Tale of Two E-grocers: AmazonFresh and Why grocery delivery service is greener than driving to the store

In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod.  Two interesting e-grocer articles appeared this week:

The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area.  Why?  In class we show the difficulty of this business and I praise the operational focus of Amazon.  If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household.  It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.

In his article, Tom proposes a second raison d’etre of AmazonFresh:

AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.

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Local Food Online Grocer Relay Foods is Expanding

Online retail is exploding with Amazon leading the charge in the long tail, items consumers buy irregularly.  Online shopping and delivery of fast movers like groceries, however, is available to few areas in the US: FreshDirect in NYC and Peapod in Chicago and some east coast cities are the big exception.

An Operations Audit gives the explanation: the costs of covering the last mile are strongly influenced by delivery density which makes large sprawl areas prohibitively costly to serve (as dotcom busts like Webvan quickly learned).   In our operations strategy class, we study Peapod by linking its financial performance to its operational structure and execution.  Such analysis highlights the importance of operational metrics such as stops per hour and pick&pack per hour and revenue metrics such as basket size ($ per order).  Students always suggest to replace the expensive delivery process by a pick-up model.  For companies with a large investment in delivery assets and processes such as FreshDirect and Peapod, however, embracing pickup (which Peapod is experimenting with) then necessitates a hybrid model.  In contrast, pure-play pick-up models such as the French ChronoDrive never invested in delivery assets.

This brings us to Relay Foods which seems to differentiate itself on 3 dimensions:

1. Emphasize local suppliers, and hence satisfy the “local food movement”.
2. Local supply allows daily deliveries which minimizes inventory risk.
3. Focus on pickup approach. (They also offer home delivery at a premium of $10/order.)

Relay foods is based in Charlottesville, Virginia, and also serves Richmond.  It can show nice growth trajectories (see video below) in those two markets and earlier this month announced it raised $1.2 million to expand in to the greater Washington, Baltimore, and Philadelphia areas.

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Running supermarket checkout with a single queue

Way back in the early days of this blog, Gady had a post about queuing innovations at Hannaford Supermarkets, a regional chain of markets serving the Northeast. One of things Gady mentioned was that they were experimenting with having a single line for those waiting to checkout. Having now visited Hannaford’s relatively new store in West Lebanon, NH, I can show you what that looks like:

As Gad’s original post notes, a single checkout line is not a completely new idea for supermarkets. Indeed, Wholefoods’ Columbus Circle store has gotten all sorts of press for its single queue system. I would argue that this is a little bit different. At Wholefoods, a single queue is as much about packing many, many registers into a tight space as it is about efficiently moving customers through. That’s not really true in West Lebanon; this is pretty much your standard, large, suburban American grocery store. In West Leb, a single queue is — as the signs suggest — all about reducing customer waiting times.

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In defense of self-service checkout

I have previously stated that I love self-service checkouts. It may just be that I hate making eye contact (ask anyone who has had to sit through me teaching). I consequently worry every time there is a story suggesting that supermarket chains are eliminating them. Gady had a post on this trend this summer and now the Associated Press is piling on with an article that was picked up by several newspapers (Supermarkets start bagging self-serve checkouts, Sep 26). Here is what the AP says:

Big Y Foods, which has 61 locations in Connecticut and Massachusetts, recently became one of the latest to announce it was phasing out the self-serve lanes. Some other regional chains and major players, including some Albertsons locations, have also reduced their unstaffed lanes and added more clerks to traditional lanes.

Market studies cited by the Arlington, Va.-based Food Marketing Institute found only 16 percent of supermarket transactions in 2010 were done at self-checkout lanes in stores that provided the option. That’s down from a high of 22 percent three years ago.

Overall, people reported being much more satisfied with their supermarket experience when they used traditional cashier-staffed lanes. …

An internal study by Big Y found delays in its self-service lines caused by customer confusion over coupons, payments and other problems; intentional and accidental theft, including misidentifying produce and baked goods as less-expensive varieties; and other problems that helped guide its decision to bag the self-serve lanes.

