As was seen after the COVID-19 pandemic took place, the grocery industry is taking its businesses to the digital world. Besides the need to analyze whether this is a viable move due to the high operational costs, grocers should also keep in mind that there are some particularities for online grocery logistics that affect the whole operation.
Successful grocery chains such as Amazon Fresh in the UK and the Brazilian Zona Sul, whose operations were digitized before or amid the pandemic, saw results skyrocket but also had to bypass logistics obstacles. Amazon Fresh, for instance, came up with a waiting list for new clients, since it wasn’t able to keep up with the fast-growing demand.
Indeed, there’s no way to run from those complexities. Below, we’ll deep dive into the main particularities of online grocery logistics: both the pain points and the opportunities for grocers.
Difficulties
Guaranteeing cost-effectiveness throughout the supply chain is one of the main challenges the industry faces when it comes to online grocery logistics, mainly due to picking and last-mile delivery. Another difficulty is dealing with inventory management, which we’ll talk about lastly.
Picking
When a person makes an order online, independently of the fulfilment option she chooses, someone has to pick the selected items and get it ready to be shipped or pick-up. It may not seem like a tough part of the operation at first, but this is one of the hardest ones – with a high cost:
- There are the labor costs of those who will actually do the picking: Capgemini points out that 70% of warehouse operations costs are related to labor costs, and 70% of labor time is spent in picking orders;
- A picking order to be followed: fresh and frozen items should be the last ones to guarantee they will still be good for consumption when delivered;
- The picking efficiency can vary according to where it happens: in regular stores, there are customers buying items and the aisles are built to make them wander around, which affects picking directly;
- Product availability must be foreseen to guarantee the correct picking; if not, costumers should be offered a substitute option for the unavailable item;
- Customer preference for fresh items: not always the picking for those specific items will please the final customer, who could ask for a refund in some cases.
Whilst this is a challenge for grocers, it is also undeniable that picking efficiency is what offers a frictionless online shopping experience.
Those are some of the reasons why automatization is relevant when it comes to picking (i.e. the case of Ocado, a grocery chain from UK that fully automatized its warehouse with robots and got to fill a 50-item order in five minutes). This is also why grocery retailers are implementing dark store operations and having warehouses dedicated exclusively to digital channels.
Last-mile delivery
The final stage of the delivery process is also known as last-mile delivery and it consists of the moment when the order leaves it’s origin until it reaches the final customer. It is considered the most expensive part of the whole online grocery operation since most parts of its costs are variable (i.e. time spent on city traffic). According to Capgemini, it accounts for an average of 41% of all operational costs.
Though this is not exclusive to the grocery industry, once again there’s the need for it to be as fast as possible since fresh and frozen items are among the deliverables. It also must have the smallest (or none at all) delivery fee to the final customer, since they do expect that from grocers. And, of course, with the lower cost for the company – that’s the challenge.
Innovations in last-mile delivery do exist. But still, there’s the difficulty to find a business model for home delivery that not only is viable for grocery companies but also responds to customers’ expectations.
By now, the solutions that grocers have found to get closer to this scenario are the ones aforementioned: to not only operate with dark stores in urban areas, where orders are concentrated but also to offer different shipping options to customers as a way to dilute last-mile delivery costs.
Inventory management
Managing a regular store’s inventory can be easy since customers are able to clearly see which products are unavailable and compare labels and prices on the shelves. When it comes to online grocery shopping, though, this can become a challenge: how to keep inventory numbers accurate while avoiding stockout and frustrating customers?
To answer to this scenario, there’s the necessity to create a process as similar as the physical experience of navigating aisles, where substitute options are offered (be it through product recommendations, easy to navigate websites or picking policy) and also to predict order volumes, which is something feasible within an online operation, that gives businesses the customer behavior data.
A possible solution here is, once again, technology: investing in tools and features that will guarantee as much accuracy as possible in the inventory and will allow customers to buy if not the main product option due to stockout, a second one, and not asking for a refund in case the item chosen is not available.
Those are measures that not only will assure cost-effectiveness for grocers, but also customer satisfaction.
Opportunities
Dark stores
Due to the increasing volume of online orders, many grocers opted to transform some of their brick-and-mortar stores into a local warehouse, where customers are not allowed to go shopping. Instead, these stores are used only to fulfill online orders and, only if needed, those units could also be turned into real stores.
