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Conquering the last mile

With online grocery shopping gaining momentum, the stakes are high for retailers to get home delivery right

With the desire for convenience growing among millennials and gen-Zers, the number of Canadians ordering their groceries online has nowhere to go but up, say experts.

“You’re seeing more retailers going after our money online rather than waiting for foot traffic to show,” says Sylvain Charlebois, professor of food distribution and policy and senior director of the Agrifood Analytics Lab at Dalhousie University in Halifax. While grocers used to believe e-commerce would cannibalize their sales, he says, “I don’t think that’s the case anymore.”

Indeed, e-commerce is increasingly important for traditional brick-and-mortar grocers, given that the majority of the growth in grocery spending is originating online, notes David Bishop, partner at strategic advisory firm Brick Meets Click in Barrington, Ill. About 40% of U.S. households buy at least some of their groceries online, he says. And he expects e-commerce will account for 6.3% of U.S. grocers’ sales this year, compared with 5.5% in 2018, and could reach 8% to 9% in a few years’ time.

On this side of the border, Charlebois estimates the food retail market to be worth about $120 billion, reasoning that if online sales in this country reached a similar percentage of total sales as those in the U.S., they would represent sales of $7.6 billion.

That said, while old-fashioned home delivery has been a presence in Canada for decades, Canadians have been slower off the mark ordering groceries online for delivery. But this is changing. While online grocery orders represent about 2% of sales in Canada, those numbers are growing, says Charlebois. For example, the statistics portal Statista forecasts 9.1% e-commerce sales growth in Canada this year.

“I can see Canada catching up to the U.S. in a few years in online shopping and delivery,” says Toronto- based retail expert Bruce Winder. “We seem to be behind the trend in terms of what’s happening in retail, but we do catch up.”

Avril, Quebec’s largest organic grocer with eight stores, is just one Canadian grocer planning to up its online game. Online sales currently represent 1.5% of overall sales at Avril, but the grocer is in the process of putting a digital strategy in place, says co-owner Rolland Tanguay. “We’re going to work harder on it.” While the sales of supplements and dry goods currently dominate online sales, fresh produce will likely be added to Avril’s mix in the next few years, Tanguay says.

Although grocers in Canada have been slow to adopt e-commerce, technology is improving, more people are using apps, and the online buying habit is increasing in predominance among Canadians, Charlebois says. “More people are saying ‘Why am I going to the grocery store?’” What’s more, the reluctance to having someone else choose your tomatoes and cucumbers is disappearing.

Winder says online grocery sales will be propelled by the millennial and generation Z demographics, which are “incredibly comfortable with buying everything online and avoiding the store because they’re time-starved and into experiences.”

Research of nearly 30 U.S. retail banners has found that average online grocery orders are significantly larger than average in-store transactions, Bishop says. It’s not uncommon to see online orders of more than $100, partly because retailers require minimum purchases of $35 or charge for deliveries under $100.

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Charlebois believes consumers prefer home delivery to the click-and-collect approach, which “is not overly-convenient for consumers.” While Loblaw is aggressively pushing its click-and-collect approach—widely available through its PC Express service—Charlebois believes the grocer, which has already teamed up with Instacart to handle home delivery in some markets, will increase its focus on home delivery and will leverage its successful PC Optimum loyalty program to do so.

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The challenge grocers face with home delivery, says Charlebois, is in trying to make money while moving product from point A to B without asking consumers to pay more. The problem, he says, is that “consumers do not want to pay for delivery.”

Grocers may try to boost sales online by providing different product offerings on their e-commerce websites and apps than is available in store. “If they’re smart, grocers will actually make you work to get to certain products,” says Charlebois. “I suspect at some point bargains won’t be as plentiful online as in the store. It’s the cost of convenience. We can’t get everything for free.”

To make money online—and for consumers to continue to believe they’re getting good deals—grocers will need more than intuition, says Charlebois. “You need analytics, you need some AI (artificial intelligence)—it’s what Amazon is doing. It boils down to empowering data as much as possible, which is not something that grocers very good at for the longest time, but are getting better at.”

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Charlebois says Sobeys’ decision to partner with U.K. online grocery retailer Ocado Group to handle online ordering, fulfillment automation and delivery makes sense. “Sobeys is designing a program based on what consumers are looking for. Ocado has been successful in the U.K. and it was smart for Sobeys to recognize it didn’t have the expertise to focus on e-commerce and delivery.”

In May, Sobeys unveiled Voilà, its new online grocery home delivery service for the Greater Toronto Area, Ottawa and major Quebec cities. Instead of putting the focus on in-store personal shoppers to fulfill online orders, Sobeys will build automated warehouses in the Toronto and Montreal areas, based on Ocado’s U.K. model. “With e-commerce, if you want to become efficient you have to centralize more and that’s what Sobeys is doing,” Charlebois says.

The pick and select process in store is “very challenging” because average online grocery orders can contain 40 to 45 SKUs and can take personal shoppers about 45 minutes to complete, Bishop adds. As a result, many retailers are working to improve that process with automation. “The majority of retailers will outsource delivery to a specialized third-party logistics provider that will focus on that last mile.”

Bishop notes while autonomous vehicles are being touted as a solution for last mile delivery of groceries, a broad market rollout in the U.S. likely won’t come for another 10 years. “The timeline for broad market adoption is still many years away,” he says.

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For grocers to succeed in e-commerce, they may have to go the route of popular meal ordering apps such as Skip the Dishes and Foodora, which are “very consumer-focused” and require only about 20 seconds for consumers to complete their orders, Charlebois says. “That’s something that grocers will have to do. That’s the kind of thing that you’re going to see more. The pressure’s going to be real so grocers will be expected to execute well,” using Amazon as their benchmark, he says. He adds that programs similar to Amazon Prime, which charges consumers an annual fee in exchange for free delivery and other benefits, could be a route for grocers to imitate.

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The stakes for grocers in home delivery are high. Not only will they have to deal with bad public relations and a social media backlash if they don’t get delivery right, but they will also lose market share to grocers who do, says Winder. “Grocers who don’t get it right in terms of smoothness of operations, process and efficiency are going to lose money or lose opportunity costs of money,” he says. “Even if you do get market share, if you’re not doing it right, you’re going to have your net margins eroded. So, there’s some pretty big stakes here.”

This article appeared in Canadian Grocer’June/July issue.

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