So one interpretation of this is that the systems are too hard to use and thus unappealing to the average shopper. The counter argument to that is in the United Kingdom. Tesco, the heavyweight champion among British supermarkets, racks up 10 million transactions per week on its self-service tills, fully one third of all its transactions (Tesco Deploys NCR Self-checkouts in Central, Eastern Europe, Sep 16, Progressive Grocer). Perhaps the Brits are more willing to adopt new technology or maybe Tesco aggressively understaffs it regular registers so that customers have no choice but to use the self-service option. In any event, it should be possible to have a decent level of adoption in the US.

The question then is what’s in it for the customer?

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On Metro Lanes and Self Checkouts in Supermarkets (yet again)

The world can be broadly divided into those who love self-checkout and those who hate them. (We already discussed it here: “Love or loathe: Self-service checkout” where my colleague confessed his love to self-checkouts).

I am of the (rare) indifferent type. I rarely, if ever, use them and find their main utility in taking people off the main checkout lanes. I found the new development reported in a recent article at the Seattle Times( “Some supermarkets replacing self-checkout lanes” h/t to Niraj Patel) somewhat surprising: both Kroger and Albertsons have started designing stores that no longer include self-checkouts lanes:

For Boise-based Albertsons, self-checkout no longer fits with the customer-service experience it wants, spokeswoman Christine Wilcox said. “Our customers are our highest priority, and we want to provide them with an excellent experience from the time they park their car to when they leave,” Wilcox said.

I am not 100% convinced about replacing self-checkout lanes. I do agree that self-checkouts are a bad idea during peak times since they divert the wrong customers to the wrong resource at the wrong time. During peak times, customers who are not used to self-checkouts tend to choose these, since the regular lanes are longer. Yet, since these customers are not used to self-checkout themselves, it take them longer to process their baskets, exacerbating the congestion in the store, exactly at the time where more customers are exposed to the quality of the service.  But self-checkouts have their places: they are about providing good and quick service in a very cheap way during off peak time, when customers appropriately self-select their preferred service.

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Bagging process design

So what is it worth to reduce the use of bags at your local grocery store? OK, so for one store, it may not be worth too much, but if you have over 1,000 stores like Supervalu does, saving a few bags here and there can be real money. Thus the chain has instituted a “rigorous” program to reduce the number of bags used (At Supervalu, Cost Cuts Are in the Bag, Wall St Journal, Mar 23).

The new rules are part of a training program that Supervalu Inc. believes will save it millions of dollars a year by putting more items in each bag or skipping the bag altogether. Plastic bags cost about two cents apiece and paper bags cost five. The Eden Prairie, Minn., operator of Albertsons, Acme Markets and Jewel-Osco stores uses more than 1.5 billion plastic and paper bags a year at about 1,100 stores, not counting its Save-A-Lot discount stores, where customers bring or pay for their own bags. …

Some of the Supervalu guidelines reinforce familiar bagging rules, such as starting the packing at the corners and moving from the outside in. But others break with common practices: No double-bagging. No bags for large items or items with handles, like one-gallon orange-juice containers. Never ask, “Paper or plastic?”—just use plastic bags. The rules can be broken, but only on request. …

The chain averages three to five items a bag, whether the bag is paper or plastic, and sells about 10 billion items annually. Since mid-2009, it has boosted its average items per bag about 5%, saving $4 million to $6 million annually even as prices for plastic bags have climbed, Mr. Siemienas says.

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Is Wal Mart Losing Focus?

According to the WSJ, Something is rotten in the state of Walmart (“Wal-Mart Tries to Recapture Mr. Sam’s Winning Formula“)

When it reports earnings on Tuesday, the retailer is widely expected to post its second straight year of declining domestic same-store sales. Wal-Mart’s U.S. comparable-store sales already had fallen for six consecutive quarters, an unprecedented losing streak.

