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Over the past 24 months, e-commerce in the North American grocery industry has continued to mature and scale. The pandemic served as an accelerator for grocery e-commerce, with much of the sector experiencing the equivalent of more than five years of growth in just five months.

We recently completed extensive research that included surveys of grocery CEOs, functional and operations executives, and consumers (see sidebar, “About the research”). Our surveys confirmed that consumers will continue to favor e-commerce as one of many ways to shop. However, many grocers don’t believe they have the necessary capabilities to manage this channel. In this article, we examine the actions organizations must take to win in e-commerce.

E-commerce takes hold

The industry is now on the edge of the next transformation in e-commerce: grocery executives expect e-commerce penetration to more than double for their own organizations in the next three to five years, to an average of 23 percent. 

Executives are even more bullish on e-commerce’s upside potential, noting that penetration could nearly triple to as high as 35 percent (nearly $600 billion versus about $150 billion at 11 percent penetration). Our research suggests continued support for e-commerce from consumers, who indicated a positive net intent to buy more groceries online (click and collect as well as delivery) in 2022.

The main drivers of e-commerce’s growth during COVID-19 were safety and convenience, but our research found consumers also value the channel’s unique features—such as product comparisons, assortment, and personalized promotions. In parallel, consumers increasingly prefer home delivery (a rise from 48 percent in December 2020 to 63 percent a year later, which translates to an approximately $100 billion market today) and appreciate its product and service enhancements, including speed, reliability, assortment breadth, and flexibility.

We are also seeing consumers demonstrate different preferences for how their digital orders are filled based on need and occasion, a shift that reflects continued maturity in consumers’ approach to online grocery. Their use of different options based on occasion compels retailers to offer a full portfolio of e-commerce options (such as same-day delivery, two-hour delivery, instant delivery, and click and collect). As demand spreads across different trips, the result is smaller baskets.

This degree of channel shifting within the grocery sector has precedents. Over the past couple of decades, the emergence and adoption of new offerings and channels have spurred significant changes in consumer behaviour. For example, the rise of mass merchants with 150,000-square-foot stores created a different in-store experience than the one offered by the traditional neighbourhood store. The mass-merchant category now accounts for about 26 percent of the market. Similarly, club retailers encouraged consumers to buy in bulk, and the rapid growth of discount and value grocery, featuring a predominantly private-label offering, defied the conventional wisdom that consumers wanted only consumer-packaged-goods (CPG) brands. Each of these “new” offerings has been accompanied by changing consumer behaviour.

Keeping pace with e-commerce growth

As consumers have shifted toward e-commerce, two-thirds of retailers don’t feel well prepared to meet the dual challenges of delivering on growth while achieving profitability. Our research revealed that retailers feel some trepidation. Two-thirds of respondents expect to lose some share in the shift to digital, and more than half believe it will be difficult to attract the necessary talent to support digital growth. Meanwhile, grocers are considering how to allocate capital across multiple parallel efforts, including supply chain resilience, store remodels, digitalization, and talent acquisition.

To enhance their capabilities in the short term, grocers have responded by implementing three specific strategies.

First, some grocers are building partnerships with technology companies. To expand fulfillment capabilities, grocers such as Ahold Delhaize, Wakefern, and H-E-B have partnered with microfulfillment center (MFC) technology players like Dematic, Takeoff Technologies, and Swisslog. Google and Microsoft are also working with grocers to introduce artificial intelligence in replenishment and commerce (for example, to enable consumers to build grocery lists while shopping online).

Second, grocers continue to rely on third parties to manage costs and expand their e-commerce offerings. Instacart became a leader through its early market entry, but it has been joined by players such as Shipt and DoorDash. The latter handles fulfillment for Albertsons, alongside Instacart and Uber. Grocers are also using partnerships to provide new and innovative value propositions to customers. In Europe, for example, Morrisons has partnered with Deliveroo to make deliveries in as little as ten minutes.

Last, the shift to e-commerce is also challenging how retailers think about capabilities across the e-commerce value chain, from in-store digitalization and pricing and promotion to trade spending and media and advertising. The role of the store will continue to be significant, with grocers investing in digitalization to improve the in-store experience for consumers—for example, through self-checkout and grab and go.

How grocers can win in e-commerce—delivering on both growth and profitability

To excel in the next horizon of e-commerce, grocers need to develop an integrated value proposition that meets consumer needs while protecting their own profitability.

