Disruption in grocery retailing

Disruption in grocery retailing

A forgotten item on the shopping list used to mean another trip to your local store. Covid-19 has accelerated the development of online grocery apps to the point where three of the country’s four largest grocery retailers offer on-demand delivery. We explore how the online grocery environment has developed in South Africa over the past 18 months and the likely implications going forward.

A competitive landscape
Pick n Pay and Woolworths have offered online delivery from their websites and shopping applications for several years. Shoprite, on the other hand, only launched online delivery for the first time in November 2019. SPAR operates a franchise model that allows individual retailers some flexibility in selecting their own product assortment and price, making it difficult to launch a groupwide online delivery app. Therefore, although some SPAR retailers do have their own websites with online delivery capabilities, the group remains well behind their listed competitors in this arena.

As Covid-19 constrained our mobility, many online businesses began to thrive. Delivery services offered by traditional retailers were overwhelmed and ‘click and collect’ options were introduced. Disruptive online operators gained market share as consumers searched for alternatives to eating out or physically going into stores. The table below summarises the types of online food retail currently available in South Africa with examples for each (including comparative examples of similar businesses in the US).

Over the past year, Uber Eats and Mr Delivery have rapidly expanded their food offering. Multiple independent convenience stores and speciality food retailers that lack the scale to develop their own delivery network have opted to join one or both platforms. The selection has grown wide enough that each of these apps now have a separate category devoted to convenience grocery. Woolworths, on the other hand, has been trialing a separate website for their meal kits, called FUUDI.

Innovation has not been limited to businesses targeting the higher income segments. Yebo Fresh delivers primarily to townships in the Western Cape, using bulk deals and combination packs to price competitively, with the aim of making online delivery accessible to lower income consumers. In the height of lockdown, the business partnered with NGOs and Community Action Networks to deliver food parcels to those in need.

Nobody’s free lunch
In the US, traditional grocery retailers were slow to adapt their offering to online, allowing the likes of Amazon Fresh to gain a foothold. This is not the case for some of the local retailers, who have instead chosen to be at the forefront of disruption. Shoprite was the first of the large South African grocery retailers to introduce same day delivery with Checkers Sixty60. Beginning with nine supermarkets and five liquor stores offering a limited selection of products, they set a target delivery window of 60 minutes. In under two years, they have rapidly scaled the operations to the point where, as at the end of June 2021, they operate out of over 200 stores with more than 15 000 products to choose from.

The popularity of Sixty60 forced competitors to respond. Pick n Pay had already been partnering with Bottles since 2018 in offering on-demand alcohol delivery. Following the introduction of the first alcohol ban, the Bottle’s business model pivoted from alcohol to grocery. In October 2020, Pick n Pay bought Bottles, thereby ensuring exclusivity and allowing for greater integration into the existing Pick n Pay ecosystem. In December 2020, Woolworths began trialing their own on-demand grocery app – Woolies Dash. Tabled below is a summary of the key differences between the three apps and their stage of development as of June 2021, with Woolies Dash still in phase 1 testing1 at the time.

1 During phase 1 testing, Woolies Dash is operating as a standalone application, offering free delivery for orders over R75 to areas surrounding a select number of stores. The next phase of rollout will see Woolies Dash integrated into the Woolworths app.

Picking from stores
Each of these three retailers use their existing store base to fulfil on-demand orders. This allows them to be close to the customer, limiting delivery time and reducing the cost of delivery. Both Checkers Sixty60 and Bottles are profitable on an incremental store cost basis. However, the additional costs involved in servicing online customers imply that on-demand will never be as profitable as in-store sales. Therefore, where in-store sales are substituted for online sales, the overall impact on profitability is negative.

Online sales do increase overall profitability where the introduction of on-demand increases the total sales that a store is able to generate. An example of this was when Shoprite introduced Checkers Sixty60 in more affluent Cape Town areas, like those around their Rondebosch, Kloof Street and Atlantic Seaboard stores, where they were previously not well-represented. They found that roughly a third of the customers on Checkers Sixty60 had not previously shopped in one of their stores. As this segment of the market is already well penetrated by both Pick n Pay and Woolworths, it seems unlikely that these two would benefit to the same extent.

Challenges arise where picking from stores results in a negative experience for in-store customers. Stockouts can occur where stores underestimate the additional demand from online orders, forcing customers to compete with in-store pickers2 for that last packet of lettuce on the shelf. Furthermore, customers may find the overall shopping experience less enjoyable when witnessing multiple in-store pickers rushing about at a frenzied pace.

Stockouts can have an even greater impact on the on-demand shopping experience. Customer dissatisfaction is likely to be high where an ‘out of stock’ item is only identified after an order has been finalised, particularly if that item happened to be the main reason behind placing the order in the first place. To combat this, each of these apps offers customers an opportunity to substitute. Recent investments in technology around supply chain and inventory management have also assisted in reducing the number of ‘out of stocks’ that occur on these orders.

Likewise, customers may become wary when a particular shopping app develops a reputation for sending goods that are typically close to expiry. Stores have an incentive to get rid of older stock to limit wastage, however, this needs to be carefully balanced against the customers’ desire for produce that stays fresh long enough for them to use it.

2 Store staff that act as shoppers for online orders, physically selecting the items off the shelves.

Market size limitations
In South Africa, although population density in urban areas appears favourable for online delivery, other challenges limit the total addressable market. Less than 7% of the population (roughly four million people) earn over R70 000 per year and less than 1.2 million of those individuals (the top 1%) earn over R500 000 a year3. Given these dynamics, only a small proportion of the population can afford to regularly pay a R35 delivery fee. In addition, about a fifth of the population is unbanked, limiting payment options available to them. A lack of street addresses in informal settlements can also complicate the delivery process, particularly when combined with the time sensitivity of an on-demand offering. Click and collect mitigates these issues, however it is less of a threat to the convenience store as these customers are still required to travel.

Shoprite management has indicated that based on their calculations, when the Checkers Sixty60 app reaches 250 stores (relative to a total store base of 1 9014), they will have penetrated around 80% of the current addressable e-commerce market. SPAR management have similarly commented that only a small proportion of their store locations (around 200) would benefit from an online presence.

3 South African Revenue Service 2020 Tax Statistics release (figures relate to the 2019 tax year).
4 The total number of Shoprite, Checkers, Checkers Hyper, Usave and Liquorshop stores in South Africa at the end of the 2020 financial year.

Looking ahead
While on-demand grocery delivery poses a threat to traditional convenience formats, the impact is likely to be limited to stores primarily servicing mid to upper income consumers and, therefore, to a relatively small proportion of the total South African population. Furthermore, the extent to which these apps can continue to grow or even defend their market share as conditions normalise, remains to be seen. As people return to work and once again find themselves commuting on a regular basis, the frequency of online shopping will likely reduce. Consequently, although it forms an important element of the overall customer proposition, we do not view on-demand delivery as a source of significant earnings growth for the listed grocery retailers over the medium term.

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