Whenever I’m asked to name the worst business models I’ve seen, I always say the following:
By far, one of the worst business models ever created is online grocery ordering and delivery. On average, grocery retailers lose between $7 to $15 on every online order they fulfill. Worse, the grocery industry continues to use brute force to manage the process for online grocery picking and delivery. The model is broken.
In addition, I also name Rapid Grocery Delivery, delivery of groceries in 15 minutes, as being arguably one of the worst business models and ideas ever created.
What’s interesting is that 40% of all non-food items for the home are ordered online and delivered. However, unlike apparel, shoes, books, electronics, and other products, groceries cannot simply be placed into a cardboard box and shipped via FedEx, UPS, or the USPS. This is why in the $811B grocery market, only 2% of groceries are delivered. Every 4.5 days, Americans make a trip to the grocery store to buy the groceries they want – that amounts to 10.6B trips annually.
Why do so few Americans order their groceries online? Because unlike what made Amazon, Walmart, and other retailers with online marketplaces successful, the grocery industry lacks the one thing online groceries need most to thrive – their own logistics platform. Instacart picking products off store shelves and having another Instacart worker deliver the groceries isn’t a platform, it’s a workaround.
I’ve written extensively about the shortcomings of the grocery industry and why they need to leverage technology like automated micro-fulfillment centers, robotics, and specialized vehicles to improve the customer experience. I agree with Benedict Evans who said:
Groceries need a whole new logistics platform. And grocery is so big it’s worth it.
Much of what I’ve focused on as an analyst and consultant since 2017 is designing such a platform and providing consulting to startups also designing logistics platforms. In my professional opinion, I believe the company with the best idea for a logistics platform for groceries is Acorn Delivery led by Terence O’ Connell. Full disclosure, I’ve advised Terence on strategy and other topics.
Like some of the designs I’ve created, Acorn has worked from the customer backwards to identify exactly what customers need to provide them with an experience that will convince customers to order more groceries online for delivery.
Among the requirements for a grocery platform is a smart, temperature controlled container that keeps perishable products chilled, and frozen products frozen for several hours while inside the container. The container must also keep ambient temperature products isolated and in their own temperature zone. I’ve evaluated half a dozen such containers. I rank what Acorn has created at the top of the list.
Next, there must be a fulfillment strategy that maintains the cold chain throughout the picking process. The ideal option is using automated micro-fulfillment centers or Customer Fulfillment Centers leveraged by Ocado, to fulfill orders and place them directly inside a temperature controlled container. This allows the containers to be staged for delivery and the groceries protected while they wait to be loaded for delivery.
Unlike the current process of using gig workers to place groceries inside their cars for delivery, what’s needed is a vehicle that is specifically designed to carry and deliver temperature controlled containers. Prior to being contacted by Acorn, I had designed several prototype vehicles and evaluated several design ideas from startups and large automotive companies. I believe the vehicle and strategy designed by Acorn is the best I’ve seen. Note: I do not have a business relationship with Acorn. This is my own unbiased opinion.
There must be communication with customers throughout the entire process. Customers must believe that the platform delivers real value specific to their needs. This means offering 24/7 365 days per years ordering and delivery and removing friction from every part of the process. It also means ‘mistake proofing’ the process; something the Japanese call Poka-yoke.
Few things are more frustrating to consumers than receiving their groceries only to find that what they ordered wasn’t provided and that too many of the products they wanted were substituted with products they would never buy or use. When was the last time you placed an order on Amazon and you were sent a different product? Probably never. Substitutions are a frequent occurrence when customers order groceries online.
I created the term ‘Inspect and Select’ to describe the process that customers go through when buying perishable products. Customers inspect fruit for ripeness, bruises, worm holes, and so on. They inspect vegetables to determine how crisp the carrots are, how green and fresh broccoli and lettuce is and so on. Customers check the expiration dates on milk, cheese, meat, and other products. Customers do all of these things before they Select the perishable products they want.
A logistics platform requires that grocery retailers do a much better job of removing bad fruits and vegetables from their stock and stores so that when picked for an online order, customers will be happy with the fruits and vegetables they receive. Grocery retailers must create a process of ensuring that online customers only receive perishable products that have the maximum amount of time left before they expire.
Most of all, there must be savings, revenue, and profits from the proposed model for the retailers and the company managing and providing the platform. Acorn’s model meets the requirements for all three.
The biggest challenge in the grocery industry is that too many grocery retailers are using point solutions and not a platform. Automated micro-fulfillment solves the problem of high labor costs using automation. However, micro-fulfillment isn’t a platform.
Another issue is that Ocado, who builds and operates large Customer Fulfillment Centers (CFC) to fulfill and deliver online orders, is discovering that they’re unable to maximize the capacity in their buildings (sheds). For example, the CFCs utilized by Kroger operate at less than 50% capacity; some are only at 30% capacity. Ocado can technically claim to offer a fulfillment and logistics platform for groceries, but the model fails to achieve the goals or offer the service I believe is necessary.
If Acorn, or some other company, Brightdrop for example, creates a platform for groceries, the percentage of online groceries ordered and delivered will significantly increase. Leveraging a platform will eliminate the need for 3rd-party grocery fulfillment companies like DoorDash, Shipt, or Instacart. (I tried to get Instacart to pursue creating a platform for groceries but they chose to focus on advertising.)
I must also point out that when 345 Global led by Mark Edwards, chooses to launch their industry leading AR/VR platform for e-commerce and specifically online grocery shopping, it will increase the percentage of customers who shop and order groceries online. All online grocery ordering platforms look and operate the same way. 345 Global has revolutionized the technology and category and it’s going to convert many grocery customers to shop online using Virtual Reality Retail.
I’ll share more information about this topic at a later date. In the meantime, I encourage grocery retailers and investors to contact Terence.