Our research found consumers are looking to save money, be healthier, build on their (rediscovered) joy of cooking, and find the best promotions more easily. For each of these needs, an evolved digital presence (both app- and web-based) can help grocers highlight their assortment, personalize their promotions, and engage consumers in a more meaningful manner—something that a purely brick-and-mortar offering cannot do. Organizations, especially retailers that have underinvested in the past, are planning to make aggressive investments in their digital capabilities to support these tasks.

However, simply redefining the value proposition will not be enough. To draw more consumers to e-commerce, retailers must offer lower costs, reduce minimum order requirements, protect quality and freshness, and enhance the breadth and discoverability of their assortments.

Consumer prices jumped by 2.1 per cent through the first three months of the year, taking annual inflation to its highest level in more than 20 years.

In figures that go to the heart of the election campaign debate about the cost of living, the Australian Bureau of Statistics on Wednesday reported a combination of soaring petrol prices, home building costs and university costs drove inflation to a level last this high in September 2000.

The March quarter result follows a 1.3 per cent increase in prices in the December quarter.

In a major concern for the Reserve Bank, which meets on May 3, the key measure of underlying inflation also pushed higher in the quarter by 1.4 per cent. The annual underlying measure is now at 3.7 per cent, the highest level since March 2009.

Head of prices statistics at the ABS, Michelle Marquardt, said the most significant contributors to the rise in consumer prices were new dwellings (up 5.7 per cent), fuel (up 11 per cent) and tertiary education (up 6.3 per cent).

“Strong demand combined with material and labour supply disruptions throughout the year resulted in the highest annual inflation for new dwellings since the introduction of the GST,” she said.

“Annual price inflation for automotive fuel was the highest since the 1990 Iraqi invasion of Kuwait.”

The 2.1 per cent quarterly and 5.1 per cent annual results are much higher than expected by financial markets, analysts, the federal Treasury and the Reserve Bank.

It also puts pressure on the major parties about real wages growth. Wages have grown by 2.3 per cent over the past year, meaning many people have suffered a 2.8 per cent fall in real incomes.

The figures also highlighted some of the pressures in the nation’s property markets.

Rents have jumped by 11.3 per cent in Darwin and by 9.7 per cent in Perth over the past year. While they lifted slightly in Sydney and Melbourne in the quarter, they are still running negative at an annual rate.

Both markets are expected to see stronger rental increases in coming months.

Perth experienced the highest capital city growth in inflation, increasing 3.3 per cent over the March quarter, while only Sydney and Adelaide saw inflation grow by less than 2 per cent. Melbourne experienced a 2.3 per cent increase in consumer prices, while Brisbane and Canberra saw growth of 2.2 per cent.

The ABS reported that prices for non-discretionary goods lifted by 3 per cent in the quarter to be 6.1 per cent up over the year. For discretionary goods, inflation is more subdued at 2.7 per cent annual.

Inflation across food groups rose 2.8 per cent due to higher costs in transport, packaging, fertiliser and ingredients, but Marquardt said inflation pressures were softened by government vouchers for dining out in NSW and Victoria.

“[The voucher programs] reduced out-of-pocket costs for meals out and takeaway foods,” she said.

“The grocery component of the group, which excludes meals out and takeaway foods, rose 4.0 per cent in the March quarter.”

The nation’s major food and grocery manufacturers say they are facing increases in costs of up to 700 per cent since the pandemic began and have warned some of that will flow through to the price shoppers pay at the checkout.

The cost of implementing Covid safety requirements at factories, sourcing ingredients, the global shortage of wooden pallets used to ship finished goods and skyrocketing freight costs are all playing into food inflation across the supermarket aisle.

It comes at a time when inflation is surging across Australia, and in many countries overseas, as the cost of everyday items that typically fill a shopping basket rises and squeezes household budgets.

Australian Food and Grocery Council chief executive Tanya Barden said food and grocery manufacturers were facing rising cost pressures and many had absorbed these their own businesses.

However, these costs would eventually have to be passed on.

“Over the past decade manufacturers have already been dealing with a situation where wholesale prices – the prices they receive for their goods – have risen by less than the cost of their inputs. There has been a lot of absorbing of costs by manufacturers before the impact of the pandemic,” Ms Barden said.

Ms Barden told The Australian on Monday that many key inputs for her members had already increased by 50 per cent before the pandemic took hold but that wholesale selling prices had only lifted by 25 per cent.

“It has now gotten to a point where the level of costs coming through now are just astronomical and businesses really are not able to contain that themselves anymore and are in negotiations with retailers to pass some of that through.”

