The COVID-19 pandemic has had a profound impact on the retail grocery business, but Brittain Ladd believes this is just the beginning. The former director of Amazon Fresh and current consultant to Amazon and Kroger says that big changes to grocers’ business model are coming. GLG recently met with him to discuss what he sees unfolding; below, his comments are edited for space and clarity.

Before we look ahead, give us your view of what’s happening right now.

First, ignore everything you’re reading related to COVID-19 and its impact on grocery retailers because it’s much bigger than everyone realizes. For retailers to survive in the future, they absolutely will need to change their business model. But let me address where they are now.

For years, I’ve been writing that grocery retailers have been more focused on reducing cost in their supply chain than reducing risks. The coronavirus has proven the weaknesses in having an efficient supply chain with minimal inventory. Many retailers had only two to three weeks’ worth of safety stock in their facilities when the virus hit.

Why were they caught so flat-footed when the experience of China and Europe showed that people weren’t going out and needed to prepare more food and have more paper goods at home? Why didn’t a single U.S. grocery retailer go out and purchase all available tractor trailers – especially refrigerated trailers – fill them up, and position them at their stores? Why didn’t one reach out to Procter & Gamble, Unilever, or other food companies and say they would take everything the manufacturers could produce? It’s because of their current “just-in-time” business model, and there must be a better one for how they fulfill groceries.

So, what’s the model?

It’s micro-fulfillment, or click-and-collect, where the customer orders online and then goes to the store to pick up groceries. Grocery retailers must invest in micro-fulfillment systems that they can put in the middle of their store or the back room to automate and speed up grocery picking and fulfilling. They also should have pickup windows so customers can walk or drive up, place an order, have the machines fulfill it, and then pick up the order right there. By changing their business model so the stores become like vending machines/warehouses, grocery retailers can operate 24/7, 365 days a year.

Why does the model have to change, especially since online grocery shopping is already doing so well as a result of COVID-19?

The reason for the uptick in online grocery ordering is because many consumers don’t have an alternative. Once this crisis passes and consumers go back to stores, online grocery ordering will decrease, but to a level higher than it was before the coronavirus arrived.

The challenge with the current model is that online grocery ordering doesn’t get cheaper as volume increases because the costs don’t scale. Lots of customers are ordering, but not a lot from the same areas, which keeps costs high. If grocery retailers really want to succeed in online grocery retail, they must move into micro-fulfillment so they can automate the picking of the groceries, reduce labor costs, and implement a marketing strategy to increase the density of deliveries going to specific regions. If they do that, they will not only gain market share but also generate a profit.

What investments will be necessary to change the model?

The best available solution I’d recommend is a system from AutoStore, whose software and technology have been proven at 450 sites globally over the past 22 years. For groceries, they simply changed their software to recognize how not to put a heavy item on top of a light item and other industry-specific things. Their system costs $1 million to $1.2 million, plus implementation costs, and the payback period averages 14 to 20 months. Grocery retailers who think that’s too big of an investment obviously don’t know what it’s costing them to run their stores now.

Which companies are leading in these innovations?

 I think Walmart and Target will be AutoStore customers, and Albertsons will switch to it from a system made by Takeoff. Overall, the larger retailers – Macy’s, Kohl’s, Target, Best Buy, Dick’s Sporting Goods, Academy Sports, and others – understand the need to do this, and the COVID-19 crisis may hasten adoption. They see the possibility of having to shut down during certain periods of the year if the virus becomes seasonal and that having a micro-fulfillment solution inside their stories allows them to retain their value because they can operate with fewer people. Customers will wind up changing their behavior.

Does operating with fewer people pose other problems?

 We’re looking at a future where millions of people are going to be displaced because they don’t have the skills to transition into other areas, which is why I think the next administration and the one after that will have to do more in the way of reeducation or retraining. Automation is the single word I hear mentioned most from executives who want to create a fully automated retail chain. Technology is making that easier to do, and by 2025 or by 2030 at the latest, there won’t be a single large retailer using people to do fulfillment on a large scale in any area of their company.

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About Brittain Ladd

Brittain Ladd is a digital, strategy, supply chain, and last-mile delivery consultant. In this role, he recently worked with Kroger. Before becoming a consultant, Ladd worked with Amazon between 2015 and March 2017, leading its effort in cross-border supply chain, logistics, transportation, and last-mile delivery and Worldwide Expansion, Amazon Fresh, and Pantry Operations.

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This article is adapted from the April 9, 2020, GLG teleconference “Efficiencies and Evolution in Grocery Retail.” If you would like access to this teleconference or would like to speak with Brittain Ladd or any of our more than 700,000 experts, contact us.

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