A Tipping Point for Grocery

It was all very contagious: Panic buying at the onset led to increasingly severe operations measures to protect the lives of workers and shoppers in one of the last corners of the U.S. economy not shut down by the disease. Supermarkets were at once realizing billions in new sales and incurring millions in new costs, balancing their roles as community nourishers in times of national trauma with the need to keep those communities safe and help tamp down the raging virus, which at press time had claimed more than 160,000 lives worldwide and more than 43,000 in the U.S., with few signals that it was slowing.

Sights that were unimaginable only weeks before—limits on in-store capacity, one-way aisles and associates wearing protective gear and being screened for fevers as they arrived for work—suddenly became commonplace. Under a patchwork of national and local stay-at-home orders, the once-raging U.S. economy began collapsing as supermarkets worked to absorb both the food supply and workers from shutdown counterparts elsewhere in the service economy while its “share of stomach” exploded. Bonuses and raises also spread rapidly industrywide for an often overlooked and overburdened hourly workforce, some of whom exhibited a new strain of activism. Grocery store work was suddenly dangerous, yet hundreds of thousands of applicants were given orange vests and hired on the spot.

A need to clean stores and restock them put caps on opening hours and the 24-hour store disappeared. Weekly paper circulars vanished along with it as the relationship between store and shopper turned from transactional to emotional. Demand overwhelmed the supply chain, suddenly altering assortment and availability and triggering an unexpected rebirth of big brands and a rapid curtailing of slower-selling SKUs that weeks before had provided supermarkets with sales growth but could no longer fit onto trucks.

A shopper wearing personal protection equipment makes her way through a ShopRite supermarket in Plainview, N.Y. Photograph by Bruce Bennett/Getty Images

Categories such as cleaning supplies and toilet paper were ravaged and then baking goods soared as homebound consumers put their kitchens to work again. Daypart meals such as breakfast that long ago were lost to restaurants returned with a vengeance. Health concerns practically shut down foodservice and deli offerings overnight, creating a need for packaged alternatives. Capacity bottlenecks zoomed from stores to cyberspace, exposing the limits of still-developing omnichannel infrastructure experiencing demand well beyond even the most optimistic projections five years down the road as well as its current ability to meet that demand.

Many workers were getting sick and others died, and nobody was entirely certain what to do about it. But people still needed grocery stores.

“What we’ve seen is a significant realization of how essential a role the food industry plays to feed ourselves and our communities,” says Neil Stern, senior partner with Chicago-based consultancy McMillanDoolittle. “Supermarkets are something that people have just taken for granted. Now you recognize how important that is.”

Preparing for What’s Next

Though consumed in the moment, the industry also needed to prepare to confront what’s ahead.

The pandemic, sources say, will yank the future forward as trends toward e-commerce, contactless transactions, personalization, automation and robotics will suddenly come of age and demand new investment. And stores will need to keep an eye on the degree to which temporary lifestyle changes take root over the longer term: Will consumers ever want to crowd food stores again? How much share can e-commerce gain? Could the disrupted supply chain and compromised availability permanently change what consumers buy and eat? How much will hourly workers make? How will costs for healthcare evolve?

It appears highly likely these questions will be pondered amid a recession triggered by massive swells among the ranks of the unemployed, a cratering stock market and uncertainty whether federal relief packages can be adequate. And as restaurants and other alternative venues come back to life, supermarkets need to be prepared to fight to protect the share they’ve gained during the crisis, raising the potential for price wars and associated deflation.

As the crisis evolved in the U.S., industry leaders have coalesced around general expectations of what lies ahead: Grocery sales, which saw a furious run-up ahead of the onset, will decline slightly ahead of the dip of COVID-19 infections as consumers work through their built-up stockpiles and alternative venues get back in the game.

Prices, which in some cases have risen since the onset, will subsequently dip into deflation as grocers work to defend and keep their share with cash generated during the initial stages. The U.S. economy will worsen and not improve until infections and deaths dip significantly and consumer confidence returns, sources anticipate. When these things will happen is anyone’s guess—and could depend in part on how successfully venues such as grocery stores execute the mitigation efforts.

Analyst Scott Mushkin of New Canaan, Conn.-based R5 Capital estimated in March that the food-at-home sector could absorb as much as $28 billion in sales from its away-from-home counterparts in the following three to four months. Financial updates from companies such as The Kroger Co. and Ahold Delhaize indicated comparable-store sales during March soared by 30% or more.

It’s a bounty they will have to accept delicately, sources note. The crisis has presented a golden opportunity for food retailers to embrace their role as community nourishers and build long-term loyalty—but they’ll likely need those advantages to absorb the soaring costs of doing business and navigate the uncertain economic landscape that’s in front of them. They also need to keep an eye on the perception that they are taking advantage of these extraordinary circumstances by, in some cases, fighting back gouging allegations from traumatized shoppers by taking losses on their booming sales.

“Demand has gone up so much that the costs for retailers have gone up as well, and right now many of them, if not all of them, are incurring those costs,” says Edris Bemanian, CEO of Engage3, a Davis, Calif.-based pricing strategy firm. “And they’re just looking for the right time to be able to pass them on to consumers, because they are also being really sensitive to the perception of price gouging, because not everyone necessarily knows that retailers’ costs are also going up. It’s a challenge for them.”

