![\"screen-shot-2016-11-13-at-9-11-53-pm\"](\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/Screen-Shot-2016-11-13-at-9.11.53-PM.png\")
<\/a><\/u><\/p>\nBusiness and Operating Model Rundown <\/u><\/p>\n
These firms\u2019 business models, and thus digitally-enhanced operating models [3], differ:<\/p>\n
- \n
- A brick and mortar grocer may enhance convenience to supplement buyers\u2019 existing habits and familiarity, meanwhile leveraging its logistics capability and physical presence. One method to bring grocers into the 21st<\/sup> century is \u201cclick and collect\u201d, grounded in a branded website. [3]<\/li>\n
- Instacart delivers value on convenience, speed, and selection, for which it charges a premium. Instacart had adopted a lower-cost model, has relied on the sharing economy, and has built partnerships with Whole Foods\/Costcos to bring their selection and speed to fruition. [3]<\/li>\n
- Walmart acknowledges the busyness of grocery shoppers, catering to parents who need a large load at low prices, without having to traipse through the aisles with kids in tow. Walmart uses pickup hubs to shift to a new mode of grocery uptake.<\/li>\n
- Amazon has traditionally leveraged its image as the online everything store with a willingness to compete on price to win customers. Amazon leveraged successful tactics from its ecommerce business for AmazonFresh, with some flexing around perishables\u2019 challenges.\u00a0 Last month, however, a Wall Street Journal article surprised the grocery and investing worlds by breaking the news that Amazon is reportedly exploring a convenience store model [4].\u00a0 You read right, Amazon in brick and mortar\u2026!<\/li>\n<\/ul>\n
Amazon\u2019s Tactics to Leverage Digital<\/u><\/p>\n
AmazonFresh uses digital to reach customers more directly, providing convenience, competitive pricing, and an intuitive user experience.\u00a0 Meanwhile, it tries to optimize logistics, minimize sales taxes, reduce warehousing, and control shipping costs to derive the greatest benefit versus the traditional grocery model [5].<\/p>\n
Diverging from it\u2019s pure online play into convenience stores is an interesting strategy.\u00a0 Specifically, it intends to introduce convenience store selling perishables, meat, and milk, with non-perishables available through mobile request [4].\u00a0 Amazon is also planning on developing pickup models to compete with Walmart, with license-plate reading technology to decrease wait times [4].<\/p>\n
Through this approach, these stores can serve not only as \u201conramps to the company\u2019s online grocery service\u201d [6], but also as broadening mechanisms for their delivery network [7] using the back of the house as a logistics stopover closer to customers.\u00a0 Some believe that \u201charmonizing the channel experience for customers\u201d [8] through an omnichannel approach is the key to winning in grocery, though most players seem to have some multi-channel approach.\u00a0 However, scale and reach can remain problematic if relying on a physical presence.<\/p>\n
What Amazon Can Do More of<\/u><\/p>\n
First, Amazon can leverage the fact that \u201che who controls the relationship with the consumer controls the game\u201d [9].\u00a0 Second, Amazon can leverage the trove of data it collects, capitalizing on consumer behavior recognition [8].\u00a0 These pose a huge risk to brick-and-mortar grocers, even through algorithms suggesting other products of interest or through its product ratings.\u00a0 Third, Amazon can continue to attract the profitable customers who are more likely to end up online: dual-income earners prioritizing convenience [8].<\/p>\n
Risks<\/u><\/p>\n
First, online grocery may not take off.\u00a0 Amazon has only captured 1.1% of the food and beverage market based on 2016 projections [4].\u00a0 The primary barriers customers report are a preference for selecting their own goods, that traditional channels are not as inconvenient as expected, and that 61% find grocery shopping enjoyable [10, 11].\u00a0 Additionally, delivery prices dissuade some buyers, yet they are not the main barrier to adoption [12].<\/p>\n
Second, a sufficient ROI on capital investment poses a risk for Amazon\u2019s new strategy.\u00a0 Webvan\u2019s \u201ccostly business model of building and operating refrigerating warehouses\u201d [13] stunk it.\u00a0 Interestingly, omnichannel strategies have been shown to be costlier at least for non-perishables.<\/p>\n
Exhibit 2: Cost to Serve by Channel [2]<\/p>\n
![\"screen-shot-2016-11-13-at-9-19-26-pm\"](\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2016\/11\/Screen-Shot-2016-11-13-at-9.19.26-PM-300x187.png\")
