retail news in context, analysis with attitude

Interesting bit of analysis, courtesy of the folks at Wells Fargo, who conclude in a new report that "online grocery still nascent, but could be at the tipping point of acceleration: While online grocery is currently only a small piece of the U.S. grocery market ($13B or 2% of the total industry), we now believe acceleration is more likely from here given several developments: (1) proof the online grocery model is working in non-Manhattan markets by companies like Fresh Direct and Relay Foods, (2) our industry sources which suggest Amazon is preparing to launch its Amazon Fresh grocery delivery service outside of Seattle, and (3) the potential for Whole Foods to test grocery delivery in several markets. We also believe the propensity for consumers to shop for groceries online is increasing, given the proliferation of smart phones and broadband access, growth in online recipe sites/blogs, and evidence consumers are purchasing consumable items not previously deemed logical for online purchase (diapers, pet food, personal care)."

The report goes on to make the following points:

• "Grocery delivery is a challenging business given the intricacies of the model (delivering perishables and optimizing driver routes while still turning a profit) and the change in customer behavior required (upfront planning, inability to pick out your own produce). However, we believe online grocery delivery may eventually be a better model, allowing for one less trip to the store but also potentially fresher goods with a shorter supply chain, personalized recommendations based on past orders and current shopping behavior (you have tomatoes and mozzarella, do you need basil?), easy reordering of typical purchases (eggs, milk, etc.) and integration with online recipes allowing for easier shopping list creation."

• "Skeptics of the online grocery model suggest that it does not translate well outside of markets like Manhattan, where population density is high, consumers are more time-starved, and lack easy access to stores and cars to transport groceries. However, companies like Fresh Direct, which now derives 50% of sales from markets outside Manhattan, and Relay Foods, which operates in the mid-Atlantic, suggest that the online grocery model can work outside of super-urban locations."

• "Amazon is building out its fulfillment center network coincident with new state tax law deals in important states (CA, TX), and our industry sources suggest that it could be preparing to expand its Amazon Fresh grocery delivery service into California (SF and LA) and potentially NY and Philadelphia. Amazon has been fine tuning the model for six years in Seattle, and has the advantage of allowing customers to combine grocery orders with higher margin general merchandise to improve profitability. Whole Foods also appears to be preparing to test grocery delivery in several markets, which could drive basket size and frequency with existing customers and attract new customers not as close to a store. Basket sizes for online grocery are typically much larger, particularly with perishables, although fewer impulse buys could be a partial offset. We believe orders would be picked from stores initially until the business reaches critical mass, and Whole Foods should be able to leverage its significant distribution network, local sourcing, and superior quality to ramp more successfully and perhaps embed some of the costs (trucks, drivers, technology) in SG&A growth vs. a significant upfront investment."
KC's View:
There is nothing like the near-musical language of an analyst, is there? You think you are going to hear dry facts, and then the words come spilling out, making your heart soar, your pulse race, and your eyes water...

Okay, maybe not.

The thing is, literary criticisms aside, I pretty much agree with the Wells Fargo analysis.

The two things that aren't in these passages are:

• Young people who have grown up in an iTunes/Amazon world have vastly different expectations about the shopping experience than their elders, even though many of these older folks have easily adapted to online shopping in many venues. This means that when these kids become the center of the target for food retailers, they'll expect an online component of some kind as a sign of relevance. Retailers that don't offer such an option risk being marginalized.

• Grocery delivery is one thing. Online ordering, with the customer picking up the order at the store is yet another ... and from everything I hear, it is the far more profitable model. Which is why a lot of retailers are opting for this approach, at least as a starting point.

Sure, it takes investment. Sure, it takes some courage. Sure, it takes a willingness to disrupt an existing business model.

But that may be the price of entry for doing business in the 21st century.