profitable. We must, as an economy, return to sane capitalism.

It is likely that this would reduce the number of people who choose delivery. Somehow, there are folks around who think that’s a bad thing. Why? There’s no reason to attempt to build a money losing business into a highly popular money losing business — which helps the retailer lose more money, faster.

Joe Skorupa
BrainTrust

Why speculate when you can look at Kroger, which increased profits by 57% YoY in the last quarter when grocery delivery was sky high? Walmart’s profits increased by just 3.9% and Target’s decreased by 64% in the same period. Kroger nailed it by investing heavily in analytics, robotics and omnichannel. I wrote about how Kroger did this in a recent blog. One thing I didn’t focus on was pricing. Kroger’s pricing model is brilliant. It keeps prices competitive in-store by enabling shoppers to get sale prices by using their loyalty card. However, home delivery shoppers pay full price and Kroger keeps the difference.

Neil Saunders
BrainTrust

Not to discredit Kroger, but the reason Target and Walmart’s profits dropped so much in the last quarter is largely because of sales mix shifts. Both saw higher priced general merchandise and non-food sales drop sharply while grocery picked up. That severely crimped margins. As such, it had less to do with fulfillment. Target is actually pretty good at minimizing digital costs because it has a high proportion of fulfill and collect from within its online sales mix.

Joe Skorupa
BrainTrust

OK, then. Let’s compare Kroger to Albertsons, which is down 50% YoY profit growth in the last quarter.

Andrew Blatherwick
BrainTrust
It is true that breaking down data silos will help enormously in driving grocers forward and enabling them to become more efficient. However, they also need to break down operational silos too. There is immense value in using the vast amount of data in a retail operation to improve supply chain flows, inventory management and operational management but unless the operational departments are also working closely together, the data flow is of significantly less value. Inventory management does not need to have real-time data to make it efficient, provided that they have good quality data forecasts can be very accurate and the supply chain plan very efficient and effective. There are very few items even in a grocery store that sells more than what is on the shelf in one day, using good forecasting and integrated supply chain and space and assortment solutions can ensure that inventory is optimized and customer service level or availability optimized at the point of sale. Again this is about integrating the operations and the software solutions. Real-time data can… Read more »
Shep Hyken
BrainTrust

Delivery is a convenience. It could be a driver of repeat business, and ultimately customer loyalty, which could increase profits. But delivery by itself, unless you build a margin into it, isn’t necessarily about profitability. Grocery delivery has been around for many years. The pandemic increased its usage and need. Retailers are discovering new ways to streamline their process to enhance the experience and the revenue they bring in from this service.

arunpofi
Guest
3 months 26 days ago

The modern grocery delivery needs a bit of investment to move on from traditional grocery business. However, in the current situation, retailers have to opt-in for technology advancements to sustain as well as getting into a more streamlined process of the business. Online delivery system and POS are most wanted elements in the retail business for aligning the process.

wpDiscuz
Braintrust
"Is there a path to profitable grocery delivery? Yes, charge the customer for it! There is no such thing as a free lunch!"
"The myth that an incredible premium service, like grocery delivery should be, essentially, free has been mind blowing."
"... delivery by itself, unless you build a margin into it, isn’t necessarily about profitability."

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