The article puts some on the blame on recent changes at Wal-Mart. In an attempt to attract wealthier customers, they have changed the mix of products they sell with stronger emphasis on organic food and trendy fashion goods. They have also reduced the clutter in the stores and improved what people refer to as servicescape. Wal-Mart also got away from its promise for every-day-low-prices. As growth slowed and Wal-Mart began running out of room to build new supercenters, the chain began running promotions and discounts on select products—Wal-Mart calls them “rollbacks”—while raising prices on other items.

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Why do heritage turkeys cost so much?

It’s Thanksgiving so it is time to revisit the question of why heritage birds cost so much more than your standard supermarket bird. This year’s lesson in turkey economics comes from The Atlantic with a post by Bill Niman and Nicolette Hahn Niman of Niman Ranch fame (Heritage Turkeys: Worth the Cost?, Nov 18). Like good locavores, they emphasize that the industrial methods of factory farms result in birds that are in a sense under-priced. Yes, they are cheap on the supermarket shelf, but that doesn’t reflect the full cost they impose on the environment.

But the reason heritage cost so much is largely operational.

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Tracking where food comes from

What is it worth to have visibility in a supply chain? When the consequence of screw ups can be catastrophic and deadly (think pharmaceuticals), it is worth tracking everything from raw materials through to consumption. So why are agricultural products any different? If anything, contaminated spinach or eggs can affect more people than any one prescription drug problem. Why then not trace produce and farm products the same way drug makers follow their products?

The Los Angeles Times reports that a number of tech firms are working with large growers to make such detailed tracking possible (Amid mounting safety concerns, technology helps track food from farm to table, Oct 3).

In general, such trace-back systems work in a way that’s similar to how Federal Express tracks its packages. On the farm, animals and crop sections are given a “smart” label with a unique identifying number. The label is then attached to a bin, crate or container used for transport. Workers then can use a hand-held computer or smart phone to scan the labels and record key information, such as date and time, location, workplace temperature and which truck hauled the food away. The information is usually uploaded to a central online database, where it is stored and can be accessed via the Web. Each time the food moves or is handled by someone new, the data can be updated and recorded.

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Operations strategy & Trader Joe’s

At one point or another, we have mentioned nearly every major food retailer in the US. One that has thus far escaped mention is Trader Joe’s. According to an article in Fortune, that’s how the company likes it (Inside the secret world of Trader Joe’s, Aug 23). The company is privately held and generally prefers not to talk about itself. I guess that makes writing an article on the firm a little harder than usual. The story that emerges, however, is pretty interesting. It depicts a firm that has tied its operations very closely to its strategy.

For those unfamiliar with Trader Joe’s, here is how Stephen Dubner (the New York Time’s resident Freakeconomist) put it:

[T]he world is divided into three sets of people.

1. Those who have never been to a Trader Joe’s, and perhaps have never heard of it.

2. Those who love Trader Joe’s more than they love their own families.

3. Those who love Trader Joe’s more than they love their own families and are incensed that there isn’t one nearby.

So Trader Joe’s is more than just a grocery store. It is something special that inspires loyalty. What is interesting about that is that as grocery stores go, it is pretty limited. As the article notes, a typical family cannot do all its shopping here even if wanted to. Being a loyal Trader Joe’s shopper means having to go to some other store as well. The question then is how does the firm offer enough value to justify coming in on a regular basis? First, somewhat counterintuitively, it limits its selection:

Trader Joe’s has a deliberately scaled-down strategy: It is opening just five more locations this year. The company selects relatively small stores with a carefully curated selection of items. (Typical grocery stores can carry 50,000 stock-keeping units, or SKUs; Trader Joe’s sells about 4,000 SKUs, and about 80% of the stock bears the Trader Joe’s brand.) The result: Its stores sell an estimated $1,750 in merchandise per square foot, more than double Whole Foods’. The company has no debt and funds all growth from its own coffers.

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