Realities and Reminders

Grocers are at a crossroads, aiming to improve both the profitability and experience of eGrocery while also remaining competitive.

This report maps out a different path that regional grocers who operate a first-party site/app can pursue. It reframes how products and services are priced, reorients the fee structure to help customers save more money, and realigns activities to lower cost in smarter ways (Table 1).

About this report:

• Is intended for regional grocers although other formats can also adapt this approach to their business.
• Assumes that grocers offer Pickup and Delivery already to better serve the demand and preferences in the market.
• Focuses on Pickup as grocers typically have greater control and responsibility for key activities across the three stages.
• Emphasizes direct labor cost as grocers can manage these areas on an ongoing basis; however, grocers should consider other direct/variable costs too.
• Is based on a recent pricing study that analyzed how eight banners in one market executed online strategies versus in-store.

Executive note: Some grocers have an entrenched belief that online prices need to be the same as in-store. However, there are grocers who are breaking from that tradition because they have seen others adapt, they better understand the online landscape, or they have a true sense of the realities they are facing with competition.

As we look ahead and plan for the future, it’s crucial to understand the current landscape and the challenges that regional grocers face in the online market.

In Part 1: Realities and Reminders, we will delve into the tangible challenges that regional grocers confront when competing against low-price market leaders like Walmart. We’ll also revisit some fundamental aspects of online grocery shopping that can serve as reminders for crafting effective strategies. Let’s discuss these realities and reminders to set the stage for the strategic roadmap that follows.

Regional grocers face several stark realities related to competing online against national rivals.

1. Online orders introduce incremental costs.

Pickup, the lower cost-to-serve method than Delivery, can easily inject an incremental $13+ in direct labor costs associated with assembling (i.e., pick, pack, and stage) and distributing (i.e., retrieve, transport, and transfer) a single order. And this does not account for CapEx investments and/or other OpEx budget lines, which would only increase this figure.

2. Demand for eGrocery has softened and growth is decelerating.

As COVID-related concerns and financial supports diminish, a portion of online customers have returned to doing more grocery shopping in-store due to personal preferences or cost considerations . While the base business remains significantly elevated versus pre-COVID levels, slower growth will challenge the larger CapEx investments intended to reduce direct labor related costs.

3. National rivals have stronger opportunities to offset eGrocery’s higher cost structure.

Although retail media networks (RMN) promise ancillary revenue, national grocers will be the big winners as they will leverage their scale and capabilities. National rivals also have the advantage with memberships or subscriptions as they can build a more compelling bundle, but these tactics have less impact on lowering costs as compared to RMNs.

Reality #1 – Online introduces incremental costs, which can add >$13 in direct labor costs associated with assembling and distributing an order.

Pickup is considered the lower cost-to-serve method than Delivery, and when analyzing the manual processes and basic practices related to assembling and distributing, a single order can add an estimated $13.70 simply in direct labor cost and that ignores all the sunk costs.

Executive Note: In understanding your direct labor cost per order, here are some key variables: store size, pick path, employee factors, product mix, and wage rates can affect this measure. In addition, presence or absence of enhanced assembly methods can impact the costs.

Reality #2 – Demand has softened and growth is decelerating, challenging ways grocers can grow sales or improve the profitability of online orders.

Demand has softened as COVID-related concerns and financial support payments diminish, prompting some users to return to in-store shopping. Although the sales base remains much higher versus pre-COVID levels, sales are forecast to grow at a slower rate over the next five years.

Executive note: Grocers should assess their sales forecast as well as their plan to reduce the cost to serve online demand over the next several years. The online market is much more competitive, making it more costly to attract new customers and vital to retain existing ones.

Reality #3 - National rivals have stronger opportunities to offset this higher cost structure via ancillary revenue, like from retail media networks.

Retail media networks (RMN) promise ancillary revenue that can help offset a portion of the incremental cost of online orders; however, national grocers will be the big winners due to their scale, and emerging capabilities will help generate even larger revenue streams in coming years.

Executive note: Retail monies can be leveraged as an offset against the cost-to-serve online orders for their customers. Grocers should estimate what revenue equates to on a per-order basis, and carve out a share of earnings to support online channels.

