Online grocery: Sprinting for the last-mile race

Grocery remains the toughest category to crack in ecommerce. Online sales only captured 2.9% of total grocery spending globally in 2017 while just 12% of online shoppers purchased groceries via the web last year. These figures from The State of Global Online Grocery Retail 2018 report by Forrester are a wake-up call that online grocery still presents huge untapped potential for retailers and ecommerce platforms.

Across the region, however, mature digital markets such as Australia, China, and South Korea are faring above average, with online grocery sales accounting for more than 3% of total grocery sales. The underlying similarity between key South Korean players such as E-mart, Homeplus and Coupang and their Chinese counterparts like Tmall, JD.com and Feiniu.com is same-day delivery, a no-brainer solution that nevertheless opens up a plethora of logistical challenges for retailers.

It is easy to fathom why online shoppers demand for their groceries to be delivered within hours of purchase, whereas they are happy to wait longer for clothes, for example. Click-and-collect models, meanwhile, give retailers relief from the logistical headaches that come with same-day delivery while also keeping foot traffic in stores. For while there is little doubt that retailers should embrace digital, the ecommercialisation of grocery certainly risks spelling the end for bricks-and-mortar stores.

“There is certainly no choice for them to say we are not going to get cannibalised, the consumers make that decision for you” says Tom Birtwhistle, director, PwC Consulting, Hong Kong and China. “The key question is, who's going to cannibalise you, is it you or the internet giants?”

Satish Meena, Forrester’s senior forecast analyst, concurs. “There’s going to be cannibalisation. The market is not going to grow, grocery is not similar to other categories. What could happen is that customers may just change channels where earlier they may be buying in a store and then move to online channels. That could hurt the offline retailers,” says Meena. The US has already seen sweeping store closures especially in non-grocery related categories, with Toys ‘R’ Us as the biggest casualty recently.

Closer to home, Walmart closed 46 stores in China between 2012 and 2016. When contacted for this article, a spokesperson for the US retailer said its partnership with JD.com, which includes inventory integration and a flagship store on the platform as well as delivery services through Jing Dong Dao Jia, has been very successful. Elsewhere, Walmart’s subsidiary Seiyu GK in Japan will offer an online grocery delivery service with Japan starting in the second half of this year.

Yet Ngai Man-lin, COO of Hong Kong retail stalwart A.S. Watson, which operates retail brands including the grocery chain ParknShop, brushed off fears of cannibalisation from online sales, according to a South China Morning Post report. While its online platform is not widely known to be the most sophisticated or user-friendly, Ngai however said in the report that data from 2016 and 2017 showed that consumers who bought from both bricks-and-mortar and online spent 2.5 to 3 times more than those who only shopped at physical stores. A.S. Watson also announced that it would open 1,500 new stores worldwide, including 500 in China, as well as investing $160 million over the next three years in technology, logistics and staff training.

All about logistics

Birtwhistle suggests that it may be difficult for traditional retailers to compete against online platforms that offer a wider product range and a better shopping experience. However, offline retailers are in turn more advantaged by having stores that serve their distribution network.

Matthew Crabbe, regional trends director for APAC, Mintel, emphasises that the acquistion and investment spree does not always mean that the online giants intend to buy out bricks-and-mortars. “Bricks-and-mortars have been in the business longer. They have the infrastructure, the chill chains, warehouses - the expertise to run this is already in this. When you are talking about online platforms trying to build out retail, this is what they lack,” says Crabbe.

In China, the logistical challenges associated with the grocery sector running online are already seeing the internet giants turn their beam onto convenience stores. JD.com signed a deal with FamilyMart in early March so that users who ordered from its O2O service Jing Dong Dao Jia could have their goods delivered from the convenience chain within 30 minutes. Alibaba, meanwhile, has rolled out the inventory and procurement cloud computing platform Ling Shou Tong to mom-and-pop stores for free in exchange for the stores to be used as fulfillment-and-delivery centres.

Meena points out that the low margins of the online grocery business necessitates the collaboration between the offline and online retailers. “I think a purely online or offline retailer is not possible in groceries,” he says.

Consumers have always liked to touch and feel the fresh produce at supermarkets.

Yet even these collaborations between the offline and online retailers will not improve the margins, according to Steven Kwok, associate partner, OC&C Consultants. “We have however seen the benefits of online on a store’s margins when they are able to closely integrate both online and offline, such as with Alibaba’s Hema Supermarket,” says Kwok.

