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.
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.