Grocery Delivery Facilitates Omnichannel Growth

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09/07/2021
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As the COVID-19 pandemic surged in the spring of 2020, online orders for groceries soared as well, leaving many retailers scrambling to meet demand for both pickup and delivery.

Many grocery retailers had existing partnerships with delivery service providers such as Instacart, but the surge led to a boom in new partnerships and expansions between retailers and third-party vendors. And as the pandemic continues to wax and wane in the U.S., the role of delivery within overall omnichannel growth in the grocery sector continues to adapt.

New Baseline for Delivery Service

That initial surge for grocery delivery has leveled off throughout much of 2021. With restaurants reopening and more consumers feeling comfortable traveling, other food options are regaining some of the share. Grocery pickup orders are seeing staying power, which means the role delivery plays in a grocer’s overall omnichannel strategy may still be evolving.

“There will be a new baseline established,” says Sylvain Perrier, CEO and president of Mercatus. “This is the perfect opportunity for retailers to be mindful of the consumers they are servicing, and determine if they are not using e-commerce, are they going back to brick-and-mortar, are they staying with them or going back to other retailers?”

Mercatus, a grocery e-commerce platform for retailers, recently published a report revealing grocery delivery orders are not growing as they were during the early days of the pandemic in 2020. The U.S. online grocery market generated $6.8 billion in sales in June 2021, down 23% from the same month in 2020, according to Mercatus. Compared to May 2021, June sales were down 3%, driven by decreases in the number of monthly active users, order frequency and spending per order.

However, that increase in online orders hasn’t totally vanished, and grocery retailers, including Midwestern supermarket chain Hy-Vee, are still anticipating heightened delivery orders.

“Use of [the] Aisles Online [platform] quadrupled when the pandemic first began,” says Dawn E. Buzynski, director of communications at Hy-Vee. “While more customers are coming back into the store, we have noticed that many are still enjoying the convenience and ease of using our e-commerce platform and continue to order their groceries online and choose to either pick up curbside or have [it] delivered.”

Additionally, the rise in the number of COVID-19 cases this summer is creating renewed uncertainty that could influence consumers to rely more on online grocery channels. Several retailers, including Walmart, Target, Apple, McDonald’s and Kohl’s, recently reinstated mask mandates for employees and will encourage customers to wear masks in COVID-19 hotspots. The public health conditions are likely to bring back a rise in demand for grocery delivery.

“We’re forecasting a renewed increase [in grocery delivery] coming with the fourth wave [of COVID-19 cases],” Perrier says. “There are slow upticks in certain markets. Gone are the days where delivery is outranking everything else. Click-and-collect, [or] pickup at the store, is very interesting to consumers, and it’s something retailers must invest in. Although we’ve seen an overall demographic flee from online from the height of the pandemic, we are forecasting they will return.”

Part of the recent slowdown in grocery delivery may also be due to seasonal changes, with more people out of their homes during the warmer months. Delivery demand could spike again as temperatures drop in the fall. Hy-Vee, which offers its “Aisles Online” digital platform for grocery pickup or delivery orders, doesn’t expect delivery orders to slow down overall, even with some adjustments here and there.

“We are still in a pandemic, and many customers still prefer to use our e-commerce platforms over going into an actual store,” says Hy-Vee’s Buzynski. “We don’t see that changing long-term. Our Aisles Online service is incredibly convenient, and for those who had not used it pre-pandemic, having groceries and meals delivered has become part of their new normal.”

Other forecasters expect much of the same, although grocery retailers will undoubtedly give up some of the huge gains they made in 2020.

“We’re expecting the food retail industry to see its first [year-over-year] decline in 20 years as it cycles COVID tailwinds and ‘food away from home’ sees more signs of recovery in [the second half of 2021],” according to analysts from UBS Global Research.

graphical user interface, application

Owned vs. Third-Party Delivery

While nearly all grocery retailers have found some way to deliver orders to consumers, there are a couple of different approaches to take. Grocery retailers have invested in their own delivery services or outsourced to third-party delivery service providers — and some have done both.

“Food retailers may use contract workers/outsourcing for grocery delivery simply because the labor costs are lower in the short-term compared to hiring grocery delivery employees,” says Cara Rasch, research analyst, food & beverage, with Packaged Facts. “This is also one reason why many grocers are using third-party delivery companies such as Instacart.”

Instacart is an attractive partner to retailers for a few reasons, including the convenience of its app for consumers to order from multiple venues in one place, the ability to help smaller businesses with less capital to build out their own services, and its Instacart Express membership that comes with free delivery on orders over $35 for a monthly or annual subscription fee, according to Rasch.

“We had already been moving in the direction of using third-party vendors for grocery delivery as early as late 2019; however, the pandemic required us to implement these partnerships very quickly so we could serve the needs of customers who chose to move to our e-commerce platforms to have their groceries, meals and medical prescriptions delivered,” Hy-Vee’s Buzynski says of the retailer’s strategy.

DoorDash, which added grocery delivery services to its platform in 2020, is another one of the top service providers for retailers and is used by Hy-Vee.

“Currently we [at Hy-Vee] use DoorDash as our delivery partner in nearly all our markets,” Buzynski says. “Using a third party allows us to focus our resources on giving all our customers our complete attention — whether we are meeting their needs in the store, filling online orders and preparing them for pickup or delivery, and ensuring our store shelves and cases are fully stocked at all times.”

The decision to build out their own delivery services or leverage third-party vendors is based on cost, convenience and ability to deliver on demand. Mass retailers that can make bigger capital investments are more likely to build out their own delivery services than smaller, regional players.

“In the long run, direct delivery services will be less expensive than third-party delivery services. Direct control will also be better for retailers due to full ownership of the online shopping and delivery experience and being able to provide better customer service,” Rasch says. “Grocers know that they need to offer online shopping options to remain competitive and build up market share now as online sales are expanding rapidly. This is why big players with the capital, such as Kroger and Walmart, have made massive investments to gear up for online grocery shopping and in-house order processing, picking, packing and delivery.”

However, most retailers won’t shut out the third-party delivery service providers. Companies offering both types of delivery capabilities are likely serving a bigger base of potential online grocery shoppers. Even if Kroger, for example, offers its own delivery services, there are some customers who will always use Instacart as their go-to for delivery orders.

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