Online shopping offers grocers “exciting potential” with double-digit sales growth

By Elizabeth Crawford

- Last updated on GMT

Online shopping offers grocers potential double-digit sales growth
Online shopping may be one of the smallest retail segments for food and beverage for now, but it also is the fastest growing channel for grocers – and those that want to cash in on the trend should act fast before competitors crowd the category, market researchers and consultants advise.

Online shopping offers the grocery industry “exciting potential”​ with sales of food and beverages in the channel expected to reach $23.4 billion in 2014 – a 21.9% increase over the $19.2 billion sold online in 2013, according to a Packaged Facts report​ published in October.

While this may represent only 3.5% of the total $667.5 billion in on- and off-line grocery spending 2014, the market share is expected to grow quickly, according to Packaged Facts, which notes online sales in 2013 were 3% of all grocery sales.

“The online share of grocery shopping is growing at rates of 20% to 50% per year in leading markets” ​outside the U.S. , which have a jump on retailers in America, according to a 2013 report​ from the Boston Consulting Group, a global management consulting firm.

It notes the share of total grocery sales captured by online sales in 2013 is 5% in the U.K., 3% in France and 4% in South Korea.

Growth of online grocery shopping sales also should pick up speed going forward, according to the Boston Consulting Group, which predicts the compound annual growth rate for the channel will exceed 23% from 2013 to 2018. This will propel sales from $36 billion in 2013 to $100 billion globally by 2018.

Packaged Facts confirms the trajectory of online grocery sales, but estimates they will not hit $100 billion until 2019. However, it notes, “the online grocery business is changing so rapidly that each day brings news of a new launch or trail. Because of this, estimates of market size and growth are highly speculative.”

Despite minor discrepancies, the firms agree that the channel is ripe for exploration thanks in part to the quickly increasing number of broadband and mobile internet connections in the past five years, which have made consumer access easier.

Consumer demand exceeds supply

In addition to easy access, online grocery shopping is convenient and allows for easy price comparison, which also is driving consumer demand for the service, according to IBISWord.

The Boston Consulting Group found half of consumers surveyed in the U.S. said they would try home delivery or a click-and-collect service that allowed them to order groceries online and pick them up in the store hassle-free. Packaged Facts adds that 5.9% of U.S. adults it surveyed last July and August already shopped online for groceries in the past three-months.

The shoppers most likely to take advantage of these services are “grocers’ most important customers – young families and affluent couples,”​ who once they move online, likely will spend 30% to 50% more across all channels than if they shopped in a traditional, physical store, adds the Boston Consulting Group.

These shoppers likely also have sustained interested in online grocery shopping, according to the Boston Consulting Group, which found U.S. adults estimated they would use the service 10.8 times per year. This is slightly less than the 13.5 times per year the average global consumer would use it, according to the group’s report.

Seize the moment

Retailers interested in capturing part of the online grocery sales revenue should act fast to enter the market if they have not done so yet, according to Packaged Facts and the Boston Consulting Group.

“The online grocery business has become crowded with participants – some well-established, and many of which entered this business only in the past two years,”​ according to Packaged Facts.

But, only six companies in the U.S. currently are “major players,”​ which leaves room for newcomers, Packaged Facts notes, adding the top competitors include: Amazon Fresh, Fresh Direct LLC, Instacart, Peapod LLC, Safeway Inc. and The Schwan Food Co.

Many brick-and-mortar grocers are dragging their feet to enter the online sales channel because they are worried about the cost of establishing the business, the risk of cannibalization of in-store sales and because they are complacent, according to the Boston Consulting Group’s report.

But, it adds, these fears are either unfounded or nothing compared to the threat of not engaging consumers online.

“Companies that allow competitors to establish an unchallenged online service risk losing customers – perhaps permanently,”​ according to the group. In addition, it notes that “there are a host of mounting threats” ​from nontraditional competitors that disrupt the supply chain by delivering food and ingredients in meal kits, sampler services or community supported agriculture, it notes.

It debunks fears that cannibalization is overstated and says fears about cost are misguided given the different models for tapping into online sales.

For example, the Boston Consulting Group advocates that retailers new to online grocery shopping opt for click-and-collection options before segueing into full delivery. It explains click-and-collect saves retailers “the extra mile,”​ by requiring the consumer to pick up groceries ordered online either at the store or a fulfillment warehouse or other site, such as an office building where multiple deliveries can be made at once to reduce shipping costs.

The click-and-collect model also is ideal for markets that do not yet offer delivery because research shows consumers find the service “attractive”​ and will drive up to 13 minutes to a pick-up site.

Consumers are not, however, interested in paying the full cost of delivery, which can be as high as $20 per delivery, according to the research group. Rather, U.S. consumers will pay only $5 to $10 for delivery, it added.

Consumers are pickier online

Whichever online shopping model is used, retailers will only have one chance to impress consumers “who tend to be even more demanding online than in the store,” ​according to the Boston Consulting Group.

“If the experience disappoints, they do not return,”​ it added.

Packaged Facts explains that “by and large, consumers expect online grocers to meet four criteria: the right range and quality of products; consistent delivery of the expected basket of goods, with low rates of substitution and high levels of freshness; punctual delivery in convenient time slots; and ease of use of the service, especially the website.”

Strategies for improving the consumer experience are to use loyalty-card records of previous shopping trips to generate suggestions and offer shopping lists to help them reduce order time, the Boston Consulting Group said.

It also recommends establishing delivery windows, such as 7 pm to 9 pm on Wednesdays and 10 am to 12 pm on Saturdays, rather than promising to deliver groceries in an hour. This will streamline consumer expectations and the delivery process.

In the end, balancing these variables may seem intimidating, but entering the online grocery sales channel offers potential growth, and steering clear of it likely will result in lost sales and market share, the reports conclude.

Related topics: Markets

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