Recent statistics from ONS show online food sales are growing slower than online non-food sales, at 9% and 11%, respectively. Why are customers not converting to online food shopping in the same way they have for books and electronics? The reason: fresh fruit and veg. Recent customer research I have been involved in reveals the biggest reason customers don’t buy food online: over half of the UK believes they can pick better quality in store.
This lack of trust in online fresh food represents a big opportunity for a supermarket that can convince shoppers the food they get in their online order is just as good as they would select themselves. By attracting customers with high-quality fresh products the retailer will not only win their spend on fresh food, but also the rest of their shopping list, typically including higher margin non-food items.
The key to high-quality fresh food is minimising the time products spend in the supply chain. In online grocery, supermarkets often assemble fresh food orders in store, using these stores as a network of local distribution centres. While this is convenient and capex-light for the grocer, it requires food to go through three separate journeys: farm to distribution centre, distribution centre to store, store to customer.
In comparison, a wholly online retailer can theoretically deliver fresh food with one fewer step in the journey by delivering to the customer straight from the distribution centre. In the UK, this shorter supply chain is seldom used in grocery, perhaps explaining the low satisfaction levels among customers. The closest we have is Ocado, where products are picked direct from the distribution centre but are then delivered through its hub-and-spoke system.
In the future, Amazon Fresh will have all the capabilities needed to deliver fresh food straight to customers from its distribution centres. This is inevitable, given its recent acquisition of US grocer Whole Foods, which has given it deep expertise in how to purchase world-class fresh foods and the ability to move fresh products efficiently.
In Germany Amazon Fresh is using its partnership with DHL to experiment with using non-refrigerated vans for online food delivery. This opens up more delivery options and reduces operating costs, making it easier to build a fresh logistics network.
At the moment, supermarkets have minimal incentive to improve their online fresh food because they want to encourage customers to visit their physical stores, driving halo. However, any retailer that focuses on the quality of its online fresh food will appeal to customers who want to shop online, but don’t trust the quality of the products.
Supermarkets have a great deal of expertise in their fresh supply chains, and it will take time for Amazon to learn from Whole Foods and apply its newly gained knowledge to markets outside the US. Any retailer able to improve fresh food delivery has the opportunity to gain a larger share of the whole grocery market. To do this, fresh supply chains will need to be redesigned, optimised, and considered a source of competitive advantage.
Duncan Brewer is partner at Oliver Wyman