E-Grocery Logistics: Feasibility Study and Framework

Introduction and Background

The home delivery of groceries is not an especially new concept in the food retail business. Numerous grocery retailers and even manufacturers have offered delivery services to consumers for many decades. The potential of the home delivery business was not remarkable until the mid-1990s, when Internet-based ordering supported significant market growth. From the customer's perspective, home shopping should mean convenience (Akali, 2005). Early e-grocers offered services such as film rental, dry cleaning, and film processing — services that made customers' lives easier by eliminating the need to stand in checkout queues or travel to a store. Specifically, an e-retailer can offer a valuable service to people who have difficulty accessing markets or who lack adequate time, such as disabled persons or busy urban families. E-grocery retailers remain too expensive for many customers, however, due to high purchase costs and home delivery charges.

In Europe, for example, the size of the grocery market is approximately 10 billion Euros. Although the perishable goods sector is not growing exceptionally quickly, the e-grocery segment is assessed to be one of the fastest-growing areas in e-commerce. Despite general interest and the deployment of various service concepts, only a small amount of research has been conducted in the area of e-grocery logistics (Gangopadhyay, 2012).

Many rules and regulations must be followed throughout the grocery supply chain. Where sound logistical solutions are developed for the e-grocery business, it is possible to apply those solutions to other supply chains. Furthermore, in the grocery business the product range is wide and material flows are substantial, even from the perspective of an individual consumer (Fernie & Sparks, 2009). Most groceries are consumed at home, and the current "home delivery" is effectively performed by shoppers themselves. The market potential in the e-grocery business is significant, and demand is not highly sensitive to price fluctuations — people require food on a regular basis. There is, therefore, an opportunity to develop a service framework that satisfies the needs of a broad customer base. From the retailer's perspective, groceries represent the best prospect for achieving profitability in the home delivery business.

Compared with traditional grocery retailing, home delivery and order picking are new operations and additional cost centers in e-grocery retailing. Currently, the most common home delivery model requires customers to select a time window during which their groceries are delivered, and they must be present at home. An alternative is the so-called unattended reception model, in which customers are freed from the delivery schedule by receiving orders in a collection point or delivery box. Unattended reception provides greater flexibility to the e-grocer, who can employ more adaptable and efficient route optimization. Order picking represents another major cost driver. Picking may be carried out in an existing store or in a dedicated distribution center. Currently, the most common approach is to pick orders in supermarkets (Kalakota & Robinson, 2010).

Some players, such as Peapod in the U.S.A. and Tele-market in France, also use distribution centers to improve picking efficiency. In certain cases, picking speed is further enhanced through the use of automated distribution centers. From the logistical perspective, existing operational models can be grouped into four primary combinations, despite the existence of various logistical alternatives. Information about success factors has consistently revealed (Khosrowpour, 2006) that customer demand has remained flat and that e-grocers have operated predominantly through store-based picking. Competitive pricing and new services are, however, required to build a broader customer base.

To achieve this, e-grocers need to implement logistics frameworks that enable cost reduction. In this study, the term "logistics framework" refers to the operational components integrated within e-grocery retailing. Many solutions aimed at cutting operational costs have been proposed, yet no clear guidance exists on which logistical solutions and their combinations are optimal from an implementation perspective. Knowledge of how best to build an e-grocery logistics framework is therefore one of the most critical variables when launching such a business.

Kornum (2005) notes that despite all the investment and capital directed toward developing e-grocery businesses worldwide, only a small number of e-grocers have made changes that have successfully led to profitable operations. Typically, e-grocers have focused on improving a single component or logistical result while overall viability has remained poor. A notable example is the former Webvan, which dramatically increased picking speeds in its distribution centers but ultimately failed. The primary objective of this study is therefore to examine how best to implement e-grocery logistics frameworks so that businesses can become profitable. A successful implementation strategy also requires an understanding of the distinct logistical options available. Accordingly, the second objective is to identify, model, and evaluate different logistical solutions that could be used in e-grocery retailing.

The focus is on picking and goods reception, as these are critical operations for an effective e-grocery logistics framework. They have required enormous investment and have also been barriers for e-grocers. It has been demonstrated that unattended reception enables a more efficient operational model than attended delivery, yet implementation and revenue issues remain unresolved. The ultimate aim is to identify financially sound combinations of solutions in diverse market scenarios and to provide guidelines for a successful implementation process (Golinska & Andres, 2012). The study seeks to answer the following research questions:

I. How can an e-grocery logistics framework best be implemented? What logistical solutions have the greatest potential in different market scenarios? What is the right combination of logistical solutions? How do different logistical solutions and implementation requirements influence the overall behavior of a logistics framework?

II. How should order picking be carried out in a dedicated distribution center? What is the potential of manual picking of customer orders? How can automation be utilized in picking?

III. What is the feasibility of providing unattended reception solutions? What are the possible revenue models for unattended reception? What is the impact of alternative goods reception modes on customer service?

