Curbside pickup powered by MFCs driving growth in grocery e-commerce
Rob Wilson is Managing Director and Shang Saavedra is Engagement Manager at LEK Consulting. The views expressed here are those of the authors.
Given the lockdown and quarantine measures for many consumers over the course of 2020, it’s no surprise that the COVID-19 pandemic has sparked an explosion in food e-commerce.
Grocers have had to quickly transform themselves to accommodate this surge in online orders. Some have converted store space from retail shelves or back rooms to dedicated spaces for online order fulfillment. Some have set up automated micro-fulfillment centers (MFCs) to aid in automated fulfillment for roadside collection.
Consumers worried about COVID-19 have turned to same-day e-commerce ordering of groceries in large numbers. According to a study by Brick Meets Click, the number of US households using online grocery services more than tripled – from 16 million (13% of US households) in August 2019 to 46 million (35% of US households) ) in June 2020. While the trend towards online grocery shopping was already underway, it is estimated that it would have taken us three to five years to achieve this level of penetration without the effects of COVID-19.
And the numbers from leading grocery retailers confirm the noticeable demand for e-commerce for groceries. For example, Target saw roadside pick-up growth of over 700% in Q2 2020 compared to the same point in 2019, and Walmart saw e-commerce sales growth of 97% in Q2.
Hug roadside pickup truck
In order for grocers to adapt and stay relevant – and for consumers to pay the cost of the last mile – grocers must accept roadside pickups. Given that stores are designed for optimal in-store shopping, it is often inefficient for employees to wander the aisles collecting orders and far from sustainable when it comes to operating margins. In addition, stores were forced to quickly set up online pick-up areas, creating a confusing pre-store experience for consumers.
To address this, some grocers have started installing MFCs in their stores to automate order picking. Thanks to lower operating costs – the result of digital ordering instead of cashiers and robots taking orders and stocking shelves instead of employees – the financial picture of a grocery store could change if auto-roadside pickup is a significant part of its volume.
Currently, it is mainly the large grocery stores – including Kroger, Albertsons, Stop & Shop, Meijer, Hy-Vee and Target – who are converting retail space into micro-fulfillment or building dedicated “dark stores” for micro-fulfillment without retail space. With Walmart’s recent $ 3.5 billion expansion in Canada, all stores have dedicated MFCs. Even so, we’ve seen general interest from retailers and up.
MFCs can cut costs, but they’re not for everyone
Grocers considering a move toward micro-fulfillment to support roadside collection need to understand what differs from traditional retail shopping and protect profitability.
To begin with, grocers should consider weighing the initial investment against long-term operational savings and changes in consumer baskets. The initial setup investment is significant – the cost of a single MFC that can process 5,000 orders per week varies widely, but it can range from $ 8 million to $ 10 million to set up and build. In the long run, an MFC enables grocers to reclaim fees from third-party delivery services like Instacart, which may consume almost the entire profit margin on the order – as long as the grocer has the volume and enough “eyeballs”. on their e-commerce website to make the payback period attractive.
MFCs are still evolving to increase the amount of the basket that can be automatically picked. More bulky items like bottled water, fresh items (e.g. produce), and some frozen and chilled items are still being worked out. Consumer baskets can also be personally different from online baskets – ecommerce baskets tend to be less profitable as they tend to be made up of bulk and staple foods. Additionally, ecommerce baskets lack the same level of impulse buying as there are no ads, graphics and smells in a digital environment compared to a physical environment.
Despite these challenges, MFCs are a promising solution that will enable grocers to offer convenient e-commerce – and most importantly, keep sales going. And that’s certainly preferable to losing it to the competition.
MFCs are part of a larger e-commerce strategy
MFCs are just one of many levers grocers should consider to improve the roadside customer experience and increase the profitability of click-and-collect shopping carts. While MFCs require upfront investment, reduced operating costs through increased automation could lead to a stable state of higher margins in the long run. MFCs may not be for everyone – but in an industry historically known for wafer-thin margins, they make a lot of sense to many.
One thing is certain: as e-commerce accelerates, the grocery retail space will change dramatically and grocers will need to act quickly to remain relevant. While not all grocers were ready to move quickly to e-commerce during the pandemic, they will need a strong e-commerce strategy going forward. MFCs are one piece of that puzzle that needs to be solved for the future of grocery e-commerce – and an important consideration to drive future profitable growth in this space.