Sparking the Online Grocery Inferno

As businesses like Amazon continue to push the envelope (or package) on faster deliveries, consumers have come to expect rapid deliveries as the new normal

Two-day shipping may have seemed like breakneck speed a few years ago, but even that’s becoming slow compared with one-day and now same-day shipping.

Even if consumers didn’t demand these speeds before they became available, once a major company like Amazon, Walmart or Target starts to offer it, this on-demand culture often gets cemented as the new normal. Consumers generally struggle to go back to old habits like paying for shipping or waiting several days for the order, barring extenuating circumstances like we’ve seen during the coronavirus pandemic.

Nowhere is this more true than grocery, where speed can be the difference between getting ingredients in time for a home-cooked meal vs. ordering takeout. Not only do 92% of online grocery customers prefer same-day fulfillment over next-day or longer options, but 65% of shoppers would consider switching to another grocer that offers same-day pickup or delivery, according to our 2019 report.

That means that as online grocery becomes more prevalent and more grocers offer same-day fulfillment, those that do not provide these options will likely fall behind.

Quickly Rolling Out Same-Day Fulfillment

In just a few short years, online grocery has gone from a novelty to a significant component of the industry. Yet simply offering online ordering isn’t enough. Through either delivery or curbside pickup, shoppers increasingly expect same-day fulfillment, ideally within two hours.

When Amazon acquired Whole Foods in August 2017, that correlated with a spike in grocers taking e-commerce more seriously. Over the course of 2018,  same-day delivery exploded, particularly as major grocers like Albertsons and Kroger partnered with delivery services like Instacart. In all, same-day delivery grew by 400% in 2018. And even with a higher baseline, same-day delivery still grew by an impressive 48% in 2019, according to our analysis.

As grocers have rolled out these offerings, online penetration has also shot up. Following years of stubbornly holding at around 2% of the market, online grocery accounted for around 4.5% of U.S. industry sales in 2019, according to Deutsche Bank estimates (Deutsche Bank, “Food Fight Round 2: Convenience & Digital Gaining Ground,” 12 November 2019). And while the bank previously predicted this share would hit 12% by 2025, the coronavirus has caused a paradigm shift.Online grocery sales are booming out of necessity, and as more grocers offer these options and consumers grow accustomed to the convenience, we believe that online penetration hit if not broke 12% by the end of 2020. Based on our 2020 survey, consumers still plan to keep up over 50% of their online grocery shopping when the pandemic ends, so grocers will need to increasingly support this channel in the long run.

Making Same-Day Fulfillment Operationally Sustainable

As the share of online grocery sales rises, grocers will increasingly have to compete on fulfillment capabilities rather than simply offering online ordering. Yet on-demand fulfillment can be prohibitively expensive using manual processes.

That means grocers can either:

  • Outsource fulfillment to a third-party players, which can lead to a loss of control over customer and vendor relationships.
  • Build automated fulfillment facilities, which can be capital intensive and lead to longer delivery times if located outside concentrated areas of customers.
  • Leverage automated micro-fulfillment solutions, which can utilize existing store space to increase speed and profitability.

We believe that micro-fulfillment centers are the way forward, particularly in urban areas where customers still expect two-hour delivery windows. Building an automated warehouse in the middle of the city is unfeasible, but using existing structures can be a game changer.

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