Case study

William Blair Funds investing for the future: The Global/Local

Challenge of Online Groceries

Tyler Chamberlin Ph.D.

Introduction:

The global COVID-19 pandemic has forced billions of people into their

homes and out of retail stores. The result has been a massive shift

towards online shopping which has hugely benefited e-commerce companies.

In addition to being one of the world’s most valuable companies, Amazon

is now also the world’s most valuable brand1, having expanded from books

to almost everything consumers want to buy. Well, almost everything.

For a company like Amazon, that seeks to make life more convenient for

consumers, developing an online grocery always seemed like a natural

fit, and they have long coveted this valuable, if competitive, global

market. But success in this market has proven elusive, both for Amazon

and other would-be online grocery retailers. One of the key questions

surrounding, what most expect will be a robust online market for

groceries even when the current pandemic passes, is whether the online

world of groceries was likely to be more international or even global

when traditionally, grocery retailing had remained dominated by domestic

competitors.

The Grocery Business:

Food is a necessity of life, and big business all around the world. For

around a hundred years now, grocery stores in most highly developed

countries, such as Canada, the US and the UK, have been dominated by

large “cash and carry” stories where customers picked what they wanted

off of shelves and then lined-up to pay for them. Stores were large, and

got larger over the years, and could easily sell over 50,000 individual

items. Change occurred but not all that rapidly with the introduction

of private label brands, such as President’s Choice for example, and new

offerings were added and removed as consumers tastes changed and evolved.

But despite a fairly standardized customer experience, grocery retailing

remained a largely domestic business. In Canada, the major players were

Loblaw, Sobey’s and Metro but since the mid-2000’s Wal-Mart has also had

a strong presence in groceries2. When Wal-Mart entered the market there

was great concern that the world’s largest retailer, at least at the

time, would be able to out-compete its Canadian rivals. The same sort

of concerns were held by British grocery store chains when Wal-Mart

bought the ASDA chain of grocery stores in 19993.

1 Abboud, Leila (2019). “Amazon clinches top spot in the world’s most valuable

brand ranking”, Financial Times, June 11th. 2 Shaw, Hollie (2014). “Walmart Canada gaining ground in retail food fight”,

Financial Post, Nov 13th. 3 Cowe, Roger; Buckingham, Lisa and Martinson, Jane (1999). “Wal-Mart swallows

Asda”, The Guardian, June 15th.

Grocery retailing has proven remarkably resilient to foreign

competition. Of course people’s tastes for specific foods differed from

one country to the next, but given that the business models were the

same it was surprising that companies had been able to be successful in

their international operations. Where companies have had at least some

success, as Wal-Mart has in Canada and the UK it has usually required

them to acquire an existing domestic player and then expand or evolve

the product offerings. But while Wal-Mart now holds about 12% of the

Canadian market4, disappointment with their progress in the UK market

(where they operate under the Asda brand) led to a proposed merger with

domestic rival Sainsbury’s, a merger that was eventually rejected by the

UK government on the grounds that it would create too large a competitor5.

Efforts by the British grocery chain Tesco were largely unsuccessful and

required the company to pull back from their attempt to penetrate the

US market in 20136. Just recently, it was announced that the company had

sold its Polish stores, it’s largest market in Europe outside of the UK,

for £181m (about $307m CDN) to a discount chain out of Denmark7. Earlier

this year, it sold its chain of over 2,000 stores in Thailand and 74 in

Malaysia for $10.6B (USD)8. It has also announced that it was ending it’s

20% share of a Chinese jointventure9.

With these experiences in mind, there was much excitement, and concern

amongst established competitors, when Amazon bought the premium American

grocery store chain Whole Foods in 2017. Whole Foods had already started

to slowly expand into both Canada and the UK and with Amazon’s pioneering

success in on-line commerce it seemed that revolution, as opposed to

evolution, might finally be upon the grocery business.

Online-Retailing of Groceries:

Groceries presented a set of new logistical challenges, even for a

dominant on-line player such as Amazon. First is the issue of the sheer

number of products that customers expect to choose from in a grocery

environment, over 50,000 at least. Would online delivery necessitate a

reduction in product offerings? The second challenge is the perishability

issue. Many groceries need to be kept refrigerated and cannot be just

left on people’s doorsteps. Urgency is a third challenge, as many

4 Shaw, Hollie (2014). “Walmart Canada gaining ground in retail food fight”,

Financial Post, Nov 13th. 5 Eley, Jonathan; Walker, Owen and Pickard, Jim (2019). “Sainsbury’s takeover

of Asda blocked by UK’s competition regulator”, Financial Times, April 25th. 6 Finch, Julia and Walsh, Fiona (2012). “Tesco’s American dream over as US

retreat confirmed”, The Guardian, December 5th. 7 Nilsson, Patricia (2020). “Tesco quits Poland in further retreat from

overseas ambitions”, Financial Times, June 18th. 8 Reed, John & Eley, Jonathan (2020). “Tesco agrees $10.6bn sale of Thai and

Malaysian operations”, March 9th. 9 Ibid.

customers are looking to receive their products today, if not

immediately. Two days is convenient for most Amazon purchases but

delivering today is a new challenge. Did these last two challenges

require a new technological solution? If so, it would appear that a

company like Amazon, that was already developing its own delivery

technologies, would be in a much better position to succeed.

The Situation in 2020:

Most the largest players in the grocery business had begun selling

products online and offering either in-store pick-up or home delivery,

albeit typically only in select urban markets. When the COVID-19 pandemic

hit in early 2020, retailers of all products scrambled to find new ways

to get their products into the hands of customers. In-store or curb-side

pick-up was a much easier solution for stores but avoiding going to

stores appeared to be what customers really wanted. The ways in which

companies had chosen to go on-line with their delivers varied

significantly.

In Canada, both Wal-Mart and Loblaw have partnered with a US-based

company called Instacart which has both an app and ‘boots on the ground’

delivery service. In the UK, Amazon is providing delivery services for

the established grocery store chain Morrisons, despite their ownership

of Whole Foods. It was thus not yet clear whether delivery would end up

being a service provided by established retailers or by new specialized

technology companies. Finding the right partner company could mean

success and an early advantage for firms operating within markets that

remained largely domestic but developing the “last-mile” solution to

grocery delivery could be the basis upon which a global grocery retailer

might finally be developed into a dominant player in multiple markets

internationally.

William Blair Funds LTD:

William Blair & Company is an American investment bank and financial

services company headquartered in Chicago. The company was established

in 1935 and has almost $100B USD in assets under management. Their

International Growth Fund looks to invest into companies that are likely

to experience growth in the next couple of years, over and above what

is expected for the industries in which they are operating. In other

words, they are looking to select the companies that are best positioned

to out-perform their competitors.

As a new investment analyst with William Blair, you have been asked to

look at the market for on-line groceries and to select one company from

either the United States, Canada or the United Kingdom which you believe

is well positioned to out-perform over the next few years in this market.

The company can be an existing grocery retailer such as Loblaw, Wal-Mart

or Morrisons, or one of the app developers such as Instacart or an online

retailer such as Amazon. You will want to consider the business model

of the company (how they make money), the market(s) in which they

operate, and the likelihood of success of their approach to on-line

grocery shopping compared to the others being developed.