How will online shopping transform the grocery business?

Discussion
Source: ShopRite ad
Feb 01, 2017
George Anderson

A new report from the Food Marketing Institute and Nielsen projects that consumer spending for online grocery shopping could reach as much as $100 billion or 20 percent of total dollar grocery purchases made by consumers by 2025. Those figures, the parties report, are the equivalent of 3,000 grocery stores based on volume.

The research, according to a CNBC report, puts the current market share of online sales at 4.3 percent of total spending for food and beverages. Using their most conservative projection, online grocery sales would roughly double by 2025.

A wide variety of companies from brick and mortar retail (Kroger, ShopRite, Walmart, et al) as well as online (Amazon.com, Door to Door Organics, FreshDirect, et al) are today offering Americans the option of home delivery or store pickup for grocery orders. Companies ranging from Costco to Whole Foods are working with third parties to enable home delivery.

Today, according to the research findings, 23 percent of U.S. households are buying food online. Among these, 60 percent expect to spend over a quarter of their food dollars online.

Younger and more digitally-engaged consumers who have yet to become regular grocery shoppers will help drive further adoption in the years to come.

Center store products representing 40 percent of the segment’s volume are expected to migrate online.

In a press release to announce the report, executives spoke of the grocery industry being at “a tipping point” and of the window to respond “narrowing” for food retailers and their suppliers.

One of the biggest challenges facing grocers is the matter of profitability, a point of frustration going back to Streamline and Webvan in the early days of online grocery. Many believe that store pickup is the key to achieving profitability in the notoriously tight margin grocery business.

DISCUSSION QUESTIONS: Do you see online grocery adoption reaching a tipping point soon? What effects do you think online sales will have on physical grocery stores between now and 2025?

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"Once someone figures out the business model, I think this will go much faster than we've seen in other verticals."

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33 Comments on "How will online shopping transform the grocery business?"

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Jon Polin
BrainTrust

This is THE topic in grocery today! And this is the money stat/quote:
“Amazon spends more on innovation than the twenty largest supermarket companies in America combined. If retailers don’t start investing at a greater level of innovation, they’re going to become lunch served for Amazon.” — Jerry Sheldon, retail analyst with IHL Group.

So the first step is that grocery chains must take action. Once they do, physical stores are likely to change accordingly over the next few years. My predictions for the coming few years are (evolution, not revolution):

  1. Stores will remain unchanged but are used for pick and pack of online orders;
  2. Center store will shrink and much of it will move to ware-rooms within stores for pick and pack of online orders;
  3. Footprints of new stores will tend to be smaller than today, as online operations are moved to dedicated warehouses (first serviced manually, then automated).

And of course stores that ignore the growing consumer demand for e-commerce, or leave it to Amazon to satisfy that demand, will start to fall by the wayside.

Ben Ball
BrainTrust

Jon,

Thanks for saving me a lot of typing on my phone this morning. You nailed it.

Nikki Baird
BrainTrust

Personally, I’ve been waiting for this for a while. Grocers lag pretty much every other sector in retail in terms of embracing online shopping. I think they have been too complacent. Once someone (ahem, Amazon perhaps?) figures out the business model, I think this will go much faster than we’ve seen in other verticals, if only because consumers ARE already trained in online shopping. There is some pain for the shopper in moving your grocery list online, but once you’ve done that, it becomes a maintenance exercise. I can see a future where grocery stores are 80 percent fresh, 20 percent shelf-stable and impulse, and a big warehouse section for either home delivery or curb-side pickup. And that’s definitely not how grocery stores look today, which means the transition will be painful.

Max Goldberg
BrainTrust

People buy groceries online for the convenience. They get what they want, when they want it, without having to visit a store and they are willing to pay a bit more for it. Grocers take heed, your stores make shopping difficult. The aisles are crammed with stand-alone displays, stores are difficult to navigate, there are too many line extensions cluttering the shelves, checkout takes too long, non-food items are too expensive compared to Amazon and it’s hard to find assistance. Time-starved consumers would rather shop online and have orders delivered. Grocery stores need to adapt or watch their business migrate elsewhere. Emphasis should be placed on speed, efficiency and in-store experience or grocers risk more than 10 percent of business migrating online by 2025. And making consumers come to the store to pick up orders is not the answer.

