Few of us are indifferent about “going shopping.” Some look forward to shopping for apparel, music or groceries but for many of us it’s a chore we want to avoid. Those using mobile or online shopping are relieved of some of the effort and inconvenience that shopping entails, but mobile and online buying lack some advantages of shopping in physical stores.
Seeing entire objects, touching merchandise and smelling fragrances are part of the sensory inputs that online shopping denies us. Those sensory inputs are especially important when we are grocery shopping. Groceries are a huge part of total retail sales.
Supermarket sales are $649 billion annually, so ambitious retailers find the segment hard to ignore. Still the margins in mainstream grocery stores are a thin 2%, leaving little cushion for missteps or competitive pressures. For a retailer to be successful in groceries, it must craft a strategy attuned to a specific targeted consumer segment — such as low-moderate income, high-income, niche interest or the price-conscious consumers. Online grocers face the same discipline and they understand that “online” is just another channel to reach their chosen consumer segment. In mid-2016, 7.5% of all retail sales were conducted online. The online channel is growing quickly and by 2025, 20% of grocery sales will be conducted online.
Physical grocery chains familiar to most consumers include Kroger’s, Safeway, Publix, Wynn Dixie, Albertsons, Walmart Supercenters and others. Conventional grocers face competition from each other and from other physical stores differentiated by package size, unit price, items carried, and loyalty programs, such as gasoline discounts or club membership. At the pricey end of grocers is Whole Foods which targets consumers seeking foods with low sodium, natural, organic, sustainably farmed, gluten-free, non-GMO and other higher priced attributes. At another price extreme is Aldi, a “hard discounter” where prices can be 20% below Walmart’s, but the choice of brands and package sizes are limited. Aldi appeals to consumers who are serious about low prices.
Online and mobile shopping have been available in some form for decades (e.g. Peapod), but technological changes such as higher bandwidth to the home, better software, smartphones, robust online payment systems, and home computing equipment set the stage for today’s painless online shopping. Retailers such as Walmart and Amazon have made online buying a generally pleasant and fast process. Amazon’s 3rd quarter 2016 sales were $33 billion, almost entirely from online sales. Amazon won 53% of the entire increase in ecommerce during 2016. Walmart’s 4th quarter 2016 sales were $118.2 billion, mostly from sales in physical stores but it is pushing hard for a dominant place in online groceries. The two behemoths seem headed for brutal online competition.
Free shipping removes one of the disadvantages inherent to online buying and it is offered by both Walmart and Amazon for grocery orders above a nominal amount. The average Amazon package was delivered in 3.4 days, compared with 5.6 days from everyone else. But time in transit for groceries needs to be akin to the time it takes for a family’s car trip from the local grocer. So, free delivery is not enough for consumers concerned about the safety and freshness of meats and fruits delivered. It must be fast and that increases the cost.
Prices for beef and chicken are very important to low-middle income shoppers. To meet that consumer requirement, grocers need to set prices for meats with almost no margin, a tactic inconsistent with finding money for expedited delivery costs. Amazon’s almost preposterous “trials” of drone delivery are likely a publicity stunt and not a precursor to a real delivery option. Autonomous terrestrial vehicles will be harnessed for retail deliveries long before drones are.
Retailers selling apparel and dry goods online have made inroads against their physical store competitors. For apparel, the need to “try on” apparel has held back some online buyers. To help diminish concerns over ill-fit or disappointing appearance of online apparel, GAP has developed a virtual fitting room and an avatar that matches the buyer’s dimensions. That innovation will be even more attractive if it allows friends to virtual shop together, perhaps without having to leave their respective homes. That virtual wrinkle in online may hasten the demise of malls.