Third-party e-commerce fulfillers: Friend or foe to the grocers?

Discussion
Photo: RetailWire
Feb 21, 2017
Jon Polin

Ask any retailer to name their most valuable assets and they will put their customer base at the top of the list. Not too far behind, likely in their top five, will be both their brand and their merchandise (or “assortment” in common grocery parlance).

With this in mind, I watch in wonder as the grocery sector hands over its most treasured assets to questionable “partners” waiting with open arms.

The growth in grocery e-commerce is finally happening in the U.S. Other than Walmart and Kroger, and a small handful of others such as Meijer and Hy-Vee, however, few grocery chains are offering e-commerce under their own brand name.

Instead, some large chains — perhaps Whole Foods most notably — allow branded third parties, such as Instacart, Shipt, Google Express and Amazon Prime Now, to enter their stores and pick-and-pack customer orders for delivery to the customer. That former grocery customer is now placing their order on a third-party site and having service provided by the third-party. They are effectively becoming that third-party’s customer.

Might recent retail history offer an analogy to what is happening in today’s grocery landscape?

In the late 1990s, two established retailers — Toys “R” Us and Borders — were floundering with their online strategies while upstart Amazon.com was growing quickly. In 2000, Toys “R” Us and Amazon entered into a pact in which Toys “R” Us effectively handed its online business over to Amazon. In 2001, Borders, the defunct book seller, in a similar deal that Bloomberg subsequently called “tragically shortsighted,’ contracted with Amazon to run its entire online business. Fast forward a few years and the once dominant bookstore chain was filing bankruptcy and the toy store chain was in an acrimonious legal battle, trying to untangle itself from its disastrous relationship with Amazon.

Meanwhile, Amazon, as the recipient of the gifts from Borders and Toys “R” Us, has marched its way to being the largest e-tailer in the world. Are today’s grocery chains headed down the same path as Borders Books and Toys “R” Us of the 1990s?

DISCUSSION QUESTIONS: Does it make sense for retailers to partner with third-party brands to directly serve their e-commerce customers? Will customers remain loyal to those retailers, or are they likely to move their business to those third-party brands?

Braintrust
"It looks like past lessons other retail segments learned the hard way are lost on many grocers."
"Brick-and-mortar grocers’ strength is in the store. They cannot be expected to efficiently become a delivery company."
"White labeling is done in so many industries, so why do grocers so willingly walk away from their brand names?"

Join the Discussion!

19 Comments on "Third-party e-commerce fulfillers: Friend or foe to the grocers?"

Notify of

Sort by:   newest | oldest | most voted
Adrian Weidmann
BrainTrust

The short answer is — probably. The challenge for these retailers is striking a balance between addressing their customers’ expectations today and making the most prudent business decision. The examples of Toys “R” Us and Borders and their fate should be heeded. Amazon Go is frictionless grocery shopping. This is the future of brick-and-mortar retail and it is happening today! I’m working on several projects that integrate frictionless shopping, checkout, shopper behavior analytics and proximity marketing into a single in-store experience. It is definitely happening and grocery is just another retail vertical. These concepts actually have further significance at grocery because of the time sensitive nature of the products.

Max Goldberg
BrainTrust

At a time when consumers demand a seamless omnichannel shopping experience, it’s important for retailers to control almost every aspect of consumer contact. And if that means setting up an e-commerce delivery system, so be it. Otherwise, retailers risk diluting their brand message and/or yielding their brand equity to other companies who could become serious competitors.

Gene Detroyer
BrainTrust

Online grocers’ strength is in delivery. Brick-and-mortar grocers’ strength is in the store. They cannot be expected to efficiently become a delivery company.

Unless they are going to change their business model, they should be using the experts on delivery. Vet them well and take your chances.

Sterling Hawkins
BrainTrust

Retailers need to maintain their brand and customer touch-points to keep their value; handing all of it over to a branded third party service seems questionable at best. It’s worth noting that there’s a difference between eCommerce and delivery. The two are complementary, but not necessarily tied together. There is a whole generation of new solution companies out there that provide eCommerce capabilities to retailers as a white label service and delivery tools that plug into the commerce engines. That seems like a much better value exchange all the way around.

shopheroinc
Guest

Great comment, Sterling. This article is spot on, and the grocers we talk to every day get it. They realize that their customers and brand are two of their most important assets, and they don’t want to pass them off to a third party company. It’s risky and makes little sense to allow someone else to manage the entire customer experience.

