By Jose Luis Rodriguez, Guest Contributor

Profitability in the online grocery business is one of the most controversial topics in the retail industry, particularly since California-based Webvan, one of the pioneer in the field, went out of business in the early days of the new millennium. The bankruptcy of Webvan may have been one of the triggers for the dot-com bubble burst, and likely one of the reasons why online grocery did not attract many investors during the last decade. Recently the market woke up, and today we find great grocers such as Tesco, Ocado, Fresh Direct, Ahold, Carrefour and Auchan that are investing heavily in their online operations.

Despite the progress made, European retailers, like their American counterparts, have been struggling to build a profitable online grocery business.

The Solution Might Be Deconstruction

I assume that most Retail Paradox Weekly readers enjoy good restaurants and creative food. You may recognize the name of Catalonian cook Ferran Adrià, who is considered by many experts in gastronomy as the best cook of all time. Deconstruction is one of Adrià’s inventions, and has changed the face of gastronomy. The idea is to take a dish that is well known and work with each of its component parts, transforming and modifying them, then putting them back together to come up with a product that, while radically different, preserves the essence of the original dish.

Adrià’s approach has reinvented cooking in a creative way. Not only a cook, he is also a brilliant designer, and I would argue that the process he uses to deconstruct (and re-create) food can serve as a model for many traditional business that are looking to build a presence and market share on the internet.

I think grocery retailers need to reinvent the Online Grocery business like Mr. Adrià reinvented modern gastronomy. They need to experiment to find the right recipe and balance, all while maintaining the elements that help make their brands successful. Designing the right customer engagement and fulfillment model are key drivers to achieving profitability. Let me share some ideas, strategies and technologies that I think could help improve your online business bottom line. If you have not started yet, it could also help in your initial business plan.

• One stop shop for groceries and weekly order profile: In order to make money in online groceries, it is very important to encourage internet customers to adopt a weekly order profile. Online shoppers often place monthly orders for heavy and high-volume products such as diapers, paper products, beverages, and detergent: none of which they’d want to carry around when shopping in stores. Fulfillment cost for such orders is very high due to the resulting inefficiencies in packing and shipping operations. Customer engagement strategies, processes and infrastructures should be designed to convince the customer to order most of the grocery basket every week; creating incentives will help them get in this habit. At the same time, retailers should not be afraid of overcharging or restricting monthly customer orders that are not profitable. Achieving at least a small profit per every customer order should be a goal in online grocery.
• Enhance fresh food online presentation, assortment, selection and packaging: Online grocers have not yet been able to offer exciting online experiences and consistent quality deliveries of fresh products, leaving consumers with no option but to continue shopping for fresh items in the store. Product information management technologies can help consumers enhance their shopping experience for fresh groceries. Fulfillment centers and store associates must be trained rigorously on how to select, pick and pack fresh products. Packaging material should be especially designed to minimize damage and enhance product presentation. Integrating fresh items into the shopping cart can be the key factor to move to a profitable weekly shopping order.
• Expand to higher margin non-food categories: Pure play retailers like Ocado and multichannel retailers like Tesco started with food online and then moved to higher margin non-food product categories like beauty, toys and games. If you are ordering once a week, why not include more products in your shopping cart? For grocery retailers, combining non-food, high margin categories with pickup in-store delivery options may generate additional sales traffic and higher profitability to the store.
• Minimize weekly grocery shopping process and checkout time: A typical weekly grocery shopping round-trip to the store takes about 1.5 to 2 hours: that an average of more than 100 hours per year. Just the average in-store shopping process, including pick, pack, and pay activities, takes around 40 minutes. A fast shopping and checkout process for online grocery could reduce the shopping process to less than 10 minutes a week. Remember, many people order many of the same basic items every week while adding new lines based on seasonality and promotions. You should try to reduce the customer shopping time even if this might appear counterintuitive from the sales point of view. I think that online retailers should offer a fast ordering option to partially or fully automate weekly reordering. I think a combination of customer engagement and customer insight technologies with powerful analytics could reduce the customer reorder time to few minutes a week. Monthly Delivery Programs such as Amazon Fresh and Ocado Smart Pass also help reduce ordering time.
• Enhance the customer engagement process with new shopping experiences like special services and online shopping assistance: Segment your customers and create intelligent campaigns to each segment and customer using personalization and analytics technologies. I also believe in online shopping assistance programs for healthy diets or special programs for special occasions. Imagine that you want to organize a party with some friends. You just go online, select Mexican Party, enter the number of people you’re having over and the system will generate the whole shopping list for you. Ocado, the online pure player grocery leader in Britain and Picard, the leader in frozen food retailing in France, are experimenting with such customer engagement models.
• Build an efficient but scalable and flexible fulfillment model: Most online grocers lose money due to inefficient, inflexible and non-scalable pick/pack/ship operations. The cost of picking and packing a 30 item grocery order starts at $10, but when you calculate the full cost it can reach more than $20. Fulfillment costs include activities such as receiving, quality control, sorting, put-away, replenishment, inventory control, picking, packing, order consolidation, truck loading, and let’s not forget: customer service costs such as call centers. Typical customer inquiries such as “Where is my order? “, “I did not receive this product “, “Why did you replace this product? ” and the like can easily add $10 of fulfillment cost to the order. So we are talking about more than $25 per order without including transportation cost. If we add $10 to $15 for transportation the fulfillment cost of the order could reach $40. Intelligent logistics solutions such as advanced warehouse management systems help reduce the fulfillment cost in the stores and fulfillment centers. If your online grocery business is in an early stage or consumer online demand is distributed geographically, I recommend a more distributed fulfillment network which leverages your retail store network. New concepts such as the Drive Stores – invented in France – could complement your fulfillment network nicely. If you are a pure player or a multichannel retailer and you have a large volume of online grocery orders I recommend warehouse automation technology such the one provided by Kiva Systems. I discovered this unique robotic technology in Las Vegas in 2009 and fell in love with it. Why? Three reasons. First, it is the only commercially available warehouse automation technology that is efficient, flexible, scalable and portable. Second, Mick Mountz, Founder of Kiva, designed it specifically to solve the online grocery fulfillment problem. Lastly, because Amazon, one of the smartest companies on earth and the undisputed leader in online commerce, not only decided to use this technology, but bought the whole company for over 700 million dollars in 2012.
• Refrigerated lockers at home, pickup points and dynamic transportation routing: One of the key challenges for online grocery profitability still is the high capital investment and operating cost for a multi temperature dedicated delivery fleet of vans. TMS solution providers can help online grocers improve vehicle utilization and reduce millage with their transportation optimization and routing software. Another way to reduce investments in the delivery fleet is to deploy refrigerated lockers at homes and pickup points. Refrigerated lockers eliminate the need for having someone at home to pick up the order. It might be a capital investment, but the cost could be shared with the customer through various types of service contracts. Pickup points simplify transportation so retailers can leverage store delivery fleet or use third party carriers.

I feel confident that with the right combination of creative marketing, smart technologies and best in class operations, there is a bright future for growth and improved profitability in online grocery.