E-commerce growth hot for grocery, but challenges loom

Online grocery sales are increasing but retailers face challenges ( Walmart )

There is no disputing that e-commerce sales of groceries are expanding, but one supply chain consultant says retailers face several challenges as click-and-collect and home delivery sales expand.

From current levels near 3% of total grocery stores sales, e-commerce sales of food could soon climb north of 15% to 20% total grocery sales in just a few years, said Jim Barnes, co-founder and CEO of enVista, a supply chain consulting service in Carmel, Ind.

“The reason why I say that is because a good, well-run (non-grocery) retailer is now pushing north of 20% of sales from online sales,” he said. “The unfortunate thing is for grocery is that they are just a little bit behind the times, compared to a lot of more general merchandise companies, who have been in e-commerce since the early 2000s.”

But growth rates for digital sales of grocery are rising fast now because of the widespread availability of click-and-collect and home delivery. Food retailers are growing as online sales 60% to 70% annually compared with year-ago levels, he said.

“The potential is good,” he said, predicting that online sales of food could account more than 10% to 15% by 2022 or 2023.

Picking the order

Fulfilling online orders in a standard grocery store isn’t easy, so some retailers are changing their strategy, instead using dark stores (not open to the public, used to fill orders) or micro-fulfillment centers.

The average online grocery order has about 30 stock-keeping units to collect, compared with two or so SKUs for an online clothes order.

“When you are picking that kind of order in a store that has 60,00 or 70,000 square feet of merchandise that hasn’t been (organized) for the best pick path sequence, you are going to lose money,” he said..

Shoppers who pick items for an online grocery order generally can’t pick more than 60 SKUs per hour.
With no real-time inventory in typical stores, substitution rates are higher; perhaps only 25% to 30% of orders are “perfect” picks with no substitutions.

“That’s a huge negative for the customer experience,” he said.

Limited assortment micro-fulfillment centers for online orders with some adjacency to high performing stores may be a viable solution, he said. 

While offering better pick efficiencies, “dark stores close to current retail store locations may cannibalize sales those grocery stores. In addition, it is impossible for those dark stores to stock the range of items in a typical grocery store.

“The challenge with dark stores is a challenge in fulfillment,” he said. “If you look at most grocery store chains, they’re sitting well north of 70,000 SKUs in their stores; it is very difficult to put 70,000 SKUs in a 25,000-square-foot space.”

That means orders might have to be fulfilled using both dark stores and supermarkets.

Produce and other perishable food in online orders offer challenges in how they are collected and kept in the proper temperature range.

“I think the real future from a cost productivity (perspective) is to automate,” he said.

Automation also prevents some challenges for fresh produce items, with some items price by the each and others by the pound.

Even so, Barnes said the high gross margins for produce compared to dry goods (25% to 5%) will keep fresh produce prominently in the mix for online orders.

“There’s an incentive to put those high-margin items in the basket, including fresh produce,” he said.

“(Retailers) aren’t making money on Cheerios; they are making money on beef and bananas.”

 

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