Speed is the name of the game in grocery delivery these days. JOKR, Go Puff and others have been pushing speed as the way to win the grocery delivery game. But two university professors in a recent MIT Sloan Management Review article argue that reducing the delivery window is a better strategy for legacy grocery stores.
“Precision instead of speed is key,” said Pedro Amorim, assistant professor of industrial engineering at the University of Porto and a co-author on the study. “Executing a strategy dedicated to speed alone can be expensive, particularly for grocery retailers, whose margins are notoriously thin.”
Over the last year and a half, people’s shopping habits have been transformed, and many people have turned to online shopping and delivery. According to the article, 18% of retail purchases worldwide were done online in 2020, and 41% of grocery shoppers in the U.S. purchased groceries online for the first time in 2020.
To keep up with the evolving landscape, grocery stores have invested millions of dollars in online ordering systems and had to make changes on the fly to adjust to new customer expectations. They have built out fulfillment centers and added robotics order picking technology. At the same time, the new speed-focused delivery companies have seen billions of dollars in venture capital investments.
“Retailers competing on speed tend to redesign their networks to bring inventory closer to the customers,” the authors state in the paper. “This entails using stores as fulfillment centers or acquiring additional warehouse space closer to consumers. Some retailers invest in automatic picking systems to reduce the time required to pick and pack orders, whereas others expand their delivery fleets to shorten routes and decrease transportation lead times.”
The two professors argue that a data-driven approach is better than just focusing on speed. Grocery stores need to maximize the route efficiency, allowing drivers to arrive at a specified time even if it is a day or two after the order is placed. They argue that “focusing on speed alone may cause a company to overlook opportunities to acquire and retain online customers who prefer delivery attributes other than speed. In fact, we found that customers exhibit differences in their willingness to pay for delivery speed, delivery precision, and delivery day choice.”
They offer four recommendations:
- Invest in data and analytics infrastructure: This includes tools that collect and manage data on customer behavior, such as how they navigate through a site. It is also essential to track purchases across both online and offline channels. That often requires changes in data management to give cross-functional teams access to all the data.
- Collect and analyze customer-specific time-slot selection data: Retailers just beginning this effort can focus on basic descriptive analytics and understand which options customers select at the moment of checkout.
- Understand what delivery attributes drive loyalty and repeat purchases: This requires the retailer to have some capability in predictive analytics. Questions of interest include whether different customer segments prefer one delivery attribute over another.
- Work across teams to roll out new delivery strategies: To capitalize on their newfound understanding of customer preferences, operations and marketing teams must collaborate closely. Operations can design the fulfillment strategy, and marketing can promote the improved service.
“Analytically minded retailers can craft delivery time slots that are unique to each customer based on revealed preferences,” said Nicole DeHoratius, adjunct professor of operations management at the University of Chicago Booth School of Business and a co-author on the study. “I strongly encourage retailers to rethink their operations to optimize not only on speed but also the most appropriate combination of speed, precision, and flexibility.”
From the research, the professors found that customers are willing to wait longer for delivery under certain conditions:
- A customer will wait 10.8 hours longer for a delivery if the delivery window is one hour shorter
- A customer will wait an additional 7.5 hours longer if the delivery can be received on a preferred day of the week
- Customers tend to prefer to receive orders at the end of the week rather than on weekends
Another key insight from the paper was how delivery preferences impacted customer loyalty and basket size. The researchers found that repeat customers were willing to pay more for delivery, and customers were willing to pay twice as much for delivery when the delivery window was reduced.