I recently wrote an article for Forbes where I introduced a new business model for grocery retailing, an online auction. The topic has generated interest from grocery retailers, Wall Street banks and retail analysts. In order to better explain the concept, I am expanding on the topic in this article.
Groceries Are Big Business But The Business Model Is Outdated
With sales in excess of $641B in 2017, the grocery industry is massive.
Walmart, Kroger, Albertsons, Ahold-Delhaize and Amazon/Whole Foods are the leaders in grocery retailing. Aldi and Lidl, two German-owned and operated retailers, are the leaders in discount grocery retailing. Aldi and Lidl pose significant threats to traditional grocery retailers due to the ability of each company to sell private label products to customers at a significant discount.
When it comes to grocery shopping, price matters to the majority of shoppers. This is not to give the impression that quality does not. Shoppers are attracted to three things when it comes to grocery shopping: price, quality and convenience. Most retailers attempt to compete on at least two of the three.
Although often recognized for its innovations, the grocery industry has not changed all that much since the early 1900s. The majority of innovations generate incremental improvements in service only. It's also true that when innovations are introduced, consumers rarely see a decrease in prices.
The first self-service grocery store, where a customer could walk up and down aisles to select the products they wanted to buy, was opened in 1916 in Memphis, TN by the grocery retailer Piggly Wiggly. The success of Piggly Wiggly was phenomenal and it spurred an entire new industry.
Over the years, different innovations have been introduced by grocery retailers (delivery to the home, online grocery ordering, pickup at the store) but at its core, the grocery retail model is virtually the same since the first Piggly Wiggly opened in 1916.
The grocery cart design still used in most grocery stores, for example, was invented in 1937.
Grocery Retailing Needs To Become A Team Sport
A truism in the grocery industry is that grocery shopping is an individual sport. In other words, groceries are purchased separately by individuals as there is no advantage in the current model for shoppers to combine or "pool" their grocery orders.
Grocery shopping should transition from an individual activity to a massive team sport. Here's why.
A fact in economics is this: When more of a product is purchased, the unit cost of each product is reduced. Costco, BJs Wholesale and Boxed are warehouse clubs that have mastered the art of buying massive amounts of products in bulk from its suppliers, and in turn, selling products in bulk to customers at a low price.
Buying in bulk saves customers money and increases the purchasing power of each dollar spent.
In the model I recommend, buying in bulk to reduce the cost of each unit is certainly applicable. However, I am not advocating that consumers buy products in bulk, they can already do this at warehouse clubs.
What I advocate is a model that doesn't exist today but it can absolutely become a reality and I believe tech companies will make it happen.
The Way We Work
As I stated earlier, grocery orders are placed by individuals. Each grocery order is treated as a separate transaction. What I advocate is a new model for grocery retailing that pools grocery orders in order to maximize savings to the customer.
Many large companies like Apple, Google, Microsoft, Tesla, Salesforce, Amazon and so on have large campuses where thousands of associates work, imagine how many groceries are purchased by each individual.
The individuals who work on the campuses all have to eat which means one thing, groceries.
Follow me on this: On average, consumers spend around $5,200 annually on groceries. Apple built a new corporate headquarters that employees 12,000 associates. Microsoft is building a new campus that will employ 47,000 associates. Amazon employs 50,000 associates in Seattle and plans to build two new campuses that will employ an additional 50,000 associates.
If the 47,000 associates that will work on Microsoft's new campus each buy $5,200 worth of groceries annually, the combined total of all groceries purchased is $244,400,000!!! Amazon's 100,000 associates working on three different campuses will purchase on averaged $520M worth of groceries annually.
Microsoft and Amazon associates combined will purchase an average of $764M in groceries on an annual basis. This is just from two companies.
Aside from the dollar value of the groceries purchased is the total volume of products purchased in each category. Thousands of jars of ketchup, peanut butter, pickles; thousands of gallons of milk; thousands of loaves of bread and thousands of other products are purchased. The volumes are massive.
Delivering packages and groceries to corporate campuses, universities, hospitals, office buildings and large office complexes would also generate incredible savings in logistics.
Last mile delivery to the home is highly inefficient. Delivering bulk orders to where massive numbers of associates/consumers work greatly reduces the cost and complexity of last mile delivery. In order to reduce the price of groceries, take advantage of the way America works.
The Online Grocery Auction
What I believe is needed is a business model that leverages grocery volumes and customer density to provide consumers with a first-of-its-kind ability to reduce the costs of groceries to the lowest possible level.
