Delivery: Can it really work?

Supermarket chain H-E-B has partnered with Shipt for 1-hour delivery of grocery orders. (Image: Shipt)

The rate of online grocery shopping in the United States doubled in 2015. Online grocery penetration increased from 11% in 2013 to 21% in 2015, according to a study by Brick Meets Click.

While groceries may be among the items least likely to be purchased online, the category has the highest percentage of digital sales coming from mobile devices. In fact, 37% of all grocery e-commerce sales in October were completed on mobile devices, according to data gathered by PwC for BI Intelligence.

In addition, a recent study by A.T. Kearney shows that online has by no means reached its peak and is expected to grow between 15% and 18% over the next few years.

Consumers absolutely have an interest in purchasing groceries online, but it seems that the stumbling block in the equation is the fulfillment of these orders. Can the grocery model of delivery or in-store pickup be sustained?

Analysts are skeptical

“The delivery game is impossibly hard for grocers. They cannot fulfill orders from their stores as efficiently as a warehouse can fulfill, so they will never be able to compete with Amazon on price. With the possibility of returns, perishability of food, and complexity of picking other people's produce the costs of offering delivery get high fast—and this is going to prevent most consumers from making delivery a habit,” Hogben says.

For the time being, as the delivery model can be quite costly and complicated, many grocers are choosing to partner with online fulfillment and delivery startups to help with online grocery orders. The idea is to combine brands that know their business well and, that way, make the execution smoother and more cost efficient.

For example, supermarket chain H-E-B is now partnering with Shipt to pack and deliver grocery orders in one hour in parts of Texas. Shipt offers H-E-B consumers the opportunity to sign for a membership model, $99 a year and all orders over $35 are delivered free.

“I think that our partnership with H-E-B has lead to exponential growth for our membership base and brought in more loyal followers,” says Anne Adams, Shipt’s regional manager in Texas. Adams says that their customer base is growing not only in urban but also in more rural areas.

She is also sure that Shipt will continue to grow as the population shift continues to families that are busier and looking for more convenience.

Stern also believes that the online space will continue to grow as convenience and technology continue to converge with shopper habits. He believes it will happen from a direct approach, such as through Peapod or Fresh Direct, or through partnerships such as ClickList and Shipt. Subscription services will also continue to grow their footprint as Amazon gets a better foothold on Dash buttons.

“Consumer demand is certainly there—the big question remains economic viability—it does cost more to get products to the home than it does to have consumers do the work themselves,” Stern says. “Again, technology does help streamline the process as well as innovative business models like Instacart. But the real test, and the answer to whether the market will grow or plateau, lies in whether consumers will pay a premium for convenience.”

For the time being, delivery still has to contend with the mindset of the U.S. shopper, which is still primarily based on shopping for price, says Hernandez. Until that changes, online grocery delivery will need to be more valuable to gain more customers. Just look at the rise of the discount stores: The companies that are succeeding have a niche, such as Thrive, where consumers are willing to pay extra for natural and organic or ethnic foods. “It can be a successful model if it merges niche with price, quality and assortment,” Hernandez says.

Delivery: Can it really work?