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Recent Investments by Amazon and FreshDirect Highlight the Growing Importance of E-commerce Fulfillment Operations

In late July, FreshDirect announced that it would be partnering with Fabric Robotics to build a micro-fulfillment center (MFC) in Washington D.C., providing same-day delivery to area customers. The online-only grocer has traditionally only done next-day fulfillment, but is planning to expand same-day throughout the Northeast Corridor. This comes shortly after Amazon’s announcement that they have now converted 6 Whole Foods locations around the country into dark stores to support E-commerce fulfillment (via Retail Dive and Progressive Grocer). These are just 2 examples of retailers recognizing the shifting channel dynamics and making investments in dedicated E-commerce fulfillment centers to keep pace.

In a new whitepaper (free for download Here), we explore the growing importance of efficient E-commerce fulfillment in the grocery sector and discuss the pros and cons of the 4 most popular E-commerce fulfillment models. Highlights include:

  • We discuss the backdrop of the global coronavirus pandemic and how it has led to massive increases in at-home food consumption and in grocery E-commerce demand and penetration.
  • We discuss the 4 most popular fulfillment options that grocers are using when it comes to servicing their E-commerce customers: in-store picking, dark store models, micro-fulfillment centers, and centralized fulfillment centers.
  • We explore the current tradeoffs of each fulfillment model when it comes to picking and labor efficiency, the order volume one facility can service, the SKU selection supported, last-mile delivery efficiency and cost, and CapEx requirements.
  • We explore the latest profitability estimates for each fulfillment model, how to choose the best model for your business, and the growing number of tech advancements that will continue to revolutionize E-commerce fulfillment.

To download this free whitepaper, follow this link.

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FAST: Future Proofing The Retail Food Industry

Understandably, the retail food industry has been consumed with responding to current events. With a global pandemic rocking the market, we have seen an unprecedented impact on the retail industry in general and the food industry in particular.

For years, I have focused on the chart below that measures “share of stomach”, the percentage of sales on food at home (generally retail food) and food away from home (generally foodservice). Not surprisingly, we have seen a long and steady march towards consuming more food away from home. Around 2011, the two lines diverged with food away from home pulling away from the pack. Busy lifestyles have led to the growth of foodservice and more convenient ways to consume food. Of course, supermarkets have gotten into the act, adding restaurant style food, leading to the growth of grocerant style formats from Whole Foods to Wegmans. With a minor blip during the last recession, this trend has held remarkably constant.

Figure 1: Jefferies USA April 2020

And then we had a pandemic. Restaurants shut down, most states issued shelter in place orders and improbably, we had a resurgence in food at home because, hey, it was the only option. Americans began cooking again, and there has been a surge in center store products like baking goods, fresh products (meat and produce) and canned foods. All of a sudden, our kitchens and our supermarkets were on trend.

For a period of time, this chart will likely remain inverted and there are estimates by the investment banker Jefferies that this trend could continue over the next 18 months. Health concerns, governmental regulations, and a recession could all come together to keep restaurant industry revenues suppressed with some estimates suggesting that 5-15% of restaurants will close due to the pandemic.

Seemingly great news for supermarkets but conditions are getting tougher there as well: restrictions have hampered supermarkets ability to sell prepared foods and bakery products, an important component of their sales mix and margins and e-commerce continues to rise, often at the expense of profitability.

Figure 2: Jefferies USA April 2020

FAST: The Development Of The E-Store

As a result, both restaurants and food retailers will need to reinvent themselves and start thinking about the future. I collaborated with Natalie Shmulik, who is CEO of Chicago-based The Hatchery, a food and beverage incubator. As Natalie suggests, “while the food community is severely challenged, it is also an opportunity for innovation and reinvention”.

FAST is an acronym that helps describe and explain what future-proofing the food business might look like:

Figure 3: The E-store as demonstrated by the FAST acronym

Every industry is going to be thinking about future-proofing their business concepts, especially those who have physical spaces. This is a unique opportunity for architects and designers to start carefully thinking about how every square foot is used and why.

Natalie introduces the concept of the “E -Store” to demonstrate the principles of FAST. This new classification will force an immense amount of rethinking and innovation. She also correctly notes that while “the food industry is uniquely positioned, other brick and mortars will be taking note. Other industries will begin exploring how to transform their space utilizing E-store protocols and we are likely going to see more beauty shops, fitness centers etc… including food products and transforming into holistic marketplaces”.

The E-store mindset will shift how we build, design and use food spaces now and in future. Every company will be thinking about how they can continue to function if and when essential business restrictions are enforced again in the future, or, if consumer patterns continue to shift and adopt to new behaviors.

What are some examples of companies who are adopting FAST principles?:

Flexible

A major lesson of the pandemic is the need to be able to change your business model quickly. Whatever we think we know about the future, it will inevitably change. Being able to flex, quickly, is paramount.