<\/a><\/p>\nThird, \u201cthere is just so much variability in the grocery delivery model, that it\u2019s always going to be a more costly delivery, and it doesn\u2019t lend itself as easily to economies of scale as packages do\u201d [4].\u00a0 For instance, previously successful strategies around timing box delivery to maximize full truckloads may not translate here, especially since \u201cthe logistics are nightmarish\u201d for perishables [1].<\/p>\n
Moreover, already \u201cvanishingly thin\u201d [1] margins may not be sustainable or worthy of the investment, especially if Amazon and Google and Walmart pursue a race to the bottom [14].<\/p>\n
Parting Questions<\/u><\/p>\n
- \n
- Will online grocery will take off?<\/li>\n
- Will Amazon capture this space? What strategies would make Amazon more successful?<\/li>\n
- How different will Amazon\u2019s operating model be from others pursuing omnichannel strategies (say Walmart)?<\/li>\n<\/ol>\n
<\/p>\n
Word count: 788<\/p>\n
Citations<\/u><\/p>\n
[1] Mitchell, Dan.\u00a0 \u201cNext up for disruption: The grocery business.\u201d \u00a0Fortune<\/em>.\u00a0 4 Apr 2014.\u00a0 http:\/\/fortune.com\/2014\/04\/04\/next-up-for-disruption-the-grocery-business\/<\/a><\/p>\n
[2] Hodson, Nick and Lauster, Steffan.\u00a0 \u201cOpportunities and Challenges in Online Grocery.\u201d\u00a0 Strategy&<\/em>.\u00a0 23 Jan 2016.\u00a0 http:\/\/www.fmi.org\/docs\/default-source\/midwinter-2015\/8am-tpa-coffee-with-pwc-online-grocery88ebfd0224aa67249237ff0000c12749.pdf?sfvrsn=2<\/a><\/p>\n
[3] Bacos, James et al.\u00a0 \u201cThe Future of Online Grocery.\u201d\u00a0 Oliver Wyman.\u00a0 http:\/\/www.oliverwyman.com\/content\/dam\/oliver-wyman\/global\/en\/2014\/oct\/OW_Future%20of%20Online%20Grocery_Final_ENG.pdf<\/a><\/p>\n
[4] Bensinger, Greg and Stevens, Laura.\u00a0 \u201cAmazon to Expand Grocery Business with New Convenience Stores.\u201d\u00a0 The Wall Street Journal<\/em>.\u00a0 Updated 12 Oct 2016.\u00a0 http:\/\/www.wsj.com\/articles\/amazon-to-expand-grocery-business-with-new-convenience-stores-1476189657<\/a><\/p>\n
[5] Wessel, Maxwell and Christensen, Clayton.\u00a0 \u201cSurviving Disruption.\u201d\u00a0 性视界 Business Review<\/em>.\u00a0 Dec 2012.\u00a0 https:\/\/hbr.org\/2012\/12\/surviving-disruption<\/a><\/p>\n
[6] Alba, Davey.\u00a0 \u201cAmazon is Opening Grocery Stores so You Don\u2019t Have to Shop in Them.\u201d\u00a0 Wired<\/em>.\u00a0 12 Oct 2016.\u00a0 https:\/\/www.wired.com\/2016\/10\/amazon-opening-grocery-stores-dont-visit\/<\/a><\/p>\n
[7] Palladino, Valentina.\u00a0 \u201cAmazon to challenge Walmart with new brick-and-mortar grocery stores.\u201d\u00a0 ArsTechnica<\/em>.\u00a0 12 Oct 2016.\u00a0 http:\/\/arstechnica.com\/business\/2016\/10\/amazon-to-open-brick-and-mortar-grocery-stores-some-with-curbside-pickup\/<\/a><\/p>\n
[8] Garc\u00eda L\u00f3pez, Enrique, Said, R\u00e9mi, and Westphely, Khiloni.\u00a0 \u201cHow to win in online grocery: Advice from a pioneer.\u201d\u00a0 McKinsey & Co.\u00a0 <\/em>Dec 2014.\u00a0 http:\/\/www.mckinsey.com\/industries\/retail\/our-insights\/how-to-win-in-online-grocery-advice-from-a-pioneer<\/a> <\/em><\/p>\n
[9] Stuckley, Barb.\u00a0 \u201cHow Google and Instacart Are Hijacking The Grocery Business From Supermarkets.\u201d\u00a0 Forbes<\/em>.\u00a0 \u00a02 Feb 2016.\u00a0 http:\/\/www.forbes.com\/sites\/barbstuckey\/2016\/02\/02\/how-google-and-instacart-are-hijacking-the-grocery-business-from-supermarkets\/#4d249faf428c<\/a><\/p>\n
[10] \u201cAre Groceries the Next Big Driver of Global eCommerce?\u201d\u00a0 Morgan Stanley Research<\/em>.\u00a0 22 Jan 2016.\u00a0 http:\/\/www.morganstanley.com\/ideas\/online-groceries-could-be-next-big-ecommerce-driver<\/a><\/p>\n
[11] \u201cThe Future of Grocery: E-Commerce, Digital Technology and Changing Shopping Preferences Around the World.\u201d\u00a0 Nielsen.\u00a0 <\/em>April 2015.\u00a0 http:\/\/www.nielsen.com\/us\/en\/insights\/reports\/2015\/the-future-of-grocery.html<\/a><\/p>\n
[12] Huang, Yan and Oppewal, Harmen.\u00a0 \u201cWhy consumers hesitate to shop online: An experimental choice analysis of grocery shopping and the role of delivery fees.\u201d\u00a0 International Journal of Retail & Distribution Management<\/em>, Vol 34 Iss: 4\/5, pp.334-353.\u00a0 http:\/\/www.emeraldinsight.com\/doi\/full\/10.1108\/09590550610660260<\/a><\/p>\n
[13] Bensinger, Greg and Plank, Willa.\u00a0 \u201cA $5.39 Bag of Chips?\u00a0 Doing the Math on an Instacart Order.\u00a0 The Wall Street Journal<\/em>.\u00a0 13 Jan 2015. \u00a0http:\/\/blogs.wsj.com\/digits\/2015\/01\/13\/heres-how-instacarts-grocery-delivery-pricing-model-works\/<\/a><\/p>\n