David versus Amazon: Can independent grocers profit off e-commerce?

When Nakul Patel took his small grocery store in Sorrento, Florida online two years ago, he was eager to go up against competitors such as Publix and Walmart.

So far sales have been promising, but Patel has found growing his online presence, which accounts for between 2% and 3% of his sales, to be a challenge. Shoppers are reluctant to try the service. He also doesn’t get the same rich data as the big chains, and money to invest on innovating and marketing is limited.

“It’s not been as easy as we thought it would be,” he told Grocery Dive.

As industry behemoths push forward with ultra-fast delivery, voice ordering and dazzling mobile apps, many smaller grocers are wondering how they can keep up. Even with the help of third-party services that deliver training and cutting-edge software, they feel hard-pressed to match the price and convenience offered by their larger competitors. Some wonder if it’s even worthwhile to offer online shopping at all.

Despite these challenges, industry experts said that skipping e-commerce, or entering the channel half-heartedly, would be a mistake. Demand for online grocery is accelerating, and consumers increasingly want the option of shopping online or in the store. Retailers that don’t offer an e-commerce option risk losing their customers to the competition.

“The good news is, it’s still early enough that I don’t think independents have been as impacted materially by e-commerce yet as they have been by so many other things that have reshaped the landscape over the past decade,” Keith Anderson, senior vice president of strategy and insights with e-commerce consulting firm Profitero, told Grocery Dive. “But I do think they are aware that time is running out to come up with a response.”

Standing out from the crowd

Independent grocers have faced an uphill battle against chain competitors for years. A study by the U.S. Department of Agriculture’s Economic Research Service found operators with four stores or fewer saw their market share decline between 2005 and 2015 in 44% of U.S. counties. Chain stores dominate sales in most of the country, according to the study, with independent grocers commanding 50% market share or greater in just 19% of U.S. counties.

E-commerce threatens to widen that gap, with research indicating that 70% of consumers will do at least some of their grocery shopping online within the next few years. Whole Foods now offers free two-hour home delivery in cities across the country. Walmart and Kroger offer order pickup at hundreds of stores. And Ahold Delhaize leverages its Peapod grocery service to fulfill orders in two dozens markets.

“The good news is, it’s still early enough that I don’t think independents have been as impacted materially by e-commerce yet as they have been by so many other things that have reshaped the landscape over the past decade. But I do think they are aware that time is running out to come up with a response.”

Keith Anderson

Senior vice president of strategy and insights, Profitero

Most independents can’t match what these retailers offer, but the good news is they don’t have to, according to industry officials interviewed by Grocery Dive.

“Logistics, analytics, service — these are capabilities that grocers need to start developing,” Barry Clogan, the former head of international online grocery with Tesco, recently told Grocery Dive. “They don’t need a centralized warehouse the size of five football stadiums.”

What they need, Clogan and others said, is to stand out from the crowd. Independents can do that by leveraging the same qualities that make their in-store experience unique — namely, customer service, localized product selection and high shopper loyalty.

In some instances, independents may have operational advantages compared to larger chains. John Ross, CEO of the independent grocery collective IGA, which oversees a global network of 1,100 U.S. stores, said independent retailers can more easily customize their assortments. They also can lean on their wholesalers to source a wider assortment of products for online customers than many of their competitors.

“If our store has 35,000 SKUs, our wholesaler might have 135,000 SKUs,” he told Grocery Dive. “It’s an instance where the nature of the way we operate becomes an advantage in the world of e-commerce.”

Keeping the customer happy

At Mt. Plymouth IGA, fresh meat is the star both online and off. The store sources angus beef and premium lines of pork and chicken. It also customizes meat orders, which according to Patel, makes it unique among area grocers. The selection is popular with customers, many of whom can place an order online and pick it up the same day, he said.

The Florida grocer has found ways to benefit from home delivery, which can be expensive. Patel said his location uses pickup as a chance to cement relationships with customers, who don’t pay for their order until they’ve come into the store and had a chance to review it.

"I want the customer to be happy when they see the product before they leave," he said. "I don't want any discrepancies, especially dealing with perishables."

Dash’s Market, a three-store chain in Buffalo, New York, stands out from local competitors Wegmans and Tops Friendly Markets, which contract with Instacart, by using its own workers to pack and deliver orders. Mark Mahoney, Dash’s director of operations, told Grocery Dive this has allowed customers to develop relationships with store employees.

“We did not want a third party selecting, and we did not want a third party delivering for us,” he said. “We thought it was kind of personal going into a customer’s home.”

Getting off the ground

Staking a compelling claim in e-commerce could help independents pick up a larger share of the shopping dollars moving online. According to a survey conducted by the National Grocers Association, just 11% of consumers said they shop for groceries online, but 30% planned to spend more on the web during the next five years. More than 80% said they want their local independent grocer to have the option of online ordering.

