What the Online Grocery Wars Really Mean: Automation

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The online grocery wars are heating up and the stakes are far bigger than any battle between Amazon and Walmart. The real story here is the automation of grocery stores and the service economy more broadly.

Amazon’s Grocery Expansion

This week, Amazon announced it is eliminating fees for grocery delivery in the U.S. The move is just the latest in the company’s aggressive expansion into physical and online grocery businesses. The first shock waves came in August 2017 with its $13.7 billion acquisition of Whole Foods. Then, in Seattle, just five months later, the company opened the first outlet for a new automated convenience store format called Amazon Go. Amazon also appears near to rolling out of a new chain of supermarkets aimed at expanding beyond the upmarket Whole Foods brand.

Amazon’s motivation for expanding into online grocery boils down to a large growth opportunity. The U.S. Department of Commerce estimates that consumers spent $513.61 billion online in 2018, or about 14% of the total $3.6 trillion U.S. retail market (excluding automobiles, gasoline stations and restaurants). The total retail groceries market in the U.S. is $655 billion, and of that, online groceries account for $20 billion, or just 3%. In other words, the percentage that online sales accounts for in groceries lags considerably behind other retail categories. Amazon, with its technical prowess, is well positioned to disrupt this market and grab a sizeable portion of the revenues in the process.

Cost Cutting in Groceries

To understand the way this disruption is unfolding, it’s important to understand what has been happening in the traditional groceries market. Over the last few decades, competition from low-cost giants like Walmart, Target, and Costco has dramatically suppressed prices—and profits—among grocers. Between 2012 and 2017, more than 50 percent of the economic profit of publicly traded grocery retailers has evaporated.

As consolidation sweeps through grocery retailers, the remaining giants invest heavily in automation technologies to further lower their operating costs. Logistics and inventory management are an important part of the puzzle, but as with all service businesses, the real opportunity to boost profits lies in reducing the cost of engaging shoppers.

Automated Self-Service

The key to reducing these costs is automation technology that enables end users to serve themselves. “Automated self-service” is what automation looks like when it meets the service economy and the grocery businesses is no exception.

In other words, what looks like a battle between Amazon and more traditional retail giants like Walmart is actually something much bigger. We are now witnessing the automation of the grocery business. This automation process looks very different from the huge combines and industrial robots that swept through the agricultural and manufacturing sectors.

In the service economy, end users play a critical role in the value chain, since there is no shopping without shoppers. Traditional retail grocers served shoppers by employing aisle stockers, cashiers, baggers, and other staff. Early attempts to automate that work essentially just shoveling it onto shoppers through self-checkout machines. These machines didn’t work that well and even though many of us have grudgingly begun to accept this new form of “shadow work,” most of us don’t like it.

For automation to really transform the groceries business, these processes need to be rethought. Simply automating old processes rarely works. Instead, new players like Amazon and Instacart and established players like Walmart and Target are disrupting and automating the retail grocery business by merging it with the online grocery business. By building a new generation of user interfaces, these grocer giants of the future are coordinating Internet-scale networks of shoppers in their highly distributed work of shopping for groceries.

Automated self-service technologies are what enable this massive coordination of end user work. These systems are what enable the new grocery giants to amass the huge quantities of data needed to make their automation ever smarter and more efficient—and with minimal assistance from human employees.

This is the future of groceries and the future of the service economy more generally.

7 comments

  1. Where does this all end? I recently was in my first Amazon GO in Chicago. What a weird feeling, walking in by scanning my phone, picking up what I wanted, and walking out, no scanning or checkout, and minutes later getting an email from Amazon with my receipt. Please tell me how it detects my items. I studied the water bottle I bought, and there was nothing I could see that would trigger the purchase. And one person worked in the store. For online grocery shopping, my wife and I would need much more organization to know what all we needed, as opposed to our routine of making a list, and then walking the aisles to see what else we need or want. And my wife has to inspect every piece of produce to find the perfect one. Having seen employees in some stores we’ve been in, filling crates for customer pick-up, I see them grabbing the nearest bananas or grapes, with no looking for the best ones. And more and more stores now have the self check-out, most recently our CVS pharmacy. Our grocery store has a rack of small portable scanners, where the customer scans items as he shops, including weighing produce, and then sacks his items, pays on the scanner, and leaves. More and more jobs disappearing.

    • Thanks for your thoughts, Bill. I agree that the Amazon Go experience is very disorienting. The idea of “just walk out” is totally strange. You feel like you’re stealing or something.

      From some of the research I did in writing this piece, produce and meats are the biggest challenges to automated self-service really taking off in grocers. Like your wife, some people really do like to inspect the fresh foods before buying them. So, it’s looking like there will need to be some sort of fusion. The exception appears to be with the younger generations.

  2. Wonderful to see you writing again, Gideon. I love to learn from you. Amazing perspective on it all. Distressing and dis-empowering if we don’t pay attention. So thanks for helping us wake up to what is occurring right before our eyes.

    • Thanks for your comment, Ragini. Yes, this shift is happening so fast these days. I don’t know if you saw the last presidential debates, but the exchange between Andrew Yang and Elizabeth Warren was very encouraging. It seems like these issues are starting to come into the mainstream more fully now.

  3. In India have been witnessing a e-commerce competition between amazon and flipkart (the alternate e-commerce platform started by Indians- now bought over by walmart). There is widespread resentment of these giants by local grocers. Many of the small local grocers can not get the deep discounts amazon and flipkart can extract from many of the packed goods manufacturers. So it is impossible for them to compete. Meanwhile both these giant entities operating in India seem to be making losses. This means they are cutting prices beyond their own sustainable limits. I expect the Indian government to act and regulate e-commerce soon. At least these entities should not report a loss, and be seen as breaking even or making a small margin.

    One view can be that progress of technology can not and should not be controlled. But when technology competes with the weaker sections of society, they are totally lost. It may be par for the course in a developed economy. But it is much more destructive to under developed economies.

    • Thanks for the perspective from India, Sowmyan. I knew Amazon was investing heavily in India, but not that it was already having this level of impact on the local economies.

      One of the important points you’re raising here is that many of the new players operating in these disruptive business models are content to operate at or in some cases below cost. They do this in the hope of building first mover advantage, which has proven critical in markets that exhibit network effects (social networks, search, online shopping). Once those network effects kick in, it becomes extremely difficult to dislodge an incumbent. That’s the strategy of disruption, of course, but what you’re raising here is that when viewed from the perspective of impact on existing players, the practices are actually quite predatory.

  4. In related news published the same day as this article:
    Why supermarkets are building ‘dark stores’
    “Albertsons and Stop & Shop are testing automated “micro-fulfillment centers” in the backs of their own stores that are dedicated to fulfilling deliveries and pickups. At two stores, Albertsons is using robots to prepare customers’ orders, which it says speeds up the picking process.”

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