Albertsons Cos. could see online grocery potentially reach 20% of sales, driven by stepped-up e-commerce investment and greater consumer affinities for digital shopping and eating at home following the COVID-19 pandemic, according to President and CEO Vivek Sankaran.
Boise, Idaho-based Albertsons stands as a “stronger company today than before we went into the pandemic early last year,” adding new customers and boosting shopper frequency and retention, Sankaran told Citigroup Global Markets analyst Paul Lejuez on Friday in Citi’s Retail Madness Virtual Conference.
“Over the last couple of years, just about every important capability in our company is now data- and technology-enabled, whether it’s the promotion engine, ordering, production, automation in DCs, etc. And we have more to do,” Sankaran said. “We’ve put a lot of money and energy into our digital transformation. We are excited. We’re going to roll out a whole new suite of customer-facing applications in April. We’ve been working on it through the year. Our e-commerce business has grown tremendously. We now have 1,400 locations with Drive Up & Go [curbside pickup]. We’ll get to 1,800 before this year is over. And we are aiming for two-hour deliveries in all our markets. That’s how we see that business going.”
He noted that Albertsons’ digital sales growth hasn’t dropped below 200% in all reported quarters during the pandemic period. In fiscal 2020, the company saw gains of 276%, 243% and 225% for the first, second and third quarters, respectively, covering from the end of February through early December.
“The fastest-growing piece of our business is Drive Up & Go. There are two things that help us. One is that we’ve got great locations, and so [consumers] are probably driving past us often,” Sankaran explained. “And I don’t think we are the only ones seeing that Drive Up & Go growth. It’s not just in the grocery sector. In other sectors, they are also seeing a lot of growth in pickup. My hypothesis is that, in Drive Up & Go, the consumer is in 100% control of when she shows up and we run to the car, right? In delivery, especially the longer [the distance for] the delivery, the more she’s waiting. It’s less controlled. So I just feel that's part of the psyche behind why people are enjoying Drive Up & Go and we’re growing it so much.”
Albertsons also has spurred growth by improving its performance in filling and delivering online orders, with rates now in the high 90s, Sankaran reported. The grocer has “made remarkable progress” in e-commerce fulfillment despite having “struggled with that in the early days of the pandemic,” he said.
“The team did two things. One is we kept adding Drive Up & Go across the [store] footprint. While we expanded it, we continued to improve quality. And the way we improved quality is we’ve rewritten all our picking algorithms, we’ve rewritten slotting algorithms, we’ve rewritten scheduling algorithms. All of that while expanding this business,” he said. “So the team has kind of expanded it while rewiring the whole business. And we feel really good about that.”
The pandemic has accelerated consumer adoption of online grocery shopping to the point where that channel is now a significant — and growing — portion of Albertsons’ business, a change that occurred much sooner than the company and the industry overall had expected, according to Sankaran.
“Before the pandemic, the theory was that we would have 10% of the sector online. I think we’re going to get there very soon — if we’re not already there — by the end of this year,” he said. “If you look at an upper bound — I think Korea was at 21%, one of the most dense markets — I think we could get there. I don’t know what time frame, but I’m imagining a business where 20% of our business is online. And I’d love it because you digitally engage better. We get potential there.”
Helping to fuel that growth will be increased automation. Albertsons currently has two micro-fulfillment centers (MFCs), powered by Takeoff Technologies, at Safeway supermarkets in South San Francisco and San Jose, Calif., which went into operation in late 2019. Though the pandemic interrupted Albertsons’ MFC rollout plans, the company has learned more about the technology and now expects to roll out another seven of the facilities this year “and then accelerate from there,” Sankaran said.
“Let me tell you why we are excited about the logic of the MFC,” he told Citi’s Lejuez in the videoconference. “One, we want to give customers an assortment that we have curated in a local market over many years. I’m sitting in downtown Dallas, and I know that the assortment here is going to be different if I went 20 miles to the west. The second thing we believe matters in e-commerce is having very small delivery radiuses. We want to get two-hour delivery systematically, again and again. So if you put those two together, then what matters is having automation that allows you to get the local assortment and have short-radius delivery, which is why we’re fundamentally excited about the MFCs, because it allows that. You can attach it to a store, near a store, etc.
“We see a lot of promise in the ability of an MFC to get costs down so that the [online] businesses are profitable and equivalent to what our core business is,” he added.
Depending on a market area’s density, an MFC can serve about six to 10 stores. “The MFCs help where you have more density, and they become less useful in more remote areas,” said Sankaran. “So I can imagine there are markets where that formula won’t necessarily work, and we’ll stay with Drive Up & Go at a store and have a slightly longer delivery radius. But in all our dense markets, we see the value in an MFC.”
Looking ahead, Albertsons will gauge its business performance on a two-year stack, given that the pandemic-triggered surge in grocery sales that hoisted 2020 results and will lead to tougher comparisons in 2021.
“We are manically focused on a two-year stack right now, a two-year stack on growth, two-year stack on share, two-year stack on every element of performance in the P&L so that we know that the business actually is re-baselining to a higher number,” Sankaran said. “That’s the way we’re thinking about it.”
While the pandemic has exacted a heavy toll financially on many Americans, the nation appears to be emerging from the crisis without “absolute carnage” among households economically, Albertsons’ CEO said.
“There’s what, $1.8 trillion in excess savings and a stimulus package coming. Because people are eating at home, we’re selling more premium wine than ever before, we’re selling more shellfish than ever before. I think people have enjoyed higher-quality food at home over the last several months,” Sankaran said. “My sense is, given people have money and have enjoyed higher-quality product, there will be a desire for continued consumption of higher-quality product. So I don’t see that behavior changing dramatically unless there’s massive amounts of inflation, and I’m not seeing that either at this time.”
Albertsons’ strong fresh food offering, growing private-label portfolio, increasingly personalized promotions and ongoing productivity efforts also leave the company well-positioned in the marketplace, he said. “We feel good about the fundamentals of the business. Our fresh portfolio, our Own Brands program, the variety of offering that we have — especially as people eat at home — we feel good about the strong foundation of the business. Like many of you, it’s hard for us to predict exactly what happens in 2021, but we are prepared for many different scenarios, and we feel good about the underlying strength of the business.”