Online grocery is big business now! As per a 2017 Kantar Worldpanel report, worldwide online grocery sales grew by 30% YoY and it now contributes to a record 36% of global FMCG growth. The general online purchasing boom seems to be rubbing off on grocery buys too. In fact, according to the report, by 2025, online grocery will be a $170 billion global business!
While entrepreneurs and investors alike are celebrating this rise of online grocery, let us focus and dive deep into a smaller segment – perishables. It is estimated that perishables, which includes fresh fruits & vegetables, dairy, fresh meat and all forms of frozen food, constitutes anywhere between 15%-35% of the online grocery basket.
A study by AT Kearney in 2015 pointed out that customers were willing to shift their loyalty from store to online groceries if they get the assurance of same quality and freshness as store.
Obviously, this expectation for quality and freshness would be much higher for the perishable purchases. However, quality consistency of perishables delivered to customers is questionable. Research by Retail Feedback Group in 2017 revealed that more than a quarter of shoppers who use grocery delivery say that perishables, across categories, do not meet their quality standards.
Temperature has the biggest impact on perishable delivery quality. With order-to-delivery time ranging from 2-hour delivery in a hyperlocal model to 12 hours or more in a full-fledged online grocery setup, maintaining 0-10C for fresh foods and -18C to -22C for frozen category is a considerable challenge. “The issue of a lower scoring quality rating [for frozen and refrigerated foods] might be centered around the cold chain and ensuring that the product stays stored at the proper temperature during the delivery and/or pickup process,” Brian Numainville, a principal at Retail Feedback Group mentioned in the survey report. Tony Stallone, Peapod’s produce guru says, “For every hour that you break the cold chain, you lose one day of shelf life”.
So, what’s at stake?
Before we delve deeper into different aspects of the perishable cold chain, let us analyze the potential (negative) impact that this inconsistency in delivery quality has on the growth of not just the perishable category, but the overall grocery business.
Let’s consider an online grocer with annual revenues of $1 Billion. The perishable category sales is assumed to be 25%, amounting to $250 Million. Obviously, the biggest and most direct impact of poor product quality is returns, estimated to be 7.6% for online grocery business. Cost incurred in forward logistics and handling, approximately 14% of order value, is lost for returned products. Reverse logistics and handling cost, at about 8.5% of order value, is additionally incurred for every return.
However, the larger cost of poor quality is the risk of decrease in repurchase intent of dissatisfied customers. In their 2016 research paper about online grocery shopping, Mortimer Gary et al. observe that customer satisfaction (with product and service quality) is key to building customer trust, which in turn directly impacts repurchase intent.
Inter factor correlations (N=555)
Source: (2016). Online grocery shopping: the impact of shopping frequency on perceived risk. The International Review of Retail, Distribution and Consumer Research
Based on the strength of these relationships, one can safely conclude that the perishable basket of customers who received poor quality products will have significant repurchase risk. It could also be argued that due to rub-off effect, some fraction of the non-perishable basket may also be at risk. However, given the unavailability of research around the topic, we have excluded that impact for the purpose of this analysis.
Also, word spreads fast in the e-commerce business. Negative reviews from dissatisfied customers and general word-of-mouth can further impact new customer acquisition (conservatively estimated @ 10%) in perishable category business.
So, for a billion dollar online grocer, the direct cost of poor quality is $24 Million and the total future dollars at risk is $88 Million in top-line and $9 Million in bottom-line (assuming a 10% gross margin). At a EV/EBITDA multiple of 7X for retail grocery and 30X for online retail, this loss would mean a valuation impact of anywhere between $230 Million and $900 Million. Investors wouldn’t be too happy with this now, would they!
Another concern is the risk of non-compliance with food regulations laid down by bodies like FDA in USA and FSSAI in India. An audit which finds perishables not being maintained or delivered within prescribed temperatures, can lead to anything from considerable fines to cancellation of perishable distribution license.
How is online grocery cold chain managed today?
There are currently three types of grocery delivery models prevalent globally.
Full grocer, central inventory model
The company maintains inventory in large central warehouses (hubs) and fulfill customer orders using a hub and spoke model. Orders are aggregated at the hub, typically based on customer location, and sent to spokes using trucks. Customer deliveries are done in pre-defined delivery slots, using dynamically assigned routes. Perishables are stored in cold rooms and delivered using refrigerated vans or passively cooled apparatus with gel and PCM coolant pads. Examples, Peapod in USA, Big Basket in India, Ocado in UK, LeShop in Switzerland.
