Digital transformation, food convenience and Amazon
The U.S. Food Industry is in the midst of a dynamic and rapidly changing competitive landscape driven by internet-enabled platforms linking customers, retailers, restaurants, delivery firms and delivery workers. We estimate 40% of grocery locations are offering delivery to the home, pick-up at the store, or both of these convenient options. Further, by 2025 we project 75% of consumers will have access to at least one grocery store offering affordable home delivery. The highest perceived quality and most convenient food option, restaurant-prepared meals that are similarly delivered to the home, is in place covering 35% of restaurant locations. We project coverage to grow to 50% of restaurants by 2025.
The key drivers of the success of this internet-enabled convenience are by-products of the impact of the internet and automation on workers and their families. The rise of white-collar “knowledge workers”, and a reduction in the manufacturing workforce, has led to expanding work hours and the bleeding of work into home as emails, reports, and demands for analyses become ever-present. About 35% of salaried employees work over 50 hours per week in an office, commute another 5 hours per week, and then are interacting via computer with their office or customers when at home. A second-order effect is the availability of part-time, affordable, delivery workers (no longer absorbed in manufacturing) who need a second job to make ends meet. These independent contractors earn $12 to $15/hour from a combination of fees and tips, and represent a pool of 250,000 non-unionized (and non-benefit earning, hence relatively inexpensive) workers.
What are the limits on the eventual size of these convenience delivery markets? We rely on the concept of opportunity cost, which applied to grocery shopping means what could a shopper earn instead - if they did not need to spend the nearly one hour on each shopping trip. With the median wage at $20/hour, our first cut analysis points us to a maximum market of 60 million households (out of a total of 126 million in the U.S.) which can afford to pay for convenience. Consumer surveys show however that only 35% of shoppers would like to turn over their in-store experience to someone else. That reduces our market size to 20 million relatively affluent households. That is a huge market and could eventually account for $180 billion annually in home-delivered groceries.
The grocery delivery infrastructure wars are being fought to retain these affluent households, who have a weekly shopping basket 50% greater than the average. The large grocery chains started by seeking a competitive edge from their traditional rivals, and then were spurred on by the entry of Amazon with their 2017 acquisition of 480 Whole Foods stores and the fear that this online giant would take home delivery to the next level. What we see to date is that Amazon has been more focused on adding value via enhanced grocery shopping to its 50 million U.S. Prime customers – who pay $5 billion annually for that membership with its suite of video, digital books, and free online delivery. Amazon’s operating income at $4 billion annually, is massively reliant on these memberships to support its other initiatives. The recently announced expansion of Whole Foods market stores into previously unserved areas is consistent with extending its reach to Prime members.
However, the fastest growing part of Amazon’s business is their cloud data storage for other enterprises. The company’s experimentation with cashier-less stores (Amazon Go, a convenience store in a limited Seattle test) could signal a flood of new data aggregation and analysis that would presumably use their storage infrastructure. With an extensive in-store network of sensors to record the movement of all items off the shelf and into the shopper’s basket, this internet-enabled store format is massively data-intensive. This type of new retail environment would also significantly reduce in-store personnel and their associated costs.
We encourage you to view our website for detail on our study, “U.S. Food Industry 2019: Digital Transformation and Convenience”. The study views the consumer and retailing landscape through our unique blend of strategic market research, industry expertise, economics, and competitor analysis.