E-commerce transforms food industry for better

By Mike von Massow

Editor’s note: Dr. Mike von Massow is an associate professor in food, agriculture and resource economics at the University of Guelph and is the Ontario Agriculture College chair in food system leadership. He can be contacted at mvonmass@uoguelph.ca.

COVID bends but does not break food system

The trend of ordering groceries online for pick-up or delivery has exploded during COVID-19.

Our food system has adapted remarkably well to the pressures of the COVID pandemic. While we have experienced some short-term food shortages, these were driven more by demand surges than by supply issues. We also did see some disruption for producers when problems arose in meat processing plants, but these appear to be largely behind us, and supply is flowing relatively normally again. 

The COVID experience so far has highlighted some vulnerabilities in the food supply chain but has also shown that the system is remarkably resilient. The challenges of the pandemic have also highlighted some opportunities within the system. One of those opportunities is for smaller food processors to access consumers directly through online channels.

Consumer, retailer behaviours adapt to circumstances

We have seen changes to food shopping behaviours arising from the pandemic. When the original shutdown occurred, we saw a combination of factors affect the food system. The food service channel closed completely and still has not opened back up to pre-COVID levels. Consumers were nervous about food availability, and overall demand at retail increased, because we were not eating out anymore. People shopped less frequently, and many tried online ordering (with or without delivery) for the first time. 

There were clearly challenges early in the process. Companies struggled to build the capacity to pick orders and coordinate delivery or pick-up. And there were different approaches to the market. Sobeys launched its ‘Voila’ project, which picks orders from a state-of-the-art robotic warehouse that can assemble a 50-item order in about five minutes, which then ships directly using an optimizing routing software. 

Other stores are picking orders from existing physical store inventory and offering pick-up or delivery through third-party partners. There has been an explosion in delivery, which has created the infrastructure to allow other smaller companies to piggyback on the opportunity. Small wineries and craft breweries, as an example, have seen a fundamental shift in their supply chain with a significant portion of the business moving to online ordering and direct delivery for as little as $5 an order. This is a huge opportunity for small food processors to access customers directly to maintain margin. 

There is an opportunity for smaller processors and farmers is to establish a web interface with delivery to allow them to deal directly with the consumer. There are many small food processors who have identified and begun to leverage this opportunity, which is expected to grow.

Several factors are driving this opportunity. First, as we have already outlined, more of us are buying things, including food, online for delivery to our homes or pick-up at a convenient point. While most of us will not ordinarily spend time going from physical store to store to find the product we want at the price we want, jumping from website to website requires little effort. It is easier to comparison-shop online, and once you find the website you like, repeating an order the next time is very simple. This is important. 

It is difficult for many smaller processors to get onto store shelves. It can be very expensive, and small processors may not be able to provide the volume that large retailers require before the retailer will even consider adding a new product. For many of these processors, they have no way to access a larger customer base but an online shopping platform, and enhanced delivery expands the potential market dramatically.

Once we remove the requirement for consumers to go to the store in-person, getting products home is also easier from a delivery perspective. The cost of direct-to-home delivery is going down. Leveraging the large volume of orders that delivery companies are carrying from a variety of sellers provides access to smaller-volume sellers. While the delivery cost needs to be small-ish relative to the total cost of what you are ordering, this burden has been lessened given the huge volume of delivery vehicles on the road, which lowers the cost per delivery.

It is also easier to receive products now that many of us are working from home. Coordinating multiple deliveries is much easier if you are at home regardless, and most deliveries can simply be dropped without signature. There does remain some threat of theft, but that is mitigated by those spending more days working from home. Meat processors have the additional cold chain requirement, but there are refrigerated options available, and the speed of delivery – especially within local markets – makes it less difficult.

It is also worth noting that large grocery companies are downloading some costs onto their suppliers. It is already difficult enough for small processors to get on the shelves of major retailers. Additional costs may make it even less profitable and provide further impetus to invest in the infrastructure to sell directly to consumers.

Challenges remain, but future is bright

‘Voila’ by Sobeys is a robust grocery delivery service currently offered in the Greater Toronto Area. Other services by national and regional retailers serve most major markets across Canada.

There are no doubt challenges associated with selling online and costs associated with both infrastructure and delivery. Companies require a new skill set to leverage the opportunity. There is some risk in making the investment in the case that the trend does not last beyond the pandemic. However, there is strong evidence to suggest the trend is here to stay. Sobeys’ investment in the ‘Voila’ system should provide some comfort to smaller processors in that regard.

Meat comes with some unique challenges beyond the obvious cold chain requirements. Customers are accustomed to selecting the size of package that they want. In some cases, particularly for specialty products, they are able to point to exactly the product they want. In the case of online orders, sizes and prices need to be standardized so that payment and shipping can be done expeditiously. There may be an opportunity to have customers provide a weight range and price per kilogram. The order would then be billed only when the specific product is picked and included in the order. These are unlikely to be significant issues for consumers and may require more of a shift to the mindset of sellers. 

There is a real opportunity for certain differentiated products to shorten the chain and deal directly with the end consumer. Small players will not compete on commodity products – shorter supply chains still have cost – but on specialty products, the opportunities are real. More and more companies are driving growth through this channel, and it is expected to become even more important as time goes on.