What's the best delivery model for a grocer? Four guiding principles to consider

Although delivery is a convenient way for online grocery shoppers to receive orders, it’s also more costly for retailers to execute than pickup. So, while the desire to remain relevant with customers and competitive against rivals is strong, grocers need to answer the question, “What’s the best delivery model for my business - delivery or pickup?”

The challenge is that there’s no single right answer to this question. So, determining what’s best requires that grocers evaluate issues related to control and cost while never losing sight of how those choices impact their customers’ experience.

Based on our experience, here are four guiding principles for a grocer to consider when answering this question.

#1 Recognize that delivery and pickup are complementary.

Delivery is the most common way that online customers receive their orders from brick-and-mortar grocers today, but that’s because delivery was how most US grocers initially filled online orders. However, it’s clear that a grocer who offers only delivery is underserving its total addressable market.

Our work with approximately one dozen grocery banners who offered their online customers a choice between delivery and pickup highlights this point. On average, we found that one-quarter of the customers used only pickup when shopping online and the number of customers who used both services was extremely low across all the banners.

As a result, a grocer needs to offer both delivery and pickup;otherwise, it will be at a competitive disadvantage. We expect pickup will gainshare of online orders and volume, driven by more customers gaining access to receiving online orders this way from even more retailers.

How retailers integrate the two services depends on a range of factors,underscoring the need for grocers to evaluate this issue for themselves.

#2 Leverage the store as it’s a strategic asset.

A store’s proximity to customers can help reduce costs connected to delivering online orders.   Although most grocers generally grasp the effective reach that a store has in the physical market, our research reveals that customers drive less than four miles, on average, to visit their preferred grocery store.

The store can also help create efficiencies when co-locating the“pick-and-pack” activity associated with assembling delivery and pickup orders. This moves more volume through the store, leading to better utilization of resources dedicated for this operation as well as improved same-store sales and space productivity.

There’s opportunity to free up square footage at the store level in order to support online sales. For instance, when analyzing assortment practices for a regional grocer, we discovered that nearly one-third of the packaged good SKUs physically available in the center store across the categories examined didn’t sell at least one item during the prior 13-week period.

So, while it’s evident that grocers can rationalize assortment, right-size categories, and redesign sections of the store layout to free up space, how that space is used or allocated will vary. Some stores may integrate a micro fulfillment center while other stores may only need space to store or stage assembled orders.

#3Optimize the three, distinct activities that make up ecommerce.

Online shopping, whether for delivery or pickup,involves three distinct and interconnected activities: orders are placed,assembled, and delivered. Viewing ecommerce this way and managing the parts can help optimize the overall process and customer experience.

When it comes to allowing customers to place online orders, some grocers operate their own ecommerce sites. This approach provides more control over branding, promotions, purchase requirements, service fees, and customer data to name a few benefits. Although it does come at a larger cost, a grocer’s effort to monetize the site and its digital reach could offset much, if not more than this investment.

If a grocer has its own site, then it’s responsible to determine how best to assemble the online orders. Currently this is challenging, as it’s time consuming and can degrade the shopping experience for customers in the store. Automating the“pick-and-pack” operation solves these problems, assuming a grocer is able to free up enough space in the store.

When it comes to the transporting a delivery order to the customer, a grocer is able to test both first- and third-party services as well as determine the options that best fit different market conditions. Even though third-party providers mitigate risk and costs for grocers, it’s clear that other operating practices arenecessary to reduce the cost-to-serve to a more sustainable level.

Autonomous delivery is one tactic that promises to drastically reduce delivery-related costs; however, rollout of this tactic isstill years away and even so some customer segments may prefer to have a person deliver the groceries. In the meantime,leveraging ways to build route density via new value propositions is anotheropportunity to explore.

#4Embrace metrics that align with an omnichannel approach.

Grocers have entered a new era where customers shop in many ways, making the task of managing the overall business more complex. Delivery is simply one way a customer can receive online orders from a brick-and-mortar grocer, and online shopping represents only a fraction of all grocery shopping sales.

To adapt, a grocer needs to embrace metrics that take a more holistic view of the customer and business simultaneously. Even though we know that very few households shop entirely online for groceries, our research also shows that a small and growing base of customers is doing around half of their grocery spending online.

Monitoring customer and/or household purchases is vital to understanding how strategies are strengthening the overall business,whether that’s attracting new customers or motivating more spending among existing ones. This capability is also essential for targeting and evaluating the impact of personalized offers.

The cost of selling an item to a customer in the store is different to selling it for pickup or even delivery. For instance, if a customer purchased the same basket of goods online as in the store, the gross margin would compress 4 percentage points if picked up and 6 percentage points if delivered, according to our modeling.

Measuring the contribution margin of transactions helps to inform decisions about ways to improve profitability.

What’s the best model for your business?

It’s evident that most grocers will need to rely on outside solution providers to some degree in order to optimize outcomes for both the customer and itself. It’s equally clear that answering the question, It’s evident that most grocers will need to rely on outside solution providers to some degree in order to optimize outcomes for both the customer and itself. It’s equally clear that answering the question, “What’s the best delivery model for my business?”demands a thoughtful and thorough assessment as there are many choices regarding costs and control to consider.

The US grocery industry is evolving, and we’ve helped many retailers understand the potential paths to consider going forward. Our experiences reinforce the value of grocers gaining a better understanding of their customer and their shopping behaviors. And, we know that winning in grocery, whether in-store or online, requires excelling in perishable departments.

Grocers and providers are encouraged to reach out to us to discuss this topic in order to advance our collective efforts at transforming the grocery shopping experience and creating sustainable business models.

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