Instore deli and bakery must adjust to the brave new world of grocery delivery and pickup.

Amazon’s 2017 purchase of Whole Foods Market sent shockwaves through the retail grocery world that will be felt for a long time. An almost immediate effect of the deal —and one amplified by Walmart Stores Inc.’s big online push —has been retailers’ adoption of grocery delivery and/or pickup. 

It’s probably safe to say that not a week went by in the second half of 2017 without a retailer (or two or three) announcing it was now delivering to customers’ homes, or at least offering curbside pickup or another alternative to pushing a cart up and down the aisles oneself.   

Delivery/pickup is growing exponentially, but is it growing equally across all grocery categories? Specifically, how are instore bakery, deli and prepared foods adapting to this new world? 

Service deli and bakery have a long way to go to catch up to other retail categories when it comes to frequency of pickup and delivery, says Paul Weitzel, vice president of Chicago-based Inmar Willard Bishop Analytics. After floral, instore bakery is the least likely category to be ordered online, and service deli the third least likely. (Packaged deli fares significantly better).

Many consumers still want to come into a brick-and-mortar store to pick out their hot prepared and other service items, Weitzel says. But change is coming even to those categories, and retailers need to adjust accordingly. “The service part of it is still pretty far behind, but I think (retail) foodservice is going to be a big portion of this going forward,” he says. “There’s a learning curve there, and it will be tricky to do, but the ones that figure out how to do it will be successful.”

Perhaps the steepest part of that learning curve will be figuring out new technologies for getting hot prepared foods to customers, Weitzel says. Ceramic totes, for instance, which are used to deliver frozen goods, could also be an option at the other end of the temperature spectrum, he says. New packaging will also play a big role. But many question marks remain, Weitzel cautions. “They’re still figuring it out — they’re not there yet.”

While the problems related to delivering hot prepared foods will take major efforts to address, at least they’re tangible. By contrast, the hurdles to online purchases faced by instore bakeries can’t as easily be fixed with a new pack or innovation, Weitzel says. “Bakery is tricky because it relies on a lot of impulse purchases. The question is: how will retailers do impulse online better than they do today?”

|||READ MORE: Gen on board ... or else|||

As shoppers get accustomed to buying online, it is highly likely confidence will be increased around purchasing online for offerings throughout the store.
Get on board…or else

The need among many consumers to shop instore deli and bakery departments in person remains a strong one, says Neil Stern, a consultant with Chicago-based McMillan Doolittle. But retailers who don’t realize that at least some of that business will shift online could be in for a rude awakening.

“Being able to see full choice, customize the product, get inspired by new ideas or get influenced by impulse purchases remain powerful category drivers,” Stern says. “But they also will see the business move online for repeat purchases or be influenced by less traffic through the doors.”

Lake Success, New York-based consultancy Retail Feedback Group polled consumers about what kinds of retail items they purchased online. At the high end were grocery (62 percent purchased) and health and beauty care (54 percent). Those categories in the lower tier included bakery (28 percent), prepared foods/meals (26 percent) and deli meats and cheeses (22 percent).

There will always be shoppers who want the brick-and-mortar experience, says Brian Numainville, Retail Feedback Group principal. But eventually those low numbers for instore departments should start to narrow the gap with center-store when it comes to online purchase and pickup/delivery. “As shoppers get more accustomed to buying online for pickup or delivery, and as the service proves itself by providing quality, it is highly likely confidence will be increased around purchasing online for offerings throughout the store.”

Instore bakery, deli and prepared foods are finding their footing in the new online world just fine, says Bill Bishop, chief architect and co-founder of Barrington, Illinois-based Brick Meets Click. “There’s no doubt that customers will continue to want to, and in fact enjoy, coming to the store to shop these departments, but there are other shopping occasions when it’s going to just be easier for them to do in online,” Bishop says. For that reason, it’s necessary for bakery, deli and prepared foods to get on the pickup/delivery bandwagon. “If they don’t, they’ll face an inevitable loss of business to competitors that do offer the online option in these attractive and profitable categories.” 

“Most successful online grocers will use the perimeter departments to attract customers,” says David Livingston of Waukesha, WI-based DJL Research.  “Restaurants already use third parties to deliver.  I’ve seen delivery services bring meals to one household but each household member got a meal from a different restaurant.  Same with grocers.”

Steve Gress, a retail expert with Atlanta-based consulting firm North Highland, believes that while some perimeter items will adjust well to the delivery/pickup era, consumers will still lean towards brick-and-mortar when it comes to buying others.  

