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Study: Regional Grocers Face Mounting Online Competition From Walmart

Mercatus Walmart

Last updated on July 25th, 2023 at 09:59 am

New research from Mercatus illustrates how much Walmart will continue to challenge regional grocers’ e-grocery business.

The retail giant enjoys on average a 15 percent price advantage online based on a large basket of groceries in the U.S. In addition, Walmart relies little on service fees to support the cost of pickup operations, and it generates some eight times more net revenue from retail media per online order compared to some regional grocers.

The advantages will likely continue to increase for Walmart in the coming years, as retail media monies are projected to climb at least 20 percent annually while automation will further lower its cost to fulfill online grocery orders.

These insights are part of recent research from Mercatus, a provider of grocery e-commerce solutions. The results suggest that regional grocers that operate their own e-commerce websites and/or mobile apps should reassess the role and relationship that various elements of pricing can have in creating a win-win outcome for customers and retailers.

“A key takeaway of this research initiative is that regional grocers need to consider pursuing a different path forward for online pricing, because they typically have less ability to cover the incremental costs of these value-added services than Walmart,” Sylvain Perrier, president and CEO of Mercatus, said in a statement.

“We recognize that grocers may view pricing as a third-rail topic, but the rationale and evidence for adopting a new online pricing paradigm continues to strengthen, and we want to help grocers navigate how they adapt to these competitive realities.”

The new online pricing paradigm shift also better aligns with why customers choose to buy from a regional grocer and points to a more sustainable path to competing online.

Last year, Mercatus found that most customers shop with a regional grocer because it is “conveniently located.” This year, Mercatus quantified what that means – four in 10 customers who say a regional is their primary grocery store indicated it is the closest store to them.

Nearly half of those who say Walmart is their primary grocery store drive past two or more rival stores to shop at the mass discounter, according to Mercatus.

Although “conveniently located” largely relates to in-store shopping, it also applies to online shoppers who receive their orders via pickup since this requires a trip to the store. The difference between regionals and Walmart reveals the implied trade-off between cost and convenience that customers make when selecting where to shop.

The new research initiative report includes many other shopper insights, including how correctly customers perceived online prices compared to in-store, how various elements of pricing affected repeat intent and how many shoppers viewed the weekly ad before placing their most recent online grocery order. 

It also outlines how regional grocers can help customers save money when shopping online under the new pricing paradigm.

For instance, grocers can benefit from leveraging a variable fee structure that flexes up or down based on when the customer wants to receive the online order. 

This approach empowers the customer to choose whether “speed” or “fee” is more important to them relative to that specific order. It also creates more opportunities for the retailer to realize labor savings by batching together orders during the pick and pack operation.

In the study, regional grocers will have access to a framework that tackles the core challenges associated with gaining agreement, positioning and managing the various pricing elements of this paradigm shift.

The framework, developed by Brick Meets Click, starts with documenting the cost to fulfill orders today and the role of service fees and retail media monies in helping to cover or offset this value-added service. 

It then examines how grocers can improve efficiencies by taking advantage of the interaction between fees and assembly activities before assessing an appropriate price premium for products online. The waterfall chart illustrates where and how a regional grocer is likely covering just a portion of the direct labor cost related to fulfilling a pickup order.

“Regional grocers are well positioned to help their customers save time, and they can also offer customers additional ways to save money based on how they want to shop,” said David Bishop, partner at Brick Meets Click. 

“Strategies like having lower prices compared to third-party marketplaces, price protecting ad items, offering digital coupons and offering graduated fees based on pickup times are all ways grocers can help their customers save money when shopping online.”

The study also touches on protecting advertised and promoted products, examples of how other grocers are communicating about online prices and reviews the potential benefit of offering a “free” pickup option to attract more cost-conscious consumers.

Research initiative

Mercatus commissioned Brick Meets Click to conduct the research and develop the framework. The research phase consisted of two parts – an in-market pricing study and an online consumer survey. 

The Mercatus pricing study was conducted in the Plano, Texas, trade area and encompassed eight retail banners (Aldi, Costco, HEB, Kroger, Market Street, Target, Tom Thumb and Walmart). It tracked a basket of 40 commonly purchased products and captured in-store and online product prices at stores within 5 miles of each other, using the banner’s first-party site or app and the same store as the pickup location for each respective banner. 

It also captured everyday and promoted prices, loyalty card savings, temporary price reductions and coupons March 15-16 and documented all related charges and fees associated with receiving a pickup order. 

The online consumer survey was conducted June 5-6 and collected the responses of 1,946 adults who participated in the household’s grocery shopping.

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