The grocery industry in America is a trillion-dollar business with little nationwide competition. The industry is competitive regionally with smaller chains and independent grocers taking up market share from Wal-Mart Stores Inc. (WMT) and Kroger Co. (KR). For established grocery stores, having in-store pick-up or delivery is a no-brainer as the inventory and supply chain is already available, the only additional cost is an employee to shop for the customer and another to deliver the food.
Online ordering comes with a large expense: an e-commerce website. Smaller chains can’t afford to set up an e-commerce website and even the larger grocery chains that do have an e-commerce site don’t have true online ordering. In fact, there are only two major stores where Americans can order a wide variety of both perishable and non-perishable food online and have it delivered.
Walmart’s entry into online grocery comes as an extension of its established grocery business. Every business needs to expand and innovate to survive and Walmart was no exception. Recently, Walmart has begun rolling out online ordering and delivery/pick-up in test locations around the U.S. These locations aren’t in the urban centers that you’d imagine but are instead in the areas that have served Walmart well in the past: rural and suburban America. (For related reading, see: Why Wal-Mart’s Growth Is No Longer A Given.)
Walmart is able to slide easily into the world of online grocery because it has the infrastructure necessary to do so and the financial resources to cover any gaps that may arise. Walmart has the suppliers, the “warehouses” (existing Super-centers), the resources to hire new employees and the ability to weather any financial losses that may arise if this foray into online grocery doesn’t work.
Internationally, online grocery shopping is popular. By going slowly and avoiding mistakes that plagued previous online grocers, Walmart has a real chance to change the way Americans shop for groceries. Walmart hopes that, in a not-so-distant future, Americans will put their kids to bed and log onto the Walmart website or mobile app to shop for groceries. Whether the customers pay extra to have them delivered or pick the groceries up for free is up to them, but providing more choices for busy people is a great way to get customers to spend their money at your store. Walmart’s biggest task right now is to get customers to spend their money at Walmart instead of at Amazon.com Inc. (AMZN).
Amazon is a less obvious entrant to the online grocery business. Interested in any business that could one day become profitable, Amazon has been experimenting with its online grocery business – Amazon Fresh – in large urban areas for the past few years. (For more, see: How Amazon Fresh Works.)
The difference between Amazon and Walmart is the physical warehouse space. Whereas Walmart has 3,400 Super-centers in the U.S. that already stock fresh food, Amazon does not. This means that the e-commerce giant has to build or renovate new facilities and needs to concentrate on more densely populated areas to make the numbers work. Walmart is using online grocery as a business add-on; Amazon is creating an online grocery business. One of these is much more expensive than the other and inherently more risky.
Target Corp. (TGT) is definitely the outlier in the online grocery industry. Not only does Target have a notoriously bad e-commerce site, but it doesn’t have the fresh grocery infrastructure that would make it a strong player in the online grocery game. Despite a $1 billion investment into networks and technology, Target’s website crashed on Cyber Monday and, as of early November 2015, the company is looking at bringing in an outside company to help supply its fresh food departments.
While Walmart and Amazon already had a foot in the door to the online grocery world, Target’s attempts at online grocery are baffling. Why would the retailer want to spend all this money and time and resources to get into a business with such tiny margins?
Again, the grocery business in America is worth $1 trillion. That’s a lot of money that Target sees going to its big retail competitors. For Target at this point, trying to take market share from Walmart and back from Amazon is an attempt at survival. Online fresh grocery will be the future of the grocery industry and Target can see its customers slipping away, lured by the promise of true one-stop shopping. As a way to stop consumers from abandoning Target, the retailer has to make progress into the world of online grocery shopping. (For related reading, see: Wal-Mart vs. Target: Which One Is a Bigger Threat to Amazon?)
The Bottom Line
Retailers are moving into an expanding new market with small margins—online grocery. For Walmart, online grocery represents a chance to dominate the grocery industry even more by using its existing 3,400 Super-centers as distribution points for its new fresh and non-perishable delivery and pick-up online grocery shoppers. Amazon is leveraging its client base and massively popular Amazon Prime to target urbanites who are looking for same-day or next-day grocery delivery.
Target is expanding into online grocery as a means of survival, but for its busy mom clientele, there’s little bringing them into Target when they can sit at home and have everything they need delivered to their doorstep.