The Supply Side: Retailers work to retain market share, improve profitability in online grocery

COVID-19 accelerated the growth of online grocery as retailers achieved three years’ growth in just six months of 2020. Research firm IGD (Institute of Grocery Distribution) reports that with penetration heading toward 5% by 2022, retailers will work to capture their share of the $82 billion business.

Stewart Samuel, program director at IGD, expects the shopping segment to transform as retailers like Walmart and Kroger focus on improving profitability. He said U.S. online grocery sales nearly doubled to $66.9 billion last year, and now retailers are aiming to keep their share.

Amazon, Walmart and Kroger are the three largest online grocers with about 65% of last year’s sales. Samuel said the three players would likely account for the most dollar sales through 2022. IGD looked at five key players in the online grocery space to get a sense of where the segment was headed.

Samuel said Walmart, Kroger, Amazon, Albertsons, Target and Ahold Delhaize, a Dutch grocery retailer, would focus on a few key areas as the online grocery shopping segment transforms. At the heart of the plan, he said all the retailers want to improve profits in this growing segment by establishing and growing marketplaces, developing new business lines, maximizing the offline opportunity, optimizing fulfillment, and innovating with last-mile delivery. He said that as online grocery is making up more total sales, the sooner retailers can reach profitability and the more meaningful contributions they can make to growth over the next five years.

Walmart Inc. President and CEO Doug McMillon has said the e-commerce segment had taken longer to reach profitability than initially planned. Walmart has made a concerted effort to trim e-commerce losses in the past year and get closer to profitability. The merchandising groups between the online and physical stores were consolidated recently when the company streamlined leadership under Walmart U.S. President and CEO John Furner after U.S. e-commerce CEO Marc Lore left the company earlier this year.

Samuel said retailers are also working on service improvements to retain share. Last year the online sales gains were huge, but they came at the expense of some market share for Walmart as out-of-stocks remained high in many categories during much of last year, according to Nielsen data and Walmart’s commentary.

Samuel said retailers are now focused on operational improvements centered on minimizing product substitutions and improving the overall pick-up experience. He said that despite the significant capacity expansion in grocery pick-up last year, most retailers have plans in place to extend their reach of pick-up and delivery service this year and next.

Walmart recently announced micro-fulfillment centers to get products closer to the consumers and allow for more efficient order picking and packing with robotics. Amazon will roll out more Amazon Fresh stores that offer same-day delivery and pickup and open more dark stores to increase reach and capacity. Amazon is also rolling out more fulfillment centers closer to homes, moving to same-day delivery and defending competition on marketplace (third-party sellers) sales.

Kroger uses a slightly different model but plans to accelerate market share gains by increasing customer reach in new areas, improving convenience with “Hometown Pickup” points at remote locations through the use of a refrigerated truck. Samuel said Kroger is also investing in personalized services to drive customer loyalty. One such service is the prescription diet being piloted in Cincinnati. A doctor can write “food prescriptions” that patients can fill at a local store under the guidance of a Kroger health employee.

Target also plans to extend the range of food and consumables through its online pickup and delivery services. The retailer has seen online sales grow by nearly $10 billion in 2020, driven by 235% growth in the company’s same-day services. The retailer also aims to build a deeper engagement with new customers gained in 2020 and migrate them to be higher spending customers by shopping more frequently at Target.

Ahold Delhaize also continues to step up online capacity by adding more click-and-collect points, targeting 1,400 by the end of this year. This chain also is integrating subsidiary FreshDirect’s operations into its more comprehensive offerings to enable both parties to benefit from the other’s skills. To expand its non-food offerings, the company is partnering with tech company Mirakl to offer tech services.

Albertsons plans to expand its store pickup service to 400 new locations this year. The grocery retailer said it aims to optimize its partnership with Google to introduce stoppable maps, conversational commerce via artificial intelligence and predictive grocery list building.

Samuel said all of these examples of digital investments represent retailers trying to use technology to improve profitability, service and efficiency.

He said competition in the grocery space has never been fiercer, and marketplace models like Instacart are also gaining traction in grocery. While Walmart is growing its marketplace business, Samuel said more work is needed to add food and other consumables to the site. He said Walmart could benefit from fees it collected from the marketplace and expanded advertising business Walmart Connect, which can help offset some of the costs with investments in e-commerce.

Samuel also expects retailers will intensify their efforts this year to drive traffic back to stores. He said they would likely emphasize the advantages of physical retail and remove any frustrations for shoppers and improve the pickup experience.

He said suppliers should focus on their digital media and data analytics capacities as they will become increasingly important platforms for retailers aiming to offset the costs associated with e-commerce. Suppliers could play a key role in thought leadership with their retail customers if they look to the latest innovations and the impacts the technology will have on their business models.

Samuel said that as more sales occur online, there could be changes to how store layout profitability is measured. The sooner suppliers can be part of that conversation, the better.

EDITOR’S NOTE: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.