Moving sales from the most profitable channel to the least profitable channel

More on shifting shopping habits and how firms are responding. Specifically, we are again looking at the growth of online grocery sales. The Financial Times has a really nice story examining why the pandemic hasn’t necessarily been a boon for supermarkets (Why supermarkets are struggling to profit from the online grocery boom, Jul 22). On the one hand, stay at home orders have limited the options for dining out; that should be a good thing for supermarkets. On the other, those orders and general pandemic concerns have made people nervous about going to the store. That has led to a boom in online orders either for delivery or for pick up. According to the article, it took 20 years for online sales to account for 7% of UK sales. That percentage jumped to 13% in two months. The problem is that online sales are just not as profitable.

Sainsbury’s chief executive Simon Roberts summed the situation up, saying Covid-19 was “moving sales out of our most profitable convenience channel and driving a huge step-up in online grocery participation, our least profitable channel”.

For some numbers to back up that statement, checkout this eye candy:

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Will pick up last past the pandemic?

One of my favorite examples I have learned from doing this blog is Chronodrive, a French chain specializing in pick up groceries. Specializing in the sense that this is all that they do. It makes for a nice example since it allows for a contrast between a firm that has tailored all of its operations for one niche against conventional supermarkets that have tried tacking on pick up or delivery onto standard stores.

Of course, in the current environment, lots of firms have had to tack on pick up or delivery options onto their existing stores. To paraphrase Don Rumsfeld, sometimes you have to serve customers with the processes you have, not the processes you might want or wish to have at a later time. But will pick up — some form of click and collect — have legs?

The Wall Street Journal reports that for both restaurants and grocery stores, pick up has been a good business and has been holding up even as states have reopened (Pickup Gains Ground Over Delivery, June 25).

Pickup grocery sales were up 81% in the week ended June 13 from the start of this year, according to Nielsen, while delivery sales rose 33% in that time. At restaurants, carryout accounted for 42% of orders by dollars in May, according to data from research firm NPD Group Inc., compared with a 13% share of sales for delivery. Carryout has maintained its share of restaurant sales since dining rooms began to reopen in May, NPD said, while drive-through and delivery have lost some ground to dine-in orders.

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What happens to all the beer left in bars?

Much like Tom T. Hall, I like beer. And much like other industries, brewers have had to adjust as consumers habits and tastes have changed as bars and restaurants closed. As the Wall Street Journal reported a few weeks ago, this has largely meant a shift from smaller craft beers to the watery, American lagers your grandfather drank (Coronavirus Brings Beer Drinkers Back to Bud Light, May 18).

Beer drinkers have turned to box stores and grocery stores, and they are buying beer in 24- and 30-packs so they can make fewer trips. Shoppers are experimenting less, gravitating to brands they trust and looking for healthier, lower-calorie beers. Some people, out of work or watching their budgets, are trading down to cheaper options. And distributors and retailers, looking to simplify their supply chain, are trimming the number of products they carry.

All of those factors are hurting small craft brewers, which make most of their sales in their own tap rooms. Many craft beer brands aren’t distributed in retail stores. For most craft breweries, on-site sales were down by more than 70% in early April, and sales of craft beer to bars and restaurants had evaporated, according to a survey by the Brewers Association, an industry group.

So craft brewers are in many ways like lots of other firms during the pandemic. They had a business model built around sending kegs out to bars and when that demand dried up, they had limited ability to switch to other channels. Even if they could switch to bottling beer, they did not necessarily have the distributional muscle to get their beer into supermarkets and convenience stores.

But that also raises the question about what happens to the kegs. It turns out the breweries own the kegs. When a keg leaves your local craft brewer for a bar, it is supposed to go back to the brewery eventually. This video from Brewbound (a trade publication covering “the beer space“) gives a bit of background.

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Managing line shoppers

I must confess that I have never really been enthralled by Trader Joe’s. I have never lived close by one so it was a convenient option for shopping nor have I ever been desperately loyal to their private label products. But there certainly are people who love Trader Joe’s and their stores can be quite busy. As consequence, the check out lines at some locations can be a special sort of experience. McSweeny’s offers a parody “Trader Joe’s Waiting in Line App” asking user to rate their overall shopping experience on the following scale:

• 4 stars: Took a while, but got what I needed.
• 3 stars: Eerily friendly cashier weirded me out; there was hardly any bagged lettuce left.
• 2 stars: Constant gridlock. Teeth gritted the whole time.
• 1 star: Anarchy. Like the ending of Lord of the Flies.

What does the ending of Lord of the Flies look like? Check out BuzzFeed’s “The Nightmare Of Shopping At Trader Joe’s In Manhattan.” It’s one thing to have to mark where the line starts; it’s another to need a sign marking the middle of the line so clueless (or super-aggressive) shoppers don’t cut the queue.

