E-commerce has pervaded nearly every aspect of our lives. We go online to buy movie tickets, baby diapers, clothes. But though food and beverage continues to be the largest retail category in the U.S., a relatively small percentage of sales are currently digital. A January 2015 article in Business Insider estimated that less than 1% of food and beverage sales occur online.
Still, signs point to grocery e-commerce picking up soon, and quickly.
Just in the last year, Amazon PrimeNow and Google Express have expanded into same-day grocery delivery. This means more and more consumers will likely be clicking on carts rather than rolling them through the aisles. A recent article from Forbes.com suggests that though online grocery sales have been slow to get off the ground, a significant shift in consumer grocery shopping habits is “closer than it looks.”
This shift will have profound effects on the food processing industry. For decades, the industry has operated according to the same basic model: companies sell to grocery stores, where the consumer interacts hands-on with the product.
But what does it mean if the customer is now a company like Amazon? Sales, distribution, the consumer experience—basically every aspect of the food processing business—will need to recalibrate. How can the industry best adapt to, and even anticipate, the changes that our increasing shift to an online world will bring?
With nearly 25 years of experience at Kraft Foods, technology and product developer Sheri Cole has a great vantage point for assessing where the industry has been, and where it's going. For this article, we spoke with Cole about why she thinks that the rise of grocery e-commerce represents one of the most significant challenges—and opportunities—that the food processing industry will meet in the 21st century.
A Brief History of E-Commerce
Remember that brief period in the late 1990s and early 2000s, when you couldn't go more than a few blocks in a dense urban center without seeing a delivery truck from Webvan or PublixDirect? Then the first dot-com bubble burst, and with it went the early promise of grocery e-commerce.
The one major success story from that initial flurry of activity is Peapod, an online grocery shopping and delivery service. Peapod avoided the fate of its peers by starting small and local. Eventually, it grew and developed an exclusive relationship with Royal Ahold and Ahold USA grocers Stop & Shop and Giant Foods.
While Peapod has managed to circumvent some of the challenges faced by smaller start-ups, the major new players in the grocery e-commerce business don't have small-business concerns to worry about.
Amazon Fresh launched in Seattle in 2007, and has been expanding ever since, offering same-day grocery delivery in a growing list of high-density urban markets. In many cities not served by Amazon Fresh, consumers can opt for the company's PrimeNow service, which partners with grocery stores to guarantee its trademark two-hour delivery. In 2015, Google Express jumped into the fray, launching its own same-day delivery service.
Add smaller (but growing) companies like Fresh Direct and InstaCart to the mix, as well as subscription food services like Blue Apron, and it's clear that grocery e-commerce is making serious inroads to how consumers get their food—even with the added expense. Though an annual membership to Amazon Fresh costs around $300, Business Insider reported that 25% of Millennials said they would pay a premium for same-day food delivery.
The Impact of E-Commerce on the Food Processing Industry
Sheri Cole believes that companies like Amazon are only going to get more adept at delivering high-quality, fresh food in a customized way to consumers and that this represents a “huge opportunity” for the industry. It's a critical moment for food processing companies to figure out how to adapt to the new model and partner with the e-commerce sector. But, she says, “no one is doing it really well yet.”
This reluctance to embrace the digital frontier may stem from a general resistance to change among larger, longstanding companies. Cole acknowledges that that this wariness is justified. “The supply chain mechanism of a company like Amazon is completely different from what we've been used to,” she said.
Indeed, a 2014 article from Supply Chain Quarterly surveys the ways that Amazon impacted the field of supply chain management, citing customers' increased expectations for same- or next-day delivery as the most significant factors. For the food processing industry specifically, Amazon and its ilk upend the old model of grocery-store-as-customer, in which food processors send their product to distributors, who deliver it en masse on pallets to groceries. E-commerce companies, on the other hand, simultaneously warehouse less product and expect quicker turnaround time from their suppliers. Likely scenarios would also include customized pallets which, add complexity and cost.
And the supply chain is not all that will be impacted by a shift away from the grocery-store model. Consumers' real-time interactions with products have always driven product design. What happens when a consumer chooses products based on what they look like on a screen, not a shelf? What will manufacturers need to understand to drive interest and purchase? What might it unlock when designing for retail customers' shelf constraints is no longer a design requirement? These are the types of critical questions that Cole thinks everyone in the food processing industry needs to be thinking about.
How Food Processing Companies Can Succeed in the Age of E-Commerce
To keep up with the pace and whims of e-commerce, the food processing industry will need to examine and evaluate the effectiveness of every aspect of how it does business. Sheri Cole identified two major areas where food processing would do well to train its focus: manufacturing and recruitment.