Dr. Stephen Needel
BrainTrust

We should keep in mind that Nielsen has been projecting very high numbers for years – they simply keep pushing out the timeline of when we’ll hit those high numbers. There’s your grain of salt.

Jon Polin
BrainTrust

True, but … Amazon is now proving to be as serious as ever about figuring out e-grocery. I wouldn’t bet against them and, if I were a grocery chain, I wouldn’t watch idly as they figure it out.

Gene Detroyer
BrainTrust

But adoption is generally a slow roll, then an acceleration. If not 20 percent by 2025, I predict 50 percent by 2030. The real question to ask, with what online grocery can offer, is not “why?” but “why not?”

Ralph Jacobson
BrainTrust

The adoption of online food sales has a lot to do with a factor we discussed yesterday. Haptic technology needs to address other human senses beyond sight. People want to touch, smell, etc. food. Online grocery shopping has been around for literally 30 years. The market will adopt this service widely over time, however we are still easily five years away from the true tipping point away from in-store shopping … if ever.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Where online orders suit grocery refreshment, in-store visits will suit discovery of alternate or new products and will be an outing for those who enjoy the tactile experience. For both reasons, grocery retail can compete more successfully by taking their customer experience to the next level. Providing information during product selection and cross-selling serves all interests.

Bob Amster
BrainTrust

The trend will continue because retailers will make it easier for consumers to shop for groceries online. The impact of increased online grocery shopping will be the same as it has proven to be for hard goods and apparel, albeit maybe to a lesser extent. That is, that store’s footprint will have to decrease commensurately with the increase of online ordering or grocers will have to experiment with other products or services to fill the unneeded space.

Liz Crawford
BrainTrust

Between restaurant delivery (GrubHub, Uber EATS, et.al.), meal kit delivery (like Blue Apron) and dry goods grocery delivery, there won’t be much reason to “shop” the grocery store any more, except fresh. And for that we have farmers’ markets and fresh delivery. Grocery needs to find a role in the future of meal solutions and home replenishment shopping. I believe that grocery needs to really corner the market on grab-and-go, grocerant-style food with some fill-in dry goods categories.

Frank Riso
BrainTrust

Today, many households need two incomes to enjoy the lifestyle they want to have and so I do see online shopping for groceries reaching the tipping point sooner than later. We will continue to see smaller chains either sell out or disappear and it will be a survival of the fittest. The industry will adjust as it did to the advent of c-stores, super centers, dollar stores and even in response to the rise of quick-serve restaurants. It will be better but smaller with chains such as Kroger, Publix, Albertsons, Wegmans and Whole Foods doing well.

Ken Lonyai
BrainTrust

This is shaping up to be a 25-year overnight success. Among physical shopping, grocery has always been more of a hassle than a source of delight, so what is now finally an internet-savvy (at least comfortable) society will surely embrace the convenience. Plus most Americans still eat the SAD (Standard American Diet), choosing commercial brands that they are familiar with. So without an interest in carefully scrutinizing labels or picking fresh food items, it’s a big time saver.

Our family eats very differently than the majority so hand-selecting fresh organic fruits and vegetables is paramount, but for packaged items, like pasta, we buy online and take the savings and doorstep delivery convenience. And no, Amazon is NOT competitive with other merchants on these items.

Adrian Weidmann
BrainTrust

As we Baby Boomers continue to age, we will begin to use online grocery shopping more and more. Although we’re not digital natives, we’ve become digitally aware and can use the tools more readily. As more seniors stay in their homes longer the need for these services will increase, particularly for those of us that live in the northern latitudes (Minneapolis in my case). The winters — never mind the temperatures — have an impact on traveling conditions and having groceries delivered will continue to be embraced.

Shep Hyken
BrainTrust

Grocery is retail. The shift of brick-and-mortar retailers (not including grocery) doing more business online is the norm. They are figuring out the balance on how to change their distribution system, stock properly and more. Grocery should take a lesson from the retailers in other industries to learn how they have adapted to the new way the consumer likes to shop.

Lee Kent
BrainTrust

Since I am not a grocery shopper I should probably stay away from this but … I have always thought that staples would be the hot market for e-commerce. Those things that you buy regularly and can predict when you will be out. Many staples are groceries. So grocery is long overdue to jump on the e-commerce bandwagon. With Amazon in the mix, things are going to stir up quick!

