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Online grocery demand: Food retailers must get ready for change

5 min read

Restaurant and Foodservice

It’s 7:42 a.m. in Busan, South Korea, and Ji-hye Kang is running late for work. She grabs her bag, ties back her hair and snatches her keys just before hustling out the front door. At the subway station, a digital sign shows five minutes until her train’s arrival. Just below the sign, lining the walls of the subway stop, are rows of large photo displays that look just like grocery shelves. Ji-hye pulls out her smartphone and scans the QR codes off product photos for two pounds of ground beef, an assortment of fresh vegetables, long grain rice and a bottle of white wine. Her order is confirmed with just enough time to beat the closing doors of her departing train. She drops her phone back into her bag knowing that the groceries will arrive at her house later that night at 6:00 p.m., an hour before her three friends join her for a night of TV and gossip. She smiles.

What sounds like the opening to a futuristic, science fiction movie happens every day in South Korea thanks to Tesco’s Homeplus digital grocery business; a venture that has made it the number one online grocery option in the market. It is a business that was created to meet a specific need of customers: time. The Homeplus model is selling convenience as a service as much as it is groceries.

And Tesco isn’t the only company seizing this opportunity. Responses from an SCM World survey of 276 retail, consumer products and high-tech companies revealed that consumer product manufacturers and retailers are deploying three key strategies to capture competitive advantage through a focus on service differentiation:

1)      Expanding SKU portfolios

2)      Changing distribution networks

3)      More actively going direct-to-consumer

The challenge of digital demand is fundamentally about complexity — both in terms of variety of items consumers expect to see and the different ways they expect to have those items delivered. Early e-commerce focused on items that lent themselves to virtual shopping and parcel-to-the-home delivery, most notably books and electronics. In the world of food and beverage, many people originally assumed shoppers would need to actually see and touch products to be sure they got what they wanted. Plus, the cold-chain requirements, short shelf life and relatively low value-to-weight ratios all worked against traditional e-commerce models. Spectacular failures by Webvan and Streamline, to name two pioneers, seemed to prove the folly of e-commerce in grocery.

However, new research shows that these pioneers may have been onto something. Tesco’s Homeplus model is increasingly visible in markets around the world, with many online grocery shopping methods such as buy-online-to-collect in-store, subscription style replenishment ship-to-home and traditional parcel delivery all in operation. The implications for supply chain are especially challenging given traditional low margins in grocery and the special demands of food logistics.

First, it means more SKUs. Retailers like Target are demanding exclusives as part of their efforts to differentiate, while retailers in general are pushing hard for more item selection both at the shelf and in online webstores. The consumer level pressure to expand SKU portfolios is tremendous, as the survey data shows, and retailers feel this pressure most acutely.

In response to demands from today’s e-commerce and mobile-enabled customers, is your supply chain supporting: Much larger SKU assortments; Some SKU expansion; little or no change; or smaller SKU assortment?

Second, it means new logistics networks and even different distribution centers. In addition to the special requirements of item level picking rather than case or pallet movement, distribution centers must increasingly accommodate a wider variety of carriers and different equipment. For some, this means allotting space within existing DCs for Amazon fulfillment. For others, like Marks & Spencer in the U.K., it means much larger multi-purpose DCs. Overall, the majority in all three sectors see some type of change in the DC design they plan to roll out.

In response to demands from today’s e-commerce and mobile-enabled customers, is your supply chain building: Larger, more centralized distribution centers; smaller, more local distribution centers; or the same type of distribution center?

Finally, the data shows a definite move toward developing new and direct channels. Retailers, responding to Amazon and other e-commerce pure plays are aggressively building direct-to-customer fulfillment capabilities. Nearly nine out of ten say they are now fulfilling direct. But now consumer packaged goods and food & beverage are also getting into the act, with a majority either going direct to customers themselves or through e-commerce pure play channel partners. Branded food companies are even taking the relationship with consumers into the realm of interactive media with direct engagement in product innovation, as in the case of Frito Lay’s mass market push for consumer flavor suggestions or Mars’ customized M&Ms. The digital revolution has arrived in grocery.

In response to demands from today’s e-commerce and mobile-enabled customers, is your supply chain: Building direct-to-customer fulfillment capabilities; relying on e-commerce retailers for customer fulfillment; or seeing little or no change to existing channels for customer fulfillment?


Kevin O’Marah is the chief content officer of SCM World.