Delivery is a big hit with consumers, but are retailers better off leaving it to third-party providers? We look at the pros and cons
Online grocery sales totaled a whopping $97.7
billion last year, boosting e-commerce’s share of total grocery spending to almost 13%, up nearly two percentage points from 2020, according to Barrington, Ill.-based Brick Meets Click. Remove ship-to-home from the equation, says the company, and pick-up and delivery combined grabbed approximately 10% of all 2021 sales.
Although pick-up continues to gain momentum (its share of online sales grew 5 percentage points last year to 45%), delivery is holding steady with about 33% of total sales. (Ship-to-home, with 22%, has lost ground each year.) That’s good news for retailers since buy-online-pickup-in-store (BOPIS) offers some pretty compelling advantages over home delivery, which is generally considered the most expensive way to fulfill grocery orders.
‘Retailers have to offer [fulfillment] options to online consumers or risk losing them to competitors.’
In fact, pre-pandemic, the average margin for BOPIS in the U.S. was 2.9% versus -6.7% for delivery, meaning grocers lost money on every order, reports Neil Saunders, managing director of retail at New York-based GlobalData. Delivery has its drawbacks for consumers, too. On the surface, it saves time, but having to choose a two-hour delivery window 24 hours in advance isn’t always particularly convenient for them. “Plus, there are often [unacceptable] substitutes and/or missing items, and there’s no way for the shopper to remedy that when they’re not at the store,” says Saunders. “Third, there is often a cost attached to home delivery that not everyone wants to pay.” As a result, he says, “BOPIS is often seen as a good compromise because it saves time but offers consumers more flexibility, and it costs way less than home delivery.”
And if consumers have to go inside the store to pick up their order, retailers still have at least a shot at getting an impulse buy or two, adds Ken Morris, managing partner at Cambridge, Mass.-based Cambridge Retail Advisors.
HOME DELIVERY IS HERE TO STAY
The benefits of BOPIS notwithstanding, industry observers agree that home delivery is here to stay. It may not be a profit center, says Saunders, but it does provide an opportunity to defend and gain market share, making it an important part of the online offer.
Recent eGrocery benchmarking from Brick Meets Click supports the notion that retailers need to include home delivery as part of their mix. During the 12 weeks ended Sept. 28, reports the company, weekly online grocery sales for stores that offered both pickup and delivery were 44% higher than those that offered only delivery and 55% higher than those that offered only pickup. (But only 49% of stores in the sample offered a choice between the two methods.) While some of those consumers might have settled for whatever fulfillment option was available, it’s likely that others simply chose a different supermarket.
‘The customer expects the retailer to support the entire order lifecycle, including last-mile delivery.’
“Choice is the name of the game,” says Carol Spieckerman, president of Bentonville, Ark.-based Spieckerman Retail. Despite what retailers might prefer, she explains, “They have to offer [fulfillment] options to online consumers or risk losing them to competitors…. Curtailing choice isn’t an option.” The only real question, then, is whether retailers should offer home delivery themselves or turn it over to a third-party provider.
Interestingly, says Saunders, almost all U.K. retailers operate their own home delivery programs, though the country’s population density makes that option much more cost-effective than it is here in the states. On this side of the pond, however, only the major players — Walmart, Safeway, Kroger, Amazon and Target (through its Shipt subsidiary) — along with a handful of others have brought the process in-house. But some industry observers think it might be time for others to join that club, citing the need to maintain control over the transaction from start to finish.
“The customer expects the retailer to support the entire order lifecycle, including last mile delivery,” explains Morris. So even if a third-provider actually delivers the groceries, if something goes wrong, consumers will hold the retailer responsible — not Instacart or DoorDash — which is what makes such partnerships so risky. “This is especially true for strong regional players like Byerlys, Sunset, Heinen’s and Roche for whom the customer relationship is critical for competing against national chains,” says Morris.
TEMPERATURE-SENSITIVE PRODUCTS RUN A RISK
Keep in mind, continues Bishop, that gig workers using their own vehicles sometimes lack the necessary equipment to properly maintain the cold chain,
making it even more likely that temperature-sensitive products will arrive in poor condition. “And the issue only becomes more pronounced as retailers batch out more orders to the same driver.” So not only does customer satisfaction take a hit, but retailers see an increase in returns, which can become costly.
Beyond lack of control over delivery quality, lack of control over transaction data represents another major disadvantage of outsourcing. At best, retailers just don’t get a lot of data on transactions that go through third-party providers, leaving them without valuable insights into a growing portion of their business. At worst, “You’re sharing data with a company that could at any point use it to go direct to your customer,” says Anne Mezzenga, co-CEO of Minneapolis-based podcast Omni Talk.
‘As instant delivery providers start to pick up the ‘I forgot something’ trips to the grocer, those not offering that service will start to feel the impact.’
Despite the drawbacks of third-party delivery, most retailers have partnered with them at one time or another, even if just as a stop-gap measure while they put their own programs in place. Why? For one thing, doing delivery in-house is really expensive, says Mezzenga. “Trying to take last mile in-house requires an entirely new business model,” she explains. “In an already low-margin business, it requires labor and capital for automation, both of which are hard to come by right now.”
It also takes time. And when the pandemic hit in early 2020, sending online demand through the roof practically overnight, time ran out on most retailers, making partnerships with established third parties their only real option — especially for smaller chains. “If you farm out the last mile, you can turn it on for your customers tomorrow,” says Mezzenga. “You have built-in infrastructure, staffing and all that goes with it.”