Implication - Regional grocers need to consider a different path forward since the one taken by national rivals isn’t a sound choice for several reasons.

Following Mass or other national rivals is risky, because their strategies are based on their scale and price positions. The two waterfall charts illustrate how differently Regional Grocers and Mass will likely attempt to cover most of the direct labor cost.

Executive note: Grocers should aim to measure how each of these components contribute to improved order profitability, but also understand how fees can help drive greater efficiencies with both the assembly and distribution functions.

Reminder A - Customers are much less likely to shop at a regional grocer due to cost, i.e., low prices, as compared to their national, discount rivals (Chart 3).

A recent in-market pricing analysis found that discounts in Mass (i.e., Walmart) and Hard Discount (i.e., Aldi) enjoy significant price advantages over regional grocers when it comes to a customer buying a basket of commonly-purchased products (Chart 4a and 4b).

Executive note: Reframe any price comparison by emphasizing the benefits of shopping online with your regional grocery store. Highlight that shopping online saves customers time and offers a seamless, convenient experience, as compared to shopping in-store.

Reminder B - Customers are more likely to choose convenience when they shop with a regional grocer as opposed to a national, low-priced rival (Chart 5).

Although this selection criteria generally relates to in-store shopping, it is relevant for Pickup since both shopping modes require a visit to the store. And those that primarily bought groceries from Mass or Hard Discount tend to drive past more stores to shop at those banners (Chart 6).

Executive note: Focus consumer messaging about shopping online more around aspects of convenience and some of its perceived benefits, like saving time or spending time doing things they enjoy more than shopping in a store.

Reminder C - Regional grocers’ customers typically expect to find different ways to save money than customers who shop at EDLP rivals (Chart 7).

While the net value remains much higher versus Walmart (see prior), customers at most regional grocers can still come away spending 7-10% less than the everyday price by taking advantage of member deals, temporary price reductions, and on-shelf/digital coupons (Chart 8a and 8B).

Executive note: Highlight the various savings that customers accrue – especially during the checkout stage. This serves as an explicit reminder on how customers saved money when shopping at a regional grocer, whether that’s in-store or online.

Reminder D - First-party (1P) has significantly strongerNet Promoter Score® (NPS®) ratings for repeat intent than third-party (3P) (Chart 9). Fees are the most pressing pricing issue (Chart 10).

A factor contributing to 1P’s higher NPS is that households are significantly more likely to use the 1P site when buying from their primary grocer. When it came to reasons for lower NPS ratings, fees took the top spot when it came to elements of pricing for both provider types.

Executive note: If true, highlight that customers find better deals, avoid added costs, and/or get the same deals online for advertised items when shopping on the 1P site/app in comparison to doing so on 3P sites/apps.

Reminder E - Customers’ perceptions about online product pricing reveals there’s lots of confusion. Although there’s less confusion on 1P sites/apps

Since most grocers currently price products on their 1P website/app at parity with in-store, it’s revealing that just 55% of the 1P customers sensed the same thing (Chart 11). And, when it comes to whether perception matched reality, basically 1 in 2 were on the same page (Chart 12).

Executive note: Analyze how your 1P platform compares to any 3P sites that are used. Measure variations in pricing elements, including promoted and non-promoted pricing, digital coupons, explicit costs (e.g., fees, charges, tips) and how savings are communicated to the customer.

Navigating the eGrocery landscape is akin to traversing a complex maze. Regional grocers are at a critical juncture where they need to balance profitability, customer experience, and competitiveness. The realities they face are palpable - online orders introduce incremental costs, demand for eGrocery has softened, and national rivals have stronger opportunities to offset eGrocery’s higher cost structure. However, grocers can't afford to simply follow the strategies of national rivals, as their tactics are based on their scale and price positions.

In store customers tend to choose grocers for convenience. Even so, they expect to find different ways to save money and appreciate the benefits of shopping online. Further, grocers first-party platforms have significantly stronger NPS ratings for repeat intent, but there’s an opportunity to do better by helping customers avoid paying more than necessary when it comes to fees. However, grocers elect to approach pricing products online, customers should be able to generally learn about the approach employed.

This next section provides a roadmap to help evolve the pricing strategy and better position pricing to win.

Click below to advance to the next section where we share the online pricing strategy roadmap.