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McKinsey: Five trends shaping U.S. grocery

The explosion of online grocery shopping is one key trend affecting the industry, according to McKinsey & Company.

In a new report, “Digital disruption at the grocery store,” McKinsey outlines five significant trends it sees as transforming the U.S. grocery sector. A summary of each trend follows.

1.    The fight is on
Major retail players such as Amazon, Walmart, Instacart, and Kroger have led a transformation of grocery into a retail vertical with significant online presence. Given that the majority of large grocers have already developed some form of an e-commerce offering, new entrants have clear disadvantages, including a lack of brand equity and scale compared with traditional grocers. 

However, McKinsey says they tend to have more strategic agility, cultures of innovation, and white space. Such features provide opportunities to craft value propositions for the customer of the future without sacrificing the customer of today. McKinsey notes that some larger and more traditional grocers may resist transformative innovation as they maintain their focus on their current core customer base. For example, Trader Joe’s discontinued its delivery services in New York City, citing already close proximity to customers and an unwillingness to pass on delivery costs.

2.    Early movers have advantages
McKinsey believes the winners in e-grocery will be those that deliver a great and consistent customer experience the fastest. They will give customers a sense of discovery, exploration, and inspiration, whether in a physical or virtual environment. Whichever player discovers and delivers the optimal customer experience first will be the incumbent. 

Some grocers believe this means offering the most seamless click-and-collect experience, while others believe this means offering the fastest delivery. According to McKinsey, while it remains to be seen which experience US consumers value the most, it is certain that they will reward consistency.

3.    Scale matters
Where demand density is low and demand is fragmented, investments in large fulfillment centers, delivery fleets, and drivers are hard to justify. It can be impossible to cover the costs without adequate demand within the serviceable radius. 

Recognizing the challenges, some major grocers are using their stores as fulfillment centers, getting more value from existing assets rather than making new investments After Amazon acquired Whole Foods Market, for example, it announced that it would fill orders from Whole Foods Market stores. Target and Walmart now offer e-commerce fulfillment at store locations and last-mile delivery through the acquisition of Shipt and a partnership with Postmates, respectively. 

Grocers are also finding that integrating e-commerce fulfillment and retail-store operations can improve employee utilization, since staff can fulfill electronic orders when in-store customer traffic is low. McKinsey says the demand-density challenge will become less of an issue as e-commerce operations achieve scale and move to more centralized fulfillment models.

4.    Economics improve with automation innovation
The two pillars of e-commerce fulfillment—picking and last-mile delivery—add significant operating costs to an already low-margin business. Therefore, McKinsey expects large grocers to turn to automation and robotics, such as Amazon and Kroger already have. Technology advancements could help level the playing field, but retailers need scale and demand density to justify the heavy up-front investment.

5.    The talent gap is a major bottleneck
To compete with the recruiting capabilities of large technology companies, McKinsey recommends grocers should take several additional steps such as hiring a chief digital officer or equivalent, developing a clear digital strategy, offering benefits millennials seek (such as flexibility and sense of meaning and purpose), and paying market rates.

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