What then is a shopper to do? According to a recent Slate piece, the answer is to shop while in line (The Six Rules of Line-Shopping at Trader Joe’s, Aug 24).

Not long ago I was waiting in line at the smaller-than-average and perpetually mobbed Trader Joe’s near Union Square in Manhattan when I noticed the shopper in front of me had come up with a clever, possibly devious solution to the crowd problem. Upon entering the store, she claimed a shopping cart and staked out a spot in the checkout line (which snaked around almost the entire perimeter of the store). She proceeded to do all her shopping from her place in line: picking up produce as the line crept through the produce aisle, frozen goods as it passed by the freezer case, cereal when it neared the cereal section.

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How should a supermarket organize its checkout lanes?

Is the express lane in the grocery store always the fastest lane?

That’s a great question and its the subject of a “Dear Mona” column over on FiveThirtyEight (Dear Mona, Which Is The Fastest Check-Out Lane At The Grocery Store?, Oct 16). Mona attacks this question by heading into the queuing theory weeds.

I couldn’t find much research on express lanes specifically, but one paper from Amsterdam found the reduction in wait times for express-lane customers didn’t offset the overall increase in wait times for everyone. Maybe life would be easier if the supermarket didn’t have an express lane — or, better yet, if it got rid of multiple lines altogether and had all customers join a single infinitely sprawling line where there were no winners and losers. That might sound nightmarish, but the math actually suggests it would be anything but.

That math comes from queuing theory, a subject of study that’s been around ever since Danish mathematician Agner Krarup Erlang discovered a method for managing telephone traffic in 1909. To answer your question, I’ve had to take a crash course in (more modern) queuing theory, including examining formulae that calculate how average wait times at the grocery store vary depending on the type of line you join.

I should state upfront Mona on the whole acquits herself quite well on this. But there are a couple of points worth mentioning. First, there in fact supermarkets that run with a single queue, like this Hannaford’s in West Lebanon, NH.

As you can see, that singe serpentine queue ends up chewing up a lot of space at the front of the store. That’s a lot of real estate to give up when you only have two people in line. As we have written about before, that is only one of the complications of having a single queue in a grocery setting.

But let’s suppose for the moment that we can get a single queue to work. Is that in fact the best way to run a supermarket’s checkout?

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Same day delivery — what can we learn from Wal-Mart de México?

Has Wal-Mart figured out how to do same day delivery? The Wall Street Journal seems to think so — at least within their Mexican operations (Mexico Delivers for Wal-Mart, Feb 20).

Has Wal-Mart really figured this all out? I have my doubts.

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Is self-service checkout on the way out?

I love self-service checkout, but it is again under attack. Here in Chicago, Jewel-Osco (one of the major local supermarket chains) is pulling self-service checkout lanes from some of its stores (Jewel scrapping self-checkout at some stores, Chicago Tribune, Sep 25). Their stated goal is to “reconnect personally with all of its customers.” Now the Wall Street Journal is piling on with an article declaring that computers just aren’t up for the job of letting people buy green beans (Humans 1, Robots 0, Oct 6).

The human supermarket checker is superior to the self-checkout machine in almost every way. The human is faster. The human has a more pleasing, less buggy interface. The human doesn’t expect me to remember or look up codes for produce, she bags my groceries, and unlike the machine, she isn’t on hair-trigger alert for any sign that I might be trying to steal toilet paper. Best of all, the human does all the work while I’m allowed to stand there and stupidly stare at my phone, which is my natural state of being. …

In a recent research paper called “Dancing With Robots,” the economists Frank Levy and Richard Murnane point out that computers replace human workers only when machines meet two key conditions. First, the information necessary to carry out the task must be put in a form that computers can understand, and second, the job must be routine enough that it can be expressed in a series of rules.

Supermarket checkout machines meet the second of these conditions, but they fail on the first. They lack proper information to do the job a human would do. To put it another way: They can’t tell shiitakes from Shinola. Instead of identifying your produce, the machine asks you, the customer, to type in a code for every leafy green in your cart. Many times you’ll have to look up the code in an on-screen directory. If a human checker asked you to remind him what that bunch of the oblong yellow fruit in your basket was, you’d ask to see his boss.

Let’s take this in two parts. First, if people prefer a conventional check out experience because that allows them to zone out then I have to wonder how Jewel’s plan to reconnect with its customers is going to work. I remember as a kid my mom having what seemed like endless conversations with cashiers. Of course, we were in a relatively small town and most of the women (they were virtually all woman) working the registers had either gone to high school with my mom or had a sibling who did. Now we live in a more class divided society. I suspect that none of the cashiers at my local Jewel are actually from the neighborhood or that the store’s staffing policies actually build in time for cashiers and customers to catch up on how their respective in-laws are doing.

But what of the claim that the information needed to run checkouts cannot be simply encoded for computers?

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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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