EXPERT ANALYSIS
SECTION ONE
SECTION TWO
How Much More Could Online Grocery Spending Grow?  

Online grocery spending could grow during the 2016-2025 forecast period from 4.3 percent of the total
U.S. food and beverage sales to as much as a 20 percent share, or reaching more than $100 billion, says
a report from the Food Marketing Institute (FMI) and Nielsen. Last year, online grocery sales were about
$20.5 billion.

DISCUSSION QUESTION:
Do you agree with this projection? Will traditional supermarket retailers be prepared to take advantage of this anticipated growth in grocery e-commerce? What forces or developments would accelerate or retard this anticipated growth?


EXPERT ANALYSIS:

For this forecast to be accurate, a few things would have to be true. For one, shopper interest and demand for online grocery would need to steadily grow. Secondly, retailers and their suppliers would need to find the economic model attractive and sustainable enough to continue expanding to meet that demand. On both points, the outlook seems to justify that online grocery is at an inflection point.

Shoppers choose where and how to shop based on fundamentals like price, selection, convenience, and quality of product and experience. E-commerce has advantages in some areas, supporting expanding demand for online grocery.

“Digital natives,” who grew up with technology and already spend disproportionately online, will likely continue to as they enter their peak consumption life-stage.

Less predictable – but still high-potential – are technologies like voice interfaces, augmented reality, and virtual reality, which might help overcome barriers to trial. For example, concerns about produce freshness or the tedium of building a first order.

As demand grows, the business and logistics models for selling food and beverages online will also continue to increase in sophistication and economic viability. Already, Amazon’s Pantry program and competitors like Boxed are improving the economics for shelf-stable products. Leading incumbents like Walmart and Kroger have leapt off the sidelines with full-basket offerings that leverage existing assets. And well-capitalized “pure-players” continue to enter the market.

Suppliers, too, are already beginning to optimize price-pack architecture and supply chains to improve channel economics. Warehouse automation has already had a profound impact on e-commerce economics, and autonomous and fuel-efficient vehicles, if they become widely available over this timeframe, will be even more transformational.  

Are traditional supermarkets ready? Some are; some aren’t. Those with a sober outlook and a plan to compete profitably have a good chance. Those still grasping desperately for evidence this isn’t happening are in for a choppy ride.
Keith Anderson, SVP Strategy & Insights, Profitero


I believe it’s possible we will reach the $100 billion mark. Online shopping has grown something like 90 percent in the last five years, and the concept is now commonplace for consumers. We rely on our mobile and in-home devices like Alexa and Home to make our lives more convenient, and grocery shopping is part of that.

However, even with strong online purchase growth, 80 percent of dollars will be spent in store in the coming years. There is still a great deal of interest in the physical store format. Lidl is entering the US. New formats are being tested. Private label brands are competing. Hyper-local store personalization is focused on attracting shoppers.

While B2C marketing will drive purchases online and in-store, it’s the B2B side of the supply chain where we’ll need to figure out more of the details. How and where will fulfillment occur? Click and Pick? Delivery? And what about alternate product choice, due to price or promotion? Using shopper data may help with this sort of personalization, but the consumer will want that sort of transparency. Although purchases happen online, what goes on in store still will be an important part of the mix.

I believe this mix of online and in-store options will be most successful, with the right data driving all the connected systems. What is certain is that we’ll see some very interesting innovation in the next five to ten years in the grocery industry.
Susan Sentell, CEO and President, Gladson


E-commerce has already transformed the retail landscape for the sale of books, electronics and fashion. Until relatively recently, however, the consumer-packaged goods (CPG) and grocery sectors in the US had been slower to see the impact, but this too is changing fast.

By the start of 2017, e-commerce had already become a very significant driver across all grocery categories, including food and beverages. The recent study from the Food Marketing Institute (FMI) and Nielsen, which predicts that online grocery spending could grow from 4.3 percent of the total US food and beverage sales in 2016 to as much as a 20 percent share by 2025, is just the latest indicator of this change.

