What are the prerequisites for a successful online grocery business?

This article deals with success factors in the online grocery business. As we have been working in this field for over a decade, we have identified a number of important aspects, both in terms of software technology and business processes. Many people consider e-commerce to be synonymous with an online shop. But to be truly successful in online grocery retailing, you need more than that. In fact, an online store is only the tip of the iceberg. The actual benefits (and challenges) arise from the backend and its processes.

Why is the online grocery business different from any other e-commerce category?

  1. Weight articles
    Most of the products you buy online are purchased per piece. You buy a shirt, a dress or a pair of shoes. But what about apples or fresh cuts from the delicatessen? Would you order seven pieces of apples or rather 1500 grams or three pounds? Would you order 20 slices of Swiss cheese or better 250 grams or half a pound? Therefore you need not only the possibility to order by weight, but also to charge by weight. The commerce software of an online grocery retailer along the entire process chain from ordering to picking to invoicing must therefore be able to handle different units of measurement for pricing, ordering and billing. In addition, in most countries it is required by law to provide base prices, which makes pricing and the product data model even more sophisticated. 
  2. Availability and replacement products
    If you always want to deliver exactly the products ordered by your customers, you either need perfect demand planning – which is impossible – or you need buffers on your shelves. This is not a real problem for many Consumer Packaged Products (CPG’s), but what about perishable goods? How much ground meat can be stored on the shelf as an additional buffer? How much fresh fish? How many bananas? How many products generally have a short shelf life? In the grocery retailing you have to take into account the fact that you can never always deliver everything 100% as ordered. And that’s why you have to deal with substitutes. This poses two challenges. One is customer satisfaction. How can you ensure that your customers accept your substitutes? The other is the supply chain. What do you do when something runs out and which products are considered for replacement?
  3. Deposit handling
    Many countries or states have legal requirements for certain types of packaging in order to avoid waste from disposable packaging. In such regions there is a deposit for plastic bottles of mineral water, aluminium cans for soft drinks or glass bottles for beer. The value of the packaging deposit must be shown separately from the actual value of the goods, which in turn must be taken into account in the entire online shopping process, from product presentation to payment. In addition to the bottle deposit, many online grocers offer delivery in deposit boxes to avoid bags and leave delivery at home when no one is home. In this case, the e-commerce system must not only be able to manually book a deposit on an order, but also book the return of boxes prior to invoicing and payment.
  4. Payment
    Unlike most other e-commerce segments, the exact invoice amount at the time of ordering groceries online is not clear. The reason for this is the characteristics mentioned above. Weight items, availability problems and replacement articles as well as deposit handling have an influence on the amount of an order. Therefore you cannot simply invoice the order value when the customer orders online. One way to solve this is to distinguish between a payment reservation and a payment capture. This is the typical process for credit card payments or other payment methods that guarantee payment to the retailer. However, there are also payment methods that only become effective after delivery. These include, for example, cash payment, bank transfer or payment with a mobile terminal. In such cases, it is strongly recommended that a credit check be carried out on the customer’s incoming orders. This must take place fully automatically in real time, which is why a synchronous integration between the e-commerce system and the credit check is necessary. 
  5. Local delivery
    In view of the particular challenges of perishable groceries such as fruit and vegetables and chilled products such as meat, fish and dairy products, local delivery is preferred over central warehouses. Short distances in refrigerated vans mean freshness. And you can reduce the amount of packaging waste – think of all the packaging waste caused by food delivered by parcel post over long distances. We are not talking about a pair of shoes here, but about several bags with heavy and voluminous purchases. Apart from that, customers who buy groceries online have different expectations. When you order your complete grocery shopping online once a week, you want to know exactly when the delivery will arrive and not wait too long. Therefore, the e-commerce system and the entire pick-pack-ship process must support same-day or at least next-day delivery – within a desired delivery window, of course. And this opens up a great opportunity for local retailers. With their own online presence, they not only retain control over assortment and prices. By delivering with their own vehicles locally, the retailer also retains control over their branding and creates trust with the end customer about the origin of the food and the competence of the retailer. And advertising on the delivery van is included free of charge.
  6. Price comparison
    There are many online trading segments where the product price is the main differentiator. Think of your favourite sneakers. If you know your shoe size and model, buy it in the cheapest online store – provided the delivery time and shipping charges are okay. This customer behaviour is completely different in online grocery stores and the reason is very simple. Customers can be very sensitive when it comes to food and especially fresh groceries. They want to know where they come from and who handled them. And that requires trust. And trust can be built with branding. To be honest, where would you like to buy your food online? Wouldn’t that naturally be the same retailer you’ve trusted for years? Therefore, prices for Consumer Packages Products (CPG’s) may be relevant within certain limits, but anything that comes from local suppliers or products paired with service aspects such as fresh cuts, recipe boxes or party platters is completely out of price comparison.

