Will This Crisis Change The World Of Grocery Shopping Forever?

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With millions stuck at home and 40% of restaurants closed, the grocery industry has never been more essential and more in flux. For instance, fueled by massive sales over the last month, grocery delivery service Instacart turned a profit for the first time ever. In the first two weeks of April, the platform sold $700 million worth of groceries per week, which is 450% of its entire December sales, according to The Information.

Though e-commerce is certainly making strides, the entire industry is accelerating at breakneck speed, even as supply chain concerns multiply with Tyson Foods warning of an upcoming meat shortage. Many view these changes as temporary realignments due to extenuating circumstances, but the question persists: Will this crisis change the world of grocery shopping forever? Let’s look at the data.

Analyzing The Dips And Spikes

Grocery stores have jumped in to fill the gap left by sit-down restaurants, but how extensively? Delivery services like DoorDash are helping some restaurants stay open, but according to a report by Swiss investment bank UBS (via Business Insider, paygate), food away from home consumption could drop by almost $350 billion, or 40%, and the decline could continue even after the pandemic is over.

This drop will dramatically alter the restaurant industry, with the Wells Fargo restaurants team estimating 25% of independent restaurants and 5% of chain restaurants will shut down before the crisis ends. This has ripple effects. Though many assume delivery services are booming, platforms like Grubhub — which specifically courted independent restaurants, from which it derives almost 90% of its profits — could be at risk as well.

Meanwhile, edible groceries saw a 33% increase in sales between December 2019 and March 2020. Barclays analyst Karen Short estimates that between $61 billion and $118 billion in food sales will shift from restaurants to grocery stores during Q2 alone. Google trend data reflects the resulting surge in cooking interest. With a greatly reduced selection of restaurants, appreciation of cheaper prices and months of building home cooking habits, a noticeable percentage of consumers might just prefer shopping at grocery stores over eating at restaurants after the crisis ends.

However, consumers feel strongly about restaurants. According to Volition Capital’s Consumer Sentiment Study, 30.9% of respondents miss having a meal in a restaurant more than any other activity, almost double the next closest response. Consumers’ pent up desire to eat out could reverse the grocery gains we’ve seen in recent weeks.

In fact, after the initial stock-up-for-the-pandemic panic, where grocery sales exceeded $8 billion during the week of March 21 alone, we’ve seen a return to just slightly above pre-COVID-19 levels. The Wall Street Journal has a wonderful graph that tracks this bump against the corresponding dip in restaurant sales. The trend data seems to paint a picture of grocery sales returning to just about where they were, but labor shortages, distribution headaches and the overall reduction of demand threatening tight-margined farmers are jeopardizing the supply chain and will lead to shortages. It will be hard to predict the lost sales due to shortages, but these are short-term changes. There’s another longer-term change in progress.

Online Grocery Sales

The real change is online. Long lines and fears of leaving home are pushing consumers to chain-owned e-commerce, third-party delivery apps and buy online pick up in-store (BOPIS), which have all exploded in the last month and a half. Whereas overall grocery sales peaked and are in the process of returning to normal levels, online grocery sales hit an all-time high in March and then broke that record in April by 37%. Total orders also increased by 33.3% from March to a whopping 62.5 million.

This explosion means there are many first-time users. The Volition Capital Consumer Sentiment Study indicates that 22.4% of Americans have tried grocery delivery for the first time during the stay-at-home mandate. Though there have been difficulties with scaling up these online services, consumers seem to like them. Volition Capital found that 18.1% of customers who had tried grocery delivery for the first time would continue to use the service after the stay-at-home mandate had been lifted, the second highest of any category.

Grocery delivery still has a long way to go. Unanticipated demand and logistical challenges have made wait times for available slots as long as five days. Supply shortages exacerbate these challenges. One solution is to have facilities specifically dedicated to online shopping called micro-fulfillment centers (MFCs), which use automation in condensed spaces to increase efficiency and lower prices.

Another solution mirrors the Costco approach by simplifying assortments, minimizing SKUs and trying to maximize velocity. However, as food shortages loom, minimized SKUs could result in another wave of “pantry loading,” where increased demand creates shortages that actually negatively impact sales downstream, such as when Goldfish crackers saw a 6.1% dive in April sales after a March splash caused “short-term supply challenges.”

The huge number of new users have proven the concept of grocery delivery, but there is a lot of work to do until this becomes cost-effective and efficient.

Forever Changed?

The impact of the current crisis will be felt for years, and grocery stores will certainly have to adjust to a new normal. It might take restaurants some time to return to their pre-pandemic quantity and competitiveness, ceding some of the market to grocery stores for the time being, but the real change will be online. As the driving factor for grocery e-commerce adoption moves from necessity to convenience, the supply chain will need to be refined. The adrenaline shot of this crisis, which accelerated the adopter curve and created a formidable and validating user base, will ensure that it does.

A few months ago, the best-case scenario for e-commerce penetration of the grocery industry was 15% by 2025 — we could hit that before 2021.