Ms Barden, who represents the $133bn food and grocery industry, said some of these input costs had lifted as much as 700 per cent in recent years, led by surges in shipping and freight prices, the cost of warehouse space, a sustained shortage of transport pallets and keeping workplaces Covid-safe.

“Over the past couple of years, the price of inputs for making and distributing goods has risen. The cost of shipping ingredients and finished goods to Australia has risen by 500 to 700 per cent.

“There have also been significant costs to business as a result of Covid-safety measures, domestic freight cost increases caused by weather disruptions, shortages of pallets and rises in the cost of packaging.

“Adding to this unprecedented Covid disruption, manufacturers are facing increases in global commodity prices as a result of the situation in Ukraine and they are now seeing increases in labour costs.”

The warning from the AFGC comes as the pick up in food inflation accelerated through the March quarter, according to investment bank UBS.

Latest research from UBS reports that food inflation has been most stark at Woolworths where March quarter prices rose 4.3 per cent, a large leap from 1.4 per cent in the previous quarter.

At Coles, the impact was more muted, but inflation is up for the period, hitting 3.2 per cent against 1 per cent in the second quarter.

In his latest Australian supermarkets survey, UBS analyst Shaun Cousins said inflation has accelerated in the third quarter to place further pressure not only on consumers as they stretch household budgets, but also potentially the supermarket chains as they seek to protect profit margins and sales from higher supplier prices.

Earlier this year, Woolworths chief executive Brad Banducci warned that inflation in food and groceries was “alive and real”.

Covid-cautious consumers and the devastating flooding in NSW and Queensland tempered the trading results of Endeavour Group in its third quarter, to April 3. 

Sales of $2.728 billion across the company’s retail and hotel business divisions were down by 2.1 per cent year on year, but after adjustment to reflect the impact of Easter’s timing on figures, trading was almost even, down by just 0.3 per cent. Retail division sales were down 3 per cent to $2.323 billion, with the hotel division turning over $405 million, up 3.8 per cent. 

Group MD and CEO Steve Donohue, said the business traded well given the impact of weather and Covid-19. 

“Hotels trading improved as Covid-19-related restrictions eased, and retail sales were slightly lower than the equivalent period last year,” he said. 

Consumer hesitancy about gathering in public led to a reduction in on-premise patronage while isolation rules for people with Covid, or potentially exposed to positive cases, created staffing challenges in both business divisions. 

Endeavour Group estimates the severe flooding cost it around $9 million in damages and even now several impacted premises have yet to resume trading.  

“The flood events caused extensive damage to a small number of our stores and hotels in the quarter. Our Dan Murphy’s Lismore store was submerged in the flooding in the first week of March. In addition, 10 of our BWS stores as well as the Breakfast Creek Hotel (Brisbane) and Westower Tavern (Ballina) were significantly impacted.”

The company is continuing to work with its insurers over compensation for clean up costs and asset write-offs, as well as an estimate of lost profits when stores and hotels were not able to operate. 

Meanwhile, team members from multiple sites have been personally impacted by the severe flooding. “We are offering them additional support including financial assistance for property damage, providing vouchers for food and offering accommodation for displaced team members and their families at our hotels,” said Donohue.

The company and its customers have raised more than $800,000 to help communities impacted by the floods via charities including donation platform Givit.org.au and Red Cross.

During the quarter, one new Dan Murphy’s store opened taking that network to 258, while five BWS stores opened and four closed leaving 1411 at the quarter’s end.

Coopers Brewery plans to invest $50 million in expanding its Regency Park site in Adelaide, including the construction of a new visitor centre, microbrewery, and whisky distillery. 

The brewery said its expansion embodies its past, present, and future with tourists front of mind. 

A new 3200-litre microbrewery will be installed to allow the brewing team to develop more craft-style beers to supplement its current portfolio. Adjacent to the microbrewery will be a whisky distillery comprising a 9600-litre wash still and a 5500-litre spirit still.

According to the company, ‘Wash’ for the wash still will be supplied by its microbrewery, with the initial objective of producing 200,000 bottles per year. However, consumers will need to wait some years before they can sample the finished product.

“We have been thinking about malt whisky for some time as we see it as a natural extension to our on-site maltings and our experience in brewing and fermentation,” said Dr Tim Cooper, MD at Coopers.

The brewery’s label rondel inspires the curved design of the new two-storey development, and the curved structures encompass a sloping amphitheatre that will showcase the brewery grounds and maltings.

A tree-lined promenade will extend from a new entry from Regency Road to bring visitors to the new facility, which will be surrounded by natural landscaping. A window-lined bridge will link the new development to the existing brewery building and feature a 300sqm interactive history display.

