A SHOPPER’S GUIDE TO E-GROCERY FULFILLMENT CONTENTS 2 DISRUPTION COMES TO THE GROCERY STORE E-commerce has been a highly disruptive force in the retail sector over the last ten years, rapidly growing to account for up to 20% of total sales. The grocery sector has largely been immune to this disruption with only about 3% of grocery spending in the U.S. occurring online in 2019. That is now changing — and quickly. Demand for e-grocery services is accelerating and multiple sources predict the industry is on the cusp of the same type of disruption other retail sectors have already experienced: • Online grocery sales in the U.S. is growing by 15% this year according to an analysis from Bricks Meet Clicks. • Nielsen and the Food Marketing Institute project that consumer spending on e-grocery could reach $100 billion by 2022 — triple what it is today. • A research study from Edge by Ascential projects the e-grocery sector will experience a compound annual growth rate (CAGR) of 13% through 2024, increasing total online sales to $162 billion. Nielsen and the Food Marketing Institute project that consumer spending on e-grocery could reach $100 billion by 2022 – triple what it is today. 3 REACHING THE LIMITS OF MANUAL PICKING Grocers have been meeting current e-grocery demand—and stoking the market — by employing manual pickers, essentially surrogate shoppers, who travel up and down supermarket aisles along with other shoppers pulling orders. But this approach is labor- and time-intensive and because the market is not willing to absorb the full cost of order fulfillment, is forcing grocers to sacrifice profitability to remain competitive in the e-grocery space. With their oversized carts, surrogate shoppers also create congestion in store aisles that negatively impacts the shopping experience for other consumers. According to industry sources, a grocery store will start to feel congested when just 6-8% of purchases are e-commerce orders fulfilled by manual pickers. That’s a level some stores are already at and most will reach within the next two years. Grocers who continue on the path of using surrogate shoppers to pull e-commerce orders from store shelves risk growing their e-commerce business at the expense of more profitable in-store sales. According to industry sources, a grocery store will start to feel congested when just 6-8% of purchases are e-commerce orders fulfilled by manual pickers. 4 REACHING THE LIMITS OF MANUAL PICKING The Need for Automation These factors are causing virtually every major grocery chain to explore opportunities to automate e-grocery fulfillment. This can prove challenging on several levels. First, it may involve bringing automation into retail stores that were never designed to accommodate it. Space constraints within the existing retail footprint will create challenges for many traditional material handling systems. The alternative is major new investments in dedicated fulfillment facilities. In addition, e-grocery order fulfillment can’t be fully automated. A majority of orders will include some combination of non-perishable items — which can be efficiently managed through an automation system — along with frozen items and perishables, such as produce, deli products and prepared foods, which don’t lend themselves to automation. These non-perishable items are also often sold by weight rather than piece, which introduces additional challenges. With the market still in its infancy, grocers are having to evaluate automation solutions while still defining fulfillment processes that optimize the use of technology while retaining the flexibility of manual processes in ways that don’t significantly compromise speed. 5 REACHING THE LIMITS OF MANUAL PICKING The One-Hour Mandate Another variable that must be considered is consumer expectations and preferences, which are still evolving and may vary in different neighborhoods within the same market. Today, consumers in densely populated urban areas are showing a preference for in-home delivery while those in surrounding suburbs seem content with in-store pickup. Will in-home delivery ultimately surpass store pickup, or will a substantial segment of the market continue to be willing to drive to the store to pick up their orders? That’s a question that will only be answered with time. Expectations around speed of fulfillment are easier to predict. Groceries aren’t a “want,” like many other e-commerce purchases. They are a need that is consumed continually in most households, creating the demand for short delivery times. Waiting even a day or two for grocery orders will prove unacceptable for many. Just as some e-commerce companies created competitive advantage by shortening delivery times, large grocers are using one-hour fulfillment as a target for e-grocery customers. This is a very aggressive goal and will not be possible in all cases, but there is little doubt consumer expectations will quickly be shaped by the situations where one-hour fulfillment is possible. 