Skipping the trip
Never have so many retailers been so eager to incur huge technology costs and upend operations to provide a service that encourages shoppers to avoid coming to stores. Yet, that is what is happening across the nation as retailer after retailer touts the availability of home delivery services alongside click and collect, which for many conventional retailers served as their gateway to the digital age.
The shift is noteworthy because store traffic, alongside transaction size, has long been a metric retailers measured and touted as an indicator of success. However, 2018 likely will be remembered as the year store traffic became a much less reliable indicator of success due to customers’ evolving expectations of retailers’ service offering. That’s because as satisfaction grows with alternative fulfillment methods such as click and collect and home delivery the universe of physical-first shoppers from whom trips are available to be captured will inevitably decline. Market share and transaction size will matter more even as stores retain their central role in how most retailers are satisfying shoppers who opt to engage digitally.
“Stores are an incredible asset for us,” said Matt Thompson, Kroger’s Vice President of Digital Business, echoing a familiar sentiment of many retailers. The importance of stores to Kroger’s digital offering occurred in 2014 with the acquisition of Harris Teeter and its 150 store ClickList operation. Since then, Kroger has embraced click and collect and increasingly home delivery. Kroger added 40 ClickList locations in 2016, another 450 in 2017 and will add 500 more this year, according to Thompson.
“We’ve never seen a category with such rapid adoption,” he said recently at the Home Delivery World retail supply chain event. Kroger also relies on roughly 1,200 of its physical stores to fulfill home delivery orders in nearly 50 markets. “By the end of the year we will have full delivery in all of our major markets,” Thompson said.
Other retailers are moving fast to offer and expand digital methods of engagement, which are universally reported to be popular, although no publicly held grocer has yet provided meaningful customer usage metrics to substantiate such claims.
“Everything we do now is next day delivery, but we are looking to do same day quickly,” said Valery Ciarimbola, Senior Director of E-Commerce Operations with Giant Eagle, the Pittsburgh-based operator of more than 200 supermarkets. “The first three deliveries are free and then $4.95 after that. The magic number of delivery orders to keep (customers) sticky with us is five or six.”
Giant Eagle fulfills home deliveries out of 36 stores currently, has more than 50 click and collect locations branded as Curbside Express and expects to add another 20 this year, according to Ciarimbola. Applied Predictive Technologies helped Giant Eagle build a predictive model that allowed for the prioritization of locations.
At SpartanNash, the Grand Rapids, Mich.-based food company whose retail division operates 145 stores, click and collect and delivery are expanding rapidly. Matt Van Gilder, Manager of E-Commerce Operations with SpartanNash, said a click and collect service branded as Fast Lane launched last July and is now available at more than 50 stores. Orders for home delivery are fulfilled from six stores.
“We are very happy with the growth we see week over week,” Van Gilder said, noting that the service is helping capture new customers and 50 percent of sales are incremental. The incrementality is key because SpartanNash does all its own deliveries and Van Gilder concedes profitability is a challenge due to the last mile expense. “We love the benefit of owning the customer experience all the way to the end.”
THE SCALABILITY CHALLENGE
As click and collect and home delivery demand grows, physical stores and the supply chains that support them are asked to perform functions for which they were never intended. This reality is not lost on supply chain executives who understand shipping merchandise from a distribution center to a store, filling store shelves and then picking orders from shelves increases product touches, which adds costs and magnifies operational weaknesses.
“E-commerce has revealed that out of stocks are worse than imagined,” said Scott DeGraeve, COO of Locai Solutions and a former Peapod executive, citing the prevalence of product substitution as an indicator.
Nevertheless, retailers eager to get into the omnichannel grocery game have rushed to crowd-sourced solutions providers such as Instacart, Shipt and Postmates. Reliance on third parties to pick orders for delivery or click and collect from physical stores emerged as an expedient solution for many retailers. It offered a way to shift the last mile expense burden to shoppers, but the long-term viability of relying on stores as fulfillment centers is suspect, according to some.
