Back to Resources

The eGrocery Revolution: Examining the Economic And Psychological Implications of Hyperlocal Micro Fulfillment with Grocery Automation

he eGrocery Revolution: Examining the Economic And Psychological Implications of Hyperlocal Micro Fulfillment with Grocery Automation

Introduction

The direct-to-consumer grocery revolution is coming. There are no two bones, ifs, ands, or buts or any other silly idiom about it.

It is coming.

Nielsen suggests that the market for direct-to-consumer grocery in the U.S. could grow to as much as $100 billion by 2022, which, although it is phenomenal growth, still only represents a sliver of total U.S. grocery sales (Redburn Partners Research, 2018). In other words, once the freight train gets a full head of steam, forget about it!

So, retailers are left with two choices. They can either bury their heads in the sand and hope that the prognosticators are all wrong, or they can take action. The former is, of course, suicide, while the latter can be more complicated than one might think.

But “going direct” is not as simple as just saying it. Meeting consumers’ needs in an economically sustainable way requires smart planning, smart operational design, and smart risk-taking, based not on where retail is today, but on where retail is going in the future.

Turning a sustainable profit on direct-to-consumer grocery means answering fundamental questions: Where one’s consumers are located? Where the important points of differentiation lie within one’s business model? Which innovations make the most sense in the long-run against the shine of “tech for tech’s sake?”

Automated micro fulfillment may not only be the answer that unlocks new business model economics for grocery retailing, but also the chemical reaction that unleashes an entirely new world of previously impossible consumer shopping experiences that were far beyond the technological means and wildest dreams of even the wildest of dreamers... until now.  

History Matters

While economics are always key factors in decision-making, history and psychology are perhaps even more telling guides. Answering any question solely on the basis of economic assumptions runs the risk of missing the 30,000 foot view of how consumers actually shop. We must take a quick look back on the history of grocery retailing in order to understand the full context.

Retail is a creature of habit. Every 30 to 40 years or so, retail innovation cycles like clockwork, and grocery retail innovation is no exception. Stores, along this innovation continuum, have always existed for five key psychological reasons: 1) Immediate Gratification, 2) Convenience, 3) Inspiration, 4) Taction – the ability to touch and feel a product, i.e. to get confidence in a purchase), and 5) Experience – the memory and delight of being somewhere.

The most important hallmark in grocery retailing occurred in 1916, when Piggy Wiggly established the first “full service” grocery store, giving consumers things like shopping carts, checkout lanes, and even the price tags on items that consumers still know and love to this day.

Piggly Wiggly, over a century ago, basically rolled all five psychological dimensions into one complete and cute Piggly-branded grocery experience, and retailers have been copying or incrementally innovating on the concept ever since.

Flash forward three to four decades later, and mass merchants like K-Mart, Walmart, and Target all burst onto the scene coincidentally in the same year, 1962. Not long after that, the “supercenter” was born, and henceforth, consumers were able to meet all five of their psychological needs in a new and compelling one-stop shop experience across multiple categories. But these innovations also came with a price – the mass market shopping experiences in, say, Arkansas, looked strikingly similar to those in Nebraska, and retailers’ assortments were bound by what they could fit inside their four walls.

But, then in the mid-1990s, the game changed dramatically. Amazon announced itself with authority by positioning itself as the convenient “everything store.” It showed the world that assortments were no longer bound by physicality, that fulfillment could happen on consumers’ own schedules, and, most importantly, that shopping, by way of a computer, could be personalized; the digital experience of someone living in Arkansas could, for the first time, look quite different than the experience of someone living in Nebraska.

Amazon and, more broadly, e-commerce in general, reset consumer expectations of how they could shop. Immediate gratification, convenience, and inspiration were no longer just the purview of physical stores.

