This is an excerpt of an article published by McKinsey & Company. Read the full article here.
Investing in the right configuration of picking and handling as well as delivery capabilities holds the key to upending the current economics in online grocery.
The explosive growth in North American online grocery presents a vexing challenge for retailers. While the need to serve this channel is obvious, achieving profitability continues to be a challenge. In the meantime, consumers have gotten used to the convenience of delivery—the faster, the better. Grocers are under rising pressure to meet these ever-increasing expectations and mitigate online grocery’s dramatic impact on order economics.
To serve online demand without significantly cutting into margins, executives must focus their investments on the two major drivers of online fulfillment cost: handling and delivery. Grocers can manage these drivers by selecting from a range of fulfillment and delivery models. The right solution varies depending on a region’s demographics and population density and is also shaped by the target customer value proposition. Organizations that navigate these options wisely will be better positioned to grow profitably.
Online is here to stay, and consumers are more demanding than ever
Online grocery penetration has grown steadily over the past several years but was greatly accelerated by COVID-19. According to a recent McKinsey consumer survey, some trends that took hold during the pandemic will likely endure and even deepen:1
The online channel continues to show strong growth. Online and delivery orders rose by about 50 percent during the pandemic and are expected to increase two to five percentage points in 2022, depending on the delivery option.
Consumers increasingly want delivery rather than click and collect. For online grocery shoppers, click-and-collect offerings have been supplanted by home delivery. According to our survey, 63 percent of online grocery shoppers in December 2021 preferred home delivery to click and collect, up from 48 percent a year earlier. Consumers are particularly gravitating toward same-day and instant delivery. The latter increased 41 percent over the course of the pandemic and is expected to rise further in 2022, with a net two percentage points of survey respondents expecting to increase their use of instant delivery.
Personal contact continues to decrease in importance. Before the pandemic, 46 percent of consumers preferred personal contact in stores. The past two years have muted its importance: now just 31 percent value this type of engagement.
Convenience trumps all. Consumers were drawn to online shopping for its convenience and relative safety during the pandemic, and our survey suggests shoppers have embraced these benefits and aren’t interested in returning to the prepandemic normal.
As these insights reinforce, even grocers that rapidly adapted their operations early in the pandemic have no time to rest; they must continue to keep pace with evolving consumer preferences.