2019 was a year of big change in the grocery space – Amazon is making big waves with its Go stores and entry into midmarket brick-and-mortar grocery, Walmart overtook Kroger as the largest grocer, and online grocery sales continued to grow, confounding traditional grocers.
But I’m predicting even bigger changes for 2020 – here are the top three trends I’m keeping an eye on.
Grocers will feel increasing pressure from Amazon and other online entrants and move rapidly towards improved e-commerce models, especially as store visits drop and niche brands increase adoption. Every week, I’m talking with traditional grocers all over the country who are increasingly concerned about Amazon – especially with the recent news that Amazon will start opening additional traditional brick-and-mortar grocery stores in 2020. The general sentiment is that grocers need to strike back with better e-commerce and delivery options that target mid-market customers who have budget constraints. All the big players in grocery are aggressively moving in this direction, but it’s a difficult operational challenge, and change isn’t likely to be quick.
Midmarket grocers (which serve 70%of the overall grocery market) are especially uneasy with Amazon right now – news of Amazon’s new midmarket brick-and-mortar grocery chain, opening in the LA area in early 2020, was jarring. The combination of low prices and free delivery will be hard for traditional midmarket grocers to match, making e-commerce even more important.
Online grocery adoption will increase from 5% to 20% by the end of the year. 2019 was a year of big growth in online grocery – Farmstead is online only, and we saw our volume grow by double digits each month. If that growth curve continues, we’re looking at potentially quadrupling the volume of groceries purchased online by the end of 2020. Since groceries are high-frequency transactions, the ripple effects on supply chain and last-mile delivery are profound. It’s now a land grab tied to how fast businesses can get each market to profitability. I suspect that in 2020 we’ll start to see more grocers pulling away from third-party services such as Instacart in order to gain better control of e-commerce customer relationships and reduce delivery costs.
Microhubs will emerge as the foundational building block of fulfilling the promise of e-commerce in grocery. Microhubs are delivery-centric warehouses unattached to existing stores that serve a wide radius, to hone efficiency and reduce costs. While physical supermarkets can cost up to $10M to build, take 18-24 months to construct, and typically serve a five-mile radius, a microhub can be constructed in under 8 weeks for just $100,000, and can serve a 50-mile delivery radius.
The promise of e-commerce -- no store visits, lower prices and home delivery -- has not come true for perishable grocery just yet. But it’s very possible using microhubs, which enable grocers and operators to expand into new markets without the need to open any physical stores. They will be the foundation of grocery e-commerce in the future, as they amortize and drastically reduce costs to get a bag of groceries to customer doorsteps while increasing the efficiency of processes tied to managing perishables.
While the grocery sector is currently behind nearly all others when it comes to e-commerce, 2020 will be transformational. As Amazon moves backwards into the brick-and-mortar space, we’ll see big progress with traditional grocers encroaching online.
Pradeep Elankumaran, co-founder and CEO, Farmstead