The Future of Grocery Is Omnichannel

Which grocery shopping items are you willing to buy online or via click-and-collect? Most of us would be happy to order reliably uniform products, such as toilet paper, frozen vegetables or canned tomatoes, without choosing them off the shelf. But what about fresh fish, or potatoes? Maybe, if you trusted the retailer. Tomatoes and avocadoes, though, are probably a step too far. Most people would prefer to give them a good look-over in person, even a squeeze.

And yet, the growth in online grocery orders — whether for delivery or pick-up — is undeniable. Many consumers made it over the initial hurdle of establishing which online retailers to work with, and taking the time to set up an account, during the COVID-19 lockdowns. Now, they appreciate the gains in convenience and time-saving, and are continuing to shop that way, at least more than they did before. A recent McKinsey report predicted online grocery shopping could rise to more than 10% of the total by 2025, and commented that online grocery is supply driven. As online grocery retailers provide more online capacity and options, customers will adopt this new method of grocery shopping.

Grocery retailers are challenged with building flexibility into their supply chains to meet these new demands; thus we will see the future of grocery retail adopting omnichannel solutions. Consumer demands will continue to evolve in an environment where there is a wider choice of customer journeys, and the grocery industry must be ready to respond.

What will an omnichannel solution look like? At the very least, we will see a growing amount of automation, both in remote fulfillment centers and at hybrid facilities where consumers can both shop in person and have their online orders picked and packed.

The essential factor is that there is a proportion of grocery items that consumers want to choose themselves, in person and in store, and a proportion of items that can be picked for them. It is not only worth automating the latter; it will soon become a matter of economic necessity. The danger is in letting the prospect of investing in technology with a relatively longer ROI stand in the way of embracing the future.

Moving Away From Manual Picking

Manually picking online grocery orders for delivery or in-store collection is neither economically efficient nor scalable. In a business with razor-thin margins, paying a staff member to wheel a cart around a grocery store or distribution center, even if they are picking multiple orders at once, will quickly wipe out any profits. At present, this service constitutes a loss-leader to attract or keep customers, or a bust at best. Secondly, in the store, there’s the risk of such pickers taking up too much space and making the experience of in-store shopping less pleasant. Despite the current spike in unemployment, these workers are increasingly hard to find.

It is possible that, in the future, all or most grocery shopping could be done online, with customers served from remote fulfillment centers. Twenty years ago, it seemed unlikely that people would buy clothes without trying them on; now fashion e-commerce accounts for more than 20% of sales. But, even if it were possible, it is not desirable. Grocery shopping has a uniquely high rate of spontaneous buying. Research shows up to 20% of the average household’s grocery bill comes from items that were purchased on impulse alone. Although impulse purchases do happen online, they are far more likely to happen in-store. Again, it’s important to recognize that there are categories of grocery that attract consumers in the moment — cookies and flowers, say, rather than bags of flour. Why not separate out the grocery items that can be picked by robots and the ones that consumers like to browse and choose?

Combining In-store and Online

One solution is a smart, attractive combination of online shopping and in-store browsing, powered by automation — something we call “OmniStore.”

OmniStore is a hybrid retail location with a small, convenient store where customers can pick fresh produce and items that tend to attract impulse buying while the rest of their cart is being picked in a back room by robots. Then the groceries gathered via automation are married with the consumer’s in-store purchases at checkout to be taken home or delivered. That way, the consumer can still see and touch perishables and other “front-of-house” items before buying, but at the same time experience much quicker and more convenient shopping. On the retailer side, the costs of order fulfillment go down, without the loss of those additional revenues from spontaneous purchases in store. It’s the perfect combination of efficient online grocery fulfillment and rich, in-store experience.

This kind of small-scale automation is also called a micro fulfillment center. In theory, it doesn’t even need to have a retail store element, and could be dedicated to fulfilling online orders only. With the rapid growth in online grocery shopping, the question for any grocery retailer is: What is the best size of fulfillment center for my online business? Some larger retailers are opting for large fulfillment centers with a high level of automation. These are great, but they’re also very capital intensive. Micro fulfillment centers are smaller, which reduces the savings from scale, but they offer a huge advantage in proximity to the customer — you can fit one into a large number of existing retail stores.

Standalone D.C.s

Meanwhile, in this new universe of omnichannel grocery fulfillment, we’ll see a strong demand for standalone fulfillment centers, often intelligently located near dense areas of population, and perfect for next-day deliveries. These will be important for serving consumers who want higher levels of product choice, service and convenience (including home delivery).

There’s no “one-size-fits-all answer” when choosing the right solution. That’s why retailers need to carefully determine what fits best, based on population density, order lead times and, perhaps most importantly, what customer expectations are about the length of time before an order gets to them. In some customer segments, next day is fine. In others, they want to receive their groceries in two hours. The determining factors are different for each and every retailer. Some need to focus on keeping costs down in order to address the value-focused customer, while others are serving highly convenience-focused customers. Micro fulfillment centers can be standalone, or can be big enough to supply orders for other stores, in a hub-and-spoke model. This offers the advantage of a larger micro fulfillment center, which increases the efficiency in picking.

Making Omnichannel Possible

In today’s grocery supply chain, automation is inevitable. In fact, behind the walls of umpteen warehouses and distribution centers right now, it’s already a reality. Automated grocery systems are estimated to pick and pack orders as much as 10 times faster than a human, and with fewer errors.

In the U.S., so far, no automation practice has proved to be the leading or best one. It seems likely that this kind of omnichannel fulfillment strategy, powered by automation, will become the preferred approach for most U.S. grocery retailers in the not-too-distant future.

However, this will require a change in thinking. Automation requires substantial capital investments that pay off only after a longer period of time — typically five years or more. Retailers tend to look for ROI between two and three years, and habitually focus on results over the next few quarters. What’s needed is a shift in mentality at management levels to accept longer ROIs, in order to make operations future proof.

As the frequency of online shopping continues to grow, all retailers need to think about how to ensure that customers who are now buying online stay online, while keeping fulfillment costs down. To enable success, it’s time to use the benefits of automation to offer consumers more choice.