ShopHero is one of the companies you described. We provide a white-label solution for grocers. Our technology integrates seamlessly with their existing infrastructure allowing them to leverage current investments (POS, digital properties, loyalty programs, eCoupons, etc.). They own the entire process, while we provide the software and support.

These stores are seeing average orders that are 4 times larger than in-store orders. They’re finding that up to 2/3’s of online shoppers are new to the store as well. There’s a lot of potential for forward thinking retailers, as consumer habits change.

Ken Lonyai
BrainTrust

I’m in total agreement with Jon on this, especially his characterization about questionable “partners.”

It looks like past lessons other retail segments learned the hard way are lost on many grocers. Rather than invest in themselves for something that is only going to expand and be a permanent fixture of business now and indefinitely (e-commerce/fulfillment), they are outsourcing.

Outsourcing is what I refer to as one of the “Dirty Deeds” in my “UX/Profitability Continuum” theorem. In the short run it’s a way to increase profits, but over time, sometimes not that much time, the shortcomings of poor user experience surface, customers turn away and profits tank. Regaining the level of customer support/trust that existed prior is a long haul back and sometimes it can never be recouped, or it can be fatal.

The last lesson comes from the planet’s most successful e-tailer, who is growing their business: they are increasing their first-hand footprint in the entire purchase/delivery cycle, not shying away from it.

Anne Howe
BrainTrust

I wonder if there is room for a “white label” delivery service option. For example, Publix is using Instacart, but why can’t that supplier give them a branded version? White labeling is done in so many industries, so why do grocers so willingly walk away from their brand names?

Tony Orlando
BrainTrust
E-commerce simply will not work for many retailers without third-party help. I’m sure many who post here think otherwise, but the truth is that many stores are simply not set up to handle this enormous task without a huge investment in the infrastructure of home delivery. This is why they go with a third party rather than re-doing their entire store with added coolers, expensive vehicles and extra staff to deliver grocers to their customers. It really is that simple, and Amazon doesn’t own grocery stores, which gives them an advantage that simply cannot be overcome with the existing facilities that many stores have. I could never do it, except for catering drop offs and large meat packages (as they remain quite profitable) rather than cookies, canned goods and paper products. The store of the future is not exclusive to Amazon. To really get this right a fairly healthy retailer will have to design the store of the future, which has a brick-and-mortar layout, which is 85 percent fresh products, which has a state-of-the-art delivery… Read more »
Ken Lonyai
BrainTrust

Tony – not picking on you and I understand that you operate under a different set of rules as a family owned store vs. a chain but…

Here in NJ, ShopRite is the dominant independent (co-op) grocery chain and stretches into 5 other states w/337 stores. That said, they are a painfully average store, yet they have a mobile scan app, BOPIS, and run their own home delivery. They are not a brand anyone would consider cutting edge and their stores are as humdrum as can be. Still, surprisingly, they have (seemingly) pulled this off and in my opinion, are shrewdly hedging their future. For now, there may be kinks and it may be costly, but in the long-run, they will be ahead of competitors that someday may have to (possibly hurriedly) bring their outsourced delivery back in-house.

Tony Orlando
BrainTrust

Happy for them Ken, and I do not know their layout or population density, but for me and many independents that I speak to, it is logistically inside the store very difficult to pull off, with the old design layout and without a major investment to pursue this. I am a pretty practical business owner, and every store is different, so I wish them well, and hopefully it is profitable for them as well.

Anna Tolmach
BrainTrust

It’s still very early in grocery delivery and there have definitely been many failed experiments, like Webvan during the last tech boom. Given that, I think outsourcing is the right model for now although it might risk hurting the brand. First, grocers aren’t delivery experts. Second, it’s a low-cost way for them to test what works and what doesn’t work about the delivery model. If it becomes scalable, they can acquire one of the players in the field or start their own delivery model. In general, without a physical store, it’s been a money-losing proposition for most delivery upstarts, so that means that the grocer has the clear advantage in this case because they hold the asset and the warehouse needed to make the delivery service profitable. So long as they are getting something out of it, there’s no reason not to test it out as a near-term strategy.

Ken Cassar
BrainTrust

Jon is asking the right question. I think that the analogy between Borders/Toys “R” Us and grocers today isn’t quite right, though. Remember that Borders and Toys “R” Us had the option of building an e-commerce operation and outsourcing shipping to a third party — UPS, FedEx or USPS. Instead they outsourced the whole thing. Grocers that sell fresh goods can’t use traditional shippers, and instead have to turn to emerging players like Instacart, Shipt and Google Express to deliver or incur significant costs doing it themselves. Peapod and Fresh Direct seem to be managing in-house delivery profitably, but it took quite a while for them to do so. I agree, though, that retailers should maintain ownership of the customer relationship. If Shipt is going to delivery an order for grocery retailer X it really ought to be branded as Grocery Retailer X, not Shipt. Just like when I order from Jet.com and the box is branded Jet.com, not FedEx.

