This is a guest post by Arthur Chow, Vice President of S2G Ventures In trying to envision the future of grocery, we at S2G Ventures go back to how it all began. In 1916, Clarence Saunders opened the first Piggly Wiggly store and changed how people shop for food. The chain’s revolutionary self-service operations, which allowed customers to browse four times the product variety of the average store, unlocked a simple truth: Americans like to pick their own groceries. While customers were delighted they did not have to wait behind a cramped counter for a store clerk to pick goods off a list, this was also a boon for retailer efficiency. With customers picking their own items, store traffic increased along with basket size from impulse purchases. (Who hasn’t grabbed candy or gum on the way out before?) For the last century, this is how America has preferred to shop for its groceries, even as the internet became an omnipresent force in other areas of our lives. Prior to 2020, it has been well-documented e-commerce penetration of grocery spend struggled to reach more than 3% of overall spend compared to several other categories that are 30% or greater.     Then overnight, the COVID-19 pandemic forced all retailers to pivot as previously covered in our Future of Food: Through the Lens of Retail report. Whether curbside pickup or delivery, offering some form of online ordering and fullfilment became table stakes for grocery retailers, with a few notable holdouts such as Trader Joe’s. This stressed the retailers who were not ready to meet the surge in online demand, and showed the cracks in the resiliency of an omni-channel model.   Online fulfillment, which most traditional retailers had only begun testing 10 months ago, became a problem everyone needed to solve today. Without the physical and technical infrastructure (which would have required investment years in advance) ready to manage online orders, many retailers turned to Instacart for a capital expenditure-light and scalable solution. But with an industry already operating at 3-5% margin, the 10% commission fee can become a losing proposition. There are no VCs at the beckoning to fund brick and mortar retailers’ growing losses as they effectively pay for the right to each additional order online. Thus, as Bain and others have concluded, supermarkets must invest in fulfillment automation to be profitable. Instacart’s recent layoffs and shift to its “Partner Pick” model, where retailers manage their own physical fulfillment of orders through Instacart’s online portal, further shows the need for grocers to own that part of the supply chain in order to build a profitable and resilient fulfillment model.  But within that hefty investment decision, retailers are still faced with another choice: should they centralize automated fulfillment in a large facility dedicated to high speed and high volume, or go with a decentralized micro-fulfillment (“MFC”) model and still pick from individual stores? Asked differently, do you want all your groceries sitting in one big automated warehouse, or spread out among many little warehouses (aka your stores) closer to customers? Enter the origins of Amazon and the supply chain principle it used to disrupt the entire book industry. One could easily point to Webvan as the poster child of the perils of big-time automation, but that would miss a deeper lesson about logistics that catapulted Amazon. Before having the foresight to invest in cloud computing services, Jeff Bezos understood a basic supply chain principle that led to wild success: niche, specialized and slow-moving products are better suited to be sold online. Amazon is now referred to as the “Everything Store,” but does anyone remember when it was just a bookstore? And what are most books? Niche, specialized items that consumers buy infrequently (relative to food).  Why does this principle hold true? Because to minimize a good’s total cost of logistics, one must factor in 1) the cost to hold a product (inventory cost) and 2) the cost to ship a product (transportation or setup costs). Seems simple? To add a bit more complexity, how fast a good sells (its demand) should determine how much of the good to hold and where to hold it. This is a basic principle to forming your supply chain network strategy. Here’s a hypothetical illustration. Imagine you are searching for a copy of Fluid Concepts And Creative Analogies: Computer Models Of The Fundamental Mechanisms Of Thought. You can shop online with Amazon or in-person at Borders at one of its 500 stores (because this is still ~2010). The publishing industry tracks that only 100 copies are sold on average each year. However, Borders doesn’t know exactly which stores the customer will show up at, so they still stock 500 copies (one at each store) to ensure there are no missed sales or “out-of-stocks.”  In contrast, Amazon’s one storefront is virtual. They only need to stock 100 copies in a central warehouse to comfortably meet the expected demand. It will cost Amazon more to ship a book directly to its customer, since the Border’s customer helped solve the last mile by shopping at the store. But Amazon saves money on all that real estate cost and, perhaps more importantly, frees up more cash to buy other book titles. In fact, with its online storefront, Amazon can hold millions of titles that far exceed the physical capacity of any bookstore. Finally, the customer also enjoys the convenience of having the book delivered and usually doesn’t mind waiting a few days (again this is 2010). This is how you build an empire in books, CDs, DVDs, consumer electronics, toys, games… and subsequently start the “retail apocalypse.” Thus, the supply chain concept enabled by the internet and pioneered by a man in a Seattle garage becomes very clear – if you sell a niche, slow-moving good, you should centralize your inventory in a big warehouse, sell online, and ship directly But a banana is not a book – it is neither niche nor slow-moving, and it spoils a lot quicker. At 85% US […]