The Milkman 2.0: A New Model for Groceries as a Service
Transformation is everywhere we look in ecommerce. While some verticals adapt readily to transformation (like books, electronics and fashion), others resist or struggle with change. One vertical that struggles is online grocery. Online grocers blame difficult delivery, low margins, and lack of adaptation from customers for slow growth.
Amidst rapid change, we sometimes forget important lessons from the past. Groceries were actually the very first vertical that sold online. Well, it was not quite online as we hardly had electricity back then, but the milkman delivered milk every morning to our grandparents and great-grandparents based on a simple subscription order.
Indeed, we can look to the milkman model to help solve the online grocer’s struggles. It incorporated solutions for delivery, while addressing low margins and lack of adaptation—and made it all work marvelously. Let’s take a closer look.
Difficult delivery. Online supermarkets claim it’s not that easy to deliver perishable goods (as compared to non-perishables such as a computer mouse or a new sweater). If a home delivery is requested, there’s always the possibility that the shopper is not at home, which is often true if you deliver at 2:00 PM, since most of us work at this time. Milkmen used to get up notoriously early in order to complete deliveries before breakfast. People could rest assured that each time they opened the door in the morning, a new bottle of milk was waiting for them. The lesson? Don’t deliver at random hours using parcel delivery services. Use a regular, familiar delivery network which can be relied upon to deliver groceries early in the morning. That’s not to say there are no other viable options: in-store pick up and home delivery at chosen time slots are still worthwhile alternatives which should be pursued.
Low Margin. Compared to other verticals, grocers indeed work off a low margin, for multiple reasons. So did the milkman. But he knew exactly how much money he would earn the next day. The lesson we learn from the milkman is to offer products via a subscription service. Most things we buy in supermarkets are products we buy over and over, like coffee, cheese, cereals, orange juice …or milk. These are so called replenishment products that are bought again and again, with customers frequently remaining faithful to the product and brand. Good personalization engines can recognize these products with ease. If these are offered in a subscription service, the business model changes to a constant and predictable revenue stream. Once somebody is hooked on a subscription, their likelihood of discontinuation is significantly lower—almost zero. Consequently, the marketing costs for this product drastically fall—also to about zero. As long as the shopper remains subscribed, their reactivation cost is exactly zero. All the foundational investments made by every supermarket chain evaporate once a customer is turned into a subscription customer, so you can expect margins to increase. But beware: growing the customer base and margins at the same time won’t work. Acquire customers first, then once critical mass is achieved, turn the margin knob.
Lack of adaptation. Groceries are inherently a local business. People not only eat differently in the North than in the South, they also have different shopping habits. While the British prefer to do their shopping once a week at a hypermarket at the city limits, Germans will run almost every day to their little supermarket across the street. Obviously it’s easier to persuade British shoppers to buy online than Germans. Numbers prove that while about 24% of the groceries in the UK are purchased online, less than 1% of the Germans choose to buy their food online. The big supermarket chains (the usual suspects) don’t get it because they still rely on a single purchase model. Those who are overcoming this hurdle are new players who distribute meals based on subscription. HelloFresh, a German fresh ingredient box delivery service, is widely popular. They don’t have customers, they have members. Every week, members receive a box with new ingredients and new recipes to try out. And it’s not just Germany where these services have sprung up to take on a market that is supposedly slow to adapt: Blue Apron, Plated and Marley Spoon are just a few similar services. Their secret to success lies in their business model. I call it “groceries as a service.“ What’s the lesson we learn from these new services? While shopping at an online supermarket, the purchase decision has to be made each time, but with a subscription service, the shopper needs to make it only once. And once the subscription runs, the adaptation has already taken place.
No other vertical is as ripe and ready for subscription services as groceries. With today’s technological advancements, we can bring the milkman back and let him deliver more than just a couple of bottles of milk. Let him deliver all of our groceries.