Twenty percent share, or more than $100 billion in sales, is a bold forecast – last year online grocery sales were about $20.5 billion – but it is achievable. Two years ago when the Grocery Manufacturers Association (GMA) published its report “The Digital Future: A Game Plan for Consumer Packaged Goods,” many in the industry scoffed at its predictions of an online grocery market worth five percent of overall sales by 2018 and growing to 10 percent shortly after that. It looks like we could surpass the five percent threshold this year.

Several factors support the FMI’s and GMA’s predictions. For a start, a growing proportion of US consumers complete at least some of their weekly shop online. According to an AlphaWise survey from Morgan Stanley Research, published last year, more than a third of online shoppers were expected to buy groceries over the Internet in 2016—34 percent versus 21 percent in 2015.

It is also telling that younger shoppers, Millennials, lead the way in this trend. Clavis Insight’s recent consumer survey found that 62 percent of 18-34 year old respondents shop online at least once a week, and 57 percent of them buy fresh produce online. As they form relationships and their households grow, so too will the value and volume of their online grocery shopping.

The rise of the online consumer presents a number of challenges for traditional supermarkets and grocery store chains. How do they compete in a world where pure-play e-commerce grocery players such as AmazonFresh, FreshDirect and Peapod are chipping away at their customer base  and – even more worryingly – their future customer base?

Success or failure will require retailers to do two things that not many have fully executed to date. They need to embrace a true omni-channel model and in parallel build a culture of innovation, investment, and flexibility that is essential to success in the digital channel.

To date many retailers pursuing e-commerce success have tried blindly following where Amazon had already gone. However, in aping the ecommerce giant’s example in both user experience and business model, brick-and-mortar retailers are missing an important trick, and are limiting their own potential.

Instead, grocery retailers need to remember their own core differentiators and most importantly their core shopper (who may not be the same as Amazon’s). Ultimately, their best path to success is to play to their strengths, by layering e-commerce and omni-channel technology capabilities on top of existing distribution and physical store infrastructure.
 
The goal has to be first develop an omni-channel approach that works within their existing model and shopper demographic, to reach shoppers where, when and how they want. Once the base is established and protected, the next phase of development can look at targeting households such as young urbanites, new families and older singles who have taken to e-commerce as their primary shopping channel.
Danny Silverman, Head, Product Strategy, Clavis Insight


Two decades ago I latched onto the trend story about online grocery ordering and home delivery from companies like Streamline (defunct) and Peapod (still surviving). I observed then that if 20 percent of shoppers used such services 25 percent of the time, it would skim 5 percent of grocery trips off the top, while adding operational complexity and creating new price transparency. I rashly predicted it would take less than 5 years to achieve this impact.

As it turned out, online grocery sales have been a slow-motion overnight success story. Shoppers didn't change their core habits overnight. Instead we are witnessing the world's largest test-and-learn experience, as innovators keep experimenting with new methods of digital merchandising, promotion and order fulfillment.

To reach 20 percent penetration by 2025, as the FMI/Nielsen report predicts, 40 percent of households will need to purchase groceries online 50 percent of the time. The figures cited in its recent release (at 23 percent of U.S. households, 60 percent spend 25 percent) works out to about a 4 percent share, so there’s a long road yet to travel.

What we see happening is hardly a tipping point. It’s the continuation of a gradual, inexorable displacement of grocery shopping habits, owing to a plethora of FMCG purchasing alternatives that range from Dash buttons to meal-kit services to full-basket home delivery to click-and-collect.

In response, we are witnessing the necessary evolution of the brick-and-mortar supermarket from a center-store-weighted concept that used to be focused on frequently-replenished packaged goods to a perimeter-weighted concept increasingly focused on fresh and prepared foods.
                                           
Here’s a new prediction: Most households will still be shopping in grocery stores most of the time in 2025 and experts will still be analyzing reports of the “sudden” market shift to digital shopping.
James Tenser, Principal, VSN Strategies

SECTION THREE