The “dark store” concept is relatively new and grew with the pandemic when online orders suddenly became the norm, and it’s been considered a long-lasting trend by specialists. There are some reasons why it became so popular for grocers:
- It decrases delivery times since the picking operation can be concluded easily and faster;
- It makes inventory management easier, and both order management and picking more accurate; in physical stores open to customers, it’s way harder to have precise, real-time inventory tracking;
- It allows automatization – be it for picking or for inventory management – which leads to faster delivery.
This is not exclusive to the grocery industry: other segments with online operations also have dark stores or the called “semi-dark stores”, that allow customers to pick up orders. It is, though, a perfect fit for the grocery industry because of the challenges when it comes to managing online orders (i.e., the amount of items per order is much bigger, from around 20 to 50, and with fresh items among them).
It is not to say that managing a dark store is not another grocery logistics challenge to be considered, but instead showing that they’re becoming more essential to online operations and can even be the solution to some common logistics problems, such as last-mile delivery.
Fulfillment options: ship from store, pick-up in-store and home delivery
Customers expect different fulfillment options when they’re shopping online. It’s been shown, for example, that younger customers prefer to buy online and pick-up the order in-store instead of opting for home delivery. To keep up with the trends and keep satisfying customers, then, it is important to offer all the shipping alternatives they’re looking for.
The main ones are home delivery and pick-up in-store. For companies, another option that can bring many benefits to the fulfilment operation is ship from store – the order is delivered to the customer’s house, but not from warehouses or dark stores, but from a real store.
At the same time that managing such different operations can look complex, it is important to say that it not only keep customers loyal but also can reduce costs. When shipping from a regular store, the inventory dedicated to the digital channels will not depend on a dark store or warehouse, for example. When offering pick-up in-store, costs with delivery are reduced and the challenging last-mile logistics avoided.
Specialists say that uncentralized fulfillment operations are the best option for retailers (and, therefore, grocers). A centralized model has a higher distribution cost and longer delivery times, which is the opposite of what a grocery order requires.
Last but certainly not least, technology is seen as the main ally for fulfilment efforts. It allows automatization and therefore the completion of more orders in less time, all that with more accuracy and lower costs.
It all connects: dark stores are often said to be the best model of fulfilment for grocers for all the aforementioned reasons, and also for being a more efficient way to offer home delivery or any other option. When having an automatized dark store, those efforts show even more results, as seen on Ocado and Kroger chains.
Speed of fulfilment
Nowadays, speed is more important than ever. Even more when it comes to fulfilment and delivery: nowadays, according to McKinsey, 75% of customers prefer to shop online due to safety, convenience and speed.
Optimizing your delivery options to guarantee a faster fulfilment is the ideal scenario, and brands found a way of doing so: creating delivery slots, having micro-fulfilment centers in urban locations to reduce the last-mile delivery time, and investing in technology that allows orders to be fulfiled faster.
Scheduled delivery
A standard for regular orders, an opportunity for the grocery industry, when it comes to digital operations, is to offer scheduled delivery for recurring orders. Since online grocery is an ever-going service and people need to constantly shop for food and other household items, there’s room to offer customers the possibility to place recurring orders with scheduled delivery. That means that once a week, twice a month or in any given desired recurrence, they’ll receive the selected items in their houses, without having to checkout every single time.
Offering this is not only a way to get ready for future order deliveries, but also to make customers loyal, increase sales and emphasize the convenience of the service.
Partnerships with third-party services
A solution that grocers have found to deal with the costs of online grocery logistics, specially picking and the last-mile delivery is to outsource these services through partnerships with Rappi, UberEats, Deliveroo and other companies that offer this service.
Although there’s a commission for both the third-party company and the person who actually picks and delivers the order, they tend to be smaller than the costs of actually owning those services.
This is a growing trend for grocery stores, restaurants, and drugstores – businesses on which those delivery services are focused.
As those businesses come as a facilitator, for the end-customer it doesn’t change a thing: a Capgemini study found that 64% of online consumers are indifferent to whether delivery is made by a retail store’s employees, private individuals, or third-party couriers.
The grocery industry, when it comes to business transformation, is just like any other: there are ups and downs, in general. When we look at the logistics of this transformation, however, is when we realize how tough it can be, but also the opportunities that grocers have to reinvent the market and maintain sustainable operations. Truth is, there is no right answer when it comes to taking your grocery business online: it will always depend on the willingness of overcoming challenges and making the best out of the opportunities.
