Food: The Last Piece of the Digital Pie

Intro by Gina:  Sometimes in Corporate Entrepreneurship class we stray from the topic of how large companies can institutionalize capability for innovation….and we talk about interesting emerging innovations themselves.  Pelin, an architecture student studying for her Masters’ degree in Technology Commercialization and Entrepreneurship, is struck by the many attempts that have been made to increase the convenience of grocery shopping.  It’s all about the business model, and to date, it appears, no one has found the winning model.

Since the advent of the internet, big business and startups alike have been exploring the possibilities of online shopping. More and more people have stopped frequenting stores and instead opt to buy necessities online. Groceries, however, have had an increasingly difficult time jumping into the digital marketplace. Today, over 80% of groceries are purchased from brick-and-mortar stores according to the FMI, but it’s not due to a lack of options. Nearly every major grocery store has both pickup and delivery options in addition to the plenty of newer companies that offer food delivery services to major cities. However, no innovation has made a dent in traditional grocery sales, and even the “successful” ventures aren’t nearly as profitable as physical stores.

This lack of success is primarily due to customers’ continued desires to inspect their produce before purchasing it. This desire trumps any perceived inconvenience of physically going to the store. Additionally, both pick-up and delivery options come with fees or minimum delivery requirements. Customers won’t pay for others to do their shopping when they believe that selecting their own produce results in better quality. Of the 5% of people who utilize online grocery shopping, it is typically as a one time interest or last resort.

In 2007, Amazon introduced an online grocery delivery service in Seattle called AmazonFresh. Since then Amazon has expanded to several other cities, but has run into the same challenges in the food delivery business as others have faced. The company has begun transitioning towards physical stores in order to increase sales. Just this year, Amazon opened its first Amazon Go store in Seattle.  Using technology similar to self-driving cars, items taken off the shelves and placed in your shopping cart are digitally recognized and your Amazon account is charged automatically when you leave the store, eliminating lines and hassle. Amazon touts the notion of convenience as a major advantage of these stores, although they assure their customers that this is just the beginning.  As much as anyone, Amazon is unsure if the stores will be a success and are working on other options such as a grocery pick-up area and drive thru’s. Amazon is confident that the next generation will embrace online grocery shopping, it’s just a matter of time and establishing buyer trust.

At the same time Wal-Mart, which already commands 25% of the grocery market, is also pushing the limits of the grocery store business model. Rather than promoting online shopping, the company is moving forward with another concept which Amazon considered: pickup stations. Setting it apart from other stores that offer similar services, Wal-Mart’s dominance of the market enables the corporation to provide in-store pickup at no cost to customers. The few stores currently offering the services proved the stations to be remarkably successful. However, nothing is free, and offering an additional service at no cost to customers means that prices increase elsewhere. In addition, this pick-up option does nothing to alleviate the worries of the average customer about purchasing produce before even viewing it.

If Wal-Mart’s small sample size is indicative of the rest of America, perhaps Amazon should abandon its high-tech no-lines store in favor of a pick-up option. However, the pick-up option is not new, and others are skeptical of how successful it will be, and doubtful that it will make a significant profit for Wal-Mart.  Only time will tell if either innovation will be successful.

-Pelin Akman

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