Farmers Fridge. Chicago-based Farmers Fridge was already an innovator, bringing consumers healthy and fresh food through high tech vending machines at major traffic areas like airports and office buildings. Practically overnight, as demand in traditional venues slowed dramatically, the company shifted to catering (they’ve done a remarkable job of servicing health care workers in hospitals) and home delivery.

Figure 4: Farmers Fridge pivoted from airports and office buildings to hospitals and home delivery

Alinea Group. This heavily Michelin-starred restaurant chain (Alinea, Next, Roister) had a problem—with dining rooms closed and a restaurant concept that relies heavily on a high touch, high service experience. One of the founders is a pioneer in restaurant technology (Tock Reservations) and was able to shift to a To Go experience early in the pandemic. Remarkably, they are serving significantly more customers (10-20x the number of customers previously) at prices that are a fraction of the dine-in experience.

Figure 5: Alinea preps for takeout orders

Agnostic

It should go without saying that being channel agnostic is a must have requirement for the future. For restaurants, this means lessening the reliance on any one channel (in-store dining, pick-up, delivery) and being able to build a flexible platform for consumer demand. For supermarkets, handling the surge in e-commerce requires a different type of fulfillment model than simply shopping in the aisles.

Raley’s. The Sacramento based grocery chain converted a closed unit to a “dark” store dedicated to e-commerce fulfillment. As e-commerce demand has risen 3-5x during the pandemic, in-store picking may no longer be the most viable solution to handle demand. Several other grocery retailers are employing robotic technology (micro-fulfillment centers) or adopting stores to become fulfillment centers. Amazon’s much anticipated first full grocery store in Woodland Hills has become a dark store as well.

Canlis. The Seattle institution went from a fine dining restaurant to creating a makeshift drive-thru, a bagel stand, and delivery of family meals. The homepage of their website says it all… In early March, we shut down our dining room. Fine dining is not what Seattle needs right now. Instead, we’re bringing the food to you. We’ve got this, Seattle.

Prairie.  In San Francisco, Prairie converted their restaurant into a general store.

What will be interesting is how much of this continues when normalcy returns. It is quite likely that many of these business options will remain viable in the future—less in-store seating and more ways to pick up and deliver.

Safe & Sustainable. One of the unfortunate consequences of the pandemic is that there are seemingly conflicting positions. Grocery stores stopped allowing customers to bring in their own bags and loose product is now being packaged. This seems to work counter to the long growing trend of sustainability.

The Wally Shop. This online grocer features bulk products shipped in reusable packaging which the consumer sends back when they are done.

Forager. Forager connects farmers with retailers to facilitate buying local. One of the saddest aspects of the pandemic is the slowdown in demand in restaurants which has led to significant food waste. This service establishes local connections between farmers and retailers, driving more food sustainability and keeping food dollars within the community.

The Dorian. This San Francisco restaurant uses compostable takeout containers in paper bags without utensils (unless requested) to reduce plastic use and repurposes unused fruit and fruit rinds and dehydrates them to use as garnishes for cocktails. With delivery and pick-up continuing to grow, retailers are going to need to rethink their approach to being both safe and sustainable.

Technology Focused

Technology will be the great enabler to power all of the trends above. Companies will need to find new ways to profitably serve customers and allow for flexibility, channel diversification and safe and sustainable practices. This likely means new ways to ensure safety and new ways and partnerships to facilitate the future.

Robots that check aisles for out of stocks, unattended pick-up stations (lockers of all sorts), and micro-fulfillment centers to drive better picking and better technology to facilitate pick-up and delivery are going to become the norms. As will new standards for safety and security. Expect salad bars to go away (for now) and for our samples to be packaged.

Magnolia Bakery.  A “cleanse portal” where customers stand under a UV light before entering the store has been installed at Magnolia Bakery.

Starbucks. Starbucks is rethinking its real estate strategy. Less in-store seating and more pick-up only locations facilitated by new technology. They have also partnered with Uber Eats to offer delivery.

Figure 6: Pick-up is prominently featured at Starbucks

The future of food will look very different than it does today. Being FAST will be the only way to future proof the business.

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Beyond the Pandemic: 4 COVID-related trends in food retail that are here to stay

The COVID-19 crisis has quickly swept over the US, amassing over 1.5 million cases and 90,000+ deaths through May 18 (NYT COVID Tracker). Consumers have responded with dramatic shifts in shopping and purchasing behaviors.  While some of these new behaviors are probably short-term responses to the crisis, we expect 4 key trends to persist in the mid- to long-term as we begin to establish a new normal.

Trend #1: At-home food consumption will remain elevated and grocery numbers should remain strong compared to the rest of the economy.  As the pandemic ramped up, US consumers spent on groceries and little else, and we expect this emphasis on grocery and in-home meals to continue.

