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Each day TFO Canada publishes a sample of trade news on the Canadian import market along with any new, updated or changed regulations and legislations regarding international trade; countries in which TFO Canada offers services and on the export sectors which it promotes.

 

Why you shouldn抰 expect online grocery shopping to catch on in Canada any time soon

Monday, October 26, 2015 > 11:33:27
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(Financial Post)

At the dawn of the Internet back in the mid-1990s, market ebullience over how the new technology might change consumer behaviour seemed to trump common-sense ideas about how the grocery supply chain works.

So it wasn’t a surprise that most early online grocers such as Webvan bit the dust within a few years of operating, saddled by high costs.


And while their failure didn’t utterly kill the dream of getting milk and apples delivered to your home, in Canada it’s still not very likely that will happen any time soon, despite the cautious strides of our bigger grocers into online fresh food retail.

Since the dot-com shakeout, online retail of fresh groceries has been confined primarily to smaller, local businesses in dense urban hubs — Grocery Gateway in Toronto, Smart City Foods in Vancouver and Sobeys-owned IGA in Quebec.

In the past, Canadian retailers have been cautious to roll out online shopping with delivery in a vast country with a spread-out population, but have started to make headway in areas that have caught on with global consumers the most — small, non-perishable items like books, makeup, electronics and athletic apparel.

Both Amazon.ca and Walmart.ca have ventured into non-perishable packaged goods and groceries such as canned goods, diapers and shampoo, but when it comes to fresh and bulky grocery items such as watermelons or whole chickens, it’s not so easy to do profitably.

Sylvain Charlebois, a business professor at the University of Guelph, notes while the online grocery business in Canada “is ongoing, it’s not necessarily growing.” The researcher and food policy expert said the industry in Canada is cost-sensitive and highly traditional.


When small retailers do discreet home delivery to local neighbourhoods, Charlebois said, people tend to be willing to pay more for convenience. Such a system places less of a cost burden on retailers who service orders from a customer’s local store rather than fulfilling it from a central warehouse 50 kilometres away.

“In Montreal, convenience stores have always played a huge role in the food market, and in Quebec to this day you still see bicycles delivering convenience store orders to people’s homes,” he said.

“The online business was quite a natural fit for Sobeys in Montreal and Quebec,” he said, because people were accustomed to the deliveries and it serves a small segment of the overall market.

In the U.S., Amazon began a fresh grocery delivery service in its hometown of Seattle in 2007 and has since rolled the program out to a handful of U.S. markets such as Los Angeles, New York, and Philadelphia. Customers wishing to shop on AmazonFresh are required to pay an annual US$299 “Prime Fresh” fee in addition to a US$50 minimum order for free delivery.

Setting up a similar service in Canada’s highly competitive grocery market would require the company to build infrastructure to house perishable goods, the flip side of bricks-and-mortar retailers, who require a sizable IT investment in order to begin selling online, whether for delivery or pickup.

Beyond IT costs, experts say, it is tough to determine how a big grocery chain with stores could set up a delivery network that is affordable for consumers and provide enough volume to be profitable for big bricks-and-mortar retailers.


Big grocers such as Loblaw Cos. and Walmart Canada are instead following a less costly, albeit technology-forward path that takes some of the legwork out of consumers’ daily routine with new “click and collect” grocery pickup programs.

Click and collect programs are growing in popularity around the world but are still in their infancy in this country, operating at Walmart stores in and around Ottawa and in a test market run at a handful of Loblaw stores in Ontario. Customers order online and then pick up their full order of perishable and non-perishable groceries at a designated pickup zone for cars outside the grocery stores.

Underlying all grocery executives’ goals for e-commerce is a desire to offer convenience to customers in a sustainable way, one way that doesn’t lead to squeezed profits or lower productivity at stores.

“We certainly feel that click and collect is our favoured e-commerce strategy or proposition for the Canadian consumer,” Galen Weston said in July during Loblaw’s second-quarter conference call, adding the company would expand the service as long as it meets customers’ needs and grows in volume.

“The fact that Walmart announced a similar mechanism for delivering fresh food e-commerce to consumers, that’s a good thing,” Weston added. The more people who are doing click and collect who have incumbent retail assets the better, so we welcome it. E-commerce is going to be an important part of the way that retailers do business in grocery and in drug over the coming years, and we are well-positioned.”

One non-retailer in the category is Penguin Fresh, which launched recently at one Toronto-area SmartCentre mall and is in pilot mode at two others. The service enables customers to order selected fresh groceries online and pick them up at refrigerated Penguin Pick-Up kiosks in the parking lot.

Charlebois noted just one per cent of all food sold in Canada is currently sold online. That compares with more than four per cent in the U.S. and five per cent in Europe. But he believes clicking for groceries will keep on growing, albeit gradually.

A Nielsen global e-commerce survey published last April found that models such as click and collect might work better in countries such as France and Italy, where labour costs are high.

“The last mile of e-commerce presents sizable logistics and cost concerns that have not yet been solved,” said Patrick Dodd, president of global retailer vertical at Nielsen.

In China, where 46 per cent of those surveyed by Neilsen shop for groceries ordering online with home delivery, the high population density and low labour costs make home delivery economically viable, Nielsen noted.

“In addition, booming smartphone ownership and usage have created huge mobile commerce opportunities,” in China, the report said.

In Britain, consumers may like the ease of online grocery shopping, but the unfolding industry has been hard for many grocers to manage though it is a far smaller, more densely populated market than Canada.

“Online sales growth has exacerbated profitability problems because of the inability of many retailers, particularly in grocery markets, to claw back the full cost of fulfillment from online shoppers,” said Mark Teale, head of retail research at CBRE, said in a report this year from KPMG/Ipsos Retail Think Tank. “Margin dilution is the inescapable result of this pressure. Online has proved brilliant at capturing sales; its record as a profit generator is much less impressive.”

Charlebois believes Canada will catch up to the U.S. and Europe in the next 10 to 15 years in terms of online retailing of fresh groceries. “I don’t think the commitment is there yet on the part of grocers when it comes to thinking of the omnichannel — offering the same experience to consumers online as you would get in the store.”


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