6 REACHING THE LIMITS OF MANUAL PICKING Urgency and Uncertainty Grocers are rightly feeling a sense of urgency around e-grocery fulfillment. With the total market for e-grocery services projected to reach $100 billion by 2022, the stakes are high. Get it right and tap into the biggest growth opportunity the industry has seen in years. Get it wrong and risk losing ground to competitors. Despite the challenges and uncertainty, grocers have several advantages when it comes to e-commerce. They benefit from a highly concentrated and localized market that removes some of the barriers to last mile delivery. Every home needs groceries and local competition is typically limited to four or five retailers so grocers may be able to consolidate multiple deliveries within the same neighborhood, much like a parcel carrier. Grocers also have the advantage of having a highly local network of stores that can be used to support both home delivery and curbside pickup. Key to their success in leveraging that asset will be choosing a right distribution strategy and matching that strategy with automation that enhances productivity, reduces fulfillment costs and can adapt to future changes in the market. 7 E-GROCERY FULFILLMENT STRATEGIES There are a number of strategies being employed by grocers today to introduce automation to improve the speed and efficiency of e-commerce fulfillment. Hub-and-Spoke Some grocers are developing centralized fulfillment centers that support multiple stores in a hub-and-spoke arrangement. The automated fulfillment center assembles orders for all non-perishable items and then bulk ships those orders to the stores where they are topped off with perishable items. Completed orders are then available for curbside pickup at the store or delivery to the home. This approach allows the fulfillment facility and automation system to be designed hand-in-hand and eliminates the space limitations imposed by integrating automation into existing retail locations. These facilities can also be designed to scale easily to accommodate continued growth by using modular automation solutions that enable a pay-as-you-grow approach. However, they are inherently capital intensive and can create an extra layer of transportation between the hub where orders are fulfilled and the store where orders are distributed, potentially limiting the ability to support expedited orders. The automated fulfillment center assembles orders for all non-perishable items and then bulk ships those orders to the stores where they are topped off with perishable items. 8 E-GROCERY FULFILLMENT STRATEGIES Bolt-on Store Automation In many cases, it will make sense for grocers to bring automation directly to the store. Using compact, robotic automation technologies, they can create small fulfillment centers at the back of the store that automate current manual processes for non-perishable item picking while utilizing store inventory to top off orders with perishable goods. This allows them to fill complete orders from one location, reducing transportation time and costs. This scenario could support faster fulfillment times than the hub-and-spoke approach, but unless the store is physically expanded to support automation most locations will not be able to bring perishables and bulk items in close proximity to the automation system, limiting the productivity of manual pickers who may still need to go out into the store to complete orders. Creating a full fulfillment center may be possible in some locations, particularly high-volume locations with available space, by physically expanding the store. This requires some additional investment but could allow these locations to achieve order cycle times similar to a larger hub-and-spoke warehouse without the need to transport orders to the store. In many cases, it will make sense for grocers to bring automation directly to the store. 9 E-GROCERY FULFILLMENT STRATEGIES Micro-fulfillment Centers The shifts in the retail landscape created by e-commerce have created opportunities to convert abandoned or underperforming retail outlets into micro-fulfillment centers that serve the same area as a traditional grocery store with automated fulfillment for curbside pickup or home delivery. This strategy sacrifices in-store shopping so is particularly attractive to pure-play e-grocers but creates the opportunity to optimize the environment by efficiently integrating automated and manual picking. It allows grocers who don’t have an existing brick-and-mortar footprint within a particular area to move fulfillment closer to customers to reduce transportation costs and enable shorter delivery times. 10 E-GROCERY FULFILLMENT STRATEGIES The Automated Grocery Store Rather than bolting on automation to the back of the store, some grocers are experimenting with moving it to the middle of the store, creating a new type of grocery store that combines automated e-fulfillment with traditional shopping. This is still an emerging concept, but early executions place an automated storage and retrieval system in the center of the store which holds the majority of the non-perishable items with perishable and specialty items located around the outside of the store.