Overall retail trade numbers show the importance of the Grocery segment. Looking at retail trade since the start of 2020, we can see Total Retail (dark blue line) began to drop precipitously in February as the number of COVID cases grew (orange line). Early declines were driven by Foodservice and Auto, the first sectors impacted by quarantining and economic uncertainty, but most other retail sectors followed with declines in March. In contrast, Grocery Store Sales (dark green line) grew +29% in March as consumers stockpiled food and necessities.

Grocery Store sales declined -13% in April from the March hoarding peak but were still up 13% compared to the same period in 2019.  Grocery is expected to remain one of the few strong US retail sectors in the short- and mid-term as:

  • Restaurant business is down in the US
    • Despite measures to increase food pickup and delivery, overall restaurant transactions have remained down between -30% and -40% all April (NPD webinar, 5.7.20)
    • Overall restaurant spend is down -55% in Q1 (Visa Q1 Earnings Call) and reservations are down -95% or more (OpenTable)
    • Even as state-by-state legislation allows some sit-down restaurants to reopen, most have strict guidelines in place to limit occupancy, curtailing their sales potential
  • Measures of in-home food consumption are up
    • 67% of respondents are cooking/preparing more meals. Most plan to continue this after COVID
    • 65% are consuming more groceries and buying more grocery items
    • Only about 1 in 3 respondents are ordering more restaurant takeout or delivery
    • (Source: Numerator webinar, 5.7.20)
  • In-home food consumption increases in recessionary conditions
    • In the 2008 recession we saw an increase in at-home meals and food expenditures when compared to food away from home. In the coming months, we are likely to face some of the same recessionary conditions and corresponding consumer behaviors as we did in 2008.

Numbers from the recovering Chinese economy show the importance of CPG and Grocery. Post-COVID consumption data shows that Supermarkets, Convenience Stores, and Food Specialized Retailers are doing relatively well when compared to Overall Offline Consumption (-21%) or Foodservice (-28%) vs pre-COVID conditions.

Trend #2: Grocery Ecommerce will remain important and keep growing

As consumption has shifted in-home, many consumers have pivoted to grocery delivery and buy online pickup in-store (BOPIS) fulfillment options. We predict these fulfillment options will remain important and continue to grow as consumers push for more convenience and safety while retailers improve their footprint and operations.

Grocery ecommerce exploded in Q1:

  • 3rd party grocery delivery orders are indexing at 250+ this quarter vs. last year (NPD Webinar 5.7.2020)
  • New users are trying grocery ecommerce options and plan to continue use after COVID
    • Only 35% of online order and 18% of BOPIS customers were regular users before their recent purchase, the rest were new or previously infrequent users.
    • 83% of new BOPIS users report they are likely to keep using this option after COVID.

(Source: Numerator Webinar 5.7.2020)

Online grocery visit frequency and spend has remained elevated in recovering APAC countries (MIYA Payments via McKinsey). Post-COVID, we expect grocery ecommerce to keep some of its share gains and continue to grow for the following reasons:

  • Convenience-driven trends have been a common thread across retail. Many new consumers will continue opting for grocery delivery and/or BOPIS due to their convenience.
  • Consumers will remain health-conscious and may avoid unnecessary trips to the grocery store or in shared/public transportation.
  • As time goes on, retailers will improve the efficiency, reach, and customer experience of grocery ecommerce, increasing consumer access and appeal.

Trend #3: “Stockpiling” shopping patterns will continue to some degree throughout recovery

During March, as cases rose and many states instituted social distancing measures, we saw some very clear signs of stockpiling behavior. Foot traffic peaked across all grocery channels (Placer.AI) while according to Numerator, basket sizes soared to 2.5x-4x their pre-COVID average size.  NPD data indicates that shelf-stable and frozen foods were key categories that over-indexed. Specialty Grocery lagged behind the Mass, Club, and Food-Only Channels as people shifted spend toward large pack sizes and household necessities instead of premium food.

During this period, NPD reports sales of stay-at-home related categories soared, e.g. cooking appliances, cookware and bakeware, office equipment, and puzzles, toys, and video games (NPD COVID News).

After the sharp drop in grocery shopping in the first 2 weeks of April, seen in both foot traffic and basket sizes, we have seen a blunted rebound. While some of the recovery in foot traffic comps can be attributed to certain states reopening and consumers returning to more typical shopping habits, there has been a concurrent rise in basket sizes (Numerator Webinar, 5.7.2020) and “stock-up” grocery channels are still greatly overperforming Specialty Grocery. This indicates that at least some consumers are continuing to stockpile, and the rebounds in foot traffic since mid-April are somewhat attributable to consumers restocking their diminished pantries.

We predict that stockpiling behaviors will continue as health and saving money remain top-of-mind. Despite being ahead of the US in terms of recovery, Chinese consumers are still making less frequent supermarket and grocery trips but buying more at once than they were pre-COVID (MIYA Payments via McKinsey). However, the degree to which stockpiling behavior will persist in the US is dependent on consumers’ perception of their own safety. News coverage, social media, and messaging from political leadership can have rapid and unpredictable impacts on this consumer behavior.