What are the typical software components of an e-commerce solution?

An online grocery retail solution typically consists of the customer-oriented online store, a back-office management console and an underlying e-commerce platform. There may also be additional systems for managing product data, known as Product Information Management (PIM) systems, for managing order fulfilment, known as Order Management System (OMS), and for adding and changing content for marketing websites, known as Content Management System (CMS). The online grocery business is growing rapidly, but still at a manageable level, so it is better to organise the pick-pack-ship in the shop rather than build local warehouses across the country. Therefore, usually no inventory management systems, the so-called WMS (Warehouse Management System), are needed. The reason for this is that the existing core IT of a supermarket chain, the so-called ERP system (Enterprise Resource Planning), takes care of replenishing the stores, while the cash registers, which are often controlled by POS systems (Point of Sales), register the turnover of local customers and thus know the quantity of goods that are actually on the shelves. The pick-pack process in the store is therefore crucial for success and must be specific to the online grocery business, while the actual route planning can be done with standard systems from third parties that are well integrated into the entire e-commerce landscape.

What does a typical shop in the online grocery business look like?

End customers usually only see the online shop. But this is often only one touchpoint of online solutions for grocery retailers. Even if modern shops in e-commerce are built in the so-called ‘responsive design’, it can make sense to have an additional native mobile app. While responsive storefronts are correctly scaled on practically any device such as desktop, tablet or mobile, a native mobile app can offer added value for location-based services and the integration of online and local retail chains.

Why is the Back-Office so important for online shops?

The existing IT for the grocery retail trade is optimised for the purchase of local branches. ERP and POS systems are not built for hundreds or thousands of online orders from end customers. Combined with the fact that online grocery is a local store, every retailer needs a system that manages its customers, products and orders. There are not only regional differences in product catalogs and prices, think of independent retailers of large chains – they must not see the data of their colleagues. Such a local Back-Office does not exclude the possibility to integrate existing ERP or POS systems, for example to exchange inventory or sales data, to maintain prices only in a leading system and of course to avoid the need to go through the checkout line with the goods picked in the store.

Does the underlying e-commerce technology really make a difference for online grocery solutions?

It may sound attractive to simply use an out-of-the-box online solution that includes even the most popular grocery products. But what if you want to add another customer experience? What if you need integration with existing or new backend systems or third-party services? Online grocery retailing is a young discipline and not all process details are carved in stone.  As a result, agility is an important success factor, as it is in so many emerging businesses. Agility is defined as the ability to move quickly and easily. And to make agility possible, online retailing in particular needs a technological basis that enables swift changes, defined and open interfaces, portability and scalability.

Do online store solutions for groceries require separate systems for PIM, OMS and CMS?

In the ideal world, IT solutions can do just about anything. But let’s be honest: Which company in the world has only one software provider? Wouldn’t it be great to have at least all core components in one solution? Certainly, yes, especially if it is an e-commerce solution for online grocery retailing that is equipped with fully integrated PIM, OMS and CMS:

  • Product Information Management (PIM) with a data model optimised for grocery data that takes into account all legal aspects such as ingredients, allergens and nutritional information, controls the pick-pack process, enables cross-selling and integrates with existing sources of product data and images.
  • Order Management System (OMS), which receives orders from the online shop and guides them through the order fulfillment process with an order status concept including pick-pack-ship and the support of mobile picking devices.
  • Content Management System (CMS) for marketing web content such as homepage, recipes or news, which enables products to be directly integrated for ordering, either individually or as bundles for cooking sets or vegetable boxes.

