Feeding the e-grocery trend

The Final Mile and Traditional Grocers’ Greatest Asset

Despite the strong growth of the last few years, e-grocery still accounts for just a fraction of the grocery marketplace, and nearly all of the growth that has occurred so far has been in dense, urban environs where grocery delivery not only makes sense, but where it already has arguably been part of the retail culture to some degree. The issue of culture remains a challenging one for e-grocery providers. Consumer preference when it comes to groceries still largely favors the in-store experience. Some of this is simply due to shopper worries over freshness – a problem that savvy operators can overcome assuming the proper management of their distribution chain. But it is in the distribution chain where e-grocery players will find their greatest hurdle.

Experts see exponential growth ahead from both pure play e-grocery and traditional grocery players expanding their online offerings. However, one area where the typical e-commerce distribution model simply does not translate into e-groceries: E-grocery fulfillment centers must be located close to their consumer base. Grocery margins remain razor thin (the typical profit margin for grocery store chains in the U.S. is only about 2 percent). Meanwhile, final mile delivery costs must be kept to an absolute minimum. Delivery fees must be competitive, otherwise the e-grocery sector will never grow beyond being a pricey convenience for a few upscale urban consumers. Deliveries must be timely and quick for freshness; perception of the freshness of delivered produce and/or meats will likely be the determining factor (more so than technology) when it comes to the consumer’s embrace or rejection of e-groceries.

And so pure play e-grocers have this challenge: Find modern distribution space with significant refrigeration and freezer components in urban environments. Amazon’s existing e-commerce fulfillment centers can run upwards of one million square feet in size and often sit 40 to 50 miles outside of core urban areas where the land is cheap. The deals so far for Amazon Fresh have been much smaller (typically in the 40,000-80,000 square foot range, with cooler and freezer space). They have also all been urban and virtually all in build-to-suit projects. This is because there is virtually no existing, serviceable space available in this arena.

As of mid-August 2016, only 17 existing industrial properties with available distribution space met the following criteria: freezer or cooler capabilities in the 20,000-100,000 square foot range; and a location within the city limits of the 30 largest U.S. markets. Limiting the search to just buildings that had been built since 2000 – and thus likely had the capability of handling the high power requirements of an e-grocery fulfilment center – this number dropped to just one.

When it comes to building the infrastructure that will be required for e-groceries to truly disrupt the marketplace, pure play e-grocers are starting from scratch. Some may opt for the cheaper development option of looking to build fulfilment centers on the fringes of urban areas, but there they gamble with that critical final mile delivery cost and all of the other risks involved with trying to serve a consumer base that is going to remain overwhelmingly urban for now. Most will opt for the safer but much more expensive option of build-to-suits in urban environments where options are few and where development issues can be expensive and complicated.

Ironically, this is where traditional grocers have the advantage, if they decide to exercise it. Their existing brick-and-mortar locations are already in the places where they need to be. The key for traditional grocery players is to revamp their existing stores to serve as the backbone of their e-grocery distribution chains. In most cases this would require some retrofitting, but at costs that are a fraction of those that will be faced by the pure play e-grocers.

Physical locations have proven to be a weakness for most retail concepts as the market has increasingly moved towards omnichannel. Ironically, they will prove to be the greatest asset that traditional grocery store chains have, whether the market moves slowly or quickly towards the embrace of e-groceries.

This is part 3 of a 3-part series, “Feeding the e-Grocery Trend.” Read part 1: The E-grocery Onslaught? and part 2: E-grocery Growth: Density, Not Demographics. Read more about the latest in CRE research in the NAIOP Research Foundation newsletter.

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