For my 2 cents.

Kai Clarke
BrainTrust

“Lies, damn lies and statistics,” said Mark Twain, and he is very correct. Online grocery shopping is a solution looking for a problem. Grocery retailing survives on very thin margins, the appeal of personally choosing fresh fruit, vegetables, meats, etc. Plus the local grocery store is a destination location for community, chat and discovery. Go into any great grocer like Whole Foods or Trader Joe’s and you will see this thriving. Replacing this from a business perspective will be difficult to say the least and certainly not profitable.

Elizabeth Meaney
Guest
4 months 26 days ago

Agreed! While there is a trend towards delivery and online shopping replacing mundane errands, grocery-shopping is a pleasure for many people. Do you think there will be some pushback from stores like Trader Joe’s or Whole Foods making shopping even more of an experience (with coffee/wine tastings, cooking classes, etc)? Or will consumers combine the two — delivery for boring standard necessities, and that saved time spent enjoying the experience of a farmers’ market or shopping for the perfect gourmet cheese?

David Livingston
Guest
4 months 26 days ago

All those projected sales are always stated way out into the future. Online shopping still isn’t practical. I’ve seen it work well for people in remote locations like Lanai or Molokai, rural Alaska, etc. But for people with cars, grocery shopping is fun and people like doing it themselves. If it’s not fun, you are not going to the right store.

Gene Detroyer
BrainTrust

Sorry David, I live in NYC and except for trips to Whole Foods for specific purchases all our grocery shopping is online, as it is for my son’s and daughter’s families (they showed us the way). In my building, only Amazon beats Fresh Direct with number of delivers per day.

Al McClain
Staff

Gene, I really think you are an outlier in terms of the percentage of shopping you do online. I am, too, but where shoppers have access to supermarkets and other grocery stores like Publix, Trader Joe’s, and Whole Foods and are in areas where service is good, most folks still like to get out of the house and pick their own groceries, especially fresh items.

David Livingston
Guest
4 months 26 days ago

I should have clarified: for people who are living in urban areas where it is impractical to own a car, online shopping is a good option. Or for people who can no longer drive.

Richard J. George, Ph.D.
BrainTrust

Maybe not a tipping point but the wave is washing ashore and, to-date, grocery retailers have been slow to respond. It is similar to the predictions that have been made over the last few years with still little pro-active omnichannel planning in process by brick-and-mortar retailers.

The FMI/Nielsen report forecasts that a significant number of brick-and-mortar categories, representing 40 percent of center store volume, will migrate to an online shopping experience. This prediction is sobering and its fruition will have serious deleterious effects on physical grocery stores in the not-so-distant future.

Graeme McVie
BrainTrust
Online shopping will have a major impact on the grocery business: Amazon Dash is showing how repeat purchases of routine items are being put on auto-pilot. Auto-replenishment could have a striking impact on the center of the store and lead it to shrink dramatically. The question is, what will grocers do with the space that becomes available when center store categories shrink? In some locations they will expand the fresh areas of the store, in others they will introduce more experience-based elements into their stores; some will use the space to fulfill online orders; some will simply reduce the size of their stores and move fulfillment of online orders to cheaper warehouse-like locations. The grocery store will not vanish completely as some shoppers will still want/need to go to the store for some purchases, but the size/layout of the stores and the prevalence of them will be impacted by online grocery shopping. We also have to remember that many shoppers only start thinking about the evening family meal during the day and they visit the store on the way home from work to purchase the elements required for the meal. While grocery delivery, click-and-collect or online ingredient companies can fulfill some of these needs… Read more »
George Nielsen
Guest
4 months 26 days ago

I started in the grocery business 29 years ago and I have been hearing about home delivery making an impact on sales ever since. It requires high population densities to make any kind of sense. Many have tried and failed in the past. Maybe the time is approaching but I don’t see it as a big threat before I reach retirement age.

