ecommerce, ebusiness, digital strategy, product data, user experience, retail, food logistics, food delivery, last mile


Food Logistics: How To Make It Happen for Online Groceries?

The market for online groceries has a huge growth potential. As my colleague Elena Martinez wrote in her article on grocery retail trends: "Grocery is the next big retail sector being reshaped by Digital". And as we see in the double-digit growth numbers in many countries, it’s coming fast! There’s a lot going on, but there is no silver bullet yet.

For non-food the logistics are almost a commodity. Delivery lead times are getting shorter (same day, two-hour) and automation is growing fast. With a calculator and a phone, you can quickly set up a competitive business with the existing providers in a couple of months.

Not so in food logistics. There are many experiments going on. To name a few: Amazon Dash & Echo, local produce distribution, meal boxes, pure players opening stores, automatic pickup points, unmanned distribution vehicles (Uber) and drones. And not all are successful.

The Game to Play

For those food retailers that are not yet in this game, this poses a serious challenge. But even for those already in the game, the challenge is no less. Most players still report substantial losses per order. The general idea is that we can’t afford not to get into this business. The market is changing and the winners of tomorrow are born today. As a FMCG retailer there is a risk in starting this complex and capital-intensive operation of food and near-food logistics. But the consequences of not doing so may be far worse.

It's the logistics, stupid

It’s the logistics, stupid!”

Consider this question: What business are you in? Are you a food retailer that has a logistical challenge? Or are you a logistics company that happens to be involved with food? The main takeaway here is that logistics are not just a facilitator. They are the main key to success. It will define whether you can be profitable or not and whether your e-commerce activities are sustainable on the long run.

So what are the main logistical challenges for food and near-food? I will discuss three main factors:

  1. Conditioning
  2. Stock and picking rate
  3. Last mile delivery

1. Conditioning: How Do You Keep Your Cool?

Most food handling comes with strict rules. These may vary per country but there are European laws to consider as well. (You will find a lot of information here). Retailers that are already selling food offline, will be familiar with the manifold rules about traceability, labeling and safety risk plans (HACCP). For this article, we will look at the conditioning part. Food products fall into one of these three categories:

  1. Unconditioned or light conditioned, like canned food
  2. Fresh: perishable goods such as fruit, vegetables and bread
  3. Frozen: the name says it all.

Each of these categories comes with specific requirements. Controlling the temperatures is the common denominator. This is defined by the “cold chain”, which is a “temperature-controlled supply chain for frozen or refrigerated food, but also for example pharmaceuticals during all stages of delivery, processing and storage.” A single temperature zone for fresh food and another zone for frozen food can be sufficient, but some retailers raise the bar by creating optimal temperatures for different zones. For example, Carrefour claims to have three zones:

  • 12-14 degrees for tomatoes
  • 2-4 degrees for cut vegetables
  • 0-2 degree for meat and poultry.

Some other retailers have up to five different cold zones! Keep in mind that this also impacts the operational processes of loading and unloading. Doors opening and closing will affect the temperatures, and even short temperature peaks may have (legal) consequences. The category of frozen food is especially challenging, requiring specialized equipment, a trained workforce and working in short shifts.

Worker scanning a package before transport

2.Stock and Picking Rate

How do you pick a large number of orders within a few (peak) hours and an average of twenty lines per order? And how do you make sure that you always have enough stock and not too much? Apart from the conditioning, there are also specifics on the handling of food in the warehouse.

Picking and packing for e-commerce are completely different processes than the (existing) bulk handling for retail operations. Moreover, picking and packing are also very different from regular non-food e-commerce picking. An average grocery order consists of twenty line items, which is much more than a regular non-food order. The delivery is usually planned in time slots, which means that there are large numbers of products that need to be picked in a short amount of time. This calls for a very efficient layout of the picking area!

Complicating factors are:

  • The number of SKU’s (Stock Keeping Units) in the assortment. Existing retailers often have a large assortment. When going online, they want to offer the customer their full experience. This will make the whole logistical process more complex and it’s one of the reasons why existing supermarkets are struggling to limit their losses on each order.
  • The amount of stock. There are conflicting goals here. For the customers, a high availability is an important precondition for shifting from offline to online grocery shopping. The retailer should aim for an availability greater than 99% on his complete assortment. But more stock won’t only mean larger risks for perishable goods. It will also result in larger picking areas. This, in turn, means that the picking process will be less efficient.
  • Consolidation of different product types (unconditioned / fresh / frozen). These products are picked in separate areas of the warehouse. They need to be consolidated in one shipment to the customer. This can be done in the warehouse for unconditioned and fresh, while frozen need to be kept separated until the doorstep of the customer.

For supermarkets that have an existing retail warehouse, these dynamics will point in the direction of setting up a separate warehouse for e-commerce. To control the stock, a location near the retail warehouse is ideal. This enables a constant replenishment flow to the e-commerce warehouse at low costs, ensuring high availability while the amount of stock storage space is kept to a minimum.

