In the year and a half since the beginning of the global COVID-19 pandemic, many things have changed for the retail industry. Some of the most noticeable changes have had to do with consumer behavior in regard to food: People couldn’t go out to grocery stores and restaurants, so food had to come to them. Ecommerce, both for groceries and prepared food, has skyrocketed.
As something that resembles pre-pandemic normality approaches, that raises a question: Did the pandemic actually cause this shift in consumer behavior, or did it simply exacerbate trends that were already in motion? Looking forward, will current trends reverse themselves? Are people so tired of cooking at home that “kitchen fatigue” has set in?
To get a hint of the post-pandemic future for grocers and food delivery services, we posed these questions to two very different companies that have a fair amount in common. The Ocado Group is a London-based technology company that focuses on hardware and software solutions for the grocery industry. Gobble, based in Palo Alto, Calif., is a food-kit service specializing in family dinners requiring less than 15 minutes of prep time.
Setting the target
If you’re going to start a company, you have to decide what it does. “Great companies start with a real problem, but most companies take a while to find a breakout solution to that problem,” says Gobble CEO Ooshma Garg.
“Ours — after three years of experimentation — was the 15-minute, one-pan dinner kit. The core insight for that product was that people really want to cook — we have a primal desire to cook for our families—but they don’t have the time. The growth rate of the 15-minute dinner kit was six times the annual growth rate of any other food startup model.”
Ocado was founded 20 years ago by three Goldman Sachs merchant bankers who wondered if the grocery industry could be improved by a then-new concept, ordering goods via the internet and having them delivered. The answer turned out to be yes, but not easily.
“Grocery is the only category of shopping where you order fifty items at once and want them all delivered at the same time — across three temperature regimes, frozen, cold, and ambient,” says Luke Jensen, CEO of Ocado Solutions. “ You need to figure out how you’re going to store and deliver those items in a way that keeps the integrity of the product.”
Building the infrastructure
Figuring it out involved rethinking the entire grocery value chain. Grocery is a very low-margin industry, Jensen notes; many of the players operate at a 2 or 3 percent net profit. The problem was not convincing people to like the idea of having their groceries picked out for them and delivered to their homes. It was how to do that without just adding cost to the existing infrastructure
The solution was to invent a lot of new technology that didn’t already exist. Along the way, Ocado got out of the grocery business itself and into the grocery technology business. One thing it discovered along the way is that it is more cost-effective to fulfill online grocery orders from a warehouse than from a regular store with customers in it.
Gobble was dealing with technology issues of its own. “Let’s just say we have 18 different Gobble dinner kits we’re serving each week, and each of those dinner kits has six to 10 individual components,” Garg says.
“We’re prepping 100 to 200 fresh sauces or meats or spice mixes or confits or whatever. Doing that at high volume on a rotating weekly basis required a supply chain muscle that took us years to build and that is the first of its kind in the food industry.”
To pay for this, rather than seek another round of investor funding, Garg and her colleagues cut back on marketing and financed the infrastructure development out of the company’s self-generated revenues.
“It paid off in spades,” says Garg. “We’ve truly built what I think is the only sustainable food technology company in the country today.”
One possible drag on automating grocery is that traditional customer-in-the-store grocery retailing is more profitable than online, Jensen notes, though fulfillment centers are more profitable than filling online orders from a store.
“How you keep driving cost out of the solutions is an important part of the technology,” he says. “Because essentially, the prevailing model for a lot of grocers is preparing online orders in-store, which is a very manual process. You can slightly improve the productivity of that, but not much — it’s limited by the need to go around the store picking up items.”
Which will only become more expensive, he says. “We may have slight blips from time to time as the economy declines, but broadly speaking, the cost of labor will only be going up in every single market, including the United States.”
Rather than selling its technology to the whole industry, Ocado has exclusive relationships with one specific grocery chain in a number of countries. In the U.S., Ocado has a partnership with Kroger, for which it fitted out a new fulfillment center in Monroe, Ohio, the first of 20 planned Ocado-powered automated warehouses.
Kroger’s online business grew 116% over the last year, evidence of what Kroger CEO Rodney McMullen referred to as “the permanent shift in grocery consumer behavior.”
That’s true of meal kit consumer behavior as well, at least as far as Gobble can see. “Many states have returned to some level of normalcy,” Garg says. “We’ve been tracking member behavior on a daily and weekly basis and haven’t seen any kind of significant swings. I think in some cases you’ll see a slight shift, but there’s no rush to pre-pandemic behavior.”
In fact, she says, Gobble has found in its internal surveys that 48 percent of its members are now ordering all their groceries online. “That’s certainly increased during the pandemic, and I think it will only increase further. This is the new normal.”