Moving away from the local grocer
Traditional, widely distributed grocery store chains are learning to deal with the threat of fast, cheap, convenient e-grocers.
H-E-B is a Texas-based grocer that is one of the largest privately-held companies in the United States. It operates over 340 stores throughout Texas and Mexico with over 76,000 employees. H-E-B is a fascinating example of a progressive grocery store chain that is grappling with the threats and opportunities of digitization. H-E-B differentiates itself by creating an experience for customers within its stores, priding itself on its friendliness, cleanliness and in particular its customization and integration to its local community. As part of this business model, H-E-B has launched initiatives such as the ‘Mi Tienda’ stores, targeting the Latin community in Texas, and a European-inspired market, complete with a juice bar, in affluent Austin. It’s also focused on developing its own products, such as H-E-B corn chips, and services, such as a ‘Quality Assurance Lab’ that undertakes safety testing of produce and ground beef, that appeal especially to its local market and create brand loyalty for the grocer. To execute its business model, H-E-B operates a warehouse and transport terminal to supply products to its stores.
Although H-E-B established itself as a prominent staple throughout Texas, the company is now faced with the potential threat of online grocery shopping and delivery services. Online grocery services, although currently a small portion of grocery sales in suburban areas, have the potential to provide lower-priced and more convenient groceries to consumers by aggregating distributed demand in a central location (rather than many distributed stores), sourcing items directly from dry goods manufacturers and fresh food distributors (and potentially generating purchasing power that reduces per unit costs) and delivering the orders to households. As compared to a traditional grocer, the additional costs for the e-grocers come from the ‘picking’ and household delivery of orders. If these additional costs can offset the savings from eliminating multiple distributed brick and mortar stores, then e-grocers have a huge potential to disrupt the old model.
Digital technology has manifested itself in the grocery space in two broad models: grocery delivery services that ‘shop’ at existing stores and deliver items to you (such as InstaCart), and online grocers (such as AmazonFresh) that source, manage and deliver their own inventory of groceries to customers. Other companies, like Peapod, use a hybrid model, partnering with brick and mortar grocers to ‘shop’ at the physical store, while also carrying its own inventory in warehouses to supplement the traditional store products.
Threats to traditional grocers can come from the entire spectrum of e-grocery business models. In the case where firms ‘pick’ products from existing stores and deliver them, traditional grocers are threatened by:
- A lack of direct contact with the customer that may erode brand loyalty over time
- The low switching costs for consumers to try a different grocery store’s offerings, since they’re just a click away within the same web platform
Seemingly more serious threats come from e-grocers that source, manage and deliver their own inventory. These e-grocers have the potential, with enough aggregated volume, to steal purchasing power from traditional retailers, giving e-grocers the ability to undercut traditional grocer pricing for similar products.
e-grocers also benefit from the data they collect from their online customers, allowing them to better target their marketing and promotional efforts. Traditional grocers have been able to collect some user-specific data with the introduction of loyalty cards in recent years. However, e-grocers benefit in that their services are more far-reaching – that is, they can track one particular user to his purchases across a wide range of stores, wherever he is in the country. This traceability is more difficult in the fragmented and dispersed world of brick and mortar grocers.
To combat the threats that e-grocers present, H-E-B announced in 2015 that it would sell and ship over 50,000 non-perishable SKUs from its company website. Then, in 2016, it announced a partnership with Instacart and Shipt to deliver hand-picked items from its stores to customers within a short time frame.
Although these steps are significant responses to e-grocers, H-E-B and other traditional grocers have the opportunity to address the customer needs that e-grocers simply cannot. Online ordering can’t give customers face-to-face interaction with a product or store. Particularly in the grocery business, H-E-B’s 300+ stores are the ideal locations in which to offer samples and cooking demonstrations, for example. Real grocery stores are the places where consumers can pick up new products and compare them to a customer’s ‘usual’. This is the place where new culinary discoveries happen, particularly when it comes to items outside of the widely-available brands such as Kraft Macaroni and Cheese. H-E-B can use its local presence to create community-centric programming and products that make mass ‘e-grocers’ seem unfamiliar and out of touch. By harnessing the in-person experience of cooking and eating, grocery stores can challenge e-grocers directly in an increasingly digital world.
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Sources:
H-E-B. (2016). Our History. Retrieved from H-E-B: https://www.heb.com/static-page/article-template/Our-History
McKinsey&Company. (n.d.). Retail 4.0: The Future of Retail Grocery in a Digital World. Retrieved from McKinsey&Company: https://www.mckinseyonmarketingandsales.com/sites/default/files/pdf/Future_of_grocery_in_digital_world.pdf
Peapod. (2016). Our Company. Retrieved from Peapod: https://www.peapod.com/site/companyPages/our-company-info-for-students.jsp
Perez, S. (2016, June 22). AmazonFresh, Amazon’s grocery delivery service, wakes back up with a launch in Boston. TechCrunch.com.