Aside from the microbrewery, the expansion will include:

• A whisky distillery.
• An underground stillage for whisky maturation.
• A dedicated tasting room.
• A restaurant and bar.
• Outdoor plaza dining.

“Although we’ve been running brewery tours since 2006, this extensive development will augment and expand the guest experience, creating a lasting impression for new visitors and an ongoing connection for our loyal consumers with a new tour and tasting experiences,” Cooper added.

Construction is expected to begin around mid this year, pending local council approval. 

In celebration of Earth Day today, Forever New has unveiled a new campaign showcasing its progress on its sustainability goals. 

The retailer unveiled its sustainability vision last year, driven by five key pillars: Responsible Fibres, Environment, Ethical Supply, Community and Diversity and Inclusion. 

Progress has already been made on key goals; with Forever New stating it will achieve the below by the end of 2022:

• 80% of garments will be conscious - garments are considered conscious if it contains at least 30% responsible fibres or produced with responsible processes. Forever New defines a responsible fibre or process as one that has a lower environmental impact than the traditional option.
• 100% of faux leather will be vegan
• 50% of polyester items will be recycled
• 100% sustainable cotton will be implemented

Forever New MD Carolyn Mackenzie said the business is excited to make positive changes. 

"It’s more important than ever that we see the fashion industry make responsible changes to ensure our planet is protected. 

"Forever New is committed to becoming a champion of change in the industry, inspiring conscious shopping choices.

"I am proud of Forever New Conscious and what we will achieve not only in 2022 but in the years to follow," she said. 

Sydney-headquartered Real Pet Food Company has bought a majority stake in pet supplements start-up People for Pets for an undisclosed sum. 

Founded last year by former executives from Blackmores and Procter & Gamble, People for Pets has developed a range of Australian-made, plant-based, medicinal water treats under the brand Nectar of the Dogs. The product was formulated with the input of veterinary surgeons and naturopaths and contains organic and ‘human-grade’ ingredients. 

The Real Pet Food Company CEO David Grant says has invested alongside one of the founders, Gabriel Perera, who will remain an employee of the business.

“The partnership fits squarely within RPF’s strategic objectives and our future growth ambitions in Australia and key global markets. We look forward to expanding into the pet supplement space.”

Perera said the partnership will allow the combining of “the entrepreneurial style and natural animal health expertise that has made us successful to date,” with Real Pet Food Company’s “experience, resources, capabilities and international reach as a values-led, Australian global pet care leader”.

The Real Pet Food Company was founded in 1994 by Tony and Christina Quinn who opened a small chilled dog roll facility in Burleigh, Queensland under the name VIP Petfoods. The business was bought by Quadrant Private Equity in 2015 which initiated the name change and acquired seven more pet food-related businesses over the subsequent two years: Nature’s Gift, Tucker Time, Dr B’s Barf, Billy + Margot, Ivory Coat, CME Factory at Inverell and Jimbo’s in New Zealand.

The company was sold to a multinational investment group in 2017 and has now grown to include nine factories internationally. It sells in Australia, New Zealand, the UK and the US. 

This marks a premium of 27.8 per cent on the company’s closing price last Friday, and a near 40 per cent premium on ResApp’s three-month volume-weighted average price. Shares in the business rocketed up 22 per cent following the news.

Tony Keating, ResApp’s chief executive, told The Age and The Sydney Morning Herald Pfizer had approached the company’s board with an offer, with the multinational keen to use ResApp’s technology to further build out its capabilities in digital health.

“Seeing how quickly they were able to make the [COVID-19] vaccine and prove its effectiveness is really impressive, so if they can apply that into digital health, that’s a massive win for digital health,” he said.

“To have someone like Pfizer, which is very thorough in what it does, for them to propose to acquire ResApp just goes to show the confidence in our company and our team.”

ResApp’s main product is a smartphone-based diagnostics program that uses machine learning algorithms to diagnose and measure the severity of respiratory conditions such as pneumonia and asthma by recording a patient’s cough.

The company is also working on expanding its diagnostics tech to instantly screen for COVID-19, an area Keating says will be the main focus of a new research and development licensing agreement between ResApp and Pfizer which will go ahead even if shareholders do not approve the acquisition in mid-June.

ResApp will be paid $3 million upfront for the licensing deal and a potential $1 million more in milestone payments. Last month it told investors initial trials of the COVID-19 diagnostic tool had successfully detected the virus in 92 per cent of cases.

