From the start of the COVID-19 pandemic, and into the future, executives from most of the world's supermarkets have turned to Asia, specifically China, for guidance on the trends, challenges and opportunities that are coming for the industry. Being a few months ahead of us in the development of the virus, China has served as a mirror to anticipate consumer preferences in the coming months. So let's ask ourselves, what can we learn from them on our own path towards more efficient deliveries?
The following observations are supported by a UBS Evidence Lab survey conducted this year in China.
The opportunity for grocery deliveries
Home deliveries are not a new concept by any means. However, its recent boom came as a surprise, for which most supermarkets were not prepared. This category of consumer products has the lowest digital penetration in China (around 6%), so it has particularly benefited from the cultural shift that has moved consumption of basic needs into the digital ecosystem. The reality is that COVID-19 has encouraged the development of new shopping habits that range from a greater willingness to pay for convenience, to a lesser desire to make on-site purchases, which is now a difficult task due to the health risks involved.
Convenience, delivery quality and added value have been key points in favoring online shopping.
On-demand grocery deliveries: the next big challenge
Despite favorable changes in consumer behavior at a business level, grocery deliveries are still less developed than other categories, making on-demand deliveries more complex, thus hurting user experience. This is why the new challenges of the last mile showcase a need for the digitalization of supermarkets, based on 360 technology, that is easy and fast to implement, like the one provided by Instaleap.
46% of respondents used grocery delivery at least once a week (a 7 percentage point increase over the previous year) and only 13% said they did not use these services.
The frequency of use has also increased to 1.5 times per week, but still remains far below the one seen in restaurants (almost 3 times per week), showing great growth potential in the coming months.
In terms of the most ordered product categories, groceries remain at the top of the list for on-demand deliveries. In turn, fresh products experienced a major surge, reaching the level of groceries in the last month.
Much of this growth relies on users aged 35-54, who have seen their professional lives significantly affected by COVID-19. Online migration, especially among the +45 age group, very accustomed to traditional channels, demonstrates the sustainability of the new models looking towards the future. 95% of these users, who see deliveries as a time and energy saver, said they were satisfied with same day deliveries, while for a growing group, the expectation of speed is even greater: between one and two hours after placing the order. In fact, the convenience factor is the key to increasing purchase frequency of both, these and lower income users.
How to capitalize on this unique moment?
Even though in most cases traditional supermarkets lag behind technologically, they have several advantages over existing delivery platforms, which should be capitalized on promptly. Probably the most important one is the proximity to the end user, which combined with the rising trend towards loyalty can help position them as the first choice for delivery. Users are beginning to become more loyal to a single known vendor, prioritizing brands they trust. This is evidenced by the fact that 32% of respondents searched for a single vendor before placing an order.
On the other hand, specialized grocery platforms are not as consolidated as restaurant platforms, and have higher operating expenses due to user acquisition costs and stock breakage derived from their business model. This reality paves the way for supermarkets to establish their own digital sales channels, in order to provide their existing customer base with the purchasing options they are demanding.
"New retail": results of key players in China
This new way of shopping, based on an omnichannel approach that combines online channels to place orders and an offline platform that functions as a distribution center, which provides superior customer experiences, has seen accelerated growth with the arrival of COVID-19 in China. Retailers digitalization in the country is already going beyond a digital sales channel, positioning itself as an invaluable source of consumer information, which in the long term will contribute to higher retention rates and greater in-store efficiency.
Alibaba is leveraging its expertise in e-commerce, offline-to-online, payments and logistics, to scale its brand, Hema, in higher-tier cities, while partnering with Sun Art, a traditional player, to digitize lower-tier cities with Taoxianda, an asset light model. Through this model, Alibaba is expanding its digital footprint by offering its online delivery platform to existing traditional retailers. By the end of 2019, more than 800 stores in approximately 300 cities had adopted this model.
Taoxianda's success is also evidenced in Sun Art 's online delivery operation (over 450 physical stores in 200 cities), which is estimated to be more profitable than traditional orders due to lower operating costs. Powered by this alliance for online delivery, the advantages of a synchronized supply chain, and the strategic location of its stores, Sun Art has been able to expand its delivery radius from 2 to 5 km and offer fresh produce deliveries in less than an hour, significantly improving user experience and retention. More than 33 million users prefer this express service, reaching more than 600 orders per day per store. Likewise, user engagement has grown by more than 60%, hitting 16 minutes per active user.
Meanwhile, digital native Missfresh, which recently raised $495 million in investment, is supporting its growth on a deep integration with Tencent's WeChat and an efficient logistics system. A key highlight is its ecosystem of "mini-warehouses" located closer to consumers, allowing for 30-minute deliveries in 16 cities across the country.
Another key player in the digital space is JD.com, which is betting on consumer data and advanced logistics to expand its 7Fresh brand. With over 380 million active accounts annually, JD has a data volume that could allow it to accurately develop an advanced supply and demand forecasting and inventory management system to serve all types of consumers. This, combined with a self-managed, efficient and modular logistics operation, allowed JD to quickly pivot during the pandemic, changing its fleet from inter-province to intra-urban operations, focusing on fresh produce, groceries and medical supplies, in line with their customers' needs.
This ability to adapt to today's needs along with a competitive logistics operation to meet digital demand, will be the key to ensuring a delightful user experience with every delivery. Several players are already betting heavily on this new retail model that has come to redefine the current market ecosystem. Alibaba and JD.com are expected to emerge as the fastest growing, ahead of more traditional giants such as RT-Mart or Walmart.
Life after the pandemic
However, is it worth investing in new channels now that the world is slowly going back to normal? Consumers have spoken and their answer is clear. E-commerce has not lost market share in any country in the world after deconfinement, and what once was just a guess is now an indisputable reality. Habits have changed, and consumers have every intention of maintaining this behavior long after COVID-19 is gone.
When asked how they expect their grocery shopping behavior to change as the coronavirus situation improves, 70% said they would buy as or more often than they currently do.
Only 6% said they will stop completely, while the remaining 24% said they will continue buying, but less frequently.
Consumers have played their hand. New trends are here to stay, and if there is anything we can learn from our peers in China, predicted to become the largest e-groceries market over the US by 2023, it's that the winner will largely depend on who's willing to bet on an omnichannel approach and operational efficiency as a differentiating factor.