6/26

Source: Morgan Stanley, January 2016

Grocery is the crucible of supply and demand.  It is huge. Demand is diverse. Products are constantly proliferating.  Price-sensitivity is intense.  Many high-value products are innately perishable.  Competition is fierce.

The enterprise that can crack-the-code on grocery will also have the systems and discipline to compete in most other retail categories.  A dozen years ago when grocery distributor Fleming fell to Walmart (plus its own self-created problems), it signaled that Sears had finally lost the wider retail war.

Sears and Kmart, A&P and many more long-time players were locked into long-term leases in declining markets.  Most were still operating on circa 1980 supply chains. Walmart could pick and choose its new locations. Walmart pioneered the information and distribution tools that transformed distribution from push to pull.

Today the competitive center-of-gravity is online. While only about five percent or so of the current market, online is growing fast.  Morgan Stanley estimates that Americans will spend about $42 billion for online groceries this years, a 163 percent increase over 2015.

Supermarket News reports:

Amazon currently dominates online grocery in the U.S., but that's due in part to the relative slowness with which brick-and-mortar retailers have moved online.... That is changing this year as the two largest physical sellers of groceries in the U.S. — Wal-Mart Stores and Kroger, respectively — aggressively add "click-and-collect" capabilities allowing their customers to shop online and retrieve orders at local stores. Walmart through the second quarter was offering pickup in 60 markets and 400 locations; Kroger's ClickList offering had about the same number of locations through its second quarter.

Walmart is also partnering with Uber, Lyft, and other non-traditional players to test last-mile urban delivery.

According to a recent Harris poll, online grocery purchasing tracks with greater density:

• Millennials (36% vs. 31% of average Americans); 
• College grads (35% vs. 26% high school education or less); 
• Parents (37% vs. 28% of those without kids); and, 
• Those in an urban setting (38% vs. 30% suburban & 25% rural). 

These indicators happen to also track with greater affluence.

At the end of the last century Walmart transformed the grocery market in the United States by claiming twenty percent -- and more -- of baby-boomer parents in the suburbs and exurbs.  Now the fight is over a new generation in a new environment.

And while Walmart, Kroger, and others are stepping up their online offerings, Amazon is testing and targeting product variations specifically designed for affluent, time-constrained, quality-conscious urban consumers. According to several media reports including Bloomberg and the Washington Post:

AmazonFresh, is beginning home-delivery of “nitro” coffee, whoopie pies, Nepalese dumplings and other foodie fodder sourced from local micro-kitchens, food trucks and farmers markets to customers across a broad swath of the East Coast. The move allows mom-and-pop artisans to tap into AmazonFresh’s huge reach, placing their goods on doorsteps in hundreds of Zip codes up and down the mid-Atlantic within 24 hours of the order being placed. It means the tiny businesses — many of whom have sales of less than $25,000 a year — will be able to sell beyond the traditional farmers markets and brick-and-mortar storefronts.

This is partly going where your target consumers are at and it's partly about pushing your competitors into an expensive arms race. But it is also about setting up the greatest challenge conceivable and setting out to conquer it.  If you can make a profit on home-delivery of the latest foodie fad, you have the capacity to effectively supply any demand just about anywhere.