Can Supermarkets Be Profitable in the Click and Collect Game?

Traditional brick-and-mortar supermarkets are under siege from competitors across the entire retail spectrum.  Not only have retailing behemoths Amazon and Wal-Mart upped their stakes in the grocery game, but seemingly every retailer now offers “grocery” items.  Walk the aisles of any drug, convenience, office supply or home improvement store and you’ll find a slew items consumers historically reserved for their weekly trip to the supermarket.  Combine this rapidly increasing competition with the continued deflation seen in core grocery categories (-2.2% CPI YoY) and you have a recipe for rapid business erosion.  To combat these sales declines, more and more traditional grocers are turning to “click and collect” as an offering to drive up customer trip frequency and basket size.

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To Marketing and Merchandising grocery executives, click and collect is an exciting new offering customers are bound to love!  After all, what busy mom or working family wouldn’t sign-up to have their groceries shopped for them?  To Operations and Finance executives, click and collect is a phrase that sends shivers down their backs nearly as much as “EMV chips” and “increasing minimum wage”.  The reason for the financial skepticism and operational concern is fairly simple; click and collect layers in incremental operational cost to a business model with already razor-thin margins.  The simple example below illustrates further:

Sales$100.00
Net Profit Rate2.00%
Original Profit $$2.00
Labor to Pick($12.00)
Service Fee Charge$5.00
New Profit $($5.00)

Using the industry standard net margin of 2%, a grocer would typically net $2 in profit on a traditional $100 basket. However, once click and collect is introduced, the same grocer must now spend labor to pick the customer’s order and ultimately pay an associate to do what the customer used to do for free.  Using a modest one hour of labor at $12/hour to pick the order and assuming there is a $5 fee for the service, the grocer has now lost $5 in profit!  Not exactly an offering any grocer should be too excited about.  Granted, this is an oversimplification of a complex financial model and most grocers are banking on a sales lift to justify the service, but it begs the question: can traditional grocers be successful (profitable) with click and collect?  The answer is yes, but doing so requires, among other tactics, an operational strategy that maximizes picking efficiency and delivers a fantastic customer experience.  Designing that operational strategy requires a grocer to deliver on and solve for a variety of topics, including:

  • In-Store Picking Approach – A recent Connors Group study showed for a 40 item order, grocers are spending between 0.8 and 2.2 hours all-in per order picked in-store, with the majority of grocers above 1.4 hours per order. The key characteristic that separates the top performers on this picking efficiency spectrum is their strategy for picking as order volume increases.  Efficient click and collect picking in a grocery environment is a step-wise function.  At low volumes, single order picking is the most economical and practical. As volume increases, it becomes economically viable to step into batch picking and then ultimately zone picking.   Establishing a “wareroom”, a miniature warehouse setup within the retail store, also warrants analysis to further optimize picking efficiency.
  • Picking Outside the Store? – To dark-store or not to dark-store? That’s one of the most hotly contest questions in the online grocery space today and rightfully so.  The allure of lower labor rates and warehouse-like inventory control are extremely appealing.  And in many cases, picking orders at a central location, instead of within the retail store, is the best decision.  However, factors ranging from transportation costs, to pick efficiency and capitalization costs need to be considered.
  • Lead Time & Pricing Considerations – When designing a click and collect offering, careful consideration needs to be given to lead time and its interplay with service fee pricing. Short lead times are valued by customers and yield higher service fee charges, but can wreak havoc on store operations.  Conversely, long lead times allow for operational optimization and alternative fulfillment models.  In the end, thorough price elasticity and efficiency modeling should be done to identify the optimal balance between lead time & pricing.
  • Work Methods, Labor Standards & Equipment – Like any frequently reoccurring retail process, establishing an accurate labor standard and using proper work methods while picking, sorting, bagging and delivering click and collect orders are essential. A suboptimal method at any step within this process can result in lost productivity and order errors.  In addition, work methods need to conform to the other characteristics of the click and collect service.  Should associates pick into totes?  Should they pick into bags to reduce sorting? What style tote cart should be used based on order profiles?
  • Technology Assessment – Operating a click and collect service is inherently technical and nearly impossible without the right technology. Even with technology in place, improperly designed or planned operational software can cause picking inefficiencies and order mistakes.  How does the software validate the correct item was picked?  What logic is being used to route associates throughout the store?  How can the software be streamlined to speed the picking process?

We at Connors Group have deep experience helping retailers answer all of these questions.  Click here to contact us to learn more about how Connors Group can help optimize your click and collect operations.

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Chris Kelly, industry thought-leader and Director at Connors Group, leverages his deep experience both in retailing and consulting to craft innovative workforce management and store execution solutions for clients. He can be reached at [email protected]
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