The grocery industry, one of the most competitive and market reactive in the retail sector, faces a critical moment. Pandemic shopping habits changed dramatically by force, and operators had to pivot and adapt quickly as customers curtailed trips to the grocery store in favor of online shopping and delivery.
Revenues rose as much as 35% from the previous year as home-cooked meals, stress baking and panic buying ensued during 2020. The coronavirus elevated fiscal sales by $4.6 billion. As events unfolded, e-commerce platforms, store operations and supply chain logistics were figured out in real-time. Profit margins in the grocery industry have always been thin because of intense competition, and operators often sought promotions to entice customers into their stores. Industry analysts are wondering if consumer habits, developed out of necessity, will carry forward as we move past the pandemic era. Will we stay glued to our phone apps and Instacart? Or will the visceral experience, and possibility to pick our own fruits and veggies, entice us back into the grocery aisle?
Doug Munson is the founding Principal at MTN Retail Advisors, a national primary grocery retail research and data collection firm that works with major grocers to help retailers, developers and investors determine the best locations for grocery stores.
Munson says, “I do see a demarcation between publicly-traded and privately-owned grocery companies and their business focus. The large publicly-traded grocers are investing heavily in e-commerce and online fulfilment to support that segment, which averages 8-10% of total store sales. To that point, the physical store is not going away. There are approximately 8,000 exclusively-online retailers looking to establish brick and mortar locations.”
High land and construction costs and a heavy-handed entitlement process is slowing down development. Darren Pitts, Executive Vice President of Velocity Retail Group in Phoenix, Arizona foresees an environment that favors a large amount of built-to-suit and small development, along with value-add opportunities that redevelop existing shopping centers.
Moving toward a period of normalcy, leading chains will need to reinvent themselves in order to preserve and sustain additional sales they achieved from the pandemic. Other headwinds include the inflationary environment, supply chain hiccups and a constricted labor market exacerbated by the “Great Resignation.” Munson sees the latter as a pain point that is not going away any time soon.
“Grocery is essential to the economy, as we quickly realized during the pandemic. While supply chain disruptions have eased somewhat as we move away from the crisis, we still face considerable challenges in hiring. The labor market is very tight, and grocers are having a tough time finding employees. I feel this will continue to be an issue for retailers for some time to come.”
Emerging Trends and Technology
Store-within-a-store concepts will continue to emerge as large grocers strike deals with retailers in alternative categories to create new segments of merchandise under their roof. Consumer brands in popular categories such as clothes and household goods will create interest, differentiation, and expand margins.
Kansas City-based Ball’s Food Store has introduced a CBD store-within-a-store in its Price Chopper supermarket through a partnership with American Shaman, a provider of high quality CBD tinctures and beverages. The store environment features botanical prints, a small seating area to test products and consult with brand representatives, and wood-toned finishes to reflect the brand’s focus on natural ingredients.
Darren Wood, Principal of The Providence Group of Charlotte, North Carolina, spoke at the recent X Team annual meeting about the integration of grocery store technology, both in and out of the store. Wood is a U.S. tenant representative for Aldi Foods, the German family-owned discount supermarket chain with 200 stores in 15 states domestically. They are currently testing frictionless checkout technology in Utrecht, the Netherlands as a pilot to implement on a wider basis. That parent division, Aldi Nord operates 500 stores throughout the country. The technology was developed by Trigio, an Israel-based computer vision startup.
Wood cites Nourish + Bloom, as an independent grocery retail innovator, based in the States. The organic market and bistro integrate cutting-edge technology and maintains a fleet of friendly mobile robots for grocery delivery. The company’s first store is located in Fayetteville, Georgia, an underserved community 22 miles south of Atlanta.
The 1,500-square-foot store is the brainchild of married entrepreneurs Jamie and Jilea Hemmings whose autistic son and his food-related issues, sent them on a mission to provide fresh, healthy food for the black community—often lacking in poorer neighborhoods. They plan to expand their concept further into Georgia and Florida. Partnering with Microsoft, who helps offset the cost of technology investment, the store promotes itself as the first African American-owned autonomous grocery store, with robotic delivery in the world. The shopping journey is frictionless and minimizes contact. Shoppers download the store app, input their payment information, and scan a QR code to enter through an automated gate.
“Smart shelves” subtract the weight of each item picked and records its purchase in a digital cart. Thirty ceiling cameras track shopper’s physical movement throughout the sales floor. One caution—if the customer fails to return any rejected item to its original shelf, it stays charged to their account as a purchase.
Store guides are on hand to help customers, and a quick phone scan checks them out. The app tabulates the order and pays electronically. The receipt is emailed. There are no lines to wait on, just a seamless experience which ends with an exit through an automated gate.
