To sell online, grocers are building walls

Consumer concerns about product expiration dates and shipping costs have long kept online grocery services on the sidelines in North America.

And while a new generation of e-food services don’t fix either of those issues, they do address one complaint by showing products in much the same way consumers shop for them–visually and in an order that mimics the way a brick-and-mortar store is laid out.

Another plus, perhaps, is that these new services give shoppers a chance to buy groceries when it’s actually convenient–namely on their way to or home from work.

The British supermarket giant Tesco claims to be the first to create a virtual grocery store, setting up backlit billboards in transit stations in Seoul. The billboards are filled with a small number of product pictures featuring QR codes. To make a buy, commuters merely scan the code with their smartphone. Once they arrive home from work, the groceries are delivered.

Setting up these virtual stores (whose shelves are exactly as they appear in stores) was a matter of necessity at first. Tesco’s subsidiary in Korean, Home Plus, has far fewer stores than the nation’s No. 1 grocer, E-mart.

The big idea at Tesco was could it add market share without opening more stores? After an initial trial last year, the answer seemed to be yes: new registered members to Home Plus’s online store rose 76 per cent and online sales grew 130 per cent and Tesco has been rolling virtual stores out in other markets in Korean.

Now, more chains are trying the same thing. Earlier this year in Australia, the grocery chain Woolworth’s set up virtual stores at transit stations in Sydney and Melbourne for a week to promote its mobile shopping app. Unlike Tesco’s Korean venture, the assortment is limited to 120 items and uses barcodes rather than QR codes.

More permanent it seems are transit billboards in Philadelphia set up by the online grocer Peapod. Those also launched earlier this year and a company spokesperson says the feedback from consumers to date has been “amazing.” In May, Peapod expanded the billboards, which use QR codes, to Chicago.

In another interesting trial in April in Toronto, Well.ca, an online retailer of health, baby and beauty products set up a virtual store on a wall in an office complex downtown next to a subway stop. Passers-by are able to order Procter & Gamble products such as Pampers, Crest and Tide.

Well.ca’s CEO, Ali Asaria, says the company built its own app that shoppers can download to order products using QR codes. The virtual store was only supposed to be up until the end of April but Asaria thinks the concept can work.

Right now, Asaria says, “our primary goal is to help Canadians imagine what the future of shopping could be. In that process we’re obviously collecting a bunch of data to see how customers interact with the virtual wall and we’re watching it very carefully.”

But can such subway stores work in Canada long-term? Perhaps not just yet.

A big reason for the success of Tesco’s virtual kiosks is that South Koreans tend to shop for a few groceries every day. “South Korea has a very densely population so this notion of grocery shopping on the way to and from work is not a big departure from what they were doing before,” says Ken Wong, a marketing professor at Queen’s School of Business in Kingston, Ont. “There, you’re delivering a small box of groceries; here, people are loading up their SUVs and vans. We don’t shop in quite the same way.”

But perhaps the biggest hurdle is the cost of setting up the logistics.

Grocery industry margins are small enough without having them eroded by additional infrastructure, says Henry Kim, an associate professor at the Schulich School of Business in Toronto. He believes, however, there could be some upselling or cross-selling opportunities or, at the very least, adding product information such as reviews or promotions.

“But that’s probably more appropriate for businesses that have higher margins and goods that are more expensive,” Kim says.

Suppliers, however, may be more keenly interested in the potential of subway stores. In the case of Well.ca, for instance, P&G was able to sell products almost straight to the consumer rather than have to go through traditional retailers. That, says Wong, begs an interesting question: "Will different suppliers line up with different virtual stores, in part to avoid price competition and in part to avoid competing against private labels?"

Bryan Pearson, CEO and president of LoyaltyOne Inc., a Toronto-based provider of loyalty strategy and programs including Air Miles, sees the logic behind the kiosks because they extend the boundaries of a store and could potentially be an added engagement device. But the key to the success of any technology is whether it can create upsells or incremental visits.

“We will move past a wall of product very quickly once people discover a more robust shopping environment,” Pearson says. “Where it gets interesting is when it gets to the point where grocers can link some of the information to create more customized shopping experiences.”

Either way, changes will come, Wong says. “I don’t know that Tesco’s model would fly here, but I can say with 100 per cent certainty that we haven’t begun to scratch the surface of how mobility will impact shopping patterns and shopping behaviours for frequently purchased goods like groceries.”