Online Groceries: The Value of Convenience is Only the Tip of the Iceberg Lettuce

Whole Foods needs to step into the digital age, it will have a tremendous impact on their business.

The Traditional Grocer

Whole Foods in New York City is a nasty place to shop. In the weekday afternoons, the checkout line can be up to 30 minutes long, and sometimes they even close the doors to new shoppers when the store reaches capacity causing countless missed dinners and frustration. Their organic 365 Everyday Value® brand almond butter must be to die for.

Supermarkets are tough, low margin, asset intensive, and highly competitive businesses. To make matters worse, with the introduction of grocery and household items in stores such as Walmart and Target, pricing pressures increased on neighborhood markets, whose stores were often located in higher rent areas, making it difficult to be competitive.1 Unlike other retail or consumer staple businesses, supermarkets have been unable to adapt to the digital economy, but opportunity is beginning to present itself.

 

The Convenience Opportunity

Whole Foods became successful by capitalizing on a shift in consumer food values, offering higher margin products such as organic, natural, and higher quality goods. Recently, supermarkets have responded by selling more natural foods, and other wholesome food retailers have popped up all over the country. The biggest current threat to Whole Foods’ business is that once again consumers’ values have shifted.2 In the millennial-driven “Uber Economy”, customers have started to value convenience over all else, paying up for in-app-ordered, on-demand services that enable them to continue playing Call of Duty while they wait for their purchases to arrive at their doorstep.3

Whole Foods began to cater to these customers in its first major consumer-focused digital initiative: partnering with Instacart beginning in 20134. Instacart, an on-demand third party ordering and logistics company, allows customers to place Whole Foods orders online, and then sends a dedicated shopper to the nearest Whole Foods store to pick, pack, pay for and deliver the order. Instacart’s platform connects with Whole Food’s inventory management and ERP systems to aggregate and display inventory, and allows for quick and simple product selection and payment. Customers have responded positively, adopting Instacart in record numbers and even increasing basket size (average order size) for the retailer in the process.

Whole Foods’ partnership with Instacart has certainly reduced friction and increased convenience for customers while increasing revenues for Whole Foods, but online ordering and third-party fulfillment of goods have much more value to add to grocery retailers.

 

The True Value

Online purchasing, advanced ordering, third party fulfillment, and data aggregation platforms have major implications for grocers allowing for increased capacity, novel marketing abilities, supply chain optimization, inventory turnover, product quality, as well as reduced real estate costs, in-store congestion, buyer friction, and spoilage/waste.

Buyer Friction: Buyers no longer need to climb into a car, schlep to the nearest Whole Foods, shop, pack the car with a cart full of shopping bags, drive home, and carry the bags into the house. Everything up to this point is done by the third party delivery function.

Supply Chain Optimization and Inventory Turnover: Early ordering reduces strain on the supply chain, allowing for greater just-in-time inventory fulfillment. In some cases, depending on the proximity of suppliers, customer orders might be able to precede retailer orders.

Product Quality: Greater inventory turnover means that Honeycrisp apple you are eating has spent far less time sitting out on a lukewarm display in a giant store while people poke it to test its ripeness.

Congestion: As more customers order online, orders can be streamlined and consolidated by efficient third-party pickers, reducing congestion in the store for in-store shoppers.

Capacity: Each Whole Foods store will be able to serve a greater number of customers in the neighborhood per square foot of store space.

Real Estate Costs: As more orders come in over the phone, store layouts can be optimized for pickers and reduced as fewer people browse physical stores. Real estate costs as determined by rental expenses are one of the greatest costs for running a supermarket business, especially for more urban-centric markets such as Whole Foods.

Spoilage/Waste: As inventories are optimized for buyers’ shopping patterns and advanced orders alert stores as to inventory needs ahead of the purchase, spoilage (one of the biggest strains on margins) is dramatically reduced. In the case of a flexible and proximate supplier, waste could be eliminated entirely as inventory is shifted to the supplier.

Marketing Abilities: Whole Foods will now be able to capitalize on digital marketing capabilities as it uses display and video advertisements, recommendation engines, and A/B testing capabilities on its online store. CPGs can leverage a digital presence to test new products and collect data on customer demographics and behavior.

Each of these benefits is an opportunity for Whole Foods to lower its cost structure, serve more consumers, capture a greater share of the supply chain, and gain value in an old, old school industry.

 

(797 words)

 

Paul B. Ellickson, “The Evolution of the Supermarket Industry: From A&P to Walmart”, March 15, 2015.