Ricardo Belmar
BrainTrust

For many grocers this is a question of scale and execution. Not every brand has the scale to execute e-commerce and delivery well enough to avoid customer satisfaction problems. So the question for those grocers becomes; do I wait until I have scale, potentially missing the window and losing a customer or do I risk partnering with a third party and risk losing control of my customer experience?

I think many will choose the second option. The key will be in how successfully they negotiate with the partner over who owns the customer data. If the grocer owns the data, they can still find ways to control the relationship and experience with the customer.

Jon Polin
BrainTrust

Some excellent comments in this discussion. Thank you. Replying to a few of the emerging themes:

1) Outsourcing some components of ecommerce is smart, such as technology and delivery. The issue is when the outsourcing is to a branded player who ends up directly interacting with the customer and competing with the retailer. As a long time Whole Foods shopper, I found it odd when Instacart started promoting Whole Foods competitors to me.

2) It’s true that grocery ecommerce requires changes to retail operations and can be costly, but the cost of handing your customers to a branded partner/competitor is higher.

3) Yes, brick and mortar grocers are starting with the inherent benefit of physical stores with shelves of inventory and a brand that is known to local consumers, but those benefits only help when that grocer jumps into the ecommerce game under its own brand. Why do brick and mortar grocers want to essentially be warehouses for branded 3rd party grocery businesses to pick that inventory?

Herb Sorensen
BrainTrust
I’m not sure that even bricks retailers that do their own online service are going to have any significant success. It’s a little like all the hootin’ and hollerin’ about smartphones in-store a few years back. I was a cheerleader myself! And this amounted to nothing much, except in a few specialized situations. Now we have BOPIS or click-and-collect. I hate to say it, but it looks like Walmart is squandering billions on what will be seen as possibly the final error in them passing their peak growth, and beginning the long descent A&P already took, and Sears is far gone on. It’s a logistics issue, pure and simple. Bricks retailers receive their merchandise in the store on pallets — that may be delivered from suppliers with SUPER EFFICIENCY. THEN, they PAY stock clerks to move those pallets to the displays across their giant neighborhood WAREHOUSE, also known as a store. UNPAID stock pickers, also known as SHOPPERS, do all the stock-picking and movement to wherever they want/need the stuff — home, office or elsewhere.… Read more »
Dan Dashevsky
Guest

The graphic image for this article was a good choice. The recent reports reveal a steady decline in Whole Foods’s business.

The reason for the Whole Foods decline is their loss of control of the customer experience. For instance, outsourcing online shopping and fulfillment to Insracart, though a logical operational option, was a terrible business decision. By losing the grip on the customer experience and interaction, they are losing the business to other organic/natural retailers that offer unique multi-channel customer experiences. Though, invested in Instacart, Whole Foods is just another store on their website among many others.

Let’s not repeat Whole Foods’s mistakes!

Jeremy Neren
Guest

Outsourcing eCommerce entirely to a marketplace and/or third party delivery provider (like Instacart) is flawed. However, leveraging incremental sales opportunities from a marketplace and/or third party delivery provider in combination with a strong white label eCommerce business and pickup/delivery service is wise and will likely become the norm in the not so distant future.

Shawn Harris
BrainTrust

My hypothesis is that there is a blended model that grocers need to land on. That is, in some cases use internal resources, and in others use outsourced services. I do like the suggestion of the outsourced service being provided as a white label offering. I feel that the complexity of managing arcs and nodes hasn’t yet made its way from the distribution team, to store operations, and that this will be the next great awakening. Just like in distribution networks, sometimes you use your own trucks and sometimes you use partners. It’s an optimization problem.

gordon arnold
Guest

Why not survey Amazon’s partners for this discussion and break down the responses? That would be a lot of fun to look at.

wpDiscuz
Braintrust
"It looks like past lessons other retail segments learned the hard way are lost on many grocers."
"Brick-and-mortar grocers’ strength is in the store. They cannot be expected to efficiently become a delivery company."
"White labeling is done in so many industries, so why do grocers so willingly walk away from their brand names?"

Take Our Instant Poll

Do you see more risks or opportunities in grocers partnering with third-party fulfillers to support online delivery?

View Results

Loading ... Loading ...