Guide to the Digital Grocery

Sometimes industries hit a tipping point. It looks like nothing is happening for a long time, while forces of change build up, and then everything shifts at once. That is happening in the grocery industry now. A shift is taking place in the most fundamental form of shopping: consumers’ purchases of food products and other basic household goods. The most visible signal of this shift occurred in June, when Amazon announced its acquisition of the Whole Foods grocery chain, but the basic trajectory was already long under way.

Central to this shift is the new digital grocery platform rapidly emerging in industrialized countries. In the U.S., Walmart and Amazon are each leveraging their scale advantages, but under different paradigms. Walmart has achieved unparalleled success with a “push” model that ships full truckloads of goods to more than 4,000 Walmart stores across the country, offering “everyday low prices,” as the slogan puts it, without sales or promotions. Amazon operates a similarly powerful supply chain but with a “pull” model that responds directly to customer demand by shipping packages rather than pallets of goods. The rest of the nation’s supermarkets and grocers must find a way to compete in this environment. Other industrialized countries have similar dynamics: traditional grocery competitors are squeezed between a “push” leader like Walmart and a digital native “pull” player like Amazon or Alibaba.

Undoubtedly, the new competitive dynamics will give consumers many more options for pickup and delivery of basic household goods, at lower cost and with far more convenience than they have ever had before. But they come at the expense of the traditional supermarket. For more than 50 years, convenience, largely defined by store location, has been the dominant factor in grocery retail. It has allowed even small players to survive, and thus helped create a fragmented sector. But now, the digital reframing of the grocery business, encompassing the entire purchase experience from order placement to delivery, reverses that reality. Conventional supermarket companies face an existential threat and must change their business models to compete and, ultimately, to survive.

One potential approach shows particular promise. It could be called the “ply” model — as in, “ply your wares with digital technology.” This model seeks to offset the scale advantages of Amazon and Walmart by leveraging the distinctive capabilities of a local grocery store: a supply chain fed by full-truckload shipments (which Amazon lacks); dynamic pricing and promotion (which Walmart disdains); and the ability to command intensive loyalty from shoppers, because of its local community knowledge, customer segmentation, and product customization. To compete in the coming decade against the twin disruptions of Amazon and Walmart (and their equivalents), today’s grocers and supermarkets need to return to the customer-centric mind-set of their 19th-century predecessors, while making the most of today’s digital tools.

A near-future scenario might involve a suburban family of two adults and three children. They are mindful of both price and convenience. Their favorite neighborhood grocer continues to win their loyalty because it understands what they are looking for; it regularly stocks its shelves with new items likely to appeal to them. On a Tuesday evening, the store sends the oldest child, a 15-year-old being driven home from a soccer game, a text saying his favorite box of prepared food, suitable for a low-cost and healthy school lunch, is half-price in the store they are driving past. Moreover, other items the family regularly purchases, including a new flavor of their favorite breakfast cereal, their usual laundry detergent (which they haven’t purchased in a few weeks), and a bag of oranges, can be boxed together for them along with a few surprises that the grocery store will “throw in just to see if you like them.”

The teenager receives the message because the store’s algorithm, after years of data analysis and machine learning, recognizes that the parent is probably driving and thus cannot text. Meanwhile, the other family members waiting at home have also received the offer and have clicked a box to indicate their support. The teenager alerts the driver to all this, and they stop at the store. As the teenager steps out to pick up the package at curbside, a store employee offers some cold sports drinks as additions to the boxed order. No payment is required right then; the cost is added to the family’s monthly tab.