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Grocery represents one quarter of U.S. retail sales; however, with the recent entry of Amazon and major mass merchandise players such as Walmart into online grocery, the industry as we know it will never be the same.
All signs point to a critical inflection point in this market, including the success of disruptive new business models such as Instacart and asset-light delivery models like UberRush that enable home delivery and support the acceleration of online grocery. The industry is also seeing double-digit growth in the prepared foods category, reflecting more single households and a key facilitator to increased online grocery sales.
The increase in mobile shopping, along with increased price transparency, is also disrupting traditional grocery selling models. The Google Shopper Marketing Council reports that 89 percent of U.S. smart phone owners are already using their phone in-store to compare grocery prices, locate products and get nutritional information. The questions facing today’s grocers and consumer packaged goods (CPG) manufacturers are: “What to do online, when and how?”
These questions pose a serious quandary to an industry that represents the last bastion of traditional brick-and-mortar retailing. Until recently, the industry was qualified by:
- Anemic online sales and regionalized pricing
- Store traffic still largely driven by paper-based flyers
- Assortments optimized for single pack sizes and sub $5 individual purchases
- Customer propensity to want to touch and feel the merchandise, especially perishables
- A mass market approach – five generations shopping side-by-side with limited segmentation and personalization beyond store location
In addition, there’s the added challenge of already low margins – traditional grocers typically have had operating margins below 2 percent.
While the digital grocery shelf may be daunting, it is not uncharted territory. Groceries have been online in the U.K. for years, largely the result of an early price war among the major U.K. grocers. The good news for U.S. grocers is that Amazon has had limited success in the U.K. market, which means there is plenty of information for retailers to learn to get a head start in the U.S. Here are some best practices to help grocers and CPG manufacturers navigate online grocery growth in the U.S. market:
Survey the online grocery landscape
Grocers should find out who is selling which products, where and at what price point. Armed with competitive pricing and assortment information, grocers can identify incremental margin and sales opportunities – online and in-store. Additionally, CPG’s can better determine the relative effectiveness of different grocery channels including assortment coverage, availability, pricing and brand compliance. CPG’s can also address threats to their brand and channel effectiveness by identifying and addressing marketplace threats.
Pick your online categories
Not all categories are equal, especially online. Understand which categories are leading in online penetration – today, these include breakfast foods, snacks, coffee and pet food. One effective way to gauge online category success as well as future potential is to leverage online keyword searches as a proxy for online consumer demand. This also helps determine SKU elasticity online vs. in-store. Grocers need to optimize their store and online assortments to reflect “trip drivers” vs. “replenishment purchases.” For CPGs with products in key online categories, there’s an opportunity to grow consumption with larger pack sizes and brand investment.
Package and price for online
This is typically where Amazon wins – they understand and use larger pack sizes at higher prices to facilitate online sales and mitigate the cost of shipping. A typical grocer starts with exactly the opposite model – single packs at low individual price points and an aversion to home delivery. Aside from a missed opportunity to grow consumption online, CPGs are vulnerable to having their products, especially those intended for the club channel, repackaged for online sale with adverse price, distribution and brand implications. CPGs and grocers must rethink packaging and pricing for online success.
Price-per-unit vs. price-per-volume?
Whether you’re a retailer, manufacturer or even a shopper, understand the game being played. Price-per-unit (i.e. price per cereal bar) is typically how retailers navigate for online channel success. Price-per-volume (i.e. price per ounce) helps CPGs understand optimal online pack sizing and pricing.
Embrace zone-based strategy
Grocery and regional pricing are natural allies. With online penetration and an in-store assortment optimized for immediate gratification, there’s even more zone upside potential. Online zones need to reflect the local supply chain reality and can be blurred from a customer perspective with free or subsidized shipping. For CPG’s, online represents an opportunity to create regional products and brands to reflect different geographic digital penetration and shopping preferences.
Manage share of digital shelf
Grocers should avoid over-concentration on one or two online channels. CPGs should be especially wary of the “Amazons,” which include Amazon.com, AmazonFresh, AmazonPantry and Amazon Marketplace. For retailers star struck with models like Instacart, recognize that this is also a form of channel disintermediation and loss of customer interface and perceived value.
The age of the U.S. digital grocery shelf has arrived – equal parts opportunity and threat for retailers and CPG manufacturers alike. The key is to be prepared and a have a strategy for success.