The Runway to Virtual Retail

The boring, archaic, and stagnant world of grocery retail is about to be turned upside-down. Thanks to technological development and investments in supply chain management, an opportunity has arisen for large grocers to shift their consumers’ behaviour towards an acceptance of virtual retail. Virtual stores are large, interactive touch-screens, three by six feet in size, that customers use to reveal virtual shelves of frequently purchased goods. Each grocery product has a QR code beneath it for customers to scan with their smartphone, adding the product to their digital shopping cart. After selecting a basket of goods, shoppers can use their smartphone to pay and select a preferred home-delivery time. A calculated roll out of these virtual stores in locations with delivery capabilities will combat consumer resistance and disrupt a maturing industry.

Big box retailers can use the unique capabilities of virtual stores to address the issues associated with selling groceries through traditional e-commerce platforms (i.e. websites). Consequently, they can increase market share vis-à-vis competitors, mimicking the familiar customer experience outside of a brick-and-mortar establishment.

Growth in the United States’ $1.2B grocery industry is a meagre 3.6%, leading to vicious price wars for market share and razor thin margins. Instead of continuing to compete with each other on price, Wal-Mart, Kroger, Safeway, Supervalu, and other big box grocery retailers looking to grow revenue must steal market share from regional players that control 76.7% of the market. To accomplish this, they must match the convenience that regional grocers offer their consumers through well located stores. Many of the large retailers are opening smaller-format urban locations, but this type of growth carries high investment costs and only incremental customer acquisition given market saturation. E-commerce proposes to reduce this fixed cost dilemma for retailers and win consumers by conveniently delivering goods. Unfortunately, dozens of failed online grocery efforts have proven that grocers will not succeed in the digital retail space unless they can achieve cost efficiency and appeal to prevailing consumer behaviour.

The Online Grocery Business Model: A History of Failure

Many retailers and entrepreneurs have sought to provide the convenience of online grocery shopping to consumers since the emergence of the Internet. However, without massive investment into supply chain management and inventory technology, the business model is infeasible. The costs of distributing, packing, and delivering goods must be passed onto consumers to protect profitability as shoppers will not pay prohibitive premiums when they can go to the store themselves. Historically, low sales volumes for e-commerce grocers do not justify the infrastructure investment that is required. However, over the past decade big box retailers have adjusted their cost equation, driving down prices by investing in automated inventory management and distribution systems.

Online grocers continue to suffer from consumers’ ingrained routine of physically searching through aisles in-store each week; consumers are creatures of habit, and when it comes to groceries, this tendency is amplified. While most groceries are dry packaged goods, an important portion of a shopper’s product basket is composed of fresh produce. This further complicates grocers’ efforts to bring stores online. The inability to see and feel items makes consumers hesitant to purchase on an e-commerce platform. The online shopping experience, either on a desktop or a mobile device, has failed to attract and maintain a strong following.

A Non-Internet E-commerce Solution?

Virtual stores are the solution to consumer behaviour problems that have previously plagued efforts to take grocery stores dig- ital. The virtual store concept has been launched outside of the U.S., and those formats can be applied in North America to gen- erate new revenue in a saturated grocery industry. Tesco, a multinational grocer, has opened virtual stores in Seoul, South Korea, and the London Gatwick Airport, realizing “great success with customers, paving the way to the opening of more.” Large interactive screens present groceries in a user-friendly platform using appealing life-size images, consequently reducing the barriers to acceptance of a digital medium. When online, consumers have limitless distracting content, requiring them to make an active effort to navigate past Internet intrusions to reach the grocery website. Moreover, virtual stores are novel. They prompt customers to react on the spot, maximizing use of idle time and consequently minimizing resistance to the digital platform.

Not all grocers are capable of operating this innovative model. Only large retailers who have invested heavily in bolstering their in-store inventory and supply chain management systems can cost-effectively ship and pack goods beyond the boundaries of their physical stores. Simply put, only the biggest and most efficient grocers can achieve the necessary economies of scale to support product delivery.

Airports are the ideal location for virtual store technology due to heavy foot traffic, and idle, captive consumers (while waiting at flight gates). Annually, 188 million leisure passengers fly domestically through America’s 29 busiest airports, representing 72 million households and a large group of potential customers. After checking in and passing security, distractions are limited.

