Peter Van Stolk, CEO of Vancouver-based Sustainable Produce Urban Delivery (SPUD.ca) has been hearing for years that online will never be able to compete with traditional brick-and-mortar when it comes to groceries. In his version of the old story, however, the emperor not only has new clothes, he probably bought them on Amazon.
According to a 2016 report from the investment banking firm Cowen & Company, the online giant will surpass Macy’s as the leading seller of apparel in the United States this year, with predicted sales of US$28 billion. The company is forecasting that number to rise to a staggering US$62 billion— roughly 16.2% of all apparel sales—by 2021.
But what in the name of Jeff Bezos do blouses and Uggs have to do with butter and eggs? Well, Van Stolk says Amazon’s remarkable growth in apparel, a category once considered immune to the threat of e-commerce, should be a cautionary tale for grocers.
“Everybody says ‘Nobody wants to buy food online, because they want to see it and touch it,’” says Van Stolk. “But these are the same people who said 10 years ago that nobody would buy clothing online because [customers] wanted to try it on and see how it looks.”
Globally, consumers purchased US$48 billion worth of groceries online in 2016, according to research firm Kantar Worldpanel, which also predicts that e-commerce will account for 9% of the grocery market (approximately US$150 billion) by 2025.
Grocery e-commerce is well entrenched in markets like South Korea—where it accounted for 16.6% of sales of fast-moving consumer goods (FMCG) last year, according to Kantar—as well as Japan (7.2%) and the United Kingdom (6.9%). North America remains a laggard, with e-commerce representing just 1.4% of the U.S. FMCG market in 2016.
But experts believe Amazon’s push into grocery with its US$13.7-billion purchase of Whole Foods enables it to bring its e-commerce expertise and pricing power to a sector ripe for transformation.
“It just reinforces that Amazon is incredibly serious about food retailing, and that grocery is a strategic category,” says Toronto-based retail analyst Bruce Winder. “Ultimately, it is a seismic shift.”
In the weeks following the Whole Foods deal, there was a spate of announcements about the online grocery space. In Canada, this included Metro’s acquisition of the meal delivery service MissFresh; Walmart’s announcement that it was dropping its $2.97 pick-up fee for online orders; and grocery delivery service InstaBuggy’s introduction of its “in-store pricing” model.
The latter saw the Toronto-based company eliminate both the price mark-ups (of up to 25% on certain items) and the $35 minimum order requirement. It also instituted a $19.98 “picking, packing and delivery fee” on every order.
InstaBuggy co-founder and CEO Julian Gleizer says the move had an immediate (favourable) impact on business—particularly in terms of basket size—as customers responded to what he called “full transparency” on pricing.
Gleizer says the move wasn’t made in response to the Amazon/Whole Foods merger, but was instead designed to help the company build scale.
InstaBuggy debuted in Ottawa in September, with plans to launch in Vancouver by the end of the year, followed by Calgary and Edmonton.
“To be honest I don’t believe [Amazon/Whole Foods] is a threat at the moment,” says Gleizer. “[The deal] just validates that there’s a lot of interest in the space. There’s going to be market share for everybody, so we’re focusing on our plan. We’re comfortable with where we’re at.”
That might not be the case for all grocery companies. In September, it was reported that U.S. online delivery giant Instacart is gearing up to enter the Canadian market via a partnership with Loblaw. According to reports, it was the Amazon deal that accelerated talks between the parties. Editor’s note: This story was published before Loblaw announced it was partnering with Instacart.
Established in 2012, Instacart operates in 39 U.S. states and includes Whole Foods, Food Lion, Target, Costco and Publix among its retail partners.
Nilam Ganenthiran, Instacart’s Toronto-based chief business of officer, directed Canadian Grocer’s interview requests to a U.S. spokesperson. He declined to address the rumoured partnership with Loblaw, instead issuing an e-mail statement: “With increasing demand for same-day grocery delivery, and continued expansion to millions of additional households, we’re seeing more and more grocers partnering with Instacart to implement an e-commerce strategy.”