Do you need special pick-pack-ship processes in the online grocery retail?

We have learned that the online grocery business requires picking from stores – as long as you don’t live in a few very densely populated conurbations. But picking in the store brings two big challenges. One is that you must not disturb your local customers if you are actually picking. The other is efficiency. As long as there are no robots whizzing through the shelves, you need a highly efficient process and software that guides the grocer’s staff through the shelves in the shortest and fastest way possible. There are three basic picking principles:

  • Individual picking: Pick orders individually, run once through the store for each order.
  • Batch picking: Combine up to four orders per picking run and hope you don’t mess up the items.
  • Wave picking: Collect all orders at once and leave the store again.

Unless a grocer has just a handful of online orders per day, Wave Picking is the most efficient picking method. The order picker processes all orders in an order cycle at once in a defined route through the aisles. If multiple picking zones are defined, the pickers can pick in parallel, but only one person per picking zone at a time, ensuring minimal impact on local customers. Picking and packing are two separate processes. While the picking algorithm is optimised for short one-way routes, the packing algorithm takes care of the correct packing groups and packing positions. Refrigerated products should be separated from uncooled packaged goods, and detergents and beverages should also be separated again. Within the packing groups, heavy and robust items should be placed in a bag at the bottom, light and fragile items at the top. All this requires a very sophisticated IT system that is able to define order cycles, picking zones and order splitting at the beginning of each pick-pack-ship cycle – also for cooking sets, vegetable boxes and the fresh cut of delicatessen products.

Why shouldn’t a grocer simply go for a full-service provider?

There are full-service providers on the market who not only operate the online shop, but also take care of product data management, picking and delivery. This sounds good for a retailer because he doesn’t have to worry about anything. So what will be the role of grocers in the future when online grocery retailing is fully established and more and more consumers buy their groceries online? How will they be able to control product catalogues and prices? How can they promote their own brand – not the service provider’s brand? How will they be able to position the higher margin products outside the price comparison? Online grocery retailing is not just a simple channel or a complement to existing grocery retailing. Digital transformation will fundamentally change the way consumers buy products in all retail segments. Grocers who want to be successful in the future must sit in the driver’s seat and take control of their online experience, online support for local stores and delivery services, and curbside- and pick-up programs. 

Key challenges in the online grocery business

  • Weight articles need a sophisticated pricing model including different measurement units for product price, expected order price, base price and actual delivery price
  • Product substitutes need to be handled due to limited availability of fresh and long-tail products
  • Deposits both for product packaging as well as for transportation boxes have to be shown separately from the goods value
  • Payment needs to deal with the fact that the order amount is not identical with the invoice amount
  • Local delivery is required to keep products fresh, to avoid mountains of packaging waste and to win trust
  • Price comparison can be mitigated by the retailer with fresh, local and unique products 
  • Product data needs a PIM-system that is tailored to the needs of the grocery business
  • Pick-Pack-Ship has to happen in-store and needs to be super efficient using wave picking
  • Grocers need to run their online business themselves to keep control over product catalogue, prices and their brand

What does SAAS have to offer?

SAAS Grocery Logo

SAAS Software as a Service offers a complete solution for online grocery retailing. The Grocery Commerce Cloud is a Headless Commerce solution that basically enables any kind of touchpoint and user experience for a unique brand experience and optimal support of demanding processes in grocery retailing. The underlying software architecture is based on Microservices API’s that enable agile development for everything that is needed and can come in the future. The SAAS Grocery Commerce Cloud also offers a pre-configured storefront for a quick and easy start and a Back-Office to support all online food retailing processes.