3. Delivery: the Last Mile Counts

Employing pickup points can be a good starting point. It takes out some of the complexity and counters low delivery densities. But it also comes with some challenges of its own. More importantly: research shows that the online consumer is in favor of home delivery.

For home delivery, the biggest challenge is in covering the last mile. This has several causes:

  1. The value to volume ratio is very low. This means that a lot of packing space is needed to make a small profit. This makes all grocery logistics expensive by nature.
  2. The delivery density is low. The number of delivery addresses per square meters is low. Partly because groceries are not yet as popular as non-food deliveries, and partly because deliveries are divided into time slots. This will improve over time as online groceries become more popular.
  3. Handling of frozen versus fresh products. This requires special equipment. Cooled trucks are not required if special packaging is used (Packaging with dry–ice can be conditioned under eighteen degrees for thirty-six hours!)
  4. The customer needs to be home. The package needs to be handed over. You want to avoid taking voluminous packages with conditioned food back to the warehouse. This is the reason for shipping in time slots. Within the time slots, the customers are often informed on the exact truck locations and delivery time by means of a dedicated app. Planning is crucial.

Measures to Take

In case of home delivery, the number of drop-offs per hour has to be maximized. To reach this, we see in online grocery delivery the following measures taken:

  • Direct shipments from the warehouse to home-address areas can be made for addresses close to the e-commerce warehouse. This is a reason that online grocery warehouses are often located strategically in a highly populated area.
  • Delivery to other areas via smaller hubs. The hubs can be supplied by big trucks. The final delivery to the home addresses can be done in smaller vehicles.
  • Limitation of the areas (via zip codes) where food and non-food can be ordered (like Ahold and Amazon do).

The Future of Cutting Costs

If we would make a calculation of the costs of warehousing and shipping of groceries today based on a regular process but tailored for food, it would show that these are four or five times as high as regular products. It’s not possible to charge these costs completely to the customers. Why would you want to embark on a business that is loss-making?

Because the market potential is not only huge, there is also the promise of reliable returning sales. The lifetime value of a customer is enormous. Let’s do the math quickly. An average family spends a modest €150, - a week. If we discount for the holidays and multiply this by 48 weeks, this sums up to €7200, - a year. Now let’s say that this family would do their grocery shopping for twenty years. Then the lifetime value amounts up to €144.000, - per family. That is serious money which qualifies for some entrepreneurial risks.

On what axes can we expect the current costs to decrease? The value to volume ratio will remain to be low. We cannot expect a lot of positive change there. Also, the conditioning will continue to be a cost factor. But this will be compensated by other changes:

  • Picking and packing: although it is harder to pick a bunch of bananas or a lettuce than a book, automation will continue to decrease the costs of picking and packing, by further eliminating the human factor.
  • Delivery: unmanned vehicles and perhaps even drones will automate the delivery as well. But until this time we can already see improvements from other factors such as:
    • Higher delivery density as online groceries become more popular
    • More efficient systems: dedicated vehicles, aggregating deliveries from multiple providers, highly localized pickup/delivery points.

So a common strategy for many retailers is to attract new customers by sponsoring the fulfillment costs. When successful, this leads to more customers and a higher repeat sales ratio. Combined, that will significantly raise the delivery density, which will reduce the delivery costs. This should make the operations sufficiently sustainable so that a market share can be secured, that will lead to real profit when disrupting technologies (such as unmanned vehicles) are rolled out.

Domino's delivers pizza through a robot

To make a short loop-back to my colleague’s favorite toothbrush: if you are an established retailer and want to embark on online food logistics, be humble. Assume that your current knowledge is not sufficient. It may even hold you back from the real innovation that you need. And don’t panic. Yes, Amazon is a threat to most of us, and yes, there are other sharks in the sea. But it is right now, at this moment in time, where creativity and an entrepreneurial spirit can make a real difference.

Small and Effective

A perfect example comes from the Netherlands. The pure player Picnic started their adventure by making their own trucks. They look cute, but they also have a clear function: Instead of having to enter the inside of the van, all packages are positioned on the outside, so they can be quickly unloaded. The color difference of the crates indicates frozen and fresh contents. These are consolidated at the customer’s doorstep. The vehicles are small enough to be cost effective and easy to maneuver in a residential area. To be able to start planning in seconds instead of minutes, the Dutch start-up developed its own planning software.

Picnic has an adoption rate of 10% in the cities where they connect within the first six months after their arrival (where the national average is 2-3%). They don’t charge delivery costs and are still one of the few online grocery business that claims to be profitable. Two years ago, in August 2017, Picnic didn’t even exist yet. Earlier this year they received a 100 million Euro investment for further growth.

So, what is stopping you?

Small and large truck


Ask Jan

August 29, 2017


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