Brick-and-mortar Grocers Adapt to Online Boom

I am often asked how e-commerce affects Cedar Realty Trust and our tenants.  My answer invariably focuses on two central elements of the grocery business.  First, as opposed to many retail goods, consumers generally want to see and touch their food before they make a purchase, especially when it comes to perishables.  Second, the grocery business has and continues to be a thin-margin business which presents challenges to business models such as those that involve incremental delivery expenses.

Many of the characteristics of the grocery business that have insulated it from the growth of e-commerce are relatively unique to this retail category.  By contrast, online sales of consumer packaged goods are rising faster than ever, growing 13 percent since 2010 and reaching $25 billion in 2014.  Despite this larger trend, according to new research by Nielsen, 74 percent of online shoppers prefer to purchase groceries at brick-and-mortar stores and online “e-grocer” sales are not yet a significant part of the overall grocery business.  I suspect a major reason for this overwhelming preference is that it's impossible to completely replace or replicate consumers’ ability to choose their fruit, vegetables, meat and desserts over the Internet.  This preference for human touch and personalized interactions drives consumer traffic to brick-and-mortar grocers notwithstanding the remarkable growth of online sales in the non-grocery category.

To be fair, we have a vested interest in making sure that this trend continues.  Cedar owns and operates grocery-anchored shopping centers in the Washington, D.C., to Boston corridor.  This focus on grocery-anchored centers is something that has been honed over the past three years during which time we divested almost 70 assets in order to focus on just this retail asset type in this geography.  Our grocery-anchored strategy is premised, in part, on the idea that although consumers are becoming more apt to buy discretionary goods online, they will still frequent and drive traffic in our “brick-and-mortar” centers when purchasing non-discretionary goods, such as groceries, consistent with the Nielsen study above.  We are constantly evaluating our portfolio –- buying stronger assets and selling weaker assets –- with a recognition that the retail business has become ever-more dynamic and as a landlord we need to nimbly adapt as well if we are to be successful.

AmazonFresh, FreshDirect and Google Shopping Express

Not surprisingly, considering this consumer preference, traditional grocers are not feeling meaningful pressure from online providers such as AmazonFresh, FreshDirect and Google Shopping Express.  Rather, the existence of these potential threats has encouraged grocers to develop their own strategies to leverage new technology.  Traditional grocers are broadening their offerings and becoming omni-channel providers; this approach drives brand recognition and increases the number of in-store visits by connecting consumers with the same channels –- such as smart phone apps, social media sites, email, text messages and store websites –- that consumers use more generally.

A few ways we’ve found that grocers enhance the store experience is by taking advantage of in-store displays and specialty counters, thereby ensuring a high-level of customer service.  Many grocers now have food demonstrations and offer recipe bundles to help improve the customer experience and increase customer interaction in the store.  Additionally, lower-priced, private-label goods that may not be available for online delivery, encourage price-conscious consumers to visit the store.  Grocers have also been able to adapt to consumers’ shopping preferences by offering coupons for complementary items based upon those consumers are placing in their carts. 

Ahold's Peapod Brand

One example of a company that has adapted well to the challenges of developing and evolving an online strategy while maintaining and growing its brick-and-mortar grocery business is Ahold, which owns the banners of Stop & Shop and Giant.  Ahold was among the first in its category to move into the online grocery channel through its Peapod brand.  At many of the Ahold-bannered grocery stores in our centers, Peapod offers pick-up stations, providing a convenience to consumers while allowing them to eliminate delivery fees charged by many other services.  Picking up an order in one of our centers still generates traffic, helping the strength of our in-line, small-shop space.  In some instances, grocers have leased additional space in order to provide for these pick-up locations.  Admittedly, there may be some risk of brick-and-mortar sales cannibalization. However, so far we have not observed the Peapod pick-up service to be anything other than a relatively modest adjunct to a larger supermarket. 

The grocery business continues to operate with razor-thin margins. Online providers, like AmazonFresh, which have other business lines that offer delivery, may think of delivering groceries as a loss leader, but arguably use this feature as a way to build brand loyalty and drive the purchase of higher-margin goods. Other online providers that deliver groceries do so for a fee or simply charge more for the goods.  In both instances, someone is paying for the delivery (either a shareholder or a customer).  Considering that grocery margins continue to decline as ever-greater efficiencies come to this industry, the challenge of running a grocery business with consumer-specific delivery costs, as opposed to bulk costs, will continue to present a vexing economic hurdle.  Our sense is that the likely place the e-grocer business settles in the near and middle term is on the current model of online ordering where the customer does the pickup either at a store or kiosk; although we cannot say how big of a slice it will take from brick-and-mortar grocery.

Our experience over the past few years has taught us many things about the impact of technology on the grocery business and on our business as a landlord to grocers.  First, we know e-commerce is a significant and growing part of the retail landscape and that it will continue to encourage best practices among all retailers, including grocers, although it has thus far failed to make the inroads into grocery that it has in many other retail verticals.  Second, in the Darwinian world of the low-margin grocery business, the fittest will be those who harness the internet and technology, more generally, in a manner that allows them to drive and grow sales especially as the e-grocers evolve and improve their models.