“Click and collect using store inventory at some point becomes unscalable,” said Andy Lockhart, Vice President of Integrated System Sales with TGW, a provider of material handling equipment used in automated distribution centers.
Among the top operational challenges associated reliance on store inventory to fulfill digital orders are store crowding, order accuracy, out of stocks, product substitutions and allocating dedicated store space for order storage, according to Lockhart. He believes the more scalable solution, is to decentralize fulfillment by leveraging dark stores, a common practice in European markets where grocery e-commerce has a higher penetration rate. Another option is fulfillment centers purpose built to handle digital grocery orders. Such a decentralized approach results in better pick rates, consistent substitution protocols and improved cold chain compliance, according Lockhart.
Sharing a similar view is Lee Hnetinka, CEO of Darkstore, a San Francisco-based company that claims to operate the nation’s largest third party fulfillment center network enabling one hour and same day deliveries.
“Our urban fulfillment model is not that much different than Amazon. We are simply forward stocking product to get it closer to the end consumer,” Hnetinka said.
Darkstore operates 82 locations nationwide ranging in size from 20,000 square feet to 150,000 square feet capable of offering same day deliveries in 40 cities.
Home delivery may be popular, but it is costly and it becomes even more costly when no one is home or unattended packages are stolen. Here again Amazon has emerged as a first mover to address a challenge with the supply chain. The company offers a service called Amazon Key In Car that allows Prime members who own General Motors or Volvo vehicles equipped with cloud-connected technologies to select their vehicle as the preferred delivery methods upon checkout.
Don’t drive a GM or Volvo? No problem. A start up called Phrame makes a nifty license plate holder that can give a delivery person access to a key to open the trunk and place a package inside.
“We turn the car trunk into a mobile locker,” said Charlene Consolacion, Co-Founder and CEO of Phrame.
Granting a delivery person access to a vehicle is one of those things that would have sounded crazy a few years ago, and maybe still does to most people today. However, availability of such services shows how quickly consumer behavior can change when presented with fulfillment solutions that over time become the new normal.
“People want to be able to accept packages when they are not home,” said Herve Letourneur, Vice Preident of Products with August Home, a company that make a smartphone controllable lock that fits over a homeowner’s existing deadbolt. The technology gives delivery people access to place packages inside the home, a use case widely thought to be one of the motivators behind Amazon’s decision to acquire Ring, a manufacturer of doorbells that gives users the ability remotely monitor video to see who is at their door.
“No one wants to have Amazon or Walmart own their lock. We provide universal access to about 200,000 homes,” Letourneur said.
He adds that, “a lot of customers are not comfortable with this yet,” but the same thing was said five years ago about home rental and ride sharing services. “It’s all coming.”
The other thing that’s coming is autonomous delivery vehicles. The business case is simply too strong and the technology is advancing too quickly for it not to happen. That is the view of Daniel Laury, CEO of Udelv.
His company has been testing a vehicle in the neighborhoods of San Mateo, about halfway between San Francisco and San Jose, that makes deliveries from the upscale Draeger’s supermarket. Since launching in early 2018, the orange Udelv vehicle had made more than 100 deliveries by April which was good enough for Laury to order a second vehicle.
“Autonomous delivery vehicles will dramatically cut the delivery cost and significantly enhance the customer experience,” Laury said.
The problem Udelv solves for retailers is cost and for retail customers it is convenience. Laury said the driver is the largest component of delivery cost, accounting for roughly 65 percent, followed by fuel at 10 percent depending on gas prices. An autonomous electric vehicle address both because, “you are guaranteed to save half the cost if you replace the driver with a computer and gas vehicles with electric vehicles.”
From a customer experience standpoint, much like with an Uber or Lyft driver, those expecting a delivery can monitor the arrival of the vehicle on their phone. Once the vehicle arrives curbside or in the driveway the order is retrieved by unlocking the cargo area with their smartphone.
“If after four minutes a customer hasn’t retrieved their order they are sent a push notification about whether they would like to reschedule,” Laury said. “This is not science fiction.”
It only sounds like it is, which is something retailers should be used to by now as innovation continues at a rapid pace. RL