Yet The Future Is Still Unwritten For Grocery

Unsurprisingly, brick-and-mortar grocery retailers have been working overtime to claw back this lost territory, but there is a limit to what they can accomplish. Taction and experience are still strong beachheads upon which to stake their claims, but, if they cannot keep pace with modern day consumers’ speed and convenience expectations, today’s grocers do not stand a chance.

That’s where fulfillment comes in – both as a table stakes play to deliver speed and convenience in an economically viable manner, and as a jet propulsion system to transform the future of in-store shopping. The economics of doing nothing are dire.

As the graph above shows, standing pat and assuming that the same grocery business model that got one here will get one there, despite changing consumer expectations, is ludicrous. As eGrocery penetration increases, it places an incredible strain on grocers’ profits. Traditional methods of eGrocery fulfillment and the cost of shipping are simply too expensive to overcome without the help of outside innovations.

But, at the same time, not all innovations are created equal, especially when one considers the U.S. market. As it stands now, there are four potential routes grocers can take.

Option #1 – the Suicide Option -- is to stand pat and to try to pick and pack and fulfill grocery orders manually out of existing centralized warehouse operations.

Option #2 – the Crowd Source Local Option – is to work around grocers’ existing centralized supply chain infrastructures and to leverage third-party picking services to come into stores (e.g. Instacart) for last-mile efficiencies.

Option #3 – the Centralized Automated Option – is to build centralized, automated warehouses that can pick and pack products for shipment with incredible efficiency (a la Ocado and Kroger).

Option #4 – the Hyperlocal Automated Micro Fulfillment Option – is to build automated micro fulfillment centers at the local level to both pick and pack orders efficiently and to take advantage of last-mile cost reductions.

If you are scoring at home, you likely already see where this is going, but just for emphasis -- Option #1 and Option #2 are complete non-starters. Standing still, as you can already see above, is an economic road to nowhere, and the long-term implications of believing that third party pickers can come into physical stores is just as insane.

The sheer mechanics of third-party picking are not tenable. Direct-to-consumer grocery penetration is in the very low single digits right now. Over the next few years, if it grows anywhere near the range of 5%, 10% or, god forbid, it ever approaches the penetration rates of furniture, toys, sporting goods, etc. (well above 15%), then there would be an insane amount of pickers within stores elbowing actual shoppers who comprise the remaining 85% of the business!

This situation makes no sense whatsoever – not from a cost perspective, not from a scale perspective, and especially not from the perspective of a great in-store experience that differentiates itself on all the best of what a physical experience has to offer. You can envision it now: “I am sorry, ma’am, can you move your shopping cart full of five different customers’ deliveries so I can squeeze my cantaloupes?” The situation is downright laughable.

So, that leaves two remaining options on the table: Centralized Automated and Hyperlocal Automated Micro Fulfillment.

It would be wonderful to think that the centralized automated fulfillment model that works in the UK could work here in the US, but that is likely fallacy. First, the US market is not as dense as the markets overseas. The country is vast, which means the cost of last-mile delivery will still be too expensive and the immediacy of the deliveries will also be hamstrung. Second, large automated facilities require a significant amount of capital to build, and who is to say whether in what one builds and invests huge amounts of dollars now will continue to work over the long-run, as consumer expectations and technology continue to evolve?

All of these considerations leave us with Option #4, Hyperlocal Automated Micro Fulfillment. Economically, hyperlocal automation, via micro fulfillment inside of existing grocery stores, has tremendous advantages over the other options out there.

First, automation improves pick and pack efficiency. Second, grocers are typically already close to their consumers from a last-mile perspective. Third, small hyperlocal micro fulfillment operations are relatively cheaper to deploy. And, fourth and finally, hyperlocal micro fulfillment centers allow grocers to repurpose unnecessary square footage inside of grocery stores for higher return-generating activities.

