Online-To-Door Grocery Deliveries Will Not Upend The Industry Like E-Commerce Did Brick-And-Mortar

Until recently, grocers have been fairly resistant to e-commerce. Many brands have rolled out their own version of online order, in-store pickup services, but few have mastered the task of delivering fresh goods to shoppers’ doors. 

Some worry Amazon's transition further into the grocery business through its $13.7B purchase of high-end grocer Whole Foods Markets could usher in a new era of online grocery shopping, and Cushman & Wakefield’s Garrick Brown and Ben Conwell said it means fewer dollars and customers for other players. But in a recent report the two said there is cause for retail landlords to breathe a sigh of relief.

“Amazon didn’t go out and lease, build or rehab millions of square feet of industrial space in order to ramp up its grocery delivery platform,” said Conwell, C&W senior managing director of the Americas. “It bought existing retail assets and it did so because the final mile delivery issues for grocery are traditionally different than those for other retail goods.”

It is easy to assume e-groceries would upend the industry much like e-commerce did for brick-and-mortar retail, according to Brown, C&W's vice president of retail research for the Americas. But in reality, the costs associated with last-mile delivery makes online grocery delivery a difficult model to scale. 

Grocers are already battling low profit margins due to increasingly declining food prices. As new discount grocers like Aldi enter the already tight market with lower prices, existing players such as Walmart and Kroger are forced to lower their prices to compete — and around the circle goes. 

This pattern, coupled with expensive online delivery costs, has kept online grocery delivery in its infancy. Grocers that have the means and distribution network needed to fulfill the online-to-door delivery of perishables are predominantly concentrated in urban markets to keep costs low. C&W reports that more than 52% of U.S. online grocery store sales were in urban markets within eight states, with markets including New York City, San Francisco, Chicago, Philadelphia and Miami. 

“We still have yet to see any large-scale successes in the e-grocery space when it comes to sprawl markets or more sparsely populated areas,” Conwell said. “To succeed, operators must be able to deliver from sites that are close to the consumer. And delivering online orders of perishables, especially fruits and vegetables, is unbelievably difficult.”

Robust Adoption Of E-Groceries Not Likely ...

There may be casualties as grocers meet the internet, but Brown said those casualties will not stem from the robust adoption of online grocery delivery, but rather an abundance of new brick-and-mortar grocers entering the already tight market and eating into market share. 

German discount grocer Aldi has announced plans to further advance its rapid expansion into America by adding an additional 900 locations to its store count in the next five years, 400 of which will open by the end of next year. Those openings mean Aldi would operate some 2,500 locations across the U.S. by 2022, making the German chain the third-largest grocer in the country by store count, trailing only Walmart and Kroger.

... But If Anyone Can Do It

Amazon has been working to expand its physical brick-and-mortar presence for some time now, and this deal will not only give the e-commerce behemoth access to Whole Food’s portfolio of 450-plus stores, but it also gives Amazon control of the grocer’s distribution network — complete with store back rooms and cold storage. What does this translate into? A quicker and fresher delivery of its goods using Whole Foods locations as distribution networks. This will prove beneficial as Amazon continues the rapid expansion of its online and physical grocery delivery business. 

“This [Amazon-Whole Foods] move will create a massive amount of disruption in the grocery industry, but not for the reasons one might think,” Brown said. “I have no doubt that e-grocery growth will be ramping up in the immediate future … but I am still not sold on anyone successfully being able to tackle the issues of final mile when it comes to most suburban markets — though Amazon would be the one player who might be able to make this work thanks to their scale, massive infrastructure and the enormous head-start they have. But rural or small town e-groceries? I’ll believe it when I see it.”