I think the number of times I’ve ordered my groceries online in 2017 has been much more than the number of times I’ve been to a supermarket this year. And not just me, but the growth in online grocery start-ups and funding becoming available to them, show the opportunities in this low margin, highly competitive business. Online groceries bring the convenience and ease of getting food on your plate, saves time and possibly lets you cash in on discounts – all benefits suited specially to the increasing number of urban working couples.
However, is it a challenging business that has to meet your needs regarding product-range availability, ease of delivery options and quality of products delivered, while managing their (and their investors’) costs and profitability expectations. Add to it the fact that customer acquisition is quite expensive and customer loyalty is hard to achieve! Sounds like a tough business model to crack!
Since this business is essentially all about logistics, let’s consider the three main grocery logistics models that exist, as illustrated in the graphic below:
- Brick and Mortar, with online presence (e.g. Cold Storage)
- Online, integrated logistics (e.g. Redmart)
- Online, personal concierge (e.g. Honest Bee)
Comparing the 3 models:
To understand which model will be successful in longer term, let’s consider the main cost and revenue drivers:
From a cost perspective, the key differentiating factors across the above models are 1) asset-dependence and utilization 2) picking efficiency (i.e. #order-lines picked per minute) and 3) routing efficiency (# trips per vehicle, # stops per trips).
- Asset dependence: While Cold Storage might have an advantage in terms of existing (already much depreciated) assets of warehouses and retail stores; Redmart’ assets prove to be lower in costs in longer term. On the other hand, an asset-light model like Honest Bee, though starts lean but, in my opinion, it might no longer be efficient the business scales.
- Picking efficiency: Redmart, in this case, has a clear advantage since this is their core operational focus. Picking systems and processes in a warehouse are much leaner and efficient vs. picking in a store (despite any pick-routing software in-store or special pick trolleys etc. that Honest Bee type model may provide to its pickers/concierges). The more automated the warehouses get, the higher the picking efficiency and more customers that can be served.
- Routing efficiency: Again, Redmart has a clear advantage in this – being their core operational focus – and within their control to measure and improve. Cold Storage does not see online as their core business yet and hence lower investment in the same. Honest Bee relies on the flexible drivers – yes they can be provided the right GPS, routing schedules, etc.; however the consolidation of orders is much lower for Honest Bee drivers vs. Redmart (due to small vehicle sizes / smaller order sizes per driver in Honest Bee).
From a revenue perspective, since the margins are already quite thin, the key is to acquire and retain customers as long as possible. Brick and Mortar retailers like Cold Storage, for e.g., have the advantage of existing customer base – something that a Redmart or Honest Bee have to spend high dollars to acquire. If Cold Storage realizes that integrating the online channel seamlessly in their business model is not cannibalizing their business, but making sure that any loss of customers to the online grocers is being stopped, they can easily win the market.
What will the future look like for the above logistics models?
Home delivery is here to stay. Online grocery sales are expected to increase further and the segment of customers buying online (e.g. urban, working couples) are probably the profitable and more loyal ones in grocery business, if they are served right. The question is which logistics model can be most profitable and efficient at it. Here are my thoughts and illustrations:
- The Brick and Mortar grocery chains will need to integrate the online channel seamlessly i.e. follow an omnichannel approach, taking lessons from the retail industry. If they are able to transform into ‘Brick and Click’, they will take the market pie, in my view.
- Online, integrated logistics will need to be more efficient with logistics – using technology (e.g. augmented reality and vision picking in warehouses, robotic storage and retrieval systems, dynamic routing software, etc.) to make picking & routing more efficient.
- Online, personal concierge – My personal opinion is that this logistics model gets tougher and costlier as the scale of customers increases. Hyperlocal has already been tried and failed in many markets e.g. US and India. Also, if ‘Brick and Click’ gets successful, this might just be a stop-gap?
My hypothesis – if Cold Storage decides to buy either a Redmart or an Honest Bee and integrate it seamlessly within its business model – that would be the clear winner. A step further might be even going the Amazon-Go + Amazon Fresh way, to digitally transform not just online but brick and mortar business as well!