Temporarily freed from the need to compete with alternative venues for food, supermarkets switched up the tenor of their messages to consumers.

“It feels like the wrong time to be trying to sell stuff,” says Ken Wyker, president of Charlotte, N.C.-based promotional analytics company Circular Logic. “The consumer feels like … ‘Who are you to be trying to promote things? I’m just trying to feed my family [while being told] I can’t leave my house.’ ”

“What I believe is happening: You have the transactional side of the relationship with consumers, which is, we sell products and they come to purchase them. I want you to buy an Oreo cookie—here’s 50 cents off,” Wyker continues. “The other side of that relationship is the emotional one: that it’s your local store. You know the cashier. It’s a part of your day. You take your kids there. And if you look at what most grocery retailers are doing today, the message isn’t, ‘Hurry to our store—we’ve got wonderful deals.’ Instead, it’s, ‘We’re all in this together. We’re here to help you in this difficult time.’”

For retailers that can get this message right, the trauma of the pandemic is an opportunity to win loyalty they’ll need when the crisis subsides, Wyker says. “This is a fine line retailers need to walk,” he says. “I don’t want to tell you about this promotion I have, because I’m going to run out of it. I don’t have enough of it. And yet if I don’t communicate why and how, then I’m vulnerable to those customers who are going to be saying, ‘We have a little crisis here. I don’t have a job, and you’re taking away all your deals.’ So what’s valuable right now are the people who understand how to communicate well with customers. It’s the people who can word a message such that those who feel fearful and concerned can feel comforted.”

Underdeveloped Online Infrastructure Exposed

In a crisis exacerbated by close contact, virtual shopping options are seeing unprecedented demand, but consumers are discovering that the emerging channel’s infrastructure is not even close to being able to handle it.

According to an April study by Brick Meets Click and ShopperKit, online grocers saw $4 billion in sales in March, a 233% increase from August 2019. Orders were up by 192%, and average spend per basket was up by $10 to $82, a 14% increase. Overall customers increased by 146% to 39.5 million, and they were ordering 19% more frequently, placing 1.2 orders per month vs. one order per month in August 2019.

San Francisco-based Instacart in April said it was experiencing weekly order volume increases of 300% vs. the same period last year, with average baskets 25% larger.

Mercato, the San Diego-based e-commerce provider for independent supermarkets, said in April it was adding 50 new stores a day and saw a 5,000% spike in consumer orders over the past month.

And the Walmart Grocery app by early April experienced a 460% growth in average daily downloads in comparison to its January performance, surpassing Amazon as the No. 1 ranking among shopping apps, according to App Annie.

There’s no telling how much larger those numbers would be were availability for online delivery and pickup windows not booked solid for weeks, particularly in dense areas of the country such as New York, which, at the onset of the virus, absorbed the hardest hits. That left millions of potential online sales on the table, despite the growth.

Scott DeGraeve, co-founder of Denver-based retail software Locai and a former longtime Peapod executive, says online sales growth during the crisis is only a function of the capacity. “It’s almost as though there is unlimited demand,” he says. “And so the limit is whatever you can satisfy at this point for right now. It’s just a question of how much you can take on.”

Kroger employees stock items for in-store pickup. Pickup and delivery orders soared at retailers nationwide amid the coronavirus outbreak. Photographs courtesy of Kroger.

Grocers and their e-commerce partners were working hard to absorb as much demand as they could meet. Kroger, for example, in March closed an existing store in the Cincinnati area to convert it to a pickup-only location, helping to take heat off surrounding units, and serving as just one example of demand-fueled ingenuity and rapid deployment of a solution that, until the virus came along, seemed destined for a tipping point much further into the future.

“If you think about the world pre-virus, grocers are expecting to grow 2% or 3% a year and their organization is designed around that. For their e-commerce business, maybe they’re targeting 15% or 20% growth, albeit from a smaller base,” DeGraeve says. “But when this thing then takes off to be at the levels that they are now, it’s just something that’s never been experienced before. There are snowstorms and events like that which can create big demand, but this is throughout the entire country.”

A Case for Automation

Even those grocers who are doing the best jobs at meeting online demand will likely feel a proportionate effect on their costs. So while online growth is skyrocketing to levels not expected until five years from now, sources predict automation and other efforts to simplify the experience and address runaway costs—only now in their earliest stages—will grow up very quickly when the crisis subsides.

“There is no doubt that people staying in and ordering online is already overwhelming every food retailer,” says Gary Hawkins, CEO of the Center for Advancing Retail and Technology (CART), a Los Angeles-based platform for consumer goods innovation. “One regional chain I talked to said their online ordering was up by 800%. There is no question this is going to drive adoption of online shopping, but stores need help managing and fulfilling orders efficiently. They need help managing curbside pickup, home delivery and last-mile solutions.”

