What Can Brick-and-Mortar Grocers Learn from Online-Only Competitors?

Walk into a supermarket today, and there’s a good chance it looks the same as it did a decade ago. In a time when virtually every industry is being reshaped by mobile and location technology, the supermarket industry has remained virtually untouched. Or at least that’s how it seems on the surface. Dig just below, and you’ll find an industry struggling to meet shifting consumer expectations and remain relevant in the mobile-first era.

Many consumers still prefer to buy groceries in brick-and-mortar stores, but now that these consumers are accustomed to shopping online, they aren’t willing to wait in long lines. Thirty-two percent of consumers say they will leave a long line and go elsewhere, and 11% say they will abandon a purchase entirely if a line is too long, according to an April 2018 Digimarc survey conducted by Forrester Consulting. One way that supermarkets have faced this challenge is by adding self-checkout lanes, but the introduction of Amazon’s checkout-free shopping experience, and the growing demand for meal kit delivery services, means supermarkets will have to go beyond the status quo to keep pace moving forward.

To learn more about what supermarkets should be doing to meet rising consumer expectations, and what brick-and-mortar stores can learn from their online-only counterparts, we caught up with Pradeep Elankumaran, CEO of Farmstead, a pure-play digital grocer that brings local groceries to doorsteps.

Q. Online-only grocers have been performing above expectations recently, particularly among younger consumers. What impact do you see these grocers having on the industry as a whole, and what should traditional brick-and-mortar supermarkets be learning from their success?

A. The ‘grocery customer experience’ has not really changed dramatically over the last 50 years—it assumes that customers will be more than happy to spend hours of their life going to multiple stores, wait in line and pay grocers for the privilege. This is no longer true, as millennial families and younger choose to do their perishable shopping via apps.

Perishable-focused e-commerce is challenging, and is primarily tied to how clean your digitized operational data is. Online grocers are pioneering how to dramatically improve margins in this historically low-margin industry by leveraging data-centric operations. Last-mile delivery to doorstep is now mandatory, and new flexible labor models really cut the cost of picking orders dramatically.

Q. What can you tell me about how Farmstead is using AI technology to manage inventory and reduce food waste?

A. Farmstead is an unconventional digital grocer. We use AI to predict just how much to keep in stock so we have high availability and low food waste for a curated set of high quality local products. Our AI stack allows us to hold just the right amount of inventory in our smaller format warehouses so we can do delivery to doorsteps in 60 minutes.

We use AI to predict exactly how much to keep in stock of any given item, while making sure that we will always have just enough in stock so that you never see an out of stock message, but not so much in stock that we waste a lot of food. It’s a fine line to walk, and really tough to do as we are growing 20% to 30% every month.

Q. What’s preventing brick-and-mortar grocers from taking advantage of the technology being pioneered by digital grocers? Is the possibility of that something that concerns you?

A. Existing grocers have built up over decades a robust operational model tied to forward deployed inventory at stores. They are faced with the challenging innovator’s dilemma — consumers are demanding an experience that’s challenging to pull off in our stores — do we rip everything down and go the e-commerce route or do we figure out ways to make our stores work in this new world?

Unfortunately — most grocery stores in the U.S. have unionized labor with a very high cost to change behavior so picking within these stores is challenging. Moving to e-commerce immediately means you will wind up wasting a ton of food since the options for converting things that don’t sell into ones that do (for example, fresh whole chicken that doesn’t sell turned into rotisserie, then sandwiches) don’t exist in an e-commerce setting.

Also, most grocers have pretty poor inventory control systems, so even solving this with data is not viable. On top of all of this, once they inevitably move to warehouses, it’s challenging to add delivery drivers on top cost-effectively and build scale on digital channels. Both of these systems are complex enough to build separate companies just to solve them.

Q. What are some of the most exciting changes you’re seeing within the grocery industry right now?

A. We are noticing a renewed focus on customer experience and saving everyday consumers time and money. It will be challenging for existing grocers to adapt to this new land, but they will have to.

Interview has been edited for length and clarity.

Stephanie Miles is a senior editor at Street Fight.