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Explainer: Why are grocery retailers teaming up with tech giants?

Reuters  |  BERLIN 

By Emma Thomasson

BERLIN (Reuters) - France's announced a deal this week with to boost its business. It is the latest in a string of partnerships between traditional retailers and tech companies as takes off.

HOW BIG IS

Global grocery retailing is worth $5.9 trillion, according to figures from provider of and drink only accounted for about 1.5 percent of that in 2017, but are growing fast in some key markets.

The figure is much higher in countries where retailers have quickly embraced The of retail in Britain is 5.5 percent and 4.5 percent in France, according to firm RNG.

China's market is expected to almost triple by 2022 to account for 11 percent of spending, according to grocery industry research group IGD.

The is a laggard on just 1 percent but is expected to more than double by 2022, according to IGD.

WHY DO RETAIL GIANTS NEED TECH PLAYERS?

Many traditional grocers need help with automatically replenishing products in stores, shopper subscription, artificial intelligence, and digital assistants, according to

"This is bringing together previously unlikely bedfellows," he said. "has positioned itself an ally in the tech arms-race and so partnership seems a pragmatic, to build skill and scale."

By 2022, Chinese will have overtaken to become the world's biggest retailer. will be third with China's in fourth place and in fifth, predicts.

While retailers possess a huge amount of data on shopping habits, particularly through their loyalty schemes, they are not as good as big tech companies at using it to make to customers, said director

"The online and offline worlds are coming together. This ability to connect with the customer and mine data is going to be one of the main capabilities for the future," he said.

"Retailers are beginning to understand that it would be a big mistake to think they can do it on their own."

They also need help in setting up automated warehouses to enable fast picking of online orders, an area where Britain's has taken the lead.

WHAT IS IN IT FOR THE TECH TITANS?

Storing and delivering food, especially fresh and frozen products, is a major headache. Many British retailers have struggled to turn a profit even after two decades of experimenting with different ways to handle

However, bricks-and-mortar retailers have major advantages over pure online players: they have long established relationships with suppliers, trusted own brands, logistics expertise and stores that can be used as a distribution network.

In Britain and France, was first offered by incumbents such as and Carrefour, while in China, the development has been led by and partnering with traditional supermarkets.

Consumers shop for food on a more regular basis than most other categories - it accounts for third to a half of all spending in many developed countries.

That is the main reason why has persisted with its Fresh grocery service, launched in 2007, despite its logistical challenges and slow progress in winning customers.

analysts say: "Once a retailer cracks the logistics path for grocery ecommerce, it provides a high frequency platform from which other categories can be approached. can therefore not be ignored."

RACE TO PARTNER

The need to combine expertise in food with digital capabilities has triggered many deals in recent years.

Here are some of the biggest recent ones:

2018

- seals warehouse deal with Ocado

- pays $16 billion for 77 percent stake in Indian ecommerce firm Flipkart

- France's upmarket chain, owned by Casino, agrees deal to sell groceries via Amazon

- announces deal with Tencent

2017

- buys for $13.7 billion

- and expand strategic cooperation

2016

- Walmart buys for $3 billion

WHO IS NEXT?

- While and JD.com say they want to focus on and for now, they have global ambitions and analysts expect they might eventually make moves into or Europe, perhaps with local partners.

- analysts speculate that Alibaba might seek to with or Britain's Tesco, while they predict Walmart could also deepen its cooperation with JD.com.

- Amazon could roll out its Fresh service to more markets; it also plans to offer groceries via its fast-shipping Prime Now scheme in select U.S. cities

- is expected to sign more deals with retailers in other countries, particularly continental Europe

- U.S. Instacart, which picks and delivers groceries for retailers, might need to make a strategic shift after Kroger's deal with Ocado

WHAT IS THE DOWNSIDE?

Grocery margins are already razor thin and ecommerce is expected to erode those further due to the high costs of delivery and the need to invest in technology and logistics.

estimates that the additional expense of selling to between 4 and 7 euros per transaction, largely due to delivery costs.

"Bricks-and-mortar grocers will feel a significant financial impact, as their slender margins make them sensitive to even a small loss in market share," according to a recent report by management consultants

Up to 30 percent of store space could close in most of the countries it has modelled if online grocery reaches about 8 percent market share, predicts.

However, online could provide just as high a return on capital as offline retail, as it requires less investment than running and owning stores, according to

Grocery delivery is much more efficient in urban areas as retailers can maximise the number of orders each unloads in a fixed period, part of the reason it has taken off in densely populated places like Britain and Chinese cities.

In suburban or rural areas, it makes more sense to encourage shoppers to collect orders themselves from stores or curbside pick-up points, an approach pioneered in that is now gaining favour in the

"It is still a category that needs a lot of work. The cost of delivery needs to be brought down, infrastructure needs to be built, and shopper trust needs to be established. This will take years," Tim Barrett

"Retailers and suppliers cannot wait for it to become mature and figure it out then. As with all paradigm shifts, true leaders will have established their presence and expertise for years before the trend hits the masses."

(Additional reporting by Lisa Baertlein; editing by Anna Willard)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, June 13 2018. 21:00 IST
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