Manufacturing: 21st-Century Agility
Gaining traction in the high-speed, ever-changing world of e-commerce necessitates a great deal of adaptability and agility when it comes to manufacturing. Cole likens this approach “pop-a-bead” manufacturing. Like the child's play jewelry that's infinitely remodelable, she thinks that the way for food processing companies to remain competitive is to develop modes of agile manufacturing that are “truly scalable and affordable.” This approach is not common in food today, where manufacturing design is either large or small scale and not highly flexible.
Such agility can, understandably, be more difficult for larger companies. One beacon in the industry comes from Mars, which has made inroads into one branch of e-commerce with its personalized My M&Ms site.
In an article for FoodProcessing.com, Mike Pehanich writes that Mars has been able to continue the mass-production on which their brand is founded and combine it with “rapid and highly profitable short-run product delivery.” Innovations in inkjet printing technology, order management technology, and inbound product delivery have allowed their wildly popular personalized candy products to thrive—at a premium price.
While Mars' success is buoying, Cole imagines that smaller companies may be the ones to make real leaps and bounds when it comes to innovating for the e-commerce arena. Smaller companies have two major advantages:
- They are inherently more agile, and
- They may be less tied to doing things the same way they've always been done.
Cole is particularly impressed with Hampton Creek's Just Mayo, which she lauds for their bold, simple product design, their digital marketing know-how, and their savviness when it comes to building a business. Rather than trying to do everything themselves, they found partners to manufacture and distribute. They also knew the challenges of competing for retailer shelf space, so they focused on key customers and grew through word of mouth via savvy marketing. A smart choice of customers— like Target and Whole Foods— allowed them to reach a broad range of consumers.
In fact, the rise of e-commerce might create a host of new opportunities for smaller companies, as the disappearance of slotting fees removes prior barriers to distribution. As these smaller companies become more competitive, larger companies will need to keep an eye on the smaller players' commitment to agility and openness to change.
New Workers, New Recruiting
Some of the innovations that will bring the food processing industry up-to-speed with e-commerce will undoubtedly come from industry veterans. But companies can also tackle these challenges by recruiting digital natives who are well-versed in this new world.
Unfortunately, this need comes at the same time as the food industry is suffering from a talent shortage. Not only are Baby Boomers retiring at an ever-increasing rate, but also the food processing industry is competing with other highly competitive industries and smaller food companies for Millennials.
Cole came up against this problem firsthand when she participated in on-campus recruiting for Kraft at her alma mater. The old method of recruiting, characterized by job fairs where companies would simply set up a booth and wait for students to flock to them, simply didn't work anymore. They needed to reinvigorate their “pipeline of technical talent.” So Cole's team reimagined their relationship with the university and its student population.
Cole and her team recognized that students who were going into the food industry were increasingly attracted to smaller companies. These smaller employers presented themselves as allied with young people's values and interests as employees, including greater flexibility and ownership over their workplace experience.
Kraft has worked hard to make its entry-level experience more in line with these 21st-century expectations, through internships that offered leadership and intensive skill-building opportunities. Once this “culture work” was in place, Kraft maintained relationships with its former interns, asking for their support to act as advocates for other potential new recruits.
In resetting its relationship the university, Kraft also partnered with the Food Science department to support educational programs relevant to the changing food industry employment landscape. Thus, the relationship between school and company blossomed from one that was merely “transactional” into an authentic partnership.
This innovation in human resources doesn't end when new people are hired on. Cole discussed exciting new programs at Kraft like “reverse mentorships,” where young, new employees share their digital-native knowledge with longtime employees. It's this kind of knowledge that will be invaluable as companies rise to the challenge of the digital age.
Change is Inevitable
Though it may be slow to get off the ground, grocery e-commerce is gaining momentum. The Business Insider report projects that “between 2013 and 2018, online grocery sales will grow at a compound annual growth rate (CAGR) of 21.1%, reaching nearly $18 billion by the end of the forecast period. For comparison, offline grocery sales will rise by 3.1% annually during the same period.”
This isn't the only type of change we will see as e-commerce makes its slow-but-sure ascent. A recent article at BeverageIndustry.com suggests that supermarkets will be going digital in other ways—creating mobile apps that consumers can use to interact with brands, for example. The more food processing companies are in play digitally themselves, the more they can be a part of that messaging.
New frontiers are, inherently, defined by the unknown. Sheri Cole suggests that, to not be left in the dust, food companies must devote resources to projecting into this unknown and embracing the possibilities of the digital frontier. The brick-and-mortar grocery store won't disappear completely, but its role in people's lives will change. The companies that get in front of those changes will be the ones that thrive in this new landscape.
It can be difficult to know where to look for inspiration when no one in the industry has yet fully grasped the potential of the digital age. Cole suggests taking a look outside the box—toward Silicon Valley, perhaps. She knows she may be an anomaly in the industry, but, she says, “I look at companies like AirBnB or Uber, and wonder, what would that look like for food?”