Loblaw has invested heavily in click-and-collect, with spokesperson Kevin Groh stating publicly that the service will soon be available at 200 stores. However, Winder says home delivery will be the key to success. “Deep down they know it’s coming, but it’s coming a little quicker than they hoped,” he says. “It’s going to start getting to a tipping point where if they’re not careful, they could end up behind companies like Amazon.”
Despite the shift by traditional grocers to embrace digital, Van Stolk believes online startups like SPUD, fuelled by data analytics and largely unshackled from legacy systems, are better equipped to compete in the future marketplace than their brick-and- mortar counterparts. “It’s not a question,” he says.
Launched in 1997 as a subscription-box service that delivered fresh produce to customers’ doors, SPUD has evolved into an online grocery store specializing in local and organic food. It currently serves key Western Canadian markets including Vancouver, Victoria, Calgary and Edmonton, racking up nearly 500,000 deliveries in 2016.
Research indicates consumers increasingly want everything now, and are willing to pay a premium for the privilege. According to a 2016 report by McKinsey & Company entitled Parcel Delivery. The Future of Last Mile, the market for same-day and instant delivery will grow to a combined 20% to 25% share of standard parcel revenue by 2025, up from less than 1% currently. The report notes that a quarter of consumers are willing to pay “significant premiums” for same-day or instant delivery.
While delivering groceries adds a layer of complexity for conventional grocers, the industry is increasingly catering to customer demand. The McKinsey & Company report notes U.K. grocers such as Tesco, ASDA and Sainsbury’s are building up their delivery fleets to handle increased e-grocery orders as they also move to same-day delivery.
Perhaps the best answer to the question of why traditional grocery retailers are suddenly embracing this potentially disruptive new model can be found not in how consumers are behaving, but on Wall Street and Bay Street.
On the day Amazon’s purchase of Whole Foods was announced, the stock prices of major U.S. grocery retailers including Walmart, Target and Costco plummeted, with about US$22 billion in market value wiped out in a single day. In response, grocers have been introducing new and innovative ways of meeting the changing customer demands.
In September, Walmart in the U.S. announced its partnership with smart lock startup August Home on a test that enables it to deliver groceries not just to the customer’s door, but right to their refrigerator. If the customer isn’t home, the delivery person gains access to their house via a one-time passcode, while customers can watch the whole transaction via surveillance camera.
Not to be outdone, Amazon is launching a new service (for its Amazon Prime members in 37 cities) that also allows for delivery of packages when customers aren’t home. The Amazon Key service works with a camera and Wi-Fi-connected lock, and in-home delivery is enabled via the Amazon app.
Daryl Porter, vice-president of omnichannel and online grocery for Walmart Canada, says the Walmart test is one of many being conducted by the retail giant as it looks to address growing consumer demand for convenience. “It doesn’t mean we’re going to scale some kind of operation to deliver to fridges,” says Porter. “Maybe, maybe not. What we’ll do is learn from some of these projects that are happening in the U.S. and, understanding that Canadian customers are completely different, make decisions that make sense for Canada.”
In light of its U.S. counterpart’s fridge delivery program, Walmart Canada’s recent efforts in the online grocery space seem far more prosaic—and, for some, a lot less creepy.
In April, the company debuted a new service that enables customers to order groceries online and have them delivered via crowdsource delivery services such as JoeyCo (slogan: “We deliver. You relax”).
The retail giant has also partnered with SmartCentres’ Penguin Pick-Up program, which enables customers to shop online and pick up their order at one of the company’s refrigerated storage lockers.
“It’s a strategic partnership that allows us to scale delivery without having to invest in infrastructure around home delivery,” says Porter. “We don’t see this as all of our customers will just buy online … we see this as getting to a place where, based on the need at the time and what they’re shopping for, they’re going to use our services in different ways. The future is unknown in terms of how much adoption we’re looking at, but we’re focused on delivering propositions they’re telling us they like.”
This article appeared in Canadian Grocer‘s December issue