Literature Review: Logistics and the E-Grocery Market

Logistics is not the only concern when attempting to reduce costs and make an e-commerce business profitable, but it is one of the primary issues. The scope of this study covers e-grocery retail logistics, which is particularly challenging because many regulations on temperature and hygiene must be observed throughout the grocery supply chain. Potential material flows in e-grocery retailing are enormous, though current volumes remain modest. Consumer expectations are also high (Dennis, Fenech & Merrilees, 2008).

To understand the e-grocery business and the implementation process from a logistics perspective, this section provides a concise overview of logistics and a review of the e-grocery market, as well as earlier research findings. These are necessary for understanding the failures and success factors of the early market participants.

The Council of Logistics Management defines logistics as that part of the supply chain process that plans, implements, and controls the efficient and effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customer requirements. Herrel (2006) describes logistics as the process of strategically managing the acquisition, movement, and storage of materials, components, and finished inventory — and the related information flows — through the organization and its marketing channels, in such a way that current and future profitability is maximized through the cost-effective fulfillment of orders.

Logistics has consistently played a significant role in the retailing industry. According to Dholakia et al. (2012), pricing, supply chain speed, inventory planning and assembly, and information availability are the primary domains for achieving effective retailing operations. Gangopadhyay (2012) examined the development of grocery logistics in the UK, noting that improvements in supplier management, centralization, just-in-time principles, and supplier-retailer relationships have been significant areas of advancement in recent decades. In particular, the centralization of distribution has led to the replacement of direct store deliveries with regional distribution centers, creating a retailer-controlled delivery system and simultaneously opening new markets for third-party logistics providers.

The objective of logistics is to achieve the chosen customer service level at the lowest possible total cost. Logistics has an important role in sustaining profitability by improving customer service, building enduring client relationships, and supporting customer retention. In e-grocery retailing, various services may be created and offered to customers depending on their needs and willingness to pay. Customer service and total costs involve a significant trade-off in e-grocery retailing, where picking and home delivery represent additional costs compared with conventional grocery retailing. A coordinated and efficient logistics framework is especially critical in the e-grocery business. According to Davis & Benamati (2013), logistics can help integrate a company's activities by: (1) reflecting the marketing mission of the organization; (2) improving the efficiency of material and information flows; and (3) bringing subsystems together.

Melo and Macharis (2011) argue that improving supply chain performance is one of the most significant management challenges today. In Business-to-Consumer (B2C) e-commerce, logistics — particularly in the downstream portion of the supply chain — represents a critical challenge. The development of e-commerce logistics involves considerable differences compared with conventional commerce, most notably in order picking and home delivery operations. In traditional grocery retailing, customers perform their own picking at no cost to the retailer. In the e-grocery business, achieving more efficient operations — and thereby reducing costs — is one of the greatest ongoing challenges.

The history of the e-grocery business is short and checkered. The first e-grocer, Grocery Express, was established in San Francisco in 1981, offering home delivery for groceries ordered through Prodigy (an online service with a simple user interface), telephone, and fax (Mendelson, 2001). In Finland, the first e-grocery pilot began in 1996. Following rapid market growth at the end of the 1990s, many players collapsed. Nevertheless, the e-grocery business remains one of the fastest-growing segments of e-commerce. According to estimates cited by Lamersdorf (2004), the e-grocery market share was forecast to reach between 2.5% and 4% of the total grocery market in European countries by 2006, while in the U.S.A. this figure was expected to rise to 3–5% by the same date.

U.S. players such as Webvan, Streamline, Shoplink, and Homeruns dominated the e-grocery market at the end of the 1990s. These pure-play operators designed their operations from scratch and typically began by investing in distribution centers. Some players, such as Streamline and Shoplink, offered reception boxes to their customers.

Despite public interest in the e-grocery business, only a modest body of research on e-grocery logistics exists outside of industry projects. This research has primarily focused on the mistakes made by early players. The principal logistical challenges in the e-grocery business appear to lie in achieving efficient picking and home delivery operations. Lamersdorf (2004) investigates whether the e-grocery cost structure can compete with that of conventional grocery retailing, arguing that e-grocery with home delivery could theoretically be more efficient than store retailing when handling a comparable sales volume.

Hypotheses

Nakayama & Sutcliffe (2010) examined the reasons for e-grocers' failures. They argue that even if e-grocers were able to solve the twin cost problems of picking and home delivery, they still faced insufficient demand, very high upfront marketing costs, and a lack of consumer trust. In the case of pure-play operators, weak negotiating and purchasing power with suppliers, inefficient customer acquisition, low order frequency, and a limited service offering have been the primary explanations for failure.

Automated picking in an e-grocery distribution center is more cost-effective than using manual solutions. Hypothesis I must be tested in order to answer Research Question II. Accordingly, the effects of automation investment on picking efficiency and cost-effectiveness are examined, along with alternative approaches to achieving cost-efficient picking operations.

Unattended reception solutions are not financially viable for e-grocery retailing. Hypothesis II must be tested to answer Research Question III. The results will indicate whether viable revenue models exist for unattended reception solutions.

The order of implementing solution components is not significant in e-grocery retailing. Hypothesis III must be tested to answer Research Question I. To respond to this, the interdependencies between the various components of the e-grocery logistics framework are examined, along with implementation choices. The results will indicate whether differences exist between alternative enabling strategies.