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Robots patrol grocery store aisles and warehouses; so-called dark stores for pure online orders; Data that has been processed in the cloud and enables retailers to identify and even optimize customer habits. U.S. grocers thought they had years to prepare for these futuristic elements, but then COVID-19 hit.
It's like stepping into a time machine in February and waking up that day – but there are still five years in the future. Case in point: According to a March survey by strategic consultancy Brick Meets Click, the percentage of online orders doubled during the pandemic lockdown to 40 percent – from 13 percent before COVID. And consumers are expected to maintain these click-and-collect behaviors.
Retailers are rushing to make big changes – and need new tech solutions to make the transition. Amazon opened its first permanent dark store in Brooklyn in September to fulfill online grocery orders. Kroger had already announced its own home delivery initiative in 2018.
With this speed of change, this is a moment when tech innovators could attract audiences from large grocery chains to new ideas. After all, tools that grocers may have stalled a year ago – shelf sensors, inventory management software, take-out stores, robotics, and AI for better personalization of orders – are likely to be more than heard today.
Solving a demand problem
Here's why: With retailers quickly holding customers by meeting increasing online demand, ordering groceries online has terrible economics – especially as most US stores do today. The added cost of picking and shipping items tends to hurt retailers' margins. Added to this is the profit and loss pressure due to enormous investments in technical capital to support the online model.
All of a sudden you have big money problems in search of big money innovations.
The most successful grocery chains will be those with the balance sheets and analytical intelligence to bend the curve of that margin compression from smart tech investments.
This offers venture investors and founders a tremendous opportunity with the vision of solving retailers' online vulnerabilities.
How to bring ideas to a large grocery store
The life and death metric that all grocers in this new world will track is Units Per Hour (UPH), a measure of how quickly online orders are processed. With this move, US grocers are still in the stone age of online ordering and averaging 40 UPH. That is bad compared to operators abroad. For example, UK-based online specialist Ocado recently reported that its UPH was close to 200.
Low UPH scores in the US are due to retailers relying on traditional stores to serve both walk-in and online customers. Even before these disposable social distancing stickers were placed on the front and back of every aisle, supermarkets were not designed to fulfill online orders. Employees who work as order pickers compete with customers for items in the aisles, slowing things down and degrade the customer experience. There's also a big spike in labor costs when a store's online orders suddenly represent 15 percent of sales, compared to less than 1-2 percent before.
The ultimate solutions are technology-driven: automated picking, inventory management software that can be used to identify and store high-volume items, and new supply chain models such as vertical farming. Much of it is already being tested: Walmart lets robots select online orders and describes the effort as “transformative” for its supply chain. Kroger partnered with Ocado to take advantage of robotics and build up to 20 automated food warehouses.
Solutions that create loyalty
The reward is online grocery shoppers buy more with each order and become more loyal over time. Average online transaction sizes are 20 to 30 percent larger, and online shoppers tend to stick with one vendor, adding to their lifetime value for retailers. Maybe they can make it up to you.
Retailers are trying to optimize the benefits of the digital while managing the disadvantages.
In the short term, those with fewer resources turn to service partners like Instacart to do the online fulfillment. However, these services are only as efficient as the stores they choose from.
Transforming any business and building robotic warehouses will take years and enormous costs. But those who can invest now know that they will gain market share later.
The software that can save supermarkets
When 15 percent of a business goes online, there is some big potential real estate savings in customer-facing stores that can be reinvested in things like robotics and specialized warehouses – or even part of a store's allocated footprint for fulfillment in a section of the store called " Storage room".
Think of all of the software that is required to make this work.
First, more efficient inventory management is a big piece of the puzzle, and grocers will certainly be looking to implement technology here. The online boom is driving higher demand for high-speed food, and retailers could logically respond by getting rid of slower moving products in order to streamline stores for online ordering.
Some packaged food stores and companies have already reduced SKUs and traded a wide range of choices for better stocking of high volume items. Venture investors in the world of niche and differentiated healthy brands can suffer here as shopping is no longer a function for consumers. More likely they'll type Heinz into a browser and they may not find or try your artisanal ketchup.
Robots and battery-powered shelf sensors are used to improve inventory management. Amazon's go-till grocery stores are trying a model that uses sensors and cameras to provide highly accurate inventory values.
Another area of need: data analysis and system integration. Even now, many are not thinking as hard as they should. Retailers do not suffer from data shortages, but they struggle to make good use of it. This is where it can be valuable for them to work with technology start-ups.
As promising as this may sound, integration must be done before analysis. This is where the huge cloud providers like Amazon, Azure and Google come into play. You can merge disparate data sources and analyze and integrate data to improve business plans and personalization for customers.
Which technical solutions are coming to the fore?
Raw data is also valuable. Retailers can use data visualization and analysis tools to find patterns in online and offline customer behavior that they haven't seen. What leads to an increase in basket sizes? What's the right mix of inventory to stay in the storage room and what needs to be left on the shelves? How can retailers be careful not to disrupt the more profitable impulse buying at the checkout? This knowledge can be applied to any product category.
Grocers will be interested in tech solutions that can also improve personalization and help retailers optimize consumer choices. If I am on a 30 year old diet, won't it pre-fill my online shopping cart? If I use MyFitnessPal to track my calories and macros, why can't this be incorporated into my future supermarket purchases? Better still, how valuable it would be if data helped apps avoid bad recommendations. Finally, vegetarians should not receive offers of fresh beef if they have indicated their dietary preferences in their profiles.
Now, think about the potential for ad delivery models, since people are familiar with click-and-collect: when Safeway knows your wife's birthday is this weekend, they can use a cake recipe to remind you of it. You can then click a button to add ingredients to your online shopping cart, ready for home delivery. Bonus points if Safeway also offers you balloons, a card and candles.
If the grocery store could help you with your dad and save you from forgetting your wife's birthday, you might not need the perpetual discount to stay loyal.
And I bet there is someone out there who reads this and can code this function in their sleep. Hey, save a marriage, introduce it to Kroger.