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

By Emma Thomasson

BERLIN (Reuters) - France’s Carrefour (PA:CARR) announced a deal this week with Google (O:GOOGL) to boost its online shopping business. It is the latest in a string of partnerships between traditional food retailers and tech companies as grocery ecommerce takes off.

HOW BIG IS GROCERY ECOMMERCE?

Global grocery retailing is worth $5.9 trillion, according to figures from market research provider Euromonitor. Online sales of food 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 ecommerce. The online share of food retail in Britain is 5.5 percent and 4.5 percent in France, according to business intelligence firm Planet Retail RNG.

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

The United States 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, voice technology and digital assistants, according to UBS analyst Daniel Ekstein.

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

By 2022, Chinese internet giant Alibaba (N:BABA) will have overtaken Walmart (N:WMT) to become the world’s biggest retailer. Amazon (O:AMZN) will be third with China's JD.com (O:JD) in fourth place and Carrefour in fifth, Planet Retail 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 personalised offers to customers, said Planet Retail director Boris Planer.

"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 Ocado (L:OCDO) has taken the lead.

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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 online grocery.

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, online grocery was first offered by incumbents such as Tesco (L:TSCO) and Carrefour, while in China, the development has been led by Alibaba and JD.com 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 Amazon has persisted with its Fresh grocery service, launched in 2007, despite its logistical challenges and slow progress in winning customers.

Bernstein 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. Grocery retail 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

- Kroger (N:KR) seals warehouse deal with Ocado

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

- France's upmarket Monoprix chain, owned by Casino (PA:CASP), agrees deal to sell groceries via Amazon

- Carrefour announces deal with Internet giant Tencent (HK:0700)

2017

- Amazon buys Whole Foods for $13.7 billion

- Walmart and JD.com expand strategic cooperation

2016

- Walmart buys ecommerce start-up Jet.com for $3 billion

WHO IS NEXT?

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

- Bernstein analysts speculate that Alibaba might seek to partner with Kroger 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 Whole Foods groceries via its fast-shipping Prime Now scheme in select U.S. cities

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

- U.S. grocery delivery start-up 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.

McKinsey estimates that the additional expense of selling groceries online amounts 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 Oliver Wyman.

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, Oliver Wyman 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 Ahold Delhaize (AS:AD).

Grocery delivery is much more efficient in urban areas as retailers can maximise the number of orders each driver 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 France that is now gaining favour in the United States.

"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," Euromonitor analyst Tim Barrett