Consider Takeoff Technologies, one of the pioneers of automated micro fulfillment. Takeoff can deploy an automated Micro Fulfillment Center using as little as one-eighth of the space of a typical grocery store and at a cost ranging from only $3.0 million to $5.0 million per installation, depending on the cost of construction for the specific space – far less than the tens of millions of dollars it costs to build a centralized automated warehouse and far more modular and adaptive in design too. Trying to redesign a large centralized warehouse versus adapting a modular micro fulfillment site is like trying to steer the Titanic relative to a speed boat. Do the former wrong, and with the next changing tide of consumer expectations, it’s likely that at some point, the retailer will hit the iceberg dead on.

Ultimately It Is The Consumer Who Matters Most In The Decision

This last point is crucial, because it goes beyond the economics of the discussion and back to how we started this piece – with the history and psychology of retail as our guide.

Grocery stores need to have a reason for being. In the not so distant future, and as stated earlier in the piece, the only psychological separators between digital and physical retail will be taction and the experience and social aspects of being out somewhere in the world.

As a result, grocery stores have to make their stores more sensory and experience-driven. Center store grocery needs to shrink, and then the periphery of the store can become more experiential and tactile. Consumers don’t need to touch and feel their macaroni and cheese boxes, and retailers don’t need to carry inventory on shelves as a result anymore either, but consumers will always want to taste and experience life, to enjoy the smell of food, the look of a fresh cut of meat, and the sensation of something unexpected.

Hyperlocal micro fulfillment enables this new expression to happen by separating the act of shopping from the act of buying. Retailers can clear their floors of the products consumers don’t need to touch and feel, and yet still have them available to their consumers at a moment’s notice through the touch of a button, using automation and the right digital touchpoints. All the while, the floor can then be opened up to highlight all the great experiences and sensory delights unique to a grocer.

The best way to conceptualize this is to imagine an IKEA, modernized by technology, but instead of the setup being about furniture, it is all about grocery. Through the power of digital solutions, the entire world becomes the consumer’s e-commerce doorstep.

This is already a reality overseas at Alibaba’s Freshippo grocery store in China. The gentleman you see in the photo above has a choose-your-own adventure shopping experience at his fingertips. If he wants the traditional grocery experience, he can have it. If he wants to scan barcodes on items and bag and pay for the items himself, he can do that too. He can also scan items on the floor and have them delivered directly to his home. But, most importantly, his experience in the physical world, via the mobile phone, like digital shopping in Arkansas and Nebraska, is now 100% personalized within the very space in which he is standing.

This is the next innovation in retail that is coming between 2020 and 2030 – the personalized physical store – and hyperlocal automation, via micro fulfillment, is the only sure way to make it happen. But you don’t have to wait ten years to see the transformation in action. My previous example, Takeoff Technologies, actually has live sites operating with retailers, making the dream of hyperlocal, automated micro fulfillment a reality. The eGrocery revolution is now.

Author’s Note: Thank you to Takeoff Technologies for sponsoring this article. Takeoff is a leader in the automated micro fulfillment space. With pilots ongoing with the likes of Sedano’s, Albertsons, and Ahold Delhaize, they are asking important questions and giving the industry intriguing new answers.

Chris Walton, Co-CEO and Editor-in-Chief, Omni Talk

Chris Walton is a leading expert and influencer in omnichannel retailing. An accomplished Senior Executive, Chris has high-level executive experience across nearly every discipline within retail. Currently he is the Co-CEO and Editor-in-Chief of Omni Talk, one of the fastest growing blogs in retail. He is also a Senior Contributor for Forbes, where his work has been read by over 3 million people, a regular keynote speaker, and he sits on the Advisory Boards for Delivery Solutions, Sezzle, and Xenia Retail. Prior to starting Omni Talk, Chris worked for Target, where he was the Vice President of the retailer’s Store of the Future project and also the Vice President of Merchandising for Home Furnishings on Target.com. Chris began his career at Gap, Inc. and holds a BA in Economics and History from Stanford University, and an MBA from the Harvard Business School.

Ready to learn more?

Find out why Takeoff is the leader in micro fulfillment technology. Contact us for a free consultation.

Talk to us