Demand was such that even global specialists such as Amazon and Ocado were having issues with congestion, but as Hawkins notes, “Any supermarket retailer that all of a sudden is doing 20% of their sales online [is] going to hurt the bottom line.”

This thorny combination of increased demand, suboptimal fulfillment strategies and ongoing staffing challenges in stores will be key to expanding microfulfillment, or the installment of compact automated warerooms in stores that can pick orders faster and cheaper than conventional methods, particularly when volumes are high. U.S. retailers, however, are operating only a handful of such units today.

“The current environment will be a tipping point for grocery businesses to accelerate their investment in automation technology,” says Mohamed Ali Vaid, VP of commercial acceleration for Dematic, an Atlanta-based logistics firm developing microfulfillment centers (MFCs) in partnership with Meijer, among other retailers. “Automation technology will enable grocers to create more capacity in their supply chains to better respond and weather major disruptions that increase demand, similar to what we’re seeing today.”

Steve Hornyak, chief commercial officer of MFC company Fabric, New York, estimates today’s events could double online as a percentage of total industry sales.

“Short term, we are seeing a massive increase in grocery e-commerce, with a lot of new users trying the service. Once this situation with COVID-19 settles down, we see this surge of grocery e-commerce settling in at levels significantly higher than they were just last month, even as high as double, translating to adoption well north of 5% and possibly closer to 10%—years faster than expected,” Hornyak said in March.

(Left) Stop & Shop, like many retailers, installed plexiglass barriers at checkout to protect its workers. (Right) Sanitizing shopping carts is one way Walmart is protecting shoppers from the coronavirus. Photographs courtesy (from left) of Stop & Shop; Walmart

A Fabric study earlier this year estimated online sales were accounting for nearly 4.5% of the U.S. grocery total. That study didn’t anticipate 10% penetration until 2024.

“When the current crises passes, I expect MFC planning to accelerate among grocery retailers as they look to pilot both in-store automation and larger, dark-store solutions,” says P.J. Stafford, VP of sales and marketing for Alert Innovation, a Boston-based robotics firm piloting MFCs at some Walmart stores. “While the actual installation of a system may only be a couple of months, other tasks such as building a business case, capital approval process, site engineering and renovations, site permits and more can add months to a go-live timeline.”

E-commerce is not the only area robotics and automation are likely to accelerate in grocery as a result of the crisis: Nascent “contactless” payment and cashierless shopping technologies are also in their early innings and could conceivably see greater adoption, while other innovations could address public health threats more directly. The Chinese omnichannel retailer JD.com, for example, said it was partnering with the state-owned robotics firm Gree to create robots that could aid disinfection of stores and other machines that could use infrared technologies to gauge shopper body temperatures.

‘Making It Up As We Go’

Another long-term question retailers will likely need to confront as they emerge from the pandemic will be about workers. Partly due to the emergence of the technologies addressed above, retailers across the country were in the process of downsizing staffs and simplifying their workforces when the pandemic came along and forced an abrupt reversal. Companies suddenly were in need of hundreds of thousands of new employees, in many cases working with their counterparts in the foodservice and tourism industries to absorbed their sidelined workers.

A series of bonuses and increased hourly pay—which continued through the first weeks of the crisis—recognized the essential roles these people play. Still, retailers were largely on their own when it came to making decisions about how to best protect their employees and shoppers—and in some cases, workers themselves were pointing out the dangers inherent in their roles.

Many were concerned that as the shutdown took effect, guidelines from the Centers for Disease Control and Prevention (CDC) were vague or open to interpretation and did not spell out specific steps that stores might take when, for example, a worker tested positive for the virus. Lisa Sedlar, CEO of Portland, Ore.-based Green Zebra Market, was one of them.

“While we all support taking care of healthcare workers’ needs first, of course, it’s been alarming that with grocers’ status as essential service providers, not one person has reached out to me or any of my other grocery leader friends to say, ‘How can we help protect your staff and your customers?’ ” Sedlar says. “Thousands and thousands of people come in and out of our stores every day and we are making it up the best we can as we go.”

After the coronavirus ripped through some food industry facilities, such as Smithfield Foods’ pork processing plant in South Dakota where hundreds of workers were affected, the CDC issued what it called an “updated interim guidance” and the Food and Drug Administration followed with a “best practice” guide. Some—but not all—retailers were well ahead of them by that point.

Their recommendations helped to address at least some questions retailers, until then, had been left to decide for themselves, such as whether to issue or require workers to wear masks, and what to do when employees test positive. Some labor advocates found that inadequate, however, and it added to a sense of unease among some workers who’d seen their stores implement one new safety measure after another, each giving the sense that the conditions they worked in days or weeks before weren’t adequate. Amazon and Instacart were among the companies that saw flare-ups of worker activism.

While retailers—and all of America, really—made a genuine show of support for their often-overlooked grocery staffs, could a longer-term change be in the offing?

“My feeling is, that you have this whole industry of workers that have quite low expectations. They don’t expect to get paid a lot. They don’t expect to get sick pay,” says an hourly retail worker who requested anonymity. “And now we’re in a situation where they ought to be paid a lot more than they’re getting paid. They need pay for the protection of society, not just themselves.”