2 ”Whole Foods’ new chain exposes one of the company’s biggest problems”, http://www.businessinsider.com/whole-foods-365-exposes-company-weakness-2016-4, accessed November 16, 2016

Convenience is King in Today’s Retail World, http://www.nielsen.com/us/en/insights/news/2014/convenience-is-king-in-todays-retail-world.html, accessed November 16, 2016.

Weeks after adding Trader Joe’s, grocery delivery service Instacart now supports Whole Foods, http://thenextweb.com/apps/2013/02/27/weeks-after-adding-trader-joes-grocery-delivery-service-instacart-now-supports-whole-foods/, accessed November 16, 2016

5 Whole Foods, 2016Q4 Earnings Call

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4 thoughts on “Online Groceries: The Value of Convenience is Only the Tip of the Iceberg Lettuce

  1. While I certainly agree with some of the advantages of Whole Food’s partnership with Instacart, I am also concerned about the potential for negative spillover effects. Having used Instacart, I am aware that there is a certain level of trust placed in your Instacart shopper that requires him to exercise a significant amount of judgment when selecting produce or finding a substitution when a requested product is not available. As noted in a recent article (http://qz.com/627605/inside-instacarts-fraught-and-misguided-quest-to-become-the-uber-of-groceries/),”the average American hasn’t been taught how to choose a ripe banana or avocado” resulting in an Instacart shopper who may provide subpar produce to his client; Whole Foods often ends up bearing the blame for these mishaps rather than its middleman. In short, how will Whole Foods guarantee that Instacart is presenting it in the best light possible and maintain strong quality controls?

  2. I agree that services like Instacart deliver value to the customer and to Whole Foods by improving convenience and reducing friction in the food shopping experience. However, the Instacart business model is not yet stable, which exposes Whole Foods to some risk. Most recently, Instacart has been in the news for discontent among its workers for a change in compensation structure. Workers reported about a 30% decrease in their earnings [1] and are now threatening to strike during Thanksgiving, a peak time for Whole Foods and Instacart [2]. While customers will still likely purchase their groceries from Whole Foods, they won’t be able to rely on Instacart, and may even switch to another service (and grocery store) in its absence. These grocery delivery and logistics companies still have a ways to go before they can be truly reliable and fully integrated into the customer journey.

    [1] https://www.buzzfeed.com/carolineodonovan/instacart-ceo-some-workers-must-earn-less-for-the-company-to?utm_term=.iqGm838D4#.ev9PqLqrQ
    [2] https://www.buzzfeed.com/carolineodonovan/instacarts-tipping-transparency-issues-could-lead-to-thanksg

  3. Thanks for posting. I would agree that Whole Foods needs to incorporate more digital initiatives, like online ordering, to remain competitive in the supermarket business, especially as they have competitors such as Google Express, Amazon Fresh, and Peapod all trying to capitalize on the push towards convenient grocery shopping. However, I don’t think Instacart is the right partnership for them. If you conduct a quick online search you will find plenty of articles, such as http://www.thekitchn.com/i-had-my-groceries-delivered-by-instacart-and-heres-how-it-went-214795, in which consumers are complaining about the price and quality of Instacart. They may mark up products as much as 20%. As SCWC mentions above this may look bad for Whole Foods. In order to remain competitive, they should either cut out this third-party service and replace it or acquire it. They could then adjust pricing and control quality in a more effective manner to increase their revenues and customer base while reducing the risk of negative PR from Instacart.

  4. First of all, I disagree with your opening remark that “Whole Foods in New York City is a nasty place to shop”. As someone who worked right next to the Tribeca Whole Foods for 5 years, I believe that Whole Foods is a fantastic grocery store. It is one of the biggest that I have visited, has excellent, fresh selection and great customer service. While I believe that Instacart is an excellent complement to Whole Foods, I do not believe it can replace Whole Foods – or any grocery store for that matter. While Instacart may work well in New York City or other densely populated areas, its ability to provide the fresh, quality service may be compromised in more rural regions. Instacart employees are paid on how many trips that complete and how quickly they complete those trips (1). Completing a higher number of trips in New York City or San Francisco is a lot easier to do vs. in Huntsville, Alabama where Whole Foods also has a location. Given all of the issues that SCWC, JZ, and Anthony already mentioned that Instacart has in urban areas, the viability of the model will likely be even more compromised as they try to expand throughout the country.

    http://www.nytimes.com/2014/05/22/technology/personaltech/online-grocery-start-up-takes-page-from-sharing-services.html

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