Return of the Milkman?: The Future of Delivery

A recent Nielsen report on the future of grocery posed an intriguing question: Could the wave of the future be a blast from the past?

Meet Your New Milkman

From the report: “In the 1950s and ‘60s, home delivery of milk and other daily necessities was a staple for many families in North America and Europe. In some markets, the milkman never really went out of fashion. In India, for example, the concept of a merchant delivering groceries and household staples or ready cooked meals to a home is very much alive and well.”

Today, consumers aren’t just picking up the phone to order. Increasingly, they’re pulling up the retailer’s webpage or using their mobile app. Per Nielsen’s study, one-quarter of global respondents are already ordering grocery products online for home delivery, and more than half (55%) are willing to use it in the future. As the study put it: “The milkman is back, but this time he’s gone digital.”

In fact, you’ve likely already interacted with one of these new-aged milkmen. You’ve seen their trucks, or maybe you’ve even used these services yourself (especially if you live in a major city or if travel by car isn’t an option). Grocery delivery is growing fast – think Peapod, FreshDirect, Instacart, and now, of course, Whole Foods, who famously entered the game through their purchase by Amazon in 2017. Your favorite grocery store probably has their version – Harris Teeter, Safeway, and even Walmart now offer online grocery shopping.

This new format of grocery –  e-grocery – can be further divided into three models: at-home delivery, click and collect, and personal shoppers. With at-home delivery, online-only companies such as Peapod and FreshDirect deliver a full range of groceries to the consumer’s door. For unattended deliveries—where the consumer is not at home at the time of delivery—products are often packed in insulated plastic totes, and frozen goods are packed with dry ice. The totes are then picked up on the next delivery, or consumers can schedule a pickup time.

By company, e-grocery models break down even further: take Amazon, for example, the behemoth of ecommerce. Amazon offers several e-grocery services, including AmazonFresh next-day delivery; Amazon Subscribe and Save, in which Amazon subscribers save money with recurring monthly deliveries; and the Amazon Dash Button, a physical, WiFi-enabled button that correlates with a consumer product that consumers can push to automatically reorder the product (typically popular household goods like laundry pods, paper towels, coffee, and trash bags) when it begins to run out. While cleaning supplies dominate Dash Button usage, food products make up nearly one-third of the top 10 spots.

Amid an increasingly crowded market of grocery retailers and delivery services, Amazon remains in the top spot. According to web-based statistics portal Statista, Amazon had the highest market share in 2016, followed by Walmart and Kroger. Amazon’s food and beverage sales are projected to rise from approximately $6 billion in 2015 to over $23 billion in 2021.

Despite all this, the vast majority of grocery shopping still takes place in traditional brick-and-mortar stores. According to industry insiders, though, this could change dramatically over the next decade, especially as younger generations raised on the Internet begin to make up the majority of consumers. Retailers are certainly trying to tap into and entice such a tech-savvy population and are increasingly offering grocery delivery options for their customers in the United States. Like the milkman used to do in the past decades, retailers are bringing food items right to your doorstep. In 2017, 31% of U.S. consumers were likely to buy groceries online. In total, U.S. online grocery sales amounted to about $14.2 billion in 2017 and are expected to rise to nearly $30 billion by 2021.

Statista writes that the emerging Generation Y (better known as Millennials), in addition to being known as a heavy Internet-user generation, is also characterized as open-minded customers when it comes to in-store apps or the usage of online grocery services. Keeping that in mind, it is not surprising that Millennial shoppers were the most likely to use online channels for grocery shopping in 2017. According to the Nielsen report, younger, newer and more engaged digital shoppers adopt digital technologies more quickly and will hasten the expansion of digital grocery shopping further. Grocery shopping will reach digital maturity and saturation faster than other industries that went online before, the report continued.

In a CNBC piece sparked by the Nielsen report, “Online grocery sales set to surge, grabbing 20 percent of market by 2025,” author Jeff Daniels writes: “Online grocery shopping could grow five-fold over the next decade, with American consumers spending upwards of $100 billion on food-at-home items by 2025.”