Anderson isn’t optimistic about the ability of independents to pick up new shoppers with their online offerings, but he said they can at least shore up their customer base and perhaps get those individuals to spend more. Retailers should add small, thoughtful touches to their online service. He pointed to Boxed, the online club retailer, which includes a handwritten note with each order.

“That’s something an independent could do to remind its loyal customers that, 'Hey, this is a business staffed by real people that live near you, ' ” Anderson said.

But first independent grocers have to start offering online shopping — something many have been reluctant to do until recently. Clogan and IGA's Ross said Amazon’s acquisition of Whole Foods last summer was the tipping point that pushed many small retailers into e-commerce.

"All of [IGA retailers] are looking at the growth trends saying, 'If I'm not involved in it over the next couple years, I'm going to miss an opportunity,' " Ross said.

However, getting an e-commerce operation off the ground can be daunting for retailers that lack expertise. That’s why many turn to services like Mercatus, Rosie, Freshop and GrocerKey. They provide operational support for independent retailers that includes developing websites, training employees and offering tips on best practices. Rosie’s customers receive 40 different documents filled with tips for grocers, according to chief customer officer Dave Makkar.

"We want our retailers to out-convenience Amazon," he told Grocery Dive.

“The heavy lifting is long and it’s ugly and it’s not fun but once you get the data flowing and it’s consistent, and you can start comparing stores against the average, magic starts to happen.”

John Ross

CEO, IGA

Retailers and analysts said it’s up to the store to determine the course of its platform and, ultimately, its success. When Dash’s Market partnered with Rosie four years ago to offer online shopping, it didn’t have dedicated workers to fill orders and deliver them from its catering van.

As the program grew, the company pushed more resources into it, and now regularly sees double-digit sales growth each month. Later this year, Dash’s will open a new store that will serve as a second e-commerce hub, allowing the retailer to offer online shopping to more customers.

Mahoney said being first to market and gradually ramping up the program was key for Dash’s.

"Because we were the first in our area to provide online grocery shopping, we were able to win over a lot of people and make them permanent customers with us," he said.

The data equation

Independents know their shoppers well, but collecting detailed data allows the likes of Amazon and Walmart to arguably know their customers even better.

This puts independents at a disadvantage despite their deep community roots. But some are beginning to fight back. IGA has made data collection and implementation a priority during the past few years. The organization has standardized the information it collects across its stores. Ross, who helped launch e-commerce at The Home Depot as the company's chief marketing officer, is helping grocers interpret that data and then act on it.

Raising the bar on data is an arduous process, Ross said, but it will ultimately help IGA’s retailers improve their in-store and online operations.

At the same time, data collection can be very low tech. Dash’s Market collects its own data by frequently polling customers, gauging their satisfaction level with the service, finding out how they discovered the program and what prompted them to buy from it. Within a year of offering online shopping, Dash’s found 40% of its e-commerce customers had never visited a store.

The chain's polling also showed that nearly one year after Instacart entered the market with Wegmans and Tops Markets, shoppers are beginning to return to the company.

“Our sales definitely took a dip, but customers are coming back to us because they have a personal relationship with our drivers and our pickers,” Mahoney said.

Can it be profitable?

Despite the slower-than-expected growth of Mt. Plymouth IGA’s online sales, Patel said he likes the economics of the business. He’s turning a profit so far — mainly because he doesn’t have a dedicated staff. His average store ticket is $18, but online that number balloons to around $140.

But Patel said he worries about the future. As the service grows, it’s going to require more investment. Whether his sales can meaningfully outpace spending is a question that weighs on his mind.

“It’s going to become a cost for us and the whole business model is going to change,” he said. “I don’t know if it’s going to be profitable.”

Many other retailers — not just independents — share these same concerns. Although online grocery is a growing opportunity, competition and significant spending threaten to make it just another cost of doing business.

Clogan acknowledged these worries. But he also counsels retailers to adopt a different perspective on the issue — that of customer profitability over time.

“If you look at this from a channel profitability perspective, then, yes, you are going to struggle with this,” he said. “But you’ve got to look at this in terms of customer lifetime profitability.”

A customer that has four kids and regularly shops with a grocer could spend more over time if the convenience of e-commerce is offered, he said. If the grocer doesn’t move online, it risks losing that customer to a competitor that does offer the service.

Ross said independent retailers have to be smart in their approach and willing to learn from one another. IGA is currently surveying the various third-party services its retailers use to determine the best options for the future.

“We can use our independents as testing and learning laboratories,” he said.

In the meantime, grocers said they’ll stay focused primarily on their bread and butter: their stores.

“You still need to focus most of your attention on your in-store sales,” Mahoney said. “As online grows and develops, we’ll put more resources behind it. But today, it’s a smaller part of our business.”