The next revolution
E-commerce is poised to disrupt grocery and food distribution businesses
SHARA Serrano pulled into the Kroger parking lot and waited a few minutes as a store clerk loaded her trunk with the groceries she ordered online earlier that day.
“The convenience has been absolutely great,” the Meyerland mother of two said, “especially when I don’t have the time to go shopping with the kids.”
Serrano is one of millions of consumers whose online shopping habits are transforming the grocery business, fueling demand for new food manufacturing plants and cold storage facilities. In the Houston area alone, customers like Serrano have spawned a frenzy of industrial development.
Goya Foods, for instance, recently announced plans to nearly double its Houston manufacturing footprint. The New Jersey-based food company is adding 324,000 square feet of new warehouses, offices and support buildings to its 380,000-square-foot manufacturing and distribution facility in Brookshire, west of Houston. The plant’s expansion will help Goya reach new consumers across the Bayou City and the western U.S.
Preferred Freezer, a New Jerseybased cold storage company, last year opened its fourth facility in the Houston area. The 180,000-square-foot cold storage facility in Pasadena, southeast of Houston, can hold 10 million cubic feet of frozen meats, seafood, produce and juice, held at temperatures ranging from 36 degrees to minus 4 degrees. From there, the frozen food is distributed to grocery stores, restaurants and food service companies, both in the U.S. and abroad.
Experts predict that foreign grocers, including Germany-based Aldi and Lidl, will have to build their
own warehouses once they reach critical mass.
To meet the growing demand for construction, Houston-based engineering firm Lockwood, Andrews and Newnam recently expanded its food distribution and manufacturing services in the southern U.S.
LAN, a subsidiary of planning and architecture firm Leo A Daly, plans to provide planning, design, site selection and construction management services to clients in the growing industry.
“Grocery is one of the last retail categories to really experience a dramatic revolution in the online space,” said Kelli Hollinger, director of Texas A&M’s Center of Retailing Studies. “As more and more consumers have positive experiences with meal subscription services or trying out click-and-collect, that’s going to rapidly change consumer behavior.”
No more cleanup on aisle 10
Although groceries lag home goods and apparel in online sales, it’s one of the fastestgrowing e-commerce segments. About 1 in 5 American households shop for food online.
Busy families are using grocery delivery startups like Instacart and Shipt. Working professionals are buying dinner kits from meal-subscription companies like Blue Apron and Hello Fresh.
And Amazon has taken notice. The e-commerce giant last year bought Austin-based Whole Foods for $13.5 billion.
Demand for food processing, preparation and storage facilities is growing with Houston’s rising population and e-commerce preferences.
“We are seeing more of those food-related users floating around,” said Chad Parrish with First Industrial Realty Trust, one of the largest U.S. owners and developers of industrial real estate. “You will see more and more of those users coming into the market.”
Figuring it out
It’s still uncertain how much e-commerce will accelerate demand for food processing and storage facilities, said Rusty Tamlyn, a commercial real estate broker with HFF.
“It’s really early on,” Tamlyn said. “Amazon hasn’t figured out how to operate Whole Foods yet and if they’re going to use their stores as distribution centers. Everyone’s been trying to figure out how to deliver groceries and not lose a ton of money.”
Delivering groceries has always been a challenge for traditional grocers and e-commerce startups. Companies such as Peapod have been trying since the 1990s to make the low-margin grocery business profitable in the online era.
Most experts believe food will be delivered, not out of regional warehouses and distribution centers, but from existing grocery stores closest to consumers. Focusing on the “last mile” of distribution is key for the grocery industry, where products like ice cream can easily melt in Houston summers.
“It’s a tough business for people to try to make money on home delivery of perishables,” Tamlyn said. “A lot of people lost millions of dollars with home delivery.”
Aaron Hinderer, director of sales and operations for Preferred Freezer, said e-commerce’s impact hasn’t yet hit the company’s coldstorage business in Houston. The company has four coldstorage facilities in Houston where millions of pounds of frozen foods are stored.
Hinderer estimates frozen food for online sales represents about 5 percent of Preferred Freezer’s overall business. That includes ancillary products like gel-packs, which are used to keep prepared dinners cold in meal kits.
However, Hinderer expects the e-commerce side of the business to expand.
“E-commerce is growing,” Hinderer said. “It’s still a very small part of our business, but it’s taking away market share.”
Shopping lists to ClickList
Grocers are increasingly offering curbside pickup and home delivery services to compete with e-commerce rivals.
Kroger, one of the largest grocery chains nationally, began offering online grocery shopping two years ago in Houston. The Cincinnati-based grocer launched ClickList, which allows customers to order groceries online and have them available for pickup or delivery.
Today, 57 of Kroger’s 111 stores in the Houston area offer curbside pickup, while 30 stores also offer home delivery. Pickup costs $4.95 per order, and home delivery costs $11.95 per order.
Although online orders represent less than 10 percent of its business, Kroger expects it will grow. Although Kroger declined to disclose exact numbers, it said thousands of Houston families have used ClickList since it launched. The company plans to expand ClickList to more than 20 local stores in 2018.
“We see e-commerce as the way of the future,” said Jason Payne, Kroger’s e-commerce manager overseeing Houston. “We’ve put a great deal of investment in e-commerce.”
Each of Kroger’s ClickList locations features a dedicated e-commerce space spanning 450 to 1,000 square feet. Inside, there are computer terminals tracking online orders, freezer and refrigerated spaces as well as a dry foods staging area.
Outside, the supermarket is mapped out much like an e-commerce fulfillment center. Black stickers on the ground note aisle and shelf numbers. An army of 15 to 60 e-commerce clerks pushing carts full of black bins fan out across the store, picking up items using handheld scanners that tell them which products to pick up and what route to take around the store.
Online shoppers can leave notes for their clerks, telling them to pick up fruits of a certain ripeness or exactly which brands of toothpaste they like. Orders are scanned multiple times to ensure accuracy.
This year, Kroger will also debut its own meal kits in 20 stores across Houston. The semi-prepared kits, similar to Blue Apron, will offer dinner for two adults between $14 and $20, Payne said.
Brick and mortar surviving
H-E-B also offers curbside pickup and home delivery, but the San Antonio-based grocer is doubling down on its brick-andmortar locations, opening nine Houston stores in 2018 across hip urban neighborhoods and family-friendly suburbs.
Grocery stores, which have added banks, gas stations and flower shops in recent years, still have much to offer online shoppers, like Meyerland mother Serrano, H-E-B president Scott McClelland said.
“We think the rise of e-commerce, of people ordering groceries or having home delivery will increase, but we don’t think the relevance of a grocery store done right is going to go away,” McClelland said. “What you put into the store, how people utilize a grocery store, may change, but we still think there’s a place for grocery stores.”
Nancy Sarnoff contributed to this report.
Above: Preferred Freezer’s 10-million-cubic-foot cold storage facility is kept at minus 4 degrees. The building hosts 25,000 pallet positions. Below: Kroger e-commerce clerk Antonio Valderas picks out items from an aisle as he fills ClickList online orders.
Pallets of goods are loaded and unloaded in the dock area at Preferred Freezer’s 10-millioncubic-foot cold storage facility in Pasadena. The loading dock is kept just above freezing before products are placed in the storage area, which is cooled to minus 4 degrees Fahrenheit.
Kroger e-commerce clerk Antonio Valderas scans baby food as he fills ClickList online orders in West University Place. Fiftyseven of Kroger’s 111 stores in the area offer curbside pickup.