A key takeaway of the Nielsen report is that online grocery spending could grow during the 2016-2025 forecast period from 4.3% of the total U.S. food and beverage sales to as much as a 20% share, or reaching more than $100 billion, based on the most upbeat scenario. For context, online grocery sales were about $20.5 billion in the year 2016. Put another way: Online sales in 2016 were the equivalent of 764 grocery stores, based on store volume; by 2025, the digital share could become comparable to nearly 3,900 stores.

But this growing industry may not offer equal opportunity growth for every grocery item. The study predicts that canned goods, condiments, spices, and other center-of-store and non-perishable products will likely shift faster to online than traditionally perimeter items such as fresh produce and meats.

However, this doesn’t necessarily spell doom for brick-and-mortar supermarkets. “The report doesn’t see the rise of grocery ecommerce as leading to the demise of the brick-and-mortar supermarkets but rather as one that will ‘reconfigure’ the role of the grocery store for the digital food shopper,” Daniels continued.

The authors of the Nielsen study envision a future in which more grocery stores will expand areas such as the service delis, bakery, and meat departments as well as add trendy cuisine sections such as sushi bars and food courts, all in hopes of potentially attracting new customers. Specialty offerings are considered particularly important to capture a younger generation of consumers (the aforementioned Millennials) and as a critical differentiator between the online and in-store experience.

The Nielsen report summarizes grocery delivery as an easier model for tech-savvy, time-crunched consumers to get the items they need. But how will they get over the dreaded last mile?

 

The Milkman’s New Delivery Truck

“The last mile of ecommerce presents sizeable logistics and cost concerns that have not yet been solved,” said Patrick Dodd, president of global retail at Nielsen, in the Nielsen report. “Therefore, retailers need to experiment with clever ‘delivery’ options that circumvent these issues.”

For these logistical concerns, shipping giant UPS is already working on solutions. In their Longitudes blog post, “Cutting the Cost of Grocery Delivery,” authors Dr. Alexander Hübner, Associate Professor at the Luxembourg Centre for Logistics and Supply Chain Management, and Manuel Ostermeier, Research Associate at the Catholic University of Eichstatt-Ingolstadt, ask: “Groceries need to be stored and transported at different temperatures depending on the nature of each product – so why not rationalize the distribution of these items by accommodating different temperature zones in the same truck?”

Meet the MCV, or multi-compartment vehicle.

 

Configuring trucks to carry multiple grocery product types can save time and cut costs. Grocery products come in deep-frozen, cold, or ambient temperature segments that are subject to strict regulation. The majority of products are shipped to stores from distribution centers; these facilities are then further organized according to temperature-specific segments, and typically serve 50 to 400 retail outlets.

“Traditionally, delivery trucks are equipped to carry one temperature category of grocery product, which restricts the number of outlets they can serve – hence the introduction of MCVs that deliver all product segments and provide much more route planning flexibility,” write Hubner and Ostermeier.

Vehicle customization was also considered. For example, the number and size of temperature-specific segments can be altered, and it is possible to deactivate individual segments. Orders of one temperature zone can be combined in the same compartment, but others must be transported separately.

These versatile vehicles are not without their own added complexity, potentially further convoluting supply chains. At distribution centers, the MCV trucks visit multiple doors to pick up different temperature-category products. Traditional, single-compartment (SCVs) trucks can usually complete loading operations at a single bay. Additionally, loading and unloading MCVs is more complicated, as the vehicles are partitioned into different compartments for each temperature zone. A further constraint built into the model is the sequencing of locations in each delivery run. For retailers, write Hubner and Ostermeier, a key question is whether MCV distribution is superior to the more traditional SCV option in terms of cost.

Hubner and Ostermeier write that when tested, the model confirmed that this versatile system can achieve more efficient vehicle routing, as well as greater operational flexibility.

“Clearly, these results will vary for different distribution systems,” write Hubner and Ostermeier. “However, the model provides a valuable support tool for the grocery industry in Europe when assessing the pros and cons of MCV distribution.”

 

Milk and More at your Door

Up and coming consumers of the Internet generation have come to expect the convenience and ease of online shopping. E-grocery and successive innovations like the multi-compartment vehicle can deliver the ingredients for an elaborate dinner party or a simple bowl of cereal and milk with the touch of a button. Grocery stores as we have known them will need to adapt in order to stay relevant in their competition with the digital marketplace.