Amazon Fresh, who currently has 19 stores across six states and Washington, D.C., according to their website, was one of the first small-format grocers to introduce this technology to consumers. The grocery chain’s deep-pocketed parent absorbed the considerable R & D technology costs as a loss leader. Wood notes, “It will be interesting to see how many companies can buy this technology in the future.”
Advances in the fulfilment center are improving efficiencies, managing inventory, costs and reducing waste and energy-use. The need for large warehouses and smaller, localized-sites to create micro-fulfillment centers, has transformed the industrial sector into the reddest hot and most active in commercial real estate. Ocado Group, a U.K-based online grocer, builds automated customer fulfilment centers (CFCs) using sophisticated AI-powered, demand-forecasting engines, high-speed picking bots and a 3D grid of crates packed with items. The company has partnered with Kroger, the largest U.S. grocery chain, to build several automated giant CFCs to meet the demand for online grocery. Ocado’s solution, the Ocado Smart Platform (OSP), offers grocers an end-to-end e-commerce, fulfilment and logistics platform.
Kroger’s e-Commerce online delivery earnings outperformed during the pandemic. The company will dedicate significant resources to accelerate e-Commerce under its strategic growth plan. Currently Kroger operates 45 warehouses. They have partnered with Ocado to build 20 super warehouses. The first of these debuted mid-April 2021 in Monroe, Ohio. The $55 million, 375,000-square-foot facility contains over 1,000 robots alongside 400 human employees to pick, sort and move items controlled by a proprietary air-traffic control system to fulfil customer’s orders. Algorithms regulate the pick-and-sort process and robots pack groceries intelligently, balancing bag weight to reduce plastic use and waste. The center is forecast to process as much as $700 million in sales annually, equivalent to 20 brick-and-mortar stores.
Omnichannel Retail Strategies
Omnichannel retailing enables consumers to interact with brands through both online and offline channels, enjoying a unified experience. Grocers are incorporating this strategy to allow shoppers to order online and pick up at the store, providing choice and flexibility. Shopping habits may be permanently changed, considering the popularity of OGP (Online Grocery Pickup) and BOPIS (Buy Online Pickup In Store). During the pandemic almost half of the top 500 retailers with brick-and-mortar operations were offering BOPIS, a rise from less than 7% pre-pandemic, according to a Digital Commerce 360 survey taken August 2020. Amazon at Whole Foods, Walmart and Kroger offers a BOPIS option to customers.
Pandemic-driven services like curbside pickup and same-day delivery are expensive for retailers to operate and eat into profitability. The BOPIS model helps offset delivery expenses and benefits grocers as it gets consumers into the store—reducing online cart abandonment and capturing brand loyalty.
Major markets have begun to roll out omnichannel grocery store prototypes that function as both a physical store and online fulfilment center. Workers quickly pick items with hand-held inventory guns identified by wayfaring signage. Inventory is restocked speedily by moving merchandise from the back-end fulfilment area to the sales floor, allowing consumers to get their essentials faster.
Grocers are partnering with nonprofit and government entities to meet the needs of “food deserts.” A food desert, or healthy food priority area, has limited access to affordable and nutritious food. The USDA’s Economic Research Service previously identified more than 6,500 food census tracts in the United States that equates to approximately 13.5 million people with low access to sources of healthful food. In early 2021, H. R. 1313 (Healthy Food Access for All Americans Act) was introduced to stimulate investment and healthy nutrition options in these communities.
However, the most viable and agile solutions seem to be emerging from grass-roots organizers, civic leaders and business partnerships. For example, when Buy For Less, suddenly shut its doors in northeast Oklahoma City in 2019, its primarily black community lost its only full grocery option. Working closely with community nonprofit, RestoreOKC, Homeland Stores was able to open a 6,800-square-foot grocery store in April 2021. It is about one-third of the size of an average store, and will sell a seasonal supply of fruits and vegetables grown at the nearby RestoreOKC urban farm by local middle and high school student interns. Corporate suppliers with food assistance programs can sell grocery items with deep discounts to the store. This particular Homeland Store will provide an invaluable resource to the community, and include nutrition, cooking and shopping classes.
Consumers and competition will continue to modify the grocery industry environment, as we move into what’s next. Technology will continue to play a major role in shaping every aspect of the industry, however the demise of physical stores is largely overblown. The U.S. Department of Commerce census bureau news reports that while 2021 e-commerce sales did increase 14.2 percent year-over-year, it still accounts for 13.2 percent of total retail sales. There is a sense that consumers like the convenience of their phone apps, but also are beginning to welcome the communal experience of shopping after a long and isolating pandemic. Chains and independents will have to willingly embrace innovation, as different choices, challenges and opportunities present themselves.