Trend #4: Grocery store foot traffic will have smaller peaks and valleys across the week

Pre-COVID grocery foot traffic tended to be much higher during weekends and certain times of day. We expect more parity in daily foot traffic across the week for the following factors:

  • Consumers will likely remain hyper-aware of health risks for the foreseeable future and seek to avoid unnecessary crowds during grocery store peak days and hours. The degree to which this is true will depend on mass perception and our success against the virus.
  • The number of full-time employees working from home has doubled (Gallup COVID Workplace Poll), and out-of-home activities are greatly reduced. Home-bound consumers have more flexible schedules, allowing them to shop for groceries at traditional off-hours.
  • Retailers have taken measures to space out foot traffic across the day (e.g. senior-only hours, externally-visible lines when busy, etc.)

Preliminary results show traffic is already evening out:

  • Daily foot traffic comps (versus the previous year) across retail are much lower on weekends than they are on weekdays (AI)
  • Transaction data from China show that weekend grocery shopping remains depressed at this point in recovery

As the retail industry shifts from Survival to Recovery, expert advice and perspective is more important than ever. Armed with decades of experience, an unparalleled commitment to your team, and play-making insights, McMillanDoolittle can help you win in a post-COVID world. To stay up to date on the latest retail industry news and insights, connect with us.

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E-commerce And Grocery: This Time It’s Real

There’s nothing like massive disruption to accelerate a trend that was already occurring in the market.  In this instance, a global pandemic the likes we’ve never seen before has caused significant change in the retail landscape. While grocery stores have remained open and fared better than any other retail segment during the crisis, e-commerce grocery sales have also accelerated at an unprecedented level that has changed the game, likely irrevocably for supermarket retailers.  For many customers, it is easier (or safer) to purchase on-line for delivery or contactless pick-up.

At the same time, e-commerce for grocery has also had an awkward coming out party. While services such as Instacart are literally hiring hundreds of thousands of new employees, the surge in demand has revealed significant cracks in the system along with the difficulty of scaling the business. Wait times for getting a slot for an order have sometimes exceeded four or five days and order fulfillment rates have been abysmal as supermarkets wrestle with out-of-stocks driven by the massive surge in demand. So, while more consumers are turning to e-commerce, they are also seeing it at its worst.

As I’ve written several times before, there are multiple reasons why the grocery category has historically been well under-penetrated relative to other e-commerce categories. Multi-temperature products, awkwardly sized and shaped products, product and SKU proliferation, delivery challenges, combined with razor thin margins have kept e-commerce penetration to around 3-4%. However, this penetration has likely tripled in the past six weeks and we are probably around 10% penetration today. And while some of these gains may be given back in a return to normalcy, it is also likely that the new normal will feature a much higher e-commerce penetration rate along with continued growth. While 15% e-commerce penetration for grocery used to have a “best-case” scenario of happening by 2025, this is much more likely to happen and perhaps several years sooner.

But, and it’s a big but, profitability and an excellent customer experience remain elusive. In-store, in-aisle pick (the primary method for Instacart and Amazon Prime Now) will always be less efficient and have poorer in-stock conditions associated with it than fully automated centralized solutions (as represented by the Kroger/Ocado partnership). But, that model is expensive and time consuming to build and takes time to maximize efficiencies.

As I’ve discussed before, a number  of technology companies are deploying efforts to find a middle ground. Referred to as MFC’s (micro-fulfillment centers), they combine robotics and automation in a much smaller space. This allows them to be less costly to build, be located in a back room of an existing store or dark store which provides closer consumer access, either for delivery or pick-up. Takeoff Technologies, one of the leaders in the field, just published a white paper entitled “How to Win in Online Grocery” that discusses the trade-offs between price, variety and speed that retailers will need to balance to win. They argue that MFC’s optimize that relationship. Along with Takeoff, other technologies include Autostore, Alert Technologies, and Fabric. While all have pilots underway, expect an explosion in the use of this technology as grocers gear up for the new level of e-commerce sales.

At the same time, while delivery has been the dominant way to get groceries to the end consumer, the cost and complication will have limitations. Led by Walmart, we would also expect curbside, contactless pickup to grow significantly as customers and retailers adapt to new realities.

The ways that COVID-19 will impact the world of retail are just beginning to be felt. Long-term social distancing, restrictions on customer counts and a less comfortable shopping environment will hasten even further e-commerce adoption.

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The Future Of Supermarket Retailing

Extraordinary measures are being taken by supermarket retailers in response to COVID-19 in this extremely challenging time including customer limits, line spacing, the discontinuation of salad and hot bars and crucial safety precautions. Are these measures temporary or are they here to stay?

We’ve been contemplating these changes with our friends at Connors Group and asking what will supermarkets look like in the future? This joint Infographic demonstrates those discussions.