On-demand, hyperlocal model
The company ties up with local retailers and offers their products on a common web platform from where customers can place orders. Delivery boys pick up the ordered products from nearest shops to customer and deliver within one to two hours of order placement. There are also some variants where companies have small fulfillment centers for order aggregation before delivery to customers. Given shorter delivery time, perishables are picked from stores, packed in passively cooled or insulated packaging specifically designed to maintain temperatures during delivery. Examples, Instacart and Shipt in USA, HappyFresh and HonestBee in APAC, AmazonFresh globally.
Supermarket online model
Possibly, the oldest form of home delivery, this model has been adopted by various supermarkets who wanted to bring the convenience of online shopping for their patrons. Typically the supermarket has a website where customers can order products present in their nearby stores. Order fulfillment happens directly from stores to customer. Perishables are picked up directly from store cold storage (refrigerators or back cold rooms) and delivered using refrigerated vans or passive cooling. Examples, Coles Online and Woolworths Online in Australia, Giant Online in APAC, Tesco.com in UK, Walmart.com in USA.
Additional complications with perishables arise when customers choose unattended delivery (they are not at home when items are delivered). The online grocery company leaves the order at customer doorstep in insulated packaging. There is typically no visibility on how long the order will stay outside in ambient conditions, leading to high risk of spoilage.
Why is perishable delivery so complicated?
Last mile perishable delivery is a complex jigsaw. State-of-the-art infrastructure and robust processes adopted by online grocers might not be good enough to match the pace of growth of these companies and the complexities that growth brings. A study suggests that for every 10X growth of an e-commerce company, product returns grow by 21X.
The mind map below demonstrates the variety of dynamic factors that affect the performance of perishable delivery cold chain.
Also, over the years, customers have gotten used to the touch-feel-smell way of picking perishable products in store. Given that online delivery doesn’t allow for that, there is always a doubt in their mind about quality and freshness. Brain Numainville from Retail Feedback Group says, “If there isn’t a clearly visible process that provides assurances to the customer that the product remained cold after the picker pulled it and/or during delivery, there may be questions about the quality of the product.” He adds, “I think retailers need to clearly illustrate what they are doing to ensure that the product remains at the proper temperature in the process between picking and pickup/delivery”.
How to improve perishable delivery quality using technology?
Technology can be used to provide process visibility to customers and solve multiple operational problems in grocery delivery. Let’s look at a few examples:
End to end visibility: Tag each van or passively cooled apparatus with multi-parameter (temperature, humidity, shock and light) sensors. Companies can get real-time visibility into temperature compliance, unnecessary exposure, mishandling etc. from picking to final delivery.
ERP integration: Facilitate dynamic matching of cold chain apparatus, order ID and sensors to get order or customer level visibility. This integration also serves as foundation of advanced analytics by linking product data with cold chain performance, which can then be used to improve operations.
Excursion risk prediction: In scenarios where passively, cooled apparatus is used for deliveries, it becomes critical to pack enough coolant to last the total delivery time, or in the case of unattended deliveries, until the customer comes back home. Machine Learning models can be used to determine the expected survival of perishables based on a variety of parameters. Based on predicted risk of temperature excursions, appropriate cold chain actions can be taken.
Route optimization: Temperature performance and excursion risk can be used as additional parameters to decide customer delivery route dynamically. Real-time location visibility can be used to plan interventions if needed.
Customer visibility: The entire product temperature profile from picking to delivery can be provided to customer via the company’s mobile app, website or SMS. This would become the foundation stone to improve customer trust on quality and freshness of perishables delivered.
Deploying this kind of technology can lead to
Online grocers can make perishable delivery a competitive advantage. All it needs is a fresh perspective, pun intended!
- AT Kearney 2015 study of online grocery shopping.
- Retail Feedback Group 2017 survey on online grocery shopping
- Gary Mortimer, Syed Fazal e Hasan, Lynda Andrews & Jillian Martin (2016) Online grocery shopping: the impact of shopping frequency on perceived risk, The International Review of Retail, Distribution and Consumer Research
- Ecommerce benchmark and retail report 2016 by Ecommerce Foundation Netherlands
- The future of online grocery in Europe, 2013 report by McKinsey
- Reverse logistics association
- EV/EBITDA multiple by industry, NYU Stern analysis
- TagBox analysis