“This proposed acquisition and research collaboration add to our growing digital capabilities and bolster our efforts to pave a new era for digital health,” Lidia Fonseca, Pfizer’s chief digital and technology officer said in a statement.

ResApp’s board has unanimously recommended that shareholders back the scheme, which will require investor approval and ticks from an independent expert and the Australian Competition and Consumer Commission.

However, some shareholders may be less than pleased with the 11.5 cent takeover price, with many taking to social media to say the offer was too cheap, given ResApp’s historical price of around 50 cents per share in 2016.

Over 100 Coles-label products will be available on the shelves of Singapore’s biggest supermarket chain following a multimillion-dollar deal brokered by the federal government’s trade agency to boost food exports.

Under the newly inked ‘alliance agreement’, Singaporean shoppers will be able to find up to 140 Coles products in a dedicated section at any of NTUC FairPrice’s 390 stores across the Asian country from Thursday.

The products include Coles’ Ultimate Biscuits, Urban Coffee, its Soup range, and a selection of its Wellness Road products. Wellness Road is a healthy food range owned by Coles.

NTUC FairPrice is the dominant supermarket in Singapore, with 60 per cent of market share. By contrast, Coles holds 28 per cent of Australia’s market share, behind Woolworths at 37 per cent.

FairPrice Group chief procurement officer Ah Yiam Tng, who flew to Melbourne last week to sign the alliance agreement, said Australian products were popular among Singaporeans due to their reputation for being clean and high-quality.

“One thing about Singaporean consumers is they look at the country of origin, where it’s from, where it’s being produced and so forth,” Mr Tng told the Sydney Morning Herald and The Age.

NTUC FairPrice has its own collection of ‘own-brand’ products (some of which are produced by Australian farmers, such as its cheese, butter, breakfast cereal and infant formula).

“Our own brand is actually here to cater to the masses. Coles’ products will be here to compliment our assortment for more affluent consumers,” he said.

“Consumers in Singapore always perceive Australian products [to be] of better quality.”

Mr Tng’s favourite Coles product is the ginger cookies. “I finished one pack in one go with a cup of coffee.”

While the exact terms of the deal cannot be disclosed, sources say the first shipment of products comes to nearly $1 million. NTUC FairPrice intends to make monthly orders that will include fresh produce, meat and new products in future shipments.

NTUC FairPrice has held long-standing relationships with a number of Australian producers and already stocks Carman’s muesli bars, Red Rock Deli chips, and Weis ice cream.

Coles has been exporting Australian food to more than 30 countries around the world for more than two decades, with a focus on Asia. The export deal with NTUC FairPrice represents the first time it has exported to Singapore. About 30 per cent of the chain’s sales in Australia come from private label products.

“We are delighted to launch a number of these products for sale at FairPrice in Singapore to showcase their amazing quality and to continue to drive growth in our Own Brand business globally,” said a Coles spokesperson.

The deal was brokered by Austrade, the federal government’s trade and investment promotion agency, in efforts to help businesses find new export markets outside of China as part of the Agri-Business Expansion Initiative.

Singapore is Australia’s seventh-largest export market, according to figures from the Department of Foreign Affairs and Trade. In the last financial year, Australian exports to Singapore grew more than 13 per cent despite supply chain hiccups.

“Many of Australia’s agricultural, aquaculture and food and beverage products adorn the shelves of Singapore supermarkets, take pride of place in home pantries, and are featured on the menus of high-end restaurants and street hawkers alike,” said an Austrade spokesperson.

“Austrade was proud to assist the Coles-FairPrice deal.”

Chemist Warehouse will take a 10-per-cent stake in consumer products supplier McPherson’s as part of a broader strategic distribution partnership between the two companies.  

McPherson’s will become an exclusive long-term distributor of a portfolio of health and beauty brands owned or controlled by Chemist Warehouse, outside of the retailer’s Australia and New Zealand network. The range includes Wagner Vitamins, Wagner Body Science, Bondi Protein, Foster Grant, INC and Microgenics, all of which will now be available to all of McPherson’s wholesale customers. 

The distribution rights will be for an initial term of five years commencing July 1, the same date as the shares are issued to Chemist Warehouse.

“McPherson’s will have three five-year options to extend the arrangements, subject to certain minimum performance thresholds on a brand-by-brand basis which McPherson’s considers it is well placed to meet,” the two companies said in a statement. 

Chemist Warehouse will also expand the range of McPherson’s brands which the retailer ranges in Australia and New Zealand. Moosehead, Maseur, Fusion Health, Stratton, Sugar Baby and Happy Flora will be added.