What changes do you think are coming to supermarkets? Leave your comments below…

 

 

 

 

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Grocery Retail: Four Waves Of Change Are Coming

Like many, I first want to say how proud I am to be associated with the retail food industry. The efforts on the part of everyone in the industry to keep stores in stock, associates safe and customers served as best as possible is nothing short of heroic. In times of great challenges, it becomes abundantly clear how elemental food is in our lives and as part of the fabric of the communities that it serves.

I believe that there will be four waves of significant change that will impact the industry in the coming months. And, as discussed before, the only real question is just how severe these waves will be. This will be dictated by the degree of severity of this global pandemic.

  • Wave One—Hoarding. We are in the middle of wave one, which involves the hoarding of products and the abundance of needs from consumers driven by both the fear and reality of the crisis. As many retailers I’ve talked to have described this, it’s like “the storm scare that never ends”. Predictably, before an anticipated weather event, consumers will stock up on needed supplies, unsure of how long they will be without power or access to goods. This particular storm scare is now in about its fourth week and shows little signs of abating. And, it’s important to note that parts of the country are experiencing this crisis slightly ahead or behind others. We will see enormous sales gains from food retail being reported for the first quarter, driven by an extraordinary March. We are also correspondingly seeing a huge spike in online ordering. Grocery retail will almost instantly move from a relatively anemic 4% of revenue done on-line to double this in very short order. Whether e-commerce can hold on to these gains is for further discussion.
  • Wave Two—The “Almost” Normal. As the hoarding begins to abate (enough of the toilet paper stocking up, people!), grocery retail is beginning to emerge to a steady state with some extraordindary new conditions. Special hours for Seniors (and now, in a wonderful addition, first responders), the monitoring of customer counts, appropriate social distancing at the service counters and checkstands, etc., are becoming commonplace. But, so are the temporary closures of salad bars, hot and cold food bars and the replacement of bulk and single serve items to pre-packaged as “contactless” service becomes entrenched in our collective vocabularies. While this would normally presage fairly significant sales declines, another countervailing factor is at work. The (likely temporary) shift of sales from food away from home (the beleaguered restaurant industry) to food at home. Since consumers can’t dine at a restaurant, many meals are being prepared and created at home. While this will hopefully (for the sake of the massive foodservice industry) not be permanent, it likely means that food retail will continue to hold on to sales gains for some period of time.
  • Wave Three—Recession. Sadly, the economic data will soon show us that we have quickly entered into a recession as unemployment spikes and GDP craters. Again, the length and severity of the recession is unknown but it will likely have impact for an extended period of time. Retailers need to quickly dust off their 2008-2009 recession playbooks to prepare. Expect to see big increases in private label sales as consumers trade down and even greater growth in price oriented formats (good news for the Costco’s, Walmart’s, Trader Joe’s and Aldi’s of the world) but also an opportunity for conventional retailers to proactively respond by offering value early.
  • Wave Four—The New, New Normal. When all of this is finally behind us, what does steady state retail look like a few years from now? Great disruptions (and a pandemic certainly qualifies) tends to act as an accelerator for a number of latent trends that were already in the market. E-commerce in grocery likely scales at a much faster rate. But, in responding to the value component, order on-line and pick-up in store offers a more value driven (and safer) way to deliver product. Contactless experiences might become the norm. Expect a huge increase in touch free experiences (Apple Pay and the like) and a decrease in cash transactions. It could be a huge boost to technology services like Amazon Go which reduce interaction with associates. It might cause a massive rethinking of how a grocery store looks and feels if food safety becomes a tantamount concern. Perhaps the next generation supermarket is one-third pick-up, one-third delivery staging and a much more automated process throughout?

I will discuss the fourth wave in more detail in a future blog. It is clear that this could drive long-term changes for retail’s largest sector.

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Lucky’s, Earth Fare And The Perils Of Overexpansion

The grocery retail world has been rocked these past few weeks with the perils of overexpansion and the subsequent closures of some prominent chains that, just a few years prior, were seen as rising stars and potential national chains.

Earth Fare just announced that they have started a going out of business sale and will liquidate over 50 stores as part of their bankruptcy filing. The company stated that it will do so while looking for other buyers for their assets. Earth Fare is a private equity owned natural and organics retailer that was competing in the Southeast and Midwest of the U.S.

In a similar fashion, Lucky’s Market announced the closure of 32 of 39 of its locations. Competing in a similar space as Earth Fare, they focused on natural and organic products with chef inspired prepared foods. This Boulder based company had 17 stores when Kroger made an investment in them back in 2016 and had proceeded to expand rapidly across the country. Many of these stores will be acquired by Aldi and Publix while the founders will reclaim 7 of the locations.

For good measure, Fairway Markets, the once formidable New York City food retailer, filed for Chapter 11 again recently. There are plans to save many of the New York City locations but there will likely be additional closures in some of the suburban outposts.

