EARLY THIS year Marc Lore, an entrepreneur who led Walmart’s digital counter-attack against Amazon, announced that he was stepping down from the world’s biggest physical retailer. Many of his responsibilities have been picked up by Casey Carl, recently appointed Chief Omni Strategy Officer at Walmart. It’s an unusual title. “They ran out of characters,” Mr Carl quips. Omni stands for omnichannel, and though not a pretty word, it signifies a lot.
Walmart bought Mr Lore’s company, Jet.com, in 2016, the year before Amazon acquired Whole Foods, a chain of grocery stores, putting the wind up the entire industry. Mr Lore was asked to lead the Walmart counter-attack. Under his stewardship, Walmart.com overtook eBay to become America’s second-biggest online retailer. Yet five years on it is well behind Amazon. The digital push bled red ink, and money was also splurged on trendy dotcom darlings like Bonobos, a menswear firm, that did not fit with “The Beast of Bentonville”. Reportedly, there were rumblings of discontent among executives overseeing physical stores. The new focus on “omni”, joining physical and digital strategies together, suggests that Walmart has no plan to prioritise e-commerce over its 4,000-store network in America. Instead it sees both as part of the same customer-focused “ecosystem,” Mr Carl says.
Walmart is far more than a grocery chain, but its omnichannel strategy shows how purveyors of food and other essentials are being transformed by the pandemic, which in a few months has pushed online grocery shopping from low-single-digit penetration rates to near double digits. Walmart swiftly expanded services to help facilitate the online and offline experience, such as pick-up in store, kerbside delivery and delivery from its shops—in some cases direct to the customer’s fridge. It also introduced Walmart +, a subscription service similar to Amazon Prime that gives members express delivery, discounted petrol and other perks.
Amazon has also gone omni. In America, besides Whole Foods, it is experimenting with a full-sized cashierless supermarket, with Amazon Fresh stores offering same-day pick-up and delivery, and with apps that enable shoppers to jump the checkout queue. So, remarkably, have China’s biggest tech platforms, such as Alibaba and JD.com. Both are building vast supermarket chains. “In China offline assets are becoming hot again,” says Leigh Hopkins, head of Walmart’s international strategy.
The biggest question is whether these omnichannel ventures can make money. Globally the supermarket and superstore sector has had a profitable pandemic, benefiting both from the fact that grocery stores remained open during lockdowns, and from the biggest surge in online activity of any retail category—rising by almost 50% in America in 2020, according to Forrester, a data firm. Its “share of stomach” has increased, as homebound consumers switched from restaurants to their own kitchens. And from Asia to America, online grocery shopping has continued to grow even when lockdowns have eased, suggesting that the trend will outlast the pandemic.
Nonetheless it is widely assumed that few retailers, even Amazon, can make money from selling groceries online, because of the high cost of delivering bulky fruit and vegetables rather than having customers pick them, pack them and take them home, as is common in supermarkets. In a business such as food retailing that already had margins as low as 2-4% before going online, only the best capitalised and most efficient are guaranteed to survive the online onslaught.
Even before the pandemic, several structural factors weighed on supermarkets’ bottom lines. In Europe and America, pressure from low-cost operators such as Aldi and Lidl was increasing. So were labour costs, as some big retailers felt compelled to increase minimum wages. Moreover, food delivery and convenience stores were leaching customers away from bigger supermarket aisles. The industry’s only consolation was that online penetration was glacial, and it thought it had time to spare before making the necessary jump in digital investment.
That has quickly changed during the pandemic, as shoppers have been given a crash course in online grocery. Now that they have overcome their phobia of delivery slots and repeat orders, demand for faster and better service is only likely to increase, putting further pressure on retailers’ profits. Unless grocers start charging more for online services, say analysts at Bain, operating losses from sending goods out from stores or warehouses could range from 5-15%. Even click-and-collect, or kerbside pick-up, barely breaks even in the best of cases. Supermarkets must invest in better technology and up their online game to stop margins continuing to erode over the next decade, says Bain. And even then, grocers are likely to be outgunned by tech giants such as Amazon and Alibaba. To compete, many will have to consolidate or find other sources of revenue such as in-app advertising. In all cases, using physical stores to complement their digital efforts may be vital.
Even in East Asia, where virtual grocery shopping took off earlier than in the West, the blend of online and offline worlds is increasingly the norm. Walmart’s Mr Hopkins describes several ways in which omnichannel is flourishing in China. Online grocers, such as JD, are focusing on rapid pick-up of products from stores and inner-city warehouses, known as “dark stores”, for express delivery, sometimes within 30 minutes. He says shops are increasingly seen as “nodes” close to the customer that add to the convenience of online shopping.
Given China’s urban density, it can even be profitable. Elinor Leung of CLSA says Alibaba and JD.com are best placed to make money online, and PDD is advancing fast via team purchases and community group-buy. They are pouring money into upgrading supermarkets. Alibaba owns a state-of-the-art supermarket chain called Freshippo (Hema in Chinese) with more than 200 stores that enable shoppers to use apps to learn what they are buying, to eat in store, and to have their groceries carried home. Smaller players are expected to join forces or be acquired to compete. Suning, a Chinese online retailer, recently bought the hypermarket operations in China of Carrefour, a French retailer. Alibaba has taken control of China’s largest big-box retailer, Sun Art Retail Group, a big rival to Walmart’s hyperstores in China.
Consolidation is also expected in North America and Europe, as supermarkets strive for scale to confront the likes of Amazon and Walmart, as well as fighting off the discounters. The transatlantic merger in 2016 that created Ahold Delhaize, a supermarket giant, is thought to have helped it develop an omnichannel business that served its customers well during the pandemic. Tesco, Britain’s largest retailer, and Carrefour, one of the biggest in continental Europe, have forged a strategic partnership.
Yet smaller supermarket chains can also find digital white knights—for a fee. In America and Canada, one of the biggest hopes lies with Instacart, a fast-growing grocery platform that may launch an initial public offering this year valuing it at $30bn. It offers shoppers a delivery or pick-up service, provided by 500,000 gig-economy workers serving about 45,000 stores. It also supplies technology for supermarkets to offer an omnichannel service themselves. Nilam Ganenthiran, president of Instacart, expects online grocery sales in the region almost to double over the next few years to above 20% of the total. He says that the bigger Instacart gets, the more easily it can scale up its technology (what he calls the digital “plumbing”) to more supermarkets, providing input from its own engineers to help reduce costs and drive further growth for its retail clients.
In selling technology to retailers, Instacart aspires to be like Shopify. Just as the Canadian firm talks of “arming the rebels”, Mr Ganenthiran claims that he wants to “arm the grocers”. But he does not think the future will be digital only. Customers will want choice, he believes. Sometimes they will want their groceries to be delivered. Sometimes they will want to drive to the supermarket to pick them up themselves. And sometimes they will simply want to do their own shopping. Yet even this level of choice is groundbreaking. “The last big innovation in groceries was the advent of supermarkets,” he says. “That was a full generation ago.” ■
This article appeared in the Special report section of the print edition under the headline “Omnivores”