He refers to a recent offer from the online-to-offline Hema Supermarket, which recently launched a round-the-clock delivery service promising  delivery within 30 minutes to customers who live within a 3km radius of the store across 25 locations in Beijing and Shanghai. This approach, says Kwok, can dramatically increase the sales density of Hema stores and correspondingly lead to an increase in margins. “Players in China typically adopt the model of leveraging distribution points that are close to the end consumer and do away with cold-chain ready vehicles. The choice is also driven in part by the wage difference between countries and route optimisation is less crucial in China,” Kwok explains.  

Alibaba's plan to open 2,000 Hema Supermarkets, among other examples, convinces Crabbe that bricks-and-mortars will always have a place in grocery shopping. “The typical idea of a supermarket has changed, you don’t really need to put a huge row of products on display. The stores become more experiential where you have product demonstrations, and staff do not necessarily have to be manning the checkout counters but can provide more experience and personal services to the consumers,” says Crabbe.

After all, grocery shopping customers will always want to touch and feel fresh produce, a tactile experience that is hard to replicate online. PwC’s Birtwhistle agrees that quality assurances typically begin with in-store experience, but thinks that retailers may be able to convert offline customers to online once trust is built. “Retailers continue to deliver on that promise by providing trusted, high quality products, and the consumers will continue to shop. As soon as the trust is broken, then they have a challenge,” says Birtwhistle.

Beyond China

Despite Alibaba and JD.com's success, some of their business models can only work in China. Other countries have much easier access to foreign goods and a higher store density. Only in China, too, do Alibaba and Tencent, the investor behind JD.com, hold the market share and the bulk of consumer data. 

Outside China, the Southeast Asian online platform Lazada, which is Alibaba-owned, has yet to venture into the grocery business even though it acquired Singapore-based online grocery marketplace Redmart in 2016. In April last year Lazada, Redmart, Netflix, Uber and UberEats (now owned by Grab) launched LiveUp, a subscription service similar to Amazon Prime, a few months before the US giant launched the service in Singapore. Both Alibaba and JD.com likewise have invested in other ecommerce marketplaces such as India’s Flipkart (Alibaba) and Vietnam’s Tiki.

Forrester’s Meena believes that having Mandarin as a common language helps China to succeed in ecommerce.  This compares to his native India, labelled by Forrester as a nascent online grocery market, which has up to 22 official languages. Other than the language issue, Meena says India is behind China by 15 to 20 years in terms of preparedness for ecommerce. The only similarity is the population size between the two countries. “Disposable income is still very low with 55 to 60% of the population still living in rural areas,” says Meena. “New Delhi and Mumbai could work like European cities but beyond that it is very difficult to shift goods from state to state,” says Meena.

PwC's Birtwhistle puts it succintly when he points out what is missing in the less robust markets. "Markets like India and Southeast Asia are still in the early days of ecommerce and digital marketing transformation, so it would be unlikley for them to integrate offline in those markets too."

Across the region, however, Meena says a large chunk of growth will be seen in existing retailers opening online stores, but last-mile delivery methods will differ by market. Birtwhistle agrees, saying that offline retailers have begun to gain share through the integration of online and offline, especially those following the click-and-collect model in markets like Australia, Japan and South Korea. 

The fragmented nature of the market has also given rise to a few online marketplaces such as HappyFresh and Honestbee, which work with hypermarket chains and gourmet food stores. The latter calls its employees ‘concierge shoppers’ and offers delivery within an hour of order placement in Singapore, thanks to express checkouts.

While retailers ultimately want to drive traffic and sell more on their own platforms, Joel Sng, CEO of Honestbee, says his platform helps retailers build new customer demographic bases among its users, many of whom he says are tech-savvy and time-pressed professionals.

PwC’s Birtwhistle says working with a multitude of platforms is as much about keeping up with the times as standing out as a retailer. “It doesn’t mean you need to have the same pricing strategy across all different platforms,” he states. “Ecommerce will create transparency for consumers to check prices but grocery is much more of an immediate consumption need so there is less likely to be showrooming. There needs to be pricing similarities across the channels but I don’t think the prices need to be completely duplicated across the channels. The prices should absolutely reflect the cost of service of the different channels, so it is going to create transparency for consumers to check prices."

Product offerings should differ by platform too, he adds, but the benefits offered should be the same across all platforms to build loyalty. 

“What retailers should not do when building their assortments is to replicate offline and try to execute it online,” he says. “Online shoppers are more willing to spend money on premium products, products with clear functional benefits, and products which are inconvenient to carry home like pet food and large packets of rice.”