“Brick and mortar will retain a large portion, though not all, of the perishables,” he says. “I also see an accelerated shift to prepared foods, from perishables, with improvements in packaging technologies. For a perishable item, consumers still like to look and feel an item to select what they think is the best available, not leaving it up to a warehouse clerk who’s trying to fill their order as fast as possible.”

|||READ MORE: Keeping up with 'the two big guys'|||

Retailers don't have a choice when it comes to getting on the delivery/pickup bandwagon.

Keeping up with “the two big guys” 
It’s pretty clear, Bishop says, what produced the huge bandwagon effect in retail grocery regarding adoption of delivery/pickup last year. “Most of what happened in the second half of 2017 can be traced to Amazon’s purchase of Whole Foods,” he says. “It was a wakeup call showing that Amazon is moving rapidly to become a physical as well as an online retailer and could be ‘right down the street’ sometime soon.” Looking ahead, it’s not just Amazon/Whole Foods but the “tremendous amount of work and effort that Walmart is putting into this area” that will accelerate the growth of online even more, Bishop says. 

Delivery/pickup is still in “test mode,” Weitzel says. Walmart, for instance, is currently testing about seven different models to see which ones fit the company’s and its customers’ needs best. But that’s still a big step forward from where it was just a year ago.

“A lot of retailers were sitting on the sidelines waiting for it to become reality,” Weitzel says. “With the investments Walmart is making now, they’re realizing this thing’s going to be around and they better get into it. The two big guys (Walmart and Amazon) are going to just keep pushing it.”

“The two big guys” and other retail giants will make a successful transition out of test mode into go mode, Weitzel says. At the other end of the spectrum, the best boutique retailers can count on their loyal customer bases to keep up the foot traffic in their stores, which prioritize the instore shopping experience. It’s many of the retailers in the broad middle of the category, he says, that will struggle to figure out how to provide delivery/pickup services in a cost-effective manner. Some, he acknowledges, won’t make it. “They face either a drain on their costs or on their market share.”

Not every delivery/pickup model adopted by every grocery chain will work, Retail Feedback Group’s Numainville says. But that fact shouldn’t dissuade retailers from at least trying something — with Amazon breathing down their necks, there’s no time to waste. “Some will identify the right model from the outset, others will try and have to redefine and reinvent their offering after some experimentation,” he says. “But better to get up and running to learn rather than waiting to find the ‘perfect’ model.”

One thing retailers in experimentation mode would be wise to consider, Numainville says: Offering delivery services is typically more complex and costly than offering pickup. 

Retailers don’t have a choice when it comes to getting on the delivery/pickup bandwagon, agrees McMillan Doolittle’s Stern. “They can either cede market share or try and compete,” he says. Unfortunately, he says, many are having to ramp up faster than they’d like. “Right now, retailers are responding without really having the time to assess the full impact,” he says. “Straight grocery delivery to the home offers the most control but is problematic for profit. Partnering with Instacart is a quick way to get into business but risks full control of the customer and data. Click and collect may be the most economically viable but also requires adjustments to the model.”

Delivery/pickup will not work equally well for all retailers, says Dan Kopp, another North Highland retail expert. “It will be essential for some and unsustainable for some.  It will be essential for retailers selling products that are lightweight, small, easy to ship, low-perishable, have a low return rate and do not require significant input to the decision-making process.”

Another North Highland expert, Lia Keel, says delivery/pickup will be unsustainable for some that don’t understand their customers and haven’t worked out business processes and trained their employees to execute the model correctly. “Having the service but doing it incorrectly will take a huge hit to customer satisfaction,” she says. “Working out the business process will prevent long wait times, wrong products being picked, inventory not being available and other areas where customer frustration will outweigh the benefits of having the service.”

The new online world definitely favors the big fish in the retail sea, Livingston says. “It works well for retailers that have the economies of scale and ease of use along with low fees. Some retailers will fail because they don’t have the capital to invest —mostly smaller grocers.” 

As big as last year was for adoption of delivery/pickup options, 2018 could be even bigger, Stern says. “I think we’ll see a lot of activity in 2018 as retailers begin to fully embrace an omnichannel world. Disruption is usually the greatest driver of innovation, so I think we will see new ideas be adopted on a faster basis. More delivery to the home, more ordering ahead, more use of technology as an expediter to change. It will be a fascinating year.”

Numainville agrees that the rate of adoption of pickup/delivery will only accelerate, but that doesn’t mean the age of brick-and-mortar is nearing its end. Far from it. “The fact that Amazon bought Whole Foods should also give retailers hope that it really is about the integration of brick and click, not about one replacing the other.”