Bucking Trends, Walmart Expands Grocery Pickup Service

Wal-Mart Stores Inc. is making headlines for something that has left some analysts scratching their heads.

Grocery delivery is supposed to be the next big thing: Amazon Fresh promises same-day delivery and its “Prime Now” service delivers customer orders in as little as an hour — for free.

Instacart charges a delivery fee, but offers delivery from the grocer of the customer’s choice within two hours. These are challenging times for grocers and exciting times for consumers who value convenience and speed.

So what’s Walmart doing in response to these changes? Expanding its grocery pickup service test.

Just to be clear, there’s a big difference between grocery delivery and grocery pickup: In the first case, the retailer brings the groceries to the customer. In the second, the customer still has to drive to a store (or designated pickup spot), though an employee brings the groceries out to the customer’s car.

In an age where customers demand and are willing to pay for convenience, why is Walmart opting to invest in the slightly slower, slightly less convenient option? After all, Walmart is no stranger to grocery delivery. The retailer’s UK brand, Asda, has been in the grocery delivery business since 1998. That’s plenty of time to learn how to successfully bring fresh groceries to a customer’s door. There are also business models in the United States that could provide guidance: Peapod has been taking online grocery orders and delivering direct to consumers in the Midwest and on the East Coast, since the mid-1990s.

As Fortune’s Phil Wahba notes, Walmart is taking a major risk by sticking with grocery pickup:

“For Walmart, the grocery stakes are high: it gets 56 percent of U.S. sales from food (or about $161 billion last year), making it by far the biggest U.S. grocer.

“In addition to Amazon’s aggressive moves in food delivery, Walmart also has to contend with a newly ambitious Target planning to vastly improve its grocery offering (some 20 percent of its sales) and that is just getting into grocery delivery to the customer’s homes via a partnership with Instacart.”

Grocery War

If Walmart loses the grocery war, or even a few major battles, stockholders, associates and suppliers alike are all going to suffer. Clearly, Walmart has a strategy. But what is it?

Many analysts think they have the answer. Walmart’s core mission from day one has been to provide exceptional value to its customers. Grocery delivery is an expensive proposition: Delivery services that operate out of warehouses need pickers to assemble orders, while third-party services like Instacart rely on personal shoppers.

Pickers and shoppers need to be paid, as do delivery drivers. Mileage and gas have to be accounted for, as do the special vehicles and containers needed to keep fresh and frozen groceries at the proper temperature.

Walmart is already well-positioned to get groceries to consumers, as it has stores across the country that are easily accessed by most of the population. For many people, the local Walmart is only a couple of minutes away from home, work or their kid’s day care center. Hardworking customers may regard the inconvenience of making a stop as inconsequential, particularly if they don’t have to pay a delivery fee, tip a delivery person or find themselves paying inflated prices.

In a recent article for TechCrunch, Sarah Perez touched on the cost issue.

“By choosing to focus on local pickup instead of delivery, there’s a cost savings for consumers,” she wrote. “That’s because some delivery services generate revenue by either marking up the price of items being delivered, or they charge a delivery fee, and they tend to require a yearly subscription fee as well. For example, Amazon has been testing Amazon Fresh grocery delivery in Seattle, New York (Brooklyn), Philadelphia, plus Northern and Southern California. But Amazon’s service will have a $299 annual fee, though the deadline to subscribe has been pushed back repeatedly, (which could indicate the pricing could be a concern).”

Logistical Issues

In fact, Walmart probably sees that grocery pickup offers benefits beyond cost savings. One difficulty with fresh grocery delivery is that the customer has to be present to accept the delivery, or the delivery company must leave the order in a special container located outside the customer’s residence. This not only adds costs and logistical issues, but there is the risk that the groceries could be stolen before the customer gets home.

Many Walmart customers lead busy lives. They may work more than one job, be a caretaker to family members, handle dropping children off at school or day care and participate in community activities. These customers probably spend a good deal of the day in their cars driving from place to place. For them, trying to arrange a home delivery is impractical.

What is practical for many Walmart customers is not having to walk the aisles at Walmart. Instead, they can order groceries online at their leisure, stop at the store on their way to or from another destination, and have someone else load their groceries into their vehicle.

These customers don’t have to get out of the car, they don’t have to spend more than a few minutes getting their groceries, and they don’t have to pay anything extra for this convenience and service. It’s a win-win for Walmart and the customer.

And it’s working.

“In its early days, the retailer has seen 85 percent of pickup customers end up becoming repeat users, which suggests that, if it can convince people to give it a try, it has a good shot of making them converts,” Sarah Halzack wrote in a recent article for The Washington Post.

Walmart’s decision to expand grocery pickup seems to be all about customer needs, not general industry trends. Back in 2012, Walmart started its “Pay with Cash” program that allowed Walmart.com customers to place an online order and then pay for it at a Walmart store. Some analysts were befuddled at what seemed to be a clunky, outdated payment option.

However, Walmart realized that many of its customers didn’t have credit or debit cards, or were wary of using them online. These customers were effectively locked out of ordering online with Walmart.

Walmart’s move ensured that any Walmart customer could place an online order and have it delivered to the destination of his or her choice.