Published on: September 21, 2016
Content Guy's Note: The goal of "The Innovation Conversation" is to explore some facet of the fast-changing, technology-driven retail landscape and how it affects businesses and consumers. It is, we think, fertile territory ... and one that Tom Furphy - a former Amazon executive, the originator of Amazon Fresh, and currently CEO and Managing Director of Consumer Equity Partners (CEP), a venture capital and venture development firm in Seattle, WA, that works with many top retailers and manufacturers - is uniquely positioned to address.
This week's topic: Last week's reports of the death of e-grocery have been greatly exaggerated.
And now, the Conversation continues...
KC: Tom, I thought it made sense to circle back on a study that came out last week, from TAB Analytics, which essentially suggested that with the exception of Amazon, e-grocery is pretty much a failure across the board. What's interesting about the report was the way they spun the numbers - suggesting that "just" 4.5 percent of consumers were regularly buying groceries online. I'd have two observations here. First, that number actually is higher than the most recent US Department of Commerce number of four percent … and it ignores that this actually adds up to (if my math is right) more than $20 billion in sales. And I've read at least one estimate (though not from TABS) that this number could quadruple by 2023. It seems to me that this study is both myopic and pessimistic in ways that simply don't make sense.
Tom Furphy: I would agree with you that 4.5 percent is actually a large number. Further, it has increased from 3.9 percent a year ago. That is a fairly significant penetration shift over just one year. And considering that the 4.5% is based primarily on Amazon and incumbent “full basket” players like Peapod and FreshDirect, that’s a pretty significant share across just a few players.
It seems that by deeming it a failure, the survey is assuming that the industry has given online grocery shopping a full, honest effort. But it hasn’t. Full basket grocery has taken a long time to mature for a number of reasons. It has been difficult to offer a great customer experience because the available shopping tools have been somewhat cumbersome, it’s hard to substitute for the sensory nature of the store experience and it’s hard for retailers to stay fully committed to a well-executed program due to the difficult economics. However, all of this is getting much better and will stand to increase total market share significantly in the coming years.
Like Moore’s Law, which states that computer processing power doubles every 18 months, as it has for decades, the amount of innovation in grocery shopping will also continue to accelerate significantly into the future. Replenishment shopping for center store items, interactive meal planning and preparation assistance, easy ordering across devices, economical delivery and easy pickup - it’s all coming. If you consider online grocery really only started less than 20 years ago, we’re still in the early days of its innovation. Brands and retailers that embrace that will do very well. Those that don’t, and hold onto the notion that e-grocery is a failure, will struggle.
KC: Regardless of the numbers that traditional retailers generate in the e-grocery sector, I can't help but think that the one thing they have to keep focused on is the fact that even if the projections are only half right, and e-grocery only hits eight percent, that $40 billion in sales has to go somewhere … and if many bricks-and-mortar retailers don't want it, then companies like Amazon, Walmart/Jet and Kroger will be more than happy to take it. Competitively, they have to look at the upside of the trend, not the downside.
TF: Our analysis at CEP projects Amazon alone to grow to well over a $40B grocery business in the next five years. This is driven mostly by programs like Subscribe & Save, Dash, Internet of Things, Pantry and Prime Now. AmazonFresh delivery and pickup will drive it, too.
I believe that most brick and mortar retailers do not want to cede this volume. Many are already building capabilities to capture it. So, when you add the amount of e-grocery growth that will come from existing grocers and new models to the Amazon’s piece, the total number should dwarf $40B. Your $80B estimate could be very reasonable. In that case, Amazon would own half of the market, with others sharing the balance.
Customer-centric retailers and new models that drive the growth of the market will do so because they will use technology to improve the shopping experience and they will optimize the pickup and/or delivery experience and economics. Technology will enable easy shopping, automation of replenish-able products, better meal planning and shopping lists, better mobile capabilities and an overall more robust shopping experience. And the delivery environment will get better as companies that are competing for the last mile mature, build better density and drive higher volumes. Yes, I am repeating myself. These innovations will be significant and will support a much larger market than we see today. And if most traditional retailers become proficient, the total could far surpass $80B.
KC: I also think it was telling that the study essentially suggested that retailers are spending too much time and money chasing the millennial spend, which is less at this point than the dollars spent by people with kids. While I agree that most retailers always have to aim at the center of the target because that's where the dollars are, it strikes me as enormously short-sighted to ignore the fact that millennials are going to be at the center of the target (with their spouses and kids) pretty soon, and they're simply not going to abandon patterns and habits that they've developed over a long period of time. It is these millennials that will drive e-grocery sales down the road, and again, retailers need to start laying that pavement now … because to ignore that e-infrastructure is tantamount to just handing over those sales to retailers that are better prepared. Once again, Amazon would be happy to have those sales. Agreed?
TF: I agree. Millennials are important. As you say, they are moving into the center of the target. So the mere dollars that they will drive will be important on their own. But they are also a proxy for other slower-tech-adopting segments of the market.
I went back and re-read the press release. TAB Analytics said “Millennials are also harder to target with deals than other demographic groups since their participation in deals is well below the national average, particularly circulars and free standing inserts.” It stated that they are less sensitive to promotion, are less responsive to the weekly circular and don’t use FSI coupons. OK, let me get this right. Since they don’t respond to these archaic, expensive and generally ineffective practices – ones which often put retailers and manufacturers on opposite sides of the ledger – we should ignore them? Really?!?
Millennials shop differently than older generations and they are giving us a direct glimpse into the future. They have become accustomed to a completely different set of tools to help them in their daily lives. Tools that the generations before them didn’t have at their disposal. They are true digital and mobile natives. Much of the traditional requirements of shopping – such as reading the insert, clipping coupons, driving to the store and walking up and down aisles – simply don’t work for them. They are used to easily ordering a car, a meal or a movie using technology. Amazon is more comfortable to them than going to the supermarket. Generations that follow them will be even more digitally native, and they will also help older generations become more comfortable with technology. Therefore, it behooves retailers and brands to understand the millennial customer more deeply and build capabilities to serve them.
The Conversation will continue...
- KC's View: