In short:

  • We set out to see how the grocery business is being disrupted — and found that unicorns are scarce.
  • The U.S. industrialized agriculture and grocery distribution model has kept prices low. It also makes an Uber-style shake-up unlikely.
  • Amazon, Target and Walmart are likely to gain traction, but smaller grocers can still compete, and win.

Regional grocers may well see themselves as under siege from behemoths like Walmart, Target and to a lesser degree, Amazon. But are they?

The 325 million of us in the United States eat. A lot. But while groceries are big business, in raw dollars as a percentage of income, the homemade pie is on the small side. The USDA tracks this pretty closely and says that, in 2018, Americans spent $2,626 per capita on food consumed at home, up from $2,368 in 2013. That’s just a 6.4% slice of household expenses, down from 6.8%.

Japan, France and Italy spend twice that much, at about 13.5%. Saudi Arabia, China, India and Russia spend about four times as much as we do, at about 26%, and the people of Africa commonly spend half their incomes on food.

Much of the global discrepancy has to do with how we tax food, the fact that we don’t have to import most of what we consume and the reality that Americans aged 24 to 62 spend an average of $3,700 yearly eating out at restaurants. Comparatively, Canadians spend about $2,600 per household. No wonder more and more grocery stores are devoting floor space to in-store restaurants, aka “grocerants.”

Eating Out vs. Cooking In

Grocers that are not Walmart or Kroger are no doubt feeling pressure. But how much should they worry when foodie startups talk about disrupting the way Americans eat at home? Is an Uber-level shakeup likely?

No — mostly because, by the classic definition of disruptive innovation, there isn’t an alternative to the U.S. agricultural and grocery distribution model that both improves service and lowers cost.

We’d argue that America’s, and in fact, according to the World Health Organization, much of the globe’s problems with poor nutrition and obesity can’t be laid at the feet of grocery stores (for an excellent graphical treatise of food production, consumption and health, see Vox’s story on the subject). Fresh, wholesome food is there. Many Americans simply choose not to eat it. And to date, legislative nudges and browbeating by the medical community haven’t moved the needle.

Still, while we don’t expect creative destruction in the grocery vertical, there is innovation happening. It centers on a distinctly American problem: a lack of free time, particularly among those who also have disposable income and are therefore interesting to innovators.

What is not happening is a full rethink of U.S. food distribution.

Let’s look at some challengers to the neighborhood grocery store, why most have yet to make real headway — and smart ways all-size grocers can address the consumer demands that upstarts promise to solve.

“‘Fold In?’ What Does That Even Mean?”

Exacerbating the time crunch is the fact that cooking skills are on the decline. That’s particularly true for millennials and Gen Z. A survey by home services app Porch comparing generations illustrates the phenomenon: Boomers cook more than 15 meals per week, millennials 13. In those meals, boomers use prepackaged food 13% of the time, millennials 18%. The Porch survey is extensive, with a good fraction of responses showing that once millennials get past scrambling an egg or making a toasted cheese sandwich, they’re lost.

Where Are Shoppers Purchasing Meal Kits?

The value proposition “we save time while teaching non-cooks how to get from ingredients to food on the table” is driving the dozens of meal delivery services operating today. They serve niches from those who want organic ingredients (Sun Basket) to people looking for bargain $4.99 per-serving meals (EveryPlate) and are working on the fringes, with the hope that Americans will decide to trade a little more of their income for more nutritious food and, possibly, choose to cook it at home rather than call DoorDash.

How fringe is meal delivery? We’re talking a small subset of buyers. A January survey by heating and cooling technology provider Phononic of 1,118 U.S. consumers found that Americans have kicked the tires on these services, with 12% having tried an app like HelloFresh.

The report is worth a read for those in the food business. Beyond meal service stats, the researchers found that 20% of Americans have used a grocery pick-up service, but only 4% get some or all their groceries delivered on a weekly basis. Respondents largely observe that the grocery store experience hasn’t changed much in years and seems old school, yet 85% say the fun of grocery shopping is seeing available options and having the in-store experience.

Meal delivery services have yet to figure out how to reproduce the serendipity of discovering a perfectly fresh heirloom tomato or the smell of an in-store bread bakery. Rather, the likes of Blue Apron, HelloFresh and others are banking on three generalizations for millennials and Gen Z: They like to buy online, they have no concept of using ingredients for more than one meal, and they tend to have no idea how much groceries should cost.

One problem keeping these companies from gaining traction is that prep instructions are often complicated enough that cooking time becomes exaggerated. For the current generation of dual-income, no-kids households, this can make for a novel evening of bonding over pots and pans, but seldom a regular dining pattern.

What We Spend on Food

Beat them or join them: Grocers are taking a “join them” approach, not building kits but partnering and providing refrigerated space. Sales of meal kits via retail outlets totaled $93 million in 2018, according to a Nielsen report . As an example, Hannaford has partnered with HelloFresh to place a variety of its kits in store and allows customers to add them to a pickup order. The idea is, a shopper might come in for a HelloFresh blackened chicken tacos kit and grab some salsa, beer or a dessert item.

However, in-store meal kits compete with a store’s own heat-and-eat and ready-to-go options and consume valuable refrigerated space.

Consumers Buy, They Fly

Meanwhile, grocery delivery services, such as Instacart, Peapod and Shipt, haven’t found a way to let customers prioritize on anything other than item choice. Many also depend on gig workers to do food selection. Training of shoppers used to take place in classroom settings; now it amounts to watching a video or two.

If a consumer goes shopping for fresh fruit to feed his kids tonight, ripeness is the priority. Apples, pears or peaches might all be fine, as long as they’re ready to eat now. Apps don’t provide that option, and gig-economy shoppers-for-hire may not be equipped (or have time) to make the judgement call anyway. So, despite special instructions, the pears a customer gets might be perfectly ripe, or they might be hard as rocks. These services are better for delivering packaged staples, saving time by enabling consumers to visit only select departments, such as for fresh produce for consumption in the very short term.

The Phononic survey also found that 66% of Americans dislike how both grocery and meal kit services store food while it’s being delivered. Insulated single-use bags or boxes seem wasteful, and they are. Amazon goes so far as to use ice packs for cold foods and dry-ice packs for frozen items. That certainly works to ensure food doesn’t perish before it's delivered, but the waste is more than most consumers will bear long-term.

One company, Yummly, now owned by Whirlpool, offers a graduated step toward self-sufficiency by helping with recipes, prep instructions and shopping lists, but leaving the actual food procurement to the end user. It provides visual online guides, including pictures and video clips so that nervous cooks can determine if that first attempt at a roux is close to what it should be. For Gen Z, following written instructions laid out by Julia Child is a nonstarter.

Beat them or join them: Some grocers are spinning up food delivery and drive-through pickup practices. Kroger is currently delivering groceries from about 2,000 stores throughout its subsidiaries. HEB is testing driverless deliveries . But others have backed off — Trader Joe’s ended all delivery earlier this year and won’t work with Instacart. The problem for TJ’s is it doesn’t reliably stock a regular lineup of items, so the app doesn’t know what any given store has on its shelves. The upshot here is that if Instacart or Shopt comes knocking, listen — it’s a way to get in front of customers you might not otherwise reach.

Back to Fundamentals

Find a real (usually self-proclaimed) foodie and you’ll likely be regaled with tales of the farm-to-table movement. Once the province of restaurants, the farm-to-table ideal is food showing up with dirt still on it from the field. Food so fresh that the farmer who delivers it — ideally in tattered bib overalls — has the same expression of pride, sadness and anticipation as a parent delivering a child for the first day school.

The point is to consume food that’s fresh and free of the preservatives and processing needed to feed a nation of 300-plus million for just 6.4% of its income.

Champions of the movement rightly say that if we consumed food grown locally, when it’s harvested, it would be fresher, taste better, and we’d save on transportation and a host of other costs that come with packaging, processing and preserving food so that it’s available year-round. They point out that eating locally sourced food would be a big step toward the salvation of the family farms that fed America for decades.

By the Numbers: Grocery Games

All good thoughts, with no sign of catching on to a degree that could be considered significant to the current food distribution system. The delivery services available for farm-fresh products are closer to a true direct-to-consumer model. To date, they remain small.

Beat them or join them: That depends on your region and the time of year. A local store that sources fresh corn, apples or other crops locally can and should make a big deal out of that, with signage. Whole Foods has mastered combining locally sourced items with its regular inventory. That thinking is a stretch for a typical grocery store, but it’s worth a pilot test.

What About Walmart?

Any large-scale disruption of the existing grocery model will likely come from the likes of Walmart and Target. In June, Walmart said it would offer grocery pickup in 3,100 stores and grocery delivery from 1,600 stores this year. In its announcement, the company talked about the extensive training its associates would receive and about its generous return policy.

In mid-September it made good on that announcement, garnering headlines and accolades for beating Amazon at its own game. While shopping is done by Walmart employees, delivery is handled by “various services,” according to the company. Current plans call for service in 200 metropolitan markets.

Smith’s, a division of Kroger, offers a similar service from its stores, and other major national grocery chains are experimenting with buy-online, pick-up in store as well as delivery services. Walmart charges $98 a year for the service, about the same as Instacart. Buyers can also opt to pay $9.99 per delivery rather than an annual fee.

That cost structure is similar to that for Shipt, which Target snapped up for $550 million in 2017. At the time, it was Instacart’s one true independent rival, albeit servicing about one-eighth the number of cities.

Walmart’s use of “various services” for delivery and Shipt and Instacart’s reliance on gig workers could hit a roadblock as California seeks to reclassify gig workers as employees. Other states will follow California’s lead, eventually pushing the future of gig work into questionable territory.

Not that Amazon is sitting still. The company is reportedly signing leases in major metro areas in preparation for opening U.S. grocery stores separate from its Whole Foods subsidiary. What those stores will look like is still a matter for speculation, but it’s a fair bet that the company will seek to replicate its cashier-less Amazon Go model to address today’s shoppers’ desire for speed. In-store pickup lockers and a convenient way to return items could be draws.

Beat them or join them: The pricing and availability of services indicate that at present, food delivery by the giants is not a money maker, but rather about brand affinity and loyalty. Local grocers can certainly compete there with private labels, loyalty programs and local marketing. Working with Instacart or launching a buy-online, pick-up in store pilot may be worthwhile.

Private Label, Secret Weapon?

And remember: Amazon’s advantage over Walmart is also its weakness. Its fewer but much larger fulfillment centers make it difficult to deliver fresh food without extensive packaging. Walmart — and regional grocers — can equip delivery staff with reusable insulated bags and cases and achieve the same results as shoppers would with an in-store trip.

Unicorns Don’t Eat Groceries

All this boils down to a reality that grocery-based startups are even less likely to reach unicorn status than those in other industries. Meal kit provider Blue Apron was the unicorn in its space, with a 2015 value of around $2 billion at its IPO. More recently, it’s been struggling to keep its share price above $1, a requirement to remain listed on the NYSE. The company’s current value is somewhere around $100 million.

Instacart is the exception, with a current valuation of about $8 billion after it got a $600 million infusion last October and a bit more in November. The seven-year-old company was in an acquisition dance with Whole Foods until Amazon acquired the latter and quickly pulled back on the close relationship.

Instacart’s goal is to reduce the cost of delivery to “about the price of a cup of [Starbucks fancy] coffee.” It does that by creating relationships with major producers, like Kraft, that pay to have their brands show up first in searches and to have buyers shown additional promotional items when they pick selected items. One advantage Instacart has over Walmart and others is that it has relationships with many stores, so your $99 annual membership gets you access to outlets like Whole Foods, some mainstream grocery stores in market, PetSmart, Costco, Restaurant Depot — places where separate memberships add up.

Instacart’s independence is a benefit as it can offer smaller chains in many markets the ability to provide a delivery service. Its list of partners continues to grow.

The battle lines are drawn, and major combatants are betting that under the right circumstances, the 4% of American households that regularly use grocery delivery will grow. It’s a fair bet that they’re all willing to lose some money now to ensure they have a slice of that pie should the public decide that in-store shopping is no longer a good use of time.

Could convenience bear the fruit that convinces Americans to up their spending from that 6.4% of the household budget? If so, it will need more time to ripen.

Art Wittmann is editor of Brainyard. He previously led content strategy across Informa USA tech brands, including Channel Partners, Channel Futures, Data Center Knowledge, Container World, Data Center World, IT Pro Today, IT Dev Connections, IoTi and IoT World Series Events, and was director of InformationWeek Reports and editor in chief of Network Computing. Got thoughts on this story? Drop him a line.