And despite fears over delivery quality, Morris says many third-party providers have built in incentives for employees to provide excellent service. For example, the higher the customer rating, the more access associates have to larger, more lucrative orders. As a result, some might argue that those employees are even more motivated to do a good job than a grocer’s in-house delivery people might be.
Plus, after operating for several years now, these companies know what they’re doing. “Third-party providers like Instacart and DoorDash have quite a bit of experience at this point,” says Spieckerman. They’ve already worked out most of the bugs. Moreover, “The loyalty these providers enjoy within their own ecosystems can sometimes transfer to retailers that partner with them.”
Indeed, says Mezzenga, “If you’re working with an Instacart or Shipt, for example, you also have the potential for new customer flow. If someone comes to Instacart to get an item and their favorite store is out, they might come to you instead. Or if they’re shopping for an HBC or home item and remember they need a few things for dinner, they can pick it up from you using their existing membership.”
Because there are clear advantages to both in-house and third-party delivery programs, many retailers have adopted a hybrid approach, allowing consumers to order through either platform, doing the picking themselves but leaving delivery to a third party, or using the third party only for certain deliveries.
“Selecting a third-party provider was an easy choice before the pandemic as it allowed retailers to compete online quickly without the same investment as going with a first-party service,” explains Bishop. “However, as the online segment continues to grow, it’s very challenging for a grocer to control their operating costs when relying only on a third-party provider. As a result, many have migrated to a hybrid approach that includes both a first- and third-party service, which makes more sense for the grocer today.”
Saunders agrees, “A hybrid approach is a good option for retailers that want the best of both worlds.”
Just when retailers are finally figuring out how best to manage home delivery, along comes a new group of players offering ultrafast 20- to 30-minute delivery. Currently duking it out in New York City and a handful of other major metropolitan areas, companies like Gopuff, Buyk and Gorillas are hoping to transform the home delivery landscape once again. Even Instacart is reportedly planning a pilot program for 15-minute delivery, set to begin as early as next month.
Though it’s way too early to predict whether or not the concept will catch on, Mezzenga, for one, is a believer. “I tried it in New York City this past weekend, and I’m hooked. In fact, I ordered instant delivery six times during a five-day stay.” And while some may argue that few consumers need groceries in 15 minutes, Mezzenga says that’s not the point. “It’s not about what you need but rather that you can get something in 15 minutes if that’s what is most convenient for you.
“Grocers need to explore where they fit into this,” she continues. “As instant delivery providers start to pick up the ‘I forgot something’ trips to the grocer, those not offering that service will start to feel the impact.”
CLOUDS LOOM FOR INDEPENDENTS, BODEGAS
Independent retailers and bodegas in particular could be in for a tough time if instant orders delivered from providers’ own micro-fulfillment centers and dark stores really start to catch on, says Spieckerman, who calls the concept both exciting and potentially troubling. One early sign that these services are playing for keeps: Gopuff just launched its own private label line.
“This is definitely a trend all grocers need to keep an eye on,” adds Christopher Walton, co-CEO of Omni Talk. “Ideally, retailers need to figure out how to do it themselves in the long run. But until then, they need to experiment with the right partners to understand its impact on their business in the here and now.”
Experiment, yes, says Saunders, but he cautions against investing too much in this space right now. “Ultra-fast delivery services are attracting a lot of attention and there’s a lot of money being pumped into them.” But there are issues. For starters, he says, very few are making any money; in fact, many are deeply unprofitable with no clear pathway to profitability, raising questions over the sustainability of the model. In addition, “The space is very crowded, so there will be consolidation at some point.” Most important, he says, while there is a place for these services, most consumers don’t need or want delivery in 10 minutes — if they have to pay for it. “They will use such services if they’re cheap and subsidized, but as soon as the costs become more realistic, consumers will opt for slower and cheaper methods of grocery delivery.”
WALMART EXPANDS IN-HOME DELIVERY
As if ultrafast delivery wasn’t enough to contend with, retailers also need to formulate a response to Walmart’s plan to expand its InHome delivery service from 6 million to 30 million households by the end of this year. Enabled by smart technology, the program allows specially trained associates outfitted with cameras to enter customers’ houses or garages and actually put groceries in the refrigerator or freezer, eliminating the need for consumers to be home. (They can also pick up Walmart returns.) The service costs $19.95 a month or $148 a year, and the smart lock costs $49.95. Amazon offers in-garage grocery delivery through Amazon Fresh and Whole Foods.
“[Walmart’s plan] has been met with a lot of backlash in the retail media, but at the end of the day, Walmart is just providing another option for shoppers,” says Spieckerman. “Even if a relatively small subset of shoppers uses the service initially, if Walmart executes effectively, word of mouth will accelerate adoption.” She adds, “Walmart is stepping out in front with InHome and will take some heat before others quickly follow!”
“It’s a great innovation that provides ultimate convenience,” continues Saunders. “But whether it makes money remains to be seen. Also, there are a large number of customers who would not be comfortable having strangers enter their home (livestream or not)… As such, I see Walmart’s move as experimental and niche.”
Walters is even less optimistic. “I 100% don’t think it will catch on. It is, at best, for the wealthier segment of the population, but it comes with way too many points of friction even for them,” he says. However, Walmart’s recent pivot to HomeValet Smart Boxes is an idea consumers are likely to be more comfortable with. The $499 price tag is a major drawback, but the product’s maker believes iOT-connected smart boxes will eventually become an integral part of every household’s suite of appliances. n