So, what does it all mean?

  • The natural and organics space remains strong and “healthy”. The market is growing and the future consumer is embracing a wellness lifestyle and is more concerned about the types of food they are consuming. The failure is not based on a lack of market demand.
  • There is a lot more competition today. Besides the established natural and organics players like Sprouts, Whole Foods and Trader Joe’s, traditional competitors like Kroger, Albertsons and Walmart have become a whole lot better as well. There are more competitors competing.
  • The real culprit here seems to be undisciplined expansion. In the end, these companies were not differentiated enough to merit rapid, out of market expansion. While the core of these chains were profitable, growing fast and in diverse markets didn’t work.

There is a real reason for local chains to remain local. The number of companies in the food retail space who have become national players is few and far between. And it is likely to remain that way into the foreseeable future.

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Amazon And Its Continuing Assault On Food Retail

There were two significant stories in the past few weeks involving Amazon’s incursion into the world of food retail. The first was the announcement of changes to pricing for the Amazon Fresh delivery service and the second was the recognition of what has been an oft rumored launch of a new grocery brand. I wrote about these rumors back in March 2019. While these are two separate stories, they really build off one another and offer clues to their future plans to dominate the grocery world.

First, Amazon announced that they will no longer charge for their Amazon Fresh service for Prime members. Amazon Fresh, launched back in 2007, offers proof that not everything Amazon touches turns to gold. This service has slowly expanded without much fanfare, and is now offered in twenty-one metro markets in the U.S. It has been slow to take off and shows the immense challenges associated with delivering fresh groceries to U.S. households. When launched, this service was priced at $299/year. They later changed to $14.99/month in addition to the cost of a Prime membership. Now, it’s free (with a $35 minimum purchase) with Prime but the pricing strategy changes illustrate a core problem of grocery delivery—it is expensive to execute, with the costs of warehouses, trucks and drivers and the trickiness of getting fresh and frozen products into consumers’ homes. In addition to Fresh, Amazon has also been focused on growing their Prime Now program, which delivers from Whole Foods. In fact, there has been so much focus on growing this “instant” delivery service that many Whole Foods stores are becoming overrun with Prime pickers, interfering with the retail customer’s shopping experience. And, of course, you can still order directly from Amazon with Pantry and Subscribe & Save. Confused? It’s a good bet that consumers are as well.  Nevertheless, this relentless pressure on growing delivery has implications for others who are trying to compete (and trying to make money) in this space.

The second story is Amazon’s confirmation of their first “Amazon branded” (name unknown) grocery store that will open early next year in Southern California. The 35,000 sq. ft. store is in a former Toys R Us (irony is not dead) and will offer a glimpse at Amazon’s latest attempt to penetrate the grocery world. The obvious question is why do they need this, given that they already own Whole Foods and have launched Amazon Go?

I’ve had a chance to look at the floor plans and here’s what I suspect we will see:

  • It will be “omni” from the start. Rather than convert Whole Foods space into efficient picking and distribution points, these stores can be optimized for an omnichannel experience from day one. The store’s plan indicates that it will have significant space to accommodate in-store picking and substantial holding facilities.
  • It will be focused more on mainstream grocery products rather than the natural and organics offer of Whole Foods. This will be aimed at slightly lower income customers and for those looking for Coca Cola, Oreos, Tide or any of the mainstream CPG products Whole Foods doesn’t offer. This is where the larger market share is available.
  • It will likely be more price competitive. While they have tried to mitigate Whole Foods’ high price reputation through reduced prices and Amazon Prime promotions, it is an uphill battle. An Amazon branded store can be more price driven out of the gate.
  • It can be more private label driven. Amazon has continued to grow its private brand presence and while new technology will likely be employed in the store, don’t expect Amazon Go checkout free technology….yet. There are plenty of traditional checkouts (likely self-service) planned. I suspect that the technology is not scalable at this point.

This will likely be the most anticipated new grocery store since Tesco opened Fresh & Easy and Lidl debuted a few years back. It’s worth noting that Fresh & Easy is a footnote in grocery history and that Lidl has yet to gain serious traction. While it would be foolish to discount Amazon’s potential impact on the industry, gaining success in grocery is a lot harder than it looks.

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Robots Are Coming To Grocery Fulfillment: Can They Drive Profitability?

As I’ve written several times before, there are multiple reasons why the grocery category is well under-penetrated relative to other e-commerce categories. Multi-temperature products, awkwardly sized and shaped products, product and SKU proliferation, delivery challenges, combined with razor-thin margins have kept e-commerce penetration today to under 3%. However, there are multiple efforts underway to change this, from massive investments in buy online, pickup in-store infrastructure (Walmart), third party, on-demand fulfillment (Instacart) along with a host of new investments in sophisticated robotics and AI from a variety of start-ups and established companies. These efforts are all designed to address the fundamental challenge of reducing costs/increasing efficiency to make grocery e-commerce more profitable, or frankly, profitable at all.