Tony Orlando
BrainTrust
Online grocery shopping will grow for sure, but the problem I see is profitability. I already deal with the fact that the big box stores and the national chains are getting better costs on key staple items, which has caused me to rethink how I run my store. Now with online growing, it could be the final nail in the coffin for stores that are currently struggling — and there are many, including me. The major cities and suburbs will do very well with online ordering, as paying more for this service is not a big problem. However, how much more are the rest of the folks willing to pay in higher prices to have their food delivered? It simply cannot be free, as the costs to procure the product and get it to someone’s home cannot cost the same as a supermarket, unless I’m wrong, which is possible. I can see staple goods being quite competitive, but perishable food must be delivered safely and it takes a very expensive vehicle to do that, and a pound of ground chuck could be $5 per pound, along with deli and prepared foods costing more as well. I agree with some of… Read more »
William Hogben
BrainTrust
I don’t believe online grocery shopping is headed for a tipping point — at least outside dense urban areas — and here’s why: Amazon Fresh has been around for 8 years and it’s only in 12 cities. If they can’t make it the default who can? I tried 8 delivery services near me (NYC) and none of them were more convenient than shopping in person — there was so much waste, ice packs, boxes, plastic layers — and I didn’t get produce I liked. It wasn’t a “oh cool what’s in this box for me!?” moment like with other online shopping. Amazon is opening 2000 physical grocery stores now and I believe that’s because they don’t believe online has a tipping point coming either. There will be factors that improve online grocery, especially for major urban hubs, but I think that most people who are going outside regularly (say to a school, job or on other errands) will continue to stop by a grocery store one a week. Grocery’s going to be the last store people stop visiting — more likely you pick up your other online shopping while you browse produce at the grocery store in person. Plus, the… Read more »
Larry Negrich
BrainTrust

Is there room in grocery margin to withstand the cost of home delivery? Will the consumer pay for the service of home delivery? At this point it’s a convenience play for urban and high-income consumers. Convenience has a cost and grocery many not be able to brunt the cost without going into the red.

James Tenser
BrainTrust
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% of shoppers used such services 25% of the time it would skim 5% of grocery trips off the top, while adding operational complexity and creating new price transparency. I boldly predicted it would take less than 5 years to achieve this impact. Well, as Ken sagely observes, online grocery sales has been a slow-motion overnight success story. Shoppers didn’t change their habits overnight. They have been enmeshed in 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% penetration by 2025, as the FMI/Nielsen report boldly predicts, 40% of households will need to purchase groceries online 50% of the time. The present figures cited above (at 23% of U.S. households, 60% spend 25%) works out to about a 4% 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… Read more »
Craig Sundstrom
Guest

23%x60%x25% = 3% … that’s a long ways from 20%. Admittedly this is just a lower bound, but I think it’s a lot closer to what’s going to happen. And statements like “one of the biggest challenges is profitability” only add to that belief.

Patricia Vekich Waldron
BrainTrust

I absolutely believe that online grocery spending increases are already starting in two ways: dry groceries and replenishables, and prepared food/food for delivery. It’s just a matter of time before the rest of the basket gets filled in by a smart retailer.

J. Peter Deeb
BrainTrust

Trying to predict the future is risky at best. However if the penetration level reaches 20 percent I feel that center store will be much higher as a percentage of that number. What does that mean for retailers? It could mean even smaller center store departments, fewer items and less variety stocked at retail, centralized pickup points for customers, etc. Conversely fresh departments might be more important to consumers so store configuration and maybe total size will evolve. Unfortunately many retailers have been building bigger and bigger stores. They may have to rethink the footprint model.

Dave Nixon
BrainTrust

From personal experience, once you’ve done it, you’re hooked. The time savings and efficiency of replenishment product purchasing makes choosing to buy groceries online a no-brainer. Young families no longer have time or patience for two-hour weekly escapades to the grocer, the elderly and infirm don’t have to brave the weather, busy worker bees and professionals can streamline a “task” of meal preparation. Once the difficult operational model is figured out, then adoption will rise. It doesn’t matter how long online grocery has been available. Once the influencers get the word out, we’ll see tremendous growth, and that time is coming.

Regarding the shopping experience, people who do the bulk of grocery shopping online now take a much more relaxed, pleasurable trip to the grocery store weekly to hand-pick fruits and vegetables. Instead of being in a hurry, they stroll through the aisles and tend to look at displays and items they might not have noticed in previous frenzied trips to get everything. Yes, the dynamics of shopping will change and the physical footprint of stores will get smaller to make room for the pick and packing, but that tipping point is soon to come.

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