Online Grocery: a Market With Huge Potential Part III

With regard to a company’s earning power, the choice of business model is crucial. This article is part of a three part series; be sure to read Part I and Part II.

Center of distribution with delivery

When reaching a four-digit number of orders per week, a center of distribution pays off due to low labor costs. From there, goods are delivered directly to the customer’s home. In Germany, online retailers like Lidl have used this strategy for several years.

Even though several online merchants operate with this model successfully, it doesn’t guarantee success.  This can be proven by the platform giant, Amazon: in July 2010, the famous online merchant started to sell and deliver food across Germany. However, due to several external Amazon suppliers, with complex pricing and packaging processes, Amazon’s service was not attractive enough to become established. All of these years later, Amazon continues their Fresh service but only in select cities across Germany, and with relatively disappointing sales compared to annual forecasts.

Center of distribution with pickup by the customer (“Click-and-Collect”)

This time-saving concept is based on the “drive-in” model. Consumers can choose their groceries and order online in the comfort of their own homes and then directly go to pick up their purchase at a center of distribution, not having to even get off their car in most cases. This model is already very well-known in countries like the UK, USA and France. In some other countries, like Germany, this trend has been a bit slower to catch on.

Serving customers everywhere: Multichannel Distribution

The future will show to what extent online pure players will be able to gain market shares in the food trade; some retailers, like GetNow, have already experienced great success with this model while others struggle.  It is unlikely that brick-and-mortar grocery stores will suffer anytime soon, as the satisfaction and comfort with existing shopping methods is firmly rooted, at least in most countries.

With a multichannel orientation, retailers are combining the advantages of both worlds – online and offline. Many large food retailers, such as Lidl and Aldi, employ a multichannel strategy that provide local, in-store shopping availability along with finding the relevant information at every customer touchpoint. Location-based search also guarantees that daily updated, local offers of brick-and-mortar stores are integrated online and are made available via smartphone, desktop or tablet.

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In-store Pickup

Over the last decade, European retailers, especially in the French market, have begun to launch a service that just might mark the tipping point for online grocery: “buy online, pick up in-store,” or “click-and-collect.” In this case, customers make an online order and pick up their merchandise in the corresponding store. The advantage of this strategy is that the customer saves the time that they would normally spend at the store, as they have already chosen and paid for their products online. In order for this strategy to work, it is important to offer an attractive service to the customer while also making sure that it pays off for the retailer in the end – a difficult balance to maintain in some cases.

This model is more beneficial to retailers financially than the home-delivery service option and therefore gives retailers with physical stores an easier entry into the growing online grocery market. An analysis of McKinsey shows that operating with a Click-and-Collect service can translate to as much as a 30 percent difference in margin in comparison to a delivery service, making it easier for a retailer to justify the investment.

Conclusion

Online grocery is attracting the attention of customers, retailers and investors across Europe. This market segment is growing steadily, both in countries with a low population density and those with high. However, online food retailers have to face two major challenges in order to become a realistic alternative to brick-and-mortar stores: gaining customers and maintaining loyalty. In order to achieve this, online merchants have to provide a unique customer experience and high usability – e.g. through investments in product data, an advanced search and navigation functionality and an individualized offer.

With a cross-channel strategy, retailers are combining the advantages of online and offline distribution. Providing all relevant product information at every customer touchpoint means convincing shoppers – resulting in higher revenue for your business.