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Grocery’s Next Frontier

December 13, 2016
By Andy Lai, Alliance Data's Strategic Insights Group

It’s tough to be a retailer, and perhaps toughest of all for grocers. But monetizing the curbside pickup offers an opportunity for grocers to win big.

The retail environment has been rough, although some have had it tougher than others. Besides department stores, grocers have had it the worst. 

Just 25 years ago, grocery rivaled the automotive industry in total retail market share; in the early 1990s, grocery stores made up 17% of total retail sales. Today, they make up only 12%. Grocery’s loss of share has been largely because of the rise of warehouse clubs and supercenters, which grew from 2% market share to 8% over those 25 years. In other words, warehouse clubs and supercenters saw their share increase by 300%, while grocery’s share is only 70% of what it used to be. A watershed trend like this has to have a compelling value proposition behind it: Buy in bulk to save money.

What is most interesting behind the rise of warehouse clubs is that their value proposition requires consumers to significantly change their shopping behavior. Consumers have to buy in bulk, pay annual membership fees, forgo additional payment options and shop in a warehouse setting.

If losing share to Costco and Sam’s Club isn’t bad enough, grocery is now seeing the Amazon effect enter its space. Amazon plans to build physical convenience stores that offer fresh foods and nonperishable goods, along with delivery and curbside pickup options. The opportunity here is a large, unpenetrated category. Grocery store sales for 2015 were $620 billion, and less than 2% of those sales were done online. However, grocery is an entirely different animal when it comes to services like delivery. Price deflation is already a headwind. Add to that complex services and logistics, such as delivering frozen goods within a narrow window, and margins get pressed even further. Grocery’s incumbents see an opportunity to become a physical Amazon store, offering curbside pickup at existing locations.

Walmart and Kroger offer curbside pickup at select locations under the monikers of Click-and-Collect and ClickList, respectively. Next year, both will extend this offering to 20% of their locations. There is a clear and compelling value proposition being extended. Warehouse clubs help us save money, whereas grocery curbside pickup saves us time. The latter goes a giant step further. Rather than ask consumers to drastically change their behavior to receive value, curbside pickup appeals to our existing habits.

Let me illustrate this point with a personal narrative for a moment. My wife and I have two small children who take midday naps. On weekends, nap time is a precious two- to three-hour window for us to either rest or devote ourselves to a worthy pursuit without interruption. Grocery shopping is not how we want to spend this time. Our lives are improved thanks to online ordering and curbside pickup. We no longer have the hassle of family grocery outings or using precious nap time for a solo run. Instead, my wife places our family’s grocery order online as she’s making her list, which is a habit that’s already in place. The following day, I swing by the store on my way home from work to pick it up. The result: Our weekend is extended by several hours. Real value is created, and our lives are better. Not only that, but we are no longer subject to the store’s “traps,” like the $5 toy placed at cart level in the cereal aisle.

Since grocery stores are more mindful of survival than benevolence, I’ll switch back from a personal narrative to a topical one. How can grocery stores monetize curbside pickup? The answer is threefold:

  1. Optimize margins with strategic pricing models.
  1. Continually refine the experience to make it as seamless as possible to drive greater frequency. Take control of customer data to enhance marketing efficiency.
  1. Charge consumers for the value being created and tier them. Curbside pickup should charge the more cost-conscious customer a nominal fee to pick up an order during off-peak times, or incent them to order days prior to pickup. Charge more to customers who place a premium on peak-demand slots. Families visit the grocery store once a week. Make curbside pickup a delightful experience that improves continuously, and remind them of the time they are saving (similar to how Kroger’s cashier tells you how much money you saved, which is also communicated at the bottom of each receipt). Delighted customers will return more often and brag to their friends about how much time they saved.

Curbside pickup allows the retailer far deeper access into their customers’ data. Amazon is working on license plate recognition technology to shorten wait time, and cars are becoming smarter and more connected. All of that yields great opportunity to cross-pollinate data to drive marketing efficiency. If grocers execute on these items, the next 25 years will be much better than the last.

Andy Lai-Alliance Data_cropped

Andy Lai is a manager at Alliance Data’s Strategic Insights Group,
where he is responsible for developing business, economic and financial
insights using
qualitative and quantitative research.
He can be reached at
andrew.lai@alliancedata.com.

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