What I recommend is the following:
- Large companies create a platform whereby company associates can select grocery products to meet their individual needs. I recommend the adoption of a single platform for all companies to use. The platform is unique because it does not display the price of any product listed. (LinkedIn remains my top choice for creating such a platform followed by Facebook).
- The products listed will be the same as the products available in most grocery stores. On average, a supermarket stocks 50,000 products.
- All grocery orders are pooled on an hourly/daily/weekly basis to identify the total number of all products by category being purchased. For example: 5,000 tw0-pound packages of hamburger, 3,345 packages of chicken breast and so on.
- Instead of associates/consumers buying products from retailers and wholesalers, retailers and wholesalers bid against each other to provide all products. The concept of a bid is simple: the retailer/wholesaler with the lowest price and the highest quality wins.
Based on research I've conducted and models I've ran, it is possible for consumers to achieve a 50% reduction in their weekly grocery bill. This is achieved from the value of pooling, savings achieved by removing the ability of retailers and wholesalers to set prices, and increasing the amount of private label products offered to consumers.
Applying the concept of bulk sales to an online auction generated a unique fact: Aldi and Lidl would no longer be the lowest-priced grocery retailers. The combination of bulk sales, online bidding on branded and private label products and DTCO all work together to create a business model capable of generating prices lower than the two leading discounters operating today.
I want to be clear on what I am recommending. Instead of each grocery order placed by an associate working at Apple, Amazon, Microsoft and Google being placed as an individual order, all grocery orders are pooled. In turn, retailers and wholesalers will bid on each product. The retailer/wholesaler that is able to meet demand at the lowest price without sacrificing quality will win the bid.
The concept of bulk savings will shift in favor of corporations and consumers and away from retailers and wholesalers.
As I've stated repeatedly, what I recommend is a model that doesn't exist today but if implemented, the savings to consumers would be massive. The impact to the grocery industry would also be massive.
Retailers And Wholesalers Will Have To Adapt
A challenge for warehouse clubs and grocery retailers that will take part in an online auction is adapting its business models to the new reality of grocery shopping. The average supermarket stocks 50,000 products, Walmart stocks 100,000 products, but warehouse clubs like Costco only stock between 4,000 to 6,000 products.
An online grocery auction will only work if associates/consumers can select the products they want in the exact size, quantity, and flavor. This means that warehouse clubs will either have to greatly increase the number of products its stocks, and grocery retailers will have to learn how to buy and deliver products in bulk.
Fulfillment of individual orders can be done by wholesalers or retailers. The strategy I recommend is for corporations to build Receive & Retrieve (R&R) facilities on its campuses and office parks. The facilities can receive products in bulk and leverage robotic technology, fulfill individual orders.
A hybrid model whereby some fulfillment is done by wholesalers and retailers as well as R&R facilities may be the optimal solution.
I believe Amazon is uniquely qualified to introduce the concept of the online grocery auction for two very important reasons:
- Amazon is a tech company with exceptional ability to harness technology, supply chain and logistics, and its position as one of the leading retailers in the world to design and introduce such a concept. In addition, Amazon is a company that embraces Thinking Big.
- Amazon owns Whole Foods making Amazon the only tech company to hold such a distinction. Amazon can implement a strategy for fulfilling and delivering orders in bulk. Amazon's grocery ecosystem gives the company a competitive and strategic advantage. (Note to Amazon: Acquire Boxed).
Conclusion
The current model for grocery retailing has remained unchanged since the early 1900s. Online grocery retail technology is new but delivering groceries to the home is not. Allowing customers to order groceries via phone or online for pickup at the store has been around for years.
The time has come for a completely different model to be utilized to shop for groceries. I believe the online grocery auction is that model.
Tech companies like Apple, Google, Amazon, Facebook, Salesforce and Microsoft are ideal for introducing the concept of the online grocery auction for its associates. In my experience, tech companies are more innovative and more willing to pursue new ideas than companies operating in other industries.
As the online auction grows in popularity, I am confident that the rest of corporate America will embrace the concept. Maintaining the status quo is wrong.
I do not like the status quo of the current state of grocery retailing because all of the advantages go to the retailer and wholesaler/warehouse club. Consumers have been lulled into a false sense that coupons, shopping at discounters and buying in bulk is the best they can do to reduce their grocery bill. This is false.
Consumers deserve a better model for meeting their grocery needs. An online auction is what's needed to create a new reality in grocery retailing.
