Source: Kroger ClickList
Will competition force all grocers to offer free store pickup?
With Walmart, Target and Whole Foods all offering free grocery pick-up, should Kroger and other traditional supermarkets stop charging as well?
Kroger’s ClickList pick-up program charges $4.95 for regular orders and $7.99 for expedited ones in most markets. (Walmart’s and Target’s pick-up promise excludes perishable items.)
A note from UBS that came out last Wednesday estimated that offering free-in-store pickup would cost Kroger five to 10 cents a share. The calculation assumes one to two percent of Kroger’s sales are purchased using the service, the average order is $100 and average fee is $4.95.
“While we don’t expect Kroger to change its fee structure in the near term, we believe there’s a chance it may revisit it in the next few years,” UBS wrote, citing pressures from Walmart and Whole Foods, according to Barron’s.
UBS noted that Kroger may be able to offset its margin pressures through the automation and best practices upgrades it is instituting with the help of Ocado, the British e-grocer. Under an exclusive deal reached in May, Ocado is developing automated warehouses for Kroger in the U.S.
UBS’s note came out a day before shares of Kroger fell 10 percent after the grocer reported second-quarter earnings that missed Wall Street’s targets. The comp growth of 1.6 percent (excluding gasoline sales) versus strong mid-single-digit growth in grocery for Walmart and Target in the quarter was an indication that Kroger is losing share to the discounter giants.
Analysts attributed the growth in grocery seen at Walmart and Target to investments the retailers have made in pricing, assortment quality (including private brands), as well as technology, including online and store pickup.
Kroger’s digital business, which includes ClickList and home delivery, was a bright spot in the quarter, up 50 percent.
Whole Food doesn’t generally compete with Kroger in its markets, but Amazon’s ownership may change that. Last month, Whole Foods launched grocery pickup, including perishables, for Prime members at select stores. Orders are free over $35, $1.99 under $35, and $4.99 for 30-minute pick-up with no minimum order.
Free in-store pickup is fairly standard across apparel, department stores, home improvement and office supply stores. Supermarkets generally charge between $4.95 and $6.95.
- Grocers: Here’s How More Free Pick-Up Service Might Hit Profits – Barron’s
- Ocado to automate Kroger warehouses in exclusive U.S. deal – RetailWire
- Kroger Reports Second Quarter 2018 Results – Kroger
- Kroger results show that Walmart and Target are taking bigger pieces of the grocery market – MarketWatch
- Kroger results disappoint, especially compared to Walmart and Target – Bloomberg/Durango Herald
Discussion Questions
DISCUSSION QUESTIONS: How likely are market forces to demand that grocers offer free in-store pickup over the next couple of years? What would you do if you were Kroger or other grocers competing with Target, Walmart or Whole Foods for customers interested in picking up their grocery orders at the store?
Poll
BrainTrust
Neil Saunders
Managing Director, GlobalData
Cathy Hotka
Principal, Cathy Hotka & Associates
If you ask customers, the overwhelming response is yes to free pickup. However, there is a huge margin challenge in groceries versus apparel and other categories where pickup is free. As the other major players like Walmart, Target and Amazon push the envelope of free pickup, speed and convenience become factors which will drive Kroger to offer some variation. Kroger should in fact be able to leverage Ocado to create a competitive advantage and offset most of the margin loss. In the world of food, the last mile is increasingly pick up at the store. And free is the most powerful four letter word for customers.
The direction of this is very clear: order online and pickup in-store is becoming more of a battleground. That inevitably means fees for the service will come down or be eliminated.
The issue is that there is a very real cost to picking products for customers. It is time-consuming and labor intensive. Even if the process is automated, there are still costs involved, not least the capital cost of the new warehouse equipment.
I have said it before and I will say it again, the move to digital in grocery is margin and profit eroding. Unfortunately, having a digital proposition is also a necessity in terms of maintaining and growing market share.
In-store pickup will become table stakes for grocers, but it might not be free for some time. Justifying the costs on tight margins for grocers will continue to be challenging, but demand for the service is high and customers will come to expect this option, free or at-cost. Grocers unable to build their in-house infrastructure will rely on third-party providers for support. Companies like Curbside, Instacart, Shipt, et. al. will offer partial or complete services including home delivery. Grocers must find ways to continue to make it easier for the customer or be left behind.
The shopper wants this kind of service, and of course doesn’t want to pay extra. But free is rarely free, the question is are the costs to the consumer going to be transparent? My bet is that these expenses will eventually come out of margin, just like the free use of a credit card (with all of its hidden processing fees and points costs), “free delivery” and anything else the retailer has to pay for that the consumer doesn’t see as a direct cost. Eventually those consumers that aren’t using this “free” service will end up paying for it in higher product costs.
Neil Saunders is right. There are inescapable costs to having store associates pick, pack, refrigerate and freeze grocery items for pickup. Those costs will either be recouped through fees, or by raising prices for everyone. Customer pickup is not table stakes in 2018, yet.
