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What will drive e-comm success for grocery retailers?

Since the start of the COVID-19 pandemic in March 2020, e-commerce sales have grown at a staggering pace in Canada. In fact, Euromonitor International estimates show that e-commerce sales grew by more than 70% year-over-year in 2020. E-commerce growth has been more subdued in 2021 but has still grown by more than 40% through the first five months of the year when compared to the same period in 2020, according to Statistics Canada. Furthermore, Euromonitor estimates that grocery e-commerce sales have grown even faster than overall e-commerce sales during this period. Over the past 18 months, grocers across Canada—and more broadly North America—had to scramble to keep up with the rapidly increasing demand for online grocery ordering.

Grocery retailers face several overarching challenges regardless of whether e-commerce sales are managed through third-party distributors, direct delivery or click-and-collect services. Grocers must operate and maintain a functional and attractive e-commerce platform, which could require a large upfront investment in resources such as technology and staffing. Grocers also must manage inventories and potentially hire employees to fulfil orders if there is no existing partnership with a third-party service. Additionally, space requirements need to be taken into consideration. With third-party and direct delivery, grocers have to dedicate portions of their real estate to pickers who shop for items on behalf of digital consumers.

Centralized fulfilment and distribution centres, often referred to as micro-fulfilment centres or local fulfilment centres, are rising as a popular method of facilitating online grocery orders. Micro-fulfilment centres are smaller than traditional fulfilment centres and are located closer to densely populated cities, as they don’t require as much space. Micro-fulfilment centres are not without their own challenges, such as a potentially large upfront investment in space and technology, staffing and management of additional operations beyond the traditional brick-and-mortar store. The benefits of micro-fulfilment centres, however, largely outweigh the costs in the current landscape where grocery e-commerce sales are accelerating. Several brands across the Canadian grocery industry are adopting this approach. Walmart Canada, for instance, has broken ground on a new central distribution centre in Moncton, N.B. that will ship groceries to the retail chain’s 40-plus stores in the region. Empire introduced an e-commerce platform, Voilà by Sobeys, in 2020 that delivers online orders from an automated fulfilment centre in Ontario. Empire recently acquired grocery retailer Longo Brothers Fruit Markets, a staple in the Greater Toronto Area. Empire plans to share its central fulfilment strategy to deliver groceries across Toronto and southern Ontario.

Centralized fulfilment and distribution strategies require substantial investment that may not be feasible for smaller or independent grocers, but the benefits for larger grocery chains are clear. Centralizing the fulfilment and distribution process allows grocers to effectively separate brick-and-mortar and e-commerce sales, bringing greater efficiencies to each channel. The separate facilities allow in-store shoppers to purchase groceries without the interference of item pickers, and the packing and shipping of online orders run more efficiently in a dedicated environment. While the initial investment can be steep for retailers, online grocery shopping is unlikely to decelerate in the near future. Investing in centralized fulfilment and distribution now will allow grocers to maximize their reach to both in-store and digital consumers, and will increase profitability of grocery e-commerce in the long run without substantially driving up prices or negatively impacting food quality.

While not every grocer in Canada has invested in centralized fulfilment (as of mid-2021), many more will likely adopt this model in the coming years as grocery e-commerce continues to expand.

This column appeared in Canadian Grocer's September/October 2021 issue.

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