At an east-end Toronto Loblaws store, Safi Hafiz-Zadeh carefully picks through bunches of green onions, rejecting a couple with limp leaves and, approving the looks of two others, places them in a black bin.
As he searches for flawless Royal Gala apples and takes time to chat, his scanner starts to beep. It's telling him he's shopping too slowly, at 14 minutes and 44 seconds. The scanner asks him if he's okay. "Please let your manager know."
Mr. Hafiz-Zadeh isn't just any regular shopper. As a senior area manager at Loblaw Cos. Ltd., he oversees staff who pick and pack groceries for the retailer's budding e-commerce business, which entails customers ordering online and driving to its stores to fetch their purchases.
He's also at ground zero of the emerging online grocery battle. Loblaw is raising the stakes in a fledgling segment in which it plans to add close to 100 more of its e-commerce order pickup stores this year to its current 48. At the same time, other major retailers are stepping up their online selling. Amid the heightened activity, big players increasingly are trying to lure customers to the online pickup model rather than delivery services. Such services can be logistically complex and costly for companies, pinching already thin profit margins.
"Delivery has all the costs of pickup plus you have the delivery [costs,]" Jeremy Pee, senior vice-president of digital and e-commerce at Loblaw, said after watching Mr. Hafiz-Zadeh select the green onions and nine apples for an order. "Food is heavy and you have to keep temperature control and a lot of other factors … Economics aside, the customers just prefer pickup."
Two of the country's biggest retailers – Loblaw, the top player, and discounter Wal-Mart Canada Corp. – are betting that shoppers will vote with their wallets for online pickup orders as a more convenient way to grocery shop. Even so, once cyber-powerhouse Amazon.com Inc. brings its fresh food offerings to Canada with delivery service, as industry observers expect it eventually will do, incumbents could feel the heat to follow suit with their own deliveries.
"If we don't push the changes now, Amazon will definitely force the retailers to do that," predicted Mudit Rawat, chief executive officer of startup Urbery. It offers Uber-style online grocery deliveries from customers' stores of choice in Toronto and plans to expand across Canada.
A nascent segment, online grocery shopping represents less than 1 per cent of the overall $120-billion of annual sales in the Canadian sector, analysts estimate. But those sales are expected to rise at three to four times the rate of those made in-store, making up 3 per cent of total sales by 2018, according to e-commerce researcher Profitero.
In the emerging debate over pickup-versus-delivery, consultancy McKinsey & Co. has found pickups generate higher margins: after variable costs such as marketing, margins are 13.8 per cent for pickups and just 10.7 per cent for home deliveries. That's in a "best-case scenario" of densely populated areas in Europe, it says in the 2013 report. "The economics of pickup can be substantially more attractive."
Loblaw, which launched its pickup "Click & Collect" in the fall of 2014 in just three stores, has already swayed shoppers such as Cynthia Chapman to it.
Ms. Chapman, 59 and the mother of two university-aged children, has been using the service every week for the past year at the east-end Loblaws supermarket. She finds it eliminates her impulse buying and the drudgery of grocery shopping. "Now I rarely go into a grocery store," she said after driving into the Loblaws parking lot and having her $153.23 online order, including a $3 click-and-collect fee, loaded in her car by a Loblaws employee.
She said home delivery "might be a nice option" but she's pleased with pickups. Her one beef: Loblaw's website "needs to be more responsive. The search functions aren't the greatest." Mr. Pee countered Loblaw is upgrading its site weekly.
Executives at Loblaw and Wal-Mart say their research found that shoppers prefer picking up their online orders at their convenience rather than sitting at home waiting for a delivery.
"It doesn't mean that we won't do delivery in the future, but it's not in our plans today," Simon Rodrigue, senior vice-president of e-commerce at Wal-Mart Canada, said.
Wal-Mart and Loblaw aim to get customers in and out of their parking lots with their online orders in five minutes. Wal-Mart meets that goal more than 99 per cent of the time, Mr. Rodrigue said. Its research found 86 per cent of its customers would recommend the service to others. Wal-Mart introduced its pickups in Ottawa last summer and expanded them to Toronto in February, with 33 stores slated for the program by the end of May, he said.
Still, even the pickup model has its costs. Loblaw hired 10 to 12 employees for picking-and-packing in each of its 48 click-and-collect stores, Mr. Pee said. It expects that higher sales will eventually help offset steeper labour costs, he said.
Wal-Mart, which has 110 employees dedicated to its pickup service, finds savings by adopting a "hub and spoke" strategy in which four stores serve as pick-and-packing hubs for all its pickup outlets, Mr. Rodrigue said. More hubs will be added as the pickup program expands, he said.
Currently, a typical Loblaw online customer spends more than $100 dollars in a shopping trip, whereas an in-store customer spends just $30 to $35, Richard Dufresne, chief financial officer of Loblaw, told a CIBC World Markets retail conference last month. For the Click & Collect program to break even, Loblaw needs online shoppers to spend even more, he said. (A company spokeswoman added later other factors, such as more efficiencies, are needed.)
Mr. Dufresne said because of the scattered population in Canada and the high cost of delivery "it would probably not be economical to do. That's why we've been pushing to motivate the industry to move to click-and-collect, because it's a cheaper alternative for online grocery," he said. "Based on what we're hearing so far, it seems that a few of our competitors are trying to imitate us, which is the right answer for Canada."
Metro Inc. is the only major grocer without some e-commerce, although it plans to launch a service this year. Industry watchers believe it will offer order pickups while delivery service firms are in talks with the retailer about teaming up with it, sources said. A Metro spokeswoman declined to comment.
Startup delivery services, such as Urbery, deliver food from other companies, thus cutting the services' risk and expense of holding inventory, with potentially higher profits than grocers that do their own shipping, Urbery's Mr. Rawat said.
To help bolster its bottom line, Urbery charges about 10 to 15 per cent higher food prices online than in stores where its "grocery gurus" shop, Mr. Rawat said. Urbery expects to make a profit in 24 to 30 months after its year-ago launch, he said. "Our business model is quite lean."
Rival Instabuggy does shopping and deliveries for Sobeys' discount Freshco division as well as independent grocers and will soon do shipments for some Sobeys Urban Fresh stores, Julian Gleizer, CEO of Instabuggy, said. Sobeys spokesman Andrew Walker said it doesn't have a formal partnership with Instabuggy. "In essence they are using us as a warehouse."
Sobeys, the country's second largest grocer after Loblaw, runs its own delivery and pickup services at its IGA stores in Quebec and Thrifty Foods in British Columbia. Sobeys is preparing for a wider launch of e-commerce this year, sources have said. Mr. Walker would not comment.
Even Grocery Gateway, an online shop-and-delivery service which was founded in 1997 and has turned a profit "for many years," is considering offering pickups, said Anthony Longo, CEO of parent Longo Brothers Fruit Markets Inc.
But with razor-thin margins, online grocers need to find savings, said Tim McGuire, a senior partner at McKinsey. For instance, grocers that ensure their pickers use easy-to-manoeuvre carts and closely monitor pickers can boost picking speeds to three times those of the worst performers – and cut those costs by as much as half, Mr. McGuire said. It could make the difference between profit and loss, he said.
At the east-end Loblaws, Mr. Hafiz-Zadeh feels the urgency to shop faster when he hears his scanner beeping. "We are very time-sensitive," he said as he searches for unblemished apples. "We're focused on efficiency."