Three new developments in robotics are all working on the profitability equation for grocery e-commerce. Commonsense Robotics, Takeoff Technologies and Kroger/Ocado are approaching this issue from different but equally fascinating angles. All are implementing automation and robotics in different ways, but they are designed to address one of the key fundamental cost challenges—picking groceries. The other, of course, is delivery, which also is seeing advancements through route management, autonomous delivery and naturally, not delivering at all (pick-up).

As Scott DeGraeve, COO and Co-founder of Locai Solutions explains, “Robotics in e-grocery are aimed at making a step function change in labor costs and throughput time. As customer penetration grows, more and more retailers are feeling the effects in their busier stores of the challenges of the in-store pick”.  While the efficient way into e-commerce is through utilizing existing in-store infrastructure, it is not likely the long-term solution.  DeGraeve cites congestion in the aisles, higher out of stocks, and issues with labor productivity as key issues, with “stores designed to sell products, not provide for an efficient 40+ item order pick”.

But, are robots truly the answer? Three notable efforts are designed to address this.

Takeoff Technologies, creator of the world’s first automated micro-fulfillment centers (MFC’s) recently announced a partnership with Wakefern Food Corp., the largest retailer-owned grocery cooperative in the U.S. Takeoff is an eGrocery solution that leverages automation on a hyper-local scale. Orders are placed online through established retailers and Takeoff’s automated technology fulfills the order using robots in the MFC’s. These centers are significantly smaller and less capital intense than full scale solutions, which could allow faster deployment and centers closer to the end consumer. The first such center will open in Clifton, NJ and work with Wakefern’s ShopRite from Home platform. It promises orders of up to 60 items being fulfilled in minutes.

CommonSense Robotics, an Israeli start-up, is also focusing on micro-fulfillment centers. Their twist—the first underground and automated grocery delivery center that will make one-hour deliveries for grocers while utilizing existing space and can also be placed closer to the consumer in denser urban markets. Their new micro-fulfillment center will be in downtown Tel Aviv, located in the parking garage of the city’s oldest skyscraper, Shalom Meir Tower, and will only take up 18,000 square feet of triangular space.

Finally, Kroger’s partnership with Ocado is an example of automated fulfillment centers at scale. Kroger has announced that they plan to build as many as 20 automated grocery warehouses with a capital cost of up to $55 million for the land and equipment. UK based Ocado is clearly a leader in the space and is perhaps the only company (certainly a public one) that has shown grocery e-commerce profitability at scale. Kroger has announced the development of the 355,000 square foot Monroe, Ohio fulfillment center known as “shed” in spring 2021. These centers are also powered by sophisticated technology and advanced robotics and Ocado is perhaps furthest along in streamlining every aspect of the process (order, pick and delivery). The disadvantage of these centers is capital cost, time to build and time to achieve economies of scale.

From in-store pick, dark stores, semi-automated fulfillment, micro fulfillment centers to full scale automated warehouses, the rush is on to figure out a way to lower costs of grocery fulfillment. As always, there will not be a one size fits all solution for the right way to approach the problem. The best retailers will have flexibility in their solutions (urban vs. suburban, delivery vs. pick-up, immediacy vs. scheduled) that ultimately meet consumers, at a profit.

Neil Stern for Forbes

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Aisle be seeing you: Why retail placement is so important to plant-based substitutes

Beyond Meat and other plant-based substitutes have made placement in or near the fresh meat case a major part of their marketing message, so much so that Beyond Meat’s filings with the Securities and Exchange Commission point out that proximity to the meat case has a material effect on its sales.

With all the publicity and news coverage of this growing new market, actual location in the supermarket wouldn’t seem important; interested consumers – which is most of them – will find what they’re looking for. But there is more to this dance between retailer and supplier, as Amanda Lai, senior consultant with retail consultancy McMillanDoolittle, pointed out in a conversation with The Analogue Dish.

The Analogue Dish: Beyond Meat and other brands, like Before the Butcher, have made a big deal about being near or in the meat case in the supermarket. Besides the obvious connection they want to forge with the meat case in consumers’ minds, what are the underlying levers that they’re trying to pull when they merchandise their products that way?

AMANDA LAI: If we’re looking strictly at merchandising over the years, the category has grown extensively from an R&D standpoint. Plant-based protein now imitate the taste, texture, appearance of meat. The challenge is getting consumers who were turned off by the old, bland meat alternatives of the past to try the new and improved iterations of these products. This customer doesn’t necessarily shop in the vegan and vegetarian section, but they can be found shopping in the meat department.

And so you’ve got the Beyond Meat packaging and product itself looking similar to other products in the meat section. That gives the brand credibility, that it can be cooked and consumed like any other type of meat. A customer might very well go to the meat section and pick up Beyond Meat without realizing they’d purchased a plant-based product, due to how similar it looks, cooks and tastes like conventional meat.