All retailers, grocers included, will need to match the competition and not charge for BOPIS. Non-grocers have set the standard and consumers now expect this to be a free service. As more grocers like Target, Walmart and Whole Foods offer grocery pickup for free, it is quickly becoming table stakes. In yesterday’s Walmart blog on RetailWire I mentioned that their drive up kiosk was a game changer and after my overnight reflection on the subject I still feel the same.
The bigger challenge is pricing grocery delivery appropriately to protect your margins and your customers. As competition heats up for grocery delivery, grocers will offer special deals on delivery and it will become a financial dilemma for grocers.
The expectation for free store pickup has been held by a small community of shoppers for quite some time — and will continue to be. Grocers will be forced to comply and align their offerings to their customer’s expectations. Click and collect is taking QSR and fast casual by storm. As the lines of demarcation between grocery, retail and restaurant continue to blur (and disappear!), click and collect (BOPIS) will become standard operating procedure in due time.
This is just another “me-too” pressure that retailers will have to compete with if they are to thrive in the future. Other conveniences have taken hold in the industry as “table stakes,” and this will become another example of that.
Remember when “free shipping” was an issue and everybody wrung their hands on how retailers were going to afford it? Well, they did. There was no choice. They found a way. .
Free pickup is inevitable and the retailers will find a way to make the picking process more efficient. I could give this problem to my students and they could come up with multiple solutions.
Consumers understand that when they ask for something extra (like someone walking the store pulling individual items from the shelves), paying a realistic fee for it makes sense.
So I marvel when retailers are told to add premium services for free. Fundamental economics and consumer marketing make it clear that it’s a bad idea — it sets up unreal expectations that will come back and hurt the retailer in the future.
From what I see, a reasonable fee for the services will not hurt a retailer competitively — with ordinary shoppers. Unfortunately, we’re in a headline-driven world. And it might lose them the “headline battle.” But the headline battle is over fake issues — just consider how it’s now clear that the “cheaper” prices at Whole Foods result in $1.50 savings on a $400 basket. Amazon won that headline battle and consumers lost.
Every study we’ve done with traditional grocers’ customers has shown that they do not like to shop for groceries, especially the middle of the store, but since they have to, they chug reluctantly through the process in a rote manner. It’s just no fun. So …
BOPIS and ship to home will change that factor forever, and if traditional grocers don’t want to join in they will pay the same price many retailers did when faced with Amazon’s much easier/more convenient/customer-oriented operation: a lot less business, traffic and possibly the end of the road. And to make matters worse the big players, like Walmart, are already competing with Amazon in such a manner. So again, NOT playing is a sure-fire losing proposition.
“Like” is not the issue.
Instead: Do consumers find value shopping for their own goods? Do they find value browsing the shelves and periodically finding new items that offer new things to their families? Do they prefer to pay the hassle cost in order to choose their own fruit and vegetables to get the ones they want?
Of course they don’t “like” shopping in the way they “like” going to a hot new movie. But life isn’t lived around “like” and retailers aren’t threatened by a lack of “like.”
As with many new service ideas, free order pickup starts out as a test, then becomes part of the regular offer. Along the way, it moves in the industry from a need to win to a needed to play. I am not sure where it is in the consumer’s mind at the moment but as more and more offer free pick up, it continues to edge more towards the needed-to-play end of the continuum.
Kroger may have many worries, but “losing market share to Target” is far, far down on the list.
Not necessarily, when it comes to shopping, consumers are more willing to pay a premium if the added service is seamless and more enjoyable then the free alternative.
Grocers have seen this first hand as pricing remains a very important factor for the shopper, however, it’s not the only one they take into consideration when selecting a grocer. Things like cleanliness, product assortment, the checkout process all play an important role; a small pickup fee won’t erode shopper loyalty.
When the consumer demand free in-store pick up it will happen. However, the concept has to become widely accepted and practiced — and consumers are not there yet. There are other competitive and more visible pressure points that will precede free in-store pick up.
At this early stage, it’s quite possible that a small fee for pick-up becomes the norm instead.
Forcing a free service which is very costly is something many small retailers can not provide and the mega retailers know it. Even if it costs millions in losses to provide this service, eventually the small stores will go under, thus switching more market share to the mega stores.
I’ve studied this service for 3 years, and ran all the numbers on real cost of delivery. Unless they raise the prices on the grocery bill by at lest another 15%, they will not turn a profit, as the profit margins are the lowest in the industry.
I actually live this every day, and I deliver catering safely in my van with a delivery charge, as Walmart doesn’t provide this, since they don’t do what I do.
This won’t end well for many small town supermarket owners, and they better start working hard on creating incredible perishable foods that the competition simply can not do. You can’t win the staple grocery war, so focus on fresh, and provide world class service.