Thanks for sharing this Bruna. I think you hit the nail on the head when you spoke about how the traditional grocery store can offer a physical experience that cannot be matched by e-grocers. For this reason I would be focusing on providing as good an “in-store” experience as possible. Personally, I love it when Wholefoods gives me free samples 🙂 I also question the quality assurance e-grocers can offer – do you know of any guarantees they offer? Shopping in-store, one can select which apple one deems the best out of a selection of 100s. Although the e-grocer delivers a convenience that cannot be matched by tradition grocer stores, I feel they have enough unique levers to still thrive into the future.
Interesting article, Bruna! It’s thought-provoking to think about whether traditional grocery stores are threatened by e-grocery shopping or not.
It’s advantageous that HEB partnered with Instacart and Shipt, because it creates another distribution channel and perhaps attracts new customers (like HBS students). However, there are also some questions about the profitability and sustainability of delivery models like Instacart: http://fortune.com/2016/03/24/instacart-profits/
HEB (and other traditional grocery stores) could think about ways to collect better point of sale data, through mobile for example, and think about whether they can make grocery shopping more convenient, such as in-store pickup, where customers don’t have to spend the time shopping but can still ensure the quality of their produce. Like you say, I think that HEB can still create a good customer experience with a reason for people to shop at their stores.
Bruna, thank you for your post! I agree with you that there are still some opportunities for traditional grocery stores to address the customer needs that e-grocers cannot. Nevertheless, I think that many of these opportunities should include some innovative experiences that include more advanced technology. For instance, in many grocery stores we still get the printed coupons that we have to store and then remember to bring back the next time we go to the grocery store in order to get the discounts. Some store chains already use coupons via mobile app; however it’s not largely widespread. Also, via app, grocery stores could inform their customers of the days in which they are providing specific in-person experiences of cooking and eating. I think grocery should focus on these and other experiences that are up-to-date with our increasing digital world and that help keeping their customers engaged.
Thanks, Bruna! I think that rather than invest too much in enhancing the in-store experience, traditional grocers should invest their money in bringing as much of the in-store experience online as possible. My opinion is that bricks and mortar grocery stores’ days will be numbered as soon as someone figures out how to profitably do online grocery delivery. Grocery margins are thin, but as you mentioned, there are still many companies trying to eek out a profit through online grocery delivery. I suspect that companies that have their own distribution haven’t cracked the code yet – Amazon Fresh and Fresh Direct have both been around for a long time, and neither has expanded beyond a few select cities. I think that is quite telling. Delivery companies like Instacart that don’t have their own distribution will still need somewhere to get the goods from if they are successful – so there will still be a role for bricks & mortar stores if that ends up being the winning model. Still, the stores need to find ways to differentiate themselves online. Online loyalty programs may be one way to do so, even through a platform like Instacart.
Interesting post Bruna! It’s good to see that H-E-B has partnered with Instacart. Instacart was the company I wrote about, and it seems to deliver high value to its retail partners by providing them with valuable data, and encouraging consumers to order through their local stores rather than shifting entirely to online delivery like Amazon Fresh. Like many others, I think your suggestion of offering in-store experiences is very compelling, and I think this will work well in its suburban locations. Another near-term thing H-E-B should consider is re-optimizing its retail footprint to be in locations where consumers are unlikely to shift to online ordering in the near future.
Interesting post Bruna, really enjoyed it. Would you happen to know what percentage of grocery shopping is done online versus in-store? I would think that in-store is considerably bigger, and that online is done more for small orders in particular situations rather than for the normal purchases. If so, how do you see H-E-B and Instacart move in a direction to increase those sales, but at the same time lower costs for consumers? Although I like Instacart for its convenience, I see their prices as the number one barrier for getting more people in. Do you think partnerships to get the products at lower prices from the grocers is possible?
I have used FreshDirect for several years in New York City. Regarding concerns about product quality, yes you do lose the ability to select the “best” produce like you can in store, but whenever I had an issue with the quality, FreshDirect credited my account no questions asked. For me, FreshDirect solved two problems 1) Grocery shopping is time consuming – with e-grocers, I can shop while at work or in transit, and avoid carving out 1-2 hours a week shopping 2) Proximity to a grocer – I did not have any options less than a 10-15 minute walk, so if I did go to the grocery I could only buy as much as I could carry home, or have to pay for a taxi. E-grocers provide a huge value add in major cities where people don’t have cars and are crunched for time, but I don’t see them spreading successfully to less dense areas. As for the grocery delivery mode (Instacart) this model is struggling. Instacart has been rumored to be unprofitable despite raising delivery and membership fees. I like your suggestions that H-E-B not get too caught up in the move to digitization, and focus on the in-store experience while leveraging Instacart to provide more online exposure.