The Supply Side: Online grocery a $35 billion market by 2022

The online grocery sector is forecast to grow from $15.1 billion in 2017 to $34.7 billion over the next five years. That’s a healthy increase of $19.6 billion, with an 18.1% compounded annual rate of return, according to IGD retail analyst Stewart Samuel.

Online grocery is just 1% of the total U.S. grocery market, but Samuel expects it to pick up steam over the next five years, doubling to roughly 2% of the total U.S. grocery sales, which are forecast at $1.722 trillion by 2022.

The two fastest growing segments within the U.S. grocery business are online and deep discounters like Aldi and Lidl. Discounters now have about 6% of the total market share, and over the next five years that’s expected to reach 7.2% — representing a 7.6% annual growth rate. Supercenters are estimated to have a 2.5% annual growth rate, with 3% growth annually at supermarkets such as Kroger, and a whopping 18.1% annual growth rate for online grocery.

IGD reports convenience stores could see 3.8% annual growth while specialty grocers are poised to grow 4.1% annually to 2022. IGD expects supercenters will concede about 1.3% of its 38% market share over the next five years, while online is expected to double its share from 1% to 2% in that same time period. Supermarket formats will also lose 1.1% of its 38% market share, while convenience formats should grow market share fractionally from 18.5% to 18.7%.

Despite the shift in market share, Samuel, director of IGD North America, said there are growth opportunities, and investment from retailers will continue as they try to stay relevant to consumers.

“The online channel is developing at pace in the U.S., and although many leading retailers have operated online for over 20 years, it is only in the last three years where we have seen an acceleration of investment and activity,” Samuel wrote in the report. “In the next five years, the online grocery channel will grow by $20 billion and will be the main driver of growth in the U.S. grocery market.”

He said to capitalize on growth, many retailers are using their store networks to offer convenient collection options that are often free or low-cost, which are proving popular with shoppers.

WAL-MART GAINS
Walmart U.S. has expanded its online grocery pickup to more than 1,000 locations across the country, which in a large way has helped the retailer grow online sales by more than 63% in the first and second quarters of 2017.

Ken Cassar, principal analyst at Slice Intelligence, said Wal-Mart’s U.S. online grocery has been the most important catalyst of growth, accounting for 26% of the retailer’s online sales in June, more than Sam’s Club and Jet combined. That metric has improved from just 8% or so a year ago.

He said Wal-Mart’s online grocery sales nearly tripled in the past year, while SamsClub.com and Jet sales are smaller in relation to the retailer’s overall U.S. e-commerce sales.

Walmart U.S. CEO Greg Foran said recently on Wal-Mart Radio the retailer will continue to roll out grocery pickup because customers love it. He said customers can expect the process will get easier over time as Wal-Mart improves its execution and new perks are added, like the reorder button added a few months back to make the initial ordering less time consuming.

He said the U.S. Wal-Mart team is working to ensure items are in-stock when they are ordered, and that customers are getting the freshest items possible at everyday low prices.

“We want to get better and better at execution and get this out to as many markets possible. When we can use technology and our wonderful associates to create a flawless executive, that’s what we are going to do,” Foran said in the recent Wal-Mart Radio broadcast.

OTHER CATALYSTS
Samuel also said there are other catalysts at work helping grow grocery market share for some. He said meal kit delivery services are growing at a rapid pace, with specialist companies like Blue Apron and HelloFresh continuing to expand their operations.

“Grocery retailers, including Wal-Mart and Kroger, are also entering the foray by testing a curbside pickup service from eMeals, while Albertsons recently acquired Plated for $200 million,” Samuel said.

Credit Suisse estimates the meal kit market at $2.2 billion, growing exponentially over the past few years.

Samuel said grocery retailers are partnering with third-party companies like Instacart and Shipt to enter the online channel, with relatively lower capital investment.

“New technologies also have an important role to play in this with voice-based ordering set to revolutionize how products are ordered. Technology is not just important for ordering products, but also has a big impact in other online fundamentals like fulfilment and delivery,” Samuel said.

“For example, the use of robots to make deliveries and pick orders in store and the advent of drones making small deliveries by air are examples of how new technologies can improve the economics of the online grocery market, although it may be many years before they are deployed at scale in the U.S. market,” he added.

GAINING TRACTION
Samuel said the discount channel is also gaining traction across the U.S. as dollar store chains continue to expand at pace, opening several hundred new stores each year.

“Discounters are also increasingly expanding their fresh food offers, and with Aldi aiming to have a store network of 2,500 by the end of 2022 and Lidl entering the market, the discount channel is becoming much more mainstream in the U.S.” he said.

IGD expects the convenience channel to hold steady with some additional consolidation in this segment of the food retail business.

“Convenience stores will increasingly focus on improving their fresh food offer and selling innovative food-to-go ranges, both of which are high priorities for the convenience store shopper,” Samuel said.

He expects supercenters and supermarkets to face a more challenging time, as they experience a declining market share over the next five years. Samuel said as sales shift online, supercenters and supermarkets are innovating with new ways to entice shoppers in-store and merge the physical worlds. For example, Samuel references healthcare hubs, investments in prepared foods and food-to-go, as well as use of digital tools to inform, engage and reward their shoppers. He said they are becoming common practices today among most grocery retailers from Wal-Mart to Kroger to Whole Foods, now owned by Amazon.
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Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics and sponsored by Propak Logistics.