The Candidate

There is only one company in the U.S. with the scale and competencies to implement a virtual store grocery model: Wal-Mart. Wal-Mart leads the industry, with double the market share of any of its competitors and groceries accounting for over 55% of its overall revenues. But size alone is not enough. It is vital that Wal-Mart demonstrate its dependability in delivering high quality produce for virtual stores to be successful. Wal-Mart’s just-in-time inventory system is able to consistently keep goods fresh. Orders from virtual stores, and Wal-Mart’s growing online consumer base, will increase turnover and reduce spoilage. Wal-Mart recently announced an agreement with UPS for same-day delivery of groceries ordered online for a flat fee of $10, further sup- porting this transition. This agreement, extended to include virtual stores, would allow airport shoppers to specify a date and time window for delivery in advance. This lead time, given from orders made at departure gates, will allow Wal-Mart-UPS trucks to enhance their capacity utilization. The UPS partnership must be closely managed, but nonetheless sets Wal-Mart apart in its ability to deliver goods to virtual store consumers at a reasonable price, utilizing the core competencies of a seasoned logistics firm.

Why Is This A Good Strategy?

The recommendation that Wal-Mart expand into virtual stores is based on this format’s ability to accommodate traditional grocery shopping behaviour previously ignored in past online ventures. The ability of the virtual store to provide a tangible representation of groceries on an interactive screen will help consumers transition from actually touching and feeling a product in traditional stores to solely viewing images on a screen; virtual stores ultimately help reframe consumer perception towards e-Commerce grocery shopping.

Virtual stores will also help consumers overcome their distrust in the delivery concept. Specifically in airports, consumers are keen to take advantage of an opportunity to eliminate the hassle of shopping to replace essential goods (i.e. milk, bread, cheese, orange juice) following a trip away from home. By placing virtual stores in airports, where consumers have no other convenient, realistic option for replenishing their groceries, consumers will be compelled to try purchasing virtually. If properly executed, Wal-Mart’s delivery capabilities (in partnership with UPS) will legitimize any delivery guarantees.

Virtual stores are a cost-effective way to reach consumers that would not otherwise shop at Wal-Mart. This sales medium helps the big box retailer grow its reach beyond its typical consumer segment. The company’s current strategy of reaching new markets by opening smaller, urban stores carries high recurring and non-recurring costs. Virtual airport stores, on the other hand, provide sales opportunities with a diverse cross-section of consumers for less investment. This is not to say that Wal-Mart should exit its brick-and-mortar expansion efforts. Rather, Wal-Mart should complement its existing strategy with the introduction of virtual stores in support of their broader e-commerce strategy, an area Wal-Mart considers to be a “priority going forward”.

Compared to Wal-Mart’s other efforts at increasing market share, virtual stores would require very low levels of capital investment and related investment costs. Each airport terminal will have several virtual screens, accompanied by two employees to provide assistance. The operating costs would be composed of this minimum wage labour, and the inexpensive floor space of airport aisles. The inventory management and packing costs would be marginal given Wal-Mart’s existing in-store infrastructure. The upfront costs are limited to technological development of the software platform and the screens themselves (roughly $6,000 each). Virtual stores are easily scalable, and should Wal-Mart experience overcapacity at airports, screens can be added without a noticeable impact to operations. This selling medium can also reduce empty space in UPS trucks delivering existing online orders, lowering the distributors’ per order costs, and thus rewarding collaboration.

So What?

In an industry where fractions of a market share percentage equate to millions of dollars in revenues, competitors are sure to take notice. However, it is unlikely that they will be able to replicate Wal- Mart’s virtual stores. The retail giant has best-in-class inventory and excellent supply chain management, both of which are necessary to implement this strategy on a significant scale. Competitors could operate regionally, but Wal-Mart’s ability to insert virtual stores ubiquitously in domestic airports provides value by allowing flight-goers to order groceries for when they arrive home from wherever they are departing. Alternatively, large grocers may try to attract consumers by implementing a similar technology in other high traffic areas, such as train stations. However, these locations will not have the same idle and captive audience as an airport.

The saturated in-store grocery market requires that large box retailers find growth via new mediums and consumer segments. Wal- Mart is uniquely positioned to use modern technology to spawn a shift in consumer behaviour, helping unlock the potential of the previously failed digital grocery business. By opening virtual stores in U.S. airports, the company can tap into a captive and diverse set of consumers to increase revenues. Virtual stores may be the catalyst to finally push grocery shoppers into the 21st century.