Way back at the turn of the last century – 1999, to be exact – one of the hot topics in the U.S. supermarket industry was online grocery shopping. Peapod had recently expanded, Webvan had raised hundreds of millions of dollars in VC financing, other competitors with slightly different business models were entering the market, and all of the talk was about how the future would belong to the combination of Internet ordering and home delivery. Grocery retail stores were believed to be an endangered species.
At the time, I made a minor name for myself in Wall Street circles for a presentation I put together suggesting that the Internet grocery business was, perhaps, a bad idea, or at least a limited one. For about two years, I was controversial, and for two years after that, I was proved right. Why am I bringing up ancient history (beyond my desire to mention, just one more time, that I was right)? The reason is simple: Over the course of the summer, and much to my surprise, I have found myself buying more and more groceries on the Internet. Now don’t get me wrong – I’m not doing the majority of my grocery shopping on the Internet, or even more than 20 percent. But the combination of my love for a few hardto- find SKUs, the fact that I have lots of storage space in my country house, and the fact that Amazon makes it so darn easy has significantly changed my shopping patterns.
To be specific, I drink a whole lot of iced tea – it’s the fuel that keeps me going – and my favourite iced tea is made from Lipton Iced Tea Mix with NutraSweet in peach flavor. This particular SKU used to be readily available, but as artificial sweeteners have multiplied in numbers, the peach flavor has been pushed off shelves. More and more often, I found myself settling for the lemon or, even worse, raspberry flavor. But one day this spring, I was thinking about how Amazon claimed to have everything, so I searched for this product, and Amazon had it. What’s more, it was ready to ship me a case of six for about the cost of three bottles in the supermarket – that’s half off for you math majors. And as an Amazon Prime member, I didn’t have to pay shipping Costs.
So I ordered a case and a mere two days later, it arrived, light and easy to store, on my doorstep, and I was a happy consumer. Then I bought some more, along with the tea bags that I like and can never find, and the particular size of lemon juice I favor, and a few more items.
And, suddenly, Amazon was representing about 15 percent of my grocery spending. So here I am, 11 years later, thinking that ordering groceries on the Internet is a pretty good idea. While it’s nice to be right, sometimes you just need to admit that you were plain wrong.
Now, let’s be clear: The Internet is never going to be the primary way I shop for groceries. I have no interest in ordering big stuff or perishables or heavy things on the Web. And I’m generally shopping today for food to eat tonight, since I’m not a big menu planner, so I’m interested only in staples I know I’ll need. But my shopping patterns have undeniably changed. That means that the stores where I shop are losing my dollars to Amazon – a place I never thought would be competing for them.
What does all of this mean? While a sample size of one is a bit small to use for global prognostication, a review of the Internet grocery space in general, and the Amazon grocery business in particular, reveals that Internet-delivered groceries are growing quickly, and that they’re growing in the way that I’ve described. The Internet isn’t replacing supermarkets at all; rather, it has become a significant niche grocery retailer, focused on a few specific attributes. The Web is a great place to find difficult-to-acquire SKUs: specific obscure products, unusual sizes and colours, less popular flavours, and even whole product lines that may not be available in certain parts of the country. And the Internet is great for items that are easy to ship, durable and Small.
Consistent with my conclusion from years ago, the Internet can’t and won’t kill the traditional grocery business, but what it can do is wound it. We need to view it as one additional factor, like club stores and improved grocery selection at large drug chains, driving volume from traditional grocery stores. And while this isn’t a death blow, it’s certainly a Problem.
What should grocery retailers do about this problem? It’s incumbent upon them to take two important steps to stem the flow of dollars away from their stores. When combined, these actions should persuade consumers to continue to spend all of their grocery dollars with the retailers they like and respect.
First, grocery retailers need to join forces with online providers to offer an extended SKU selection to customers. By working with mywebgrocer. com, netgrocer.com or even amazon.com, grocers can integrate a significantly enhanced SKU assortment into their websites, and be able to market this improved assortment to their customers. Grocery retailers might or might not want to offer a full line of groceries for delivery, but all retailers should want to offer the SKUs they don’t stock to their customers through a third-party partnership.
Second, grocery retailers need to do a better job of finding out which SKUs their best customers really want. I’m hardly the poster child for this, since I divide my grocery shopping among four chains, and am admittedly nobody’s best customer.
But there are folks who loyally spend $100 or more per week in your stores, and you need to find out who they are, what they buy, what they want and make sure that you have these specific items available for them. You can do this via analysis of loyalty card data, but even if you don’t offer a card, methodologies now exist that allow you to figure these things out through analysis of POS data. These loyal customers drive your business, and you must meet their needs.
While the Internet is not immediately threatening to destroy your business as a grocery retailer, it could diminish your profitability in a real way. The two simple steps I’ve outlined could solve this emerging problem.