From a marketing standpoint, they’re pulling a couple different levers. ‘Plant-based’: that term is new. It’s not a new concept, but usage of the term ‘plant-based’ has risen in popularity in recent years. Whereas ‘vegan’ has notions of exclusivity and what you can’t eat, the term ‘plant-based’ sounds a little more inclusive, familiar, and is viewed more as a broadening of one’s tastes rather than a limitation of them in the way that ‘vegan’ might sound.

And then lastly, it’s getting to the science of it with the nutrition. Traditionally, we often view our food intake as symbols of the food groups, meat, vegetables, dairy and so forth. Beyond Meat’s CEO, Ethan Brown, wants consumers to think beyond these groupings and consider the science behind it. When you view nutrition through the lens of proteins and amino acids rather than just broad food groups, you can see that there are options beyond traditional meats that can be just as satisfying and fulfill those nutritional needs and also be more sustainable.

AD: Sometimes the retailers have put the alt-meat products in the meat case and sometimes they haven’t. I understand that there is nothing contractual that requires them to merchandise these meat substitutes next to the actual meat in a meat case. But from the retailer’s perspective, how do they go about making that decision as to where to place these products that really don’t have a category of their own?

LAI: From the retailer’s perspective, they’re ultimately juggling multiple relationships. You’ve got the tried-and-true purist consumers who are shopping in the vegan and vegetarian sections, that are disgusted by the idea of going to the meat section for their plant-based products. We also have retailers needing to maintain their long-term relationships with the largest meat suppliers in the country, who will now be squeezed on space by entry of these newcomers if they do go in the meat department.

There is also an emerging consumer segment of flexitarians and meat reducers who do not necessarily view plant-based products as an abandonment of meat altogether, the way that a vegan or a vegetarian might see it, but as a broadening of their existing eating habits. So, ultimately a retailer’s relationships with the purist consumers, with their long-time suppliers, and along with it all the financial implications, are at risk in this attempt to appeal to these new consumers. And are these new consumers going to pay off and make that a change worth making?

AD: From the point of view of Beyond Meat and these other brands, they’ve made a very public request that they be merchandised in this way and retailers have not always gone along with that request. What does that then mean for the plant-based supplier? Is Beyond Meat better served to kind of go along and get along with the retailer’s decision if it’s counter to their merchandising request?

LAI: What’s important with Beyond Meat is that they’re really taking a stand in their mission. It’s a huge gamble for them. The main focus behind Beyond Meat is on ultimately saving the planet, and retailers that kind of rebuke this can be viewed as closed-minded and unchanging by not necessarily accommodating such a public, mission-driven request. Beyond Meat, they took this dedicated stand to only go under retailers who would merchandise them in the meat department, and so Whole Foods was the first to really take that chance with them.

After seeing their success we see conventional retailers, such as Safeway and Kroger, Wegmans, Target, also following suit. That is indicative of the start of a general trend that plant-based products are becoming more mainstream. Those that may have rejected Beyond Meat early on might now be a bit late to market and might have potentially fallen behind others that did decide to take a more forward-thinking risk in the product assortment and merchandising.

AD: Are there examples from other parts of the store, other products, where this might be a parallel? Or is this sort of merchandising push by Beyond Meat unique?

LAI: The best example that is similar to Beyond Meat’s case is the plant-based milk alternatives category. Dairy alternatives sales really didn’t take off until they were able to get themselves out of the aisle and into the refrigerated dairy section where they could be perceived as, in consumers’ minds, another equivalent form of milk.

AD: We’re seeing bigger brand names, and Tyson is the latest, moving into this space. Would we expect Tyson to also say, ‘Okay, put our plant-based products next to the meat products?’ Or do we think that Tyson might handle its Raised & Rooted brand differently?

LAI: I would expect Tyson to follow a similar strategy to Beyond Meat and request space for their new plant-based products next to their existing products. To adapt in a competitive category and adapt to changing consumer habits, companies like Tyson are strategically shifting their position from being ‘meat’ companies to becoming, more holistically, ‘protein’ companies.

Since Tyson already has a strong reputation and high brand recognition within the meat department, it would strategically benefit from positioning their plant-based products adjacent to their meat products and create this strong, centralized point for them within the grocery store. Beyond Meat and similar companies are leading the charge in repositioning the entire meat department into a protein department in all its many forms, and this is forcing larger players, like Tyson, to react.

It’s interesting looking at Beyond Meat and the risk that they’re taking. Essentially it was an all-or-nothing decision to seek out placement in the meat department. They made a choice to forego sales that could have easily been achieved in the vegan and vegetarian sections to go after a larger piece of the pie in the greater population as part of its dedicated mission to change consumer perception of meat as an animal product alone.

They’re really pushing to broaden the definition of how we perceive meat, and are really looking to find ways to provide meat in a way that takes the animal out of the equation.

This article first appeared in Meatingplace Magazine.

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