In the online grocery industry, there are really three types of different companies, all of which behave quite distinct. This is important to understand for MHE providers and consultants, and it is just as important to understand for these companies that they have strange (from their respective perspective) siblings from whom they could nonetheless learn something. This short article provides an overview.
The eGrocery Market
After a first wave of e-Grocery companies was seen emerge and disappear during the dot-com boom and subsequent bust between 1999 and 2001, the second wave seems to be here to stay. The internet’s and mobile devices’ penetration of the population today, and especially the general acceptance that anything can be ordered online, makes it much more likely today than back then that shopping for groceries online will be adopted by significant parts of the population. The share of e-Grocery in the food retail market still is relatively small; in Europe, the UK leads the pack (with fairly high penetration rate in London, less so elsewhere), but we are still talking about single-digit percentage market penetration. That said, companies operating in this market have been experiencing double-digit growth for quite a while.
eGrocery Vendor Typology
While operating roughly the same business model and serving the same or similar customers, there are significant differences among eGrocers.
“Bricks’n’Clicks” or “Clicks and Mortar”:
Incumbent retailers expanding into the digital space – the large supermarket chains. These companies, often highly profitable in their conventional store business, are now facing the situation that everybody is talking about e-com, experts are saying e-com will be the future – yet food e-com is not profitable at all for the vast majority of eGrocers. When expanding their eGrocery operations, the incumbents turn profitable store business into unprofitable e-com business. Millions of customers who, until so far, have done their own picking now need to be served and serviced. That’s really not attractive and you can feel and see their hesitance to pursue this path when talk to them. Also, some of them (in all seriousness) believe this e-com thing is merely a fad and it is going to go away . The only thing that’s driving their e-com business is that they feel it is expected from them. For some companies of this type, the characterization may be a slight exaggeration, for some not so much. All of these companies have the financial strength to really do it “right”. That said, some of these companies have understood the importance of e-Grocery and use their financial strength to build up and improve operations for e-com. Some others still “wait and see” what all the fuss is about.
Talking about financial strength: There seems to be a negative correlation between financial strength and efficiency, as if good funding takes away the need for efficiency. Not surprising, but worthwhile mentioning since this correlation seems to be really strong. This is also the reason why incumbents can learn a lot from start-ups (and, hence, from us) when it comes to lean and efficient processes.
These incumbents often use their existing shop network and have clerks collect groceries for one or several customers at a time in their regular shop shelves. Some companies to date (2019) still operate solely on this mode whereas others see it as a segue to explore a new geographical area before they open up darkstores or conventional warehouses. Some disadvantages are obvious: picking clerks are competing with regular customers for items in the shelves, hurrying through the aisles, destroying some of the good and cozy atmosphere retail chains have been investing in to create. Also, picking efficiency is low (i.e., orders become expensive to fulfill) as supermarket aisles are not set up for fast picking: store layouts, for instance, do not normally reflect the ABC distribution of items, or a good sequence for packing items into bags in such a way as to reduce damage (i.e., no crash classes considered) or to separate temperature zones. Also, companies have literally no inventory control as any customer could take the last item of a kind from the shelf before the professional shopper would get it, so there will be uncontrolled stock-outs. Thus, picking from conventional shops may well be the most expensive, least efficient way to fulfill customer orders, yet it is an easy way to “try out” this new online thing without committing significant upfront investment cost, to pick up some online customers, to explore new geographical areas, and to maintain a certain visibility in the online market among the many newly arising online grocery companies.
Pure Online Players
The drivers of online grocery shopping. Some – few – of these companies have carried on since the first wave of online groceries from around the year 2000; many have emerged only during the past five years. These companies do not operate a network of stores but sell online only. This means, they have to be somewhat good (i.e., efficient) doing this in order to survive, which is a big difference to the category of companies discussed previously. Another differentiating factor is that these companies want to do this. In contrast to many of the incumbent companies, they do not see online grocery as a threat or something they have to do in order to maintain their market share: it is their field of business and they are driving it forward. The prototypical example of such a company is Ocado. And everybody looks at Ocado and follows them closely. That said, while they certainly have some really good processes and ideas, there is reason to believe that their self-developed AutoStore-type of hive robot is not the best AS/RS system for food items.
To date, these companies are fairly small as compared to their incumbent rivals, yet they are growing quickly. Norwegian newspapers recently reported that online grocery may be one of the reasons why incumbents’ growth rate in conventional store business is lower than had been expected. 
Since these companies are not able to build upon an existing network of stores, they commonly operate from one to very few locations to fulfill customer orders. Start-up companies don’t normally invest the little money they have in huge automated warehouses (Ocado is the exception but has been around since 2000 and does have serious turnover) but start a website and put up some racks in a cheap warehouse. Often, these warehouses are best characterized as darkstores. That is, they look like supermarkets at first sight, though with a different store planogram. Items are presented to picking staff in conventional shelves or collie flow racks and are picked man-to-goods. The only difference to a normal store is that there are no customers inside but only “professional shoppers”
Since these companies’ online business cannot be subsidized from “conventional” business, they are striving for efficiency and in many cases do a better job than the incumbent companies. The processes they operate are often well thought-through, hierarchies are flat and decisions are made quickly. That said, even within this group, there are significant differences between vendors, though it is fair to say that almost all of them are more efficient than most incumbents.
A third category of companies is mostly known for and dominated by Amazon and Alibaba – those companies which just seem to take on every single industry. Amazon is investing heavily in Amazon Fresh, opening warehouse locations (darkstore concept) in a number of countries (e.g., Germany). The warehouse sites Amazon is looking for range between 10.000 and 13.000 sqm. Both Amazon and Alibaba are pure online players yet have their origin in other branches than food retail.
Amazon in particular seems to scare incumbent food retailers. They are afraid Amazon will do to food retail stores what they have previously done to book stores. It needs to be said that there current (2017 – 2019) concept seems to be mostly bruteforce. Though there aren’t a lot of details publicly available, their eGrocery operations are not known to be of particularly high efficiency and productivity.
When it comes to efficiency and productivity of warehousing processes, it seems that Pure Online Players, start-ups that have specialized on online grocery, are way ahead of their companions. But even within this distinct group, the differences are huge. Some of fastest-growing companies have a strong IT background, which I believe will be a major determinant for success and profitability since the (timely) implementation of good and efficient processes almost always is an IT topic. Companies reliant on third-party software and IT engineering thus have a structural disadvantage. This certainly is a bold statement, but it is backed-up by plenty of observations and evidence from my work with a broad range of online supermarkets.
Personally, I find it obvious that eGrocery is not going to go away. There is still a window of opportunity for incumbent companies, yet I strongly assume that some of those companies who keep postponing making investment decisions and who can’t make sense of food e-com for some more years won’t be around in 15 years from now. And clearly, not all of the Pure Online Players won’t be around, either. In order to survive in this very tough market with tight margins, high customer expectations, and high logistical requirements, it is key to learn from the best and improve every single process in the warehouse.
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