Online grocery growth tests U.S. retail agility

Online grocery is here and poised for steady growth in the next decade with Amazon expected to lead the charge.

Multiple surveys reveal that 11% of consumers are already buying groceries online. A study by Brick Meets Click found more than 10% of the 22,000 shoppers recently interviewed had made a grocery purchase online in the last 30 days.

A white paper by Kantar Research last year, noted that 11% of shoppers had purchased grocery items online in the past 90 days. Of that, 56% purchased those groceries from Amazon and that was prior to the launch of Amazon Prime Fresh. Anne Zybowski, a retail analyst with Kantar Retail, notes that Amazon has set the competitive bar for the grocery industry.

“Responding to – and revolutionizing on behalf of – the shopper, Amazon is set to learn from its Fresh launch in Los Angeles. … it expects to roll out to as many as 20 other markets by the end of 2014, if Los Angeles proves successful,” Zybowski said.


She said despite “conventional wisdom” and the limited yet growing availability of online grocery delivery models in the U.S. (Safeway, Fresh Direct, Peapod, Coburns), shoppers are already purchasing groceries online. Kantar Retail expects online grocery to grow at a compound annual rate of 26%, moving from 1% of the US grocery landscape to 5% by 2020.

Bricks Meet Clicks research notes the online grocery market today is poised for a moderate growth scenario to 10.7% over the next decade. Bill Bishop of Bricks Meet Clicks said with this scenario, Amazon is already a "disrupter" by taking market share from brick and mortar chains. He said Safeway and Wal-Mart are two other national grocers also playing in the place. Bishop suggests the market growth could escalate to 16.9% over the next decade if Amazon or some other large retailer launched a dramatic rollout.

The experts said online sales are growing in popularity even though the market is highly fragmented with some niche retailers in targeted areas like San Francisco and Los Angeles.

Zybowski said while online grocery will by no means replace stores, appealing to today’s connected shopper will be critical to driving future growth. The new value proposition is delivering on convenience without a hefty price tag. Retailers that find this balance will win in the medium to long term, according to the market watchers.

AMAZONFRESH CATALYST
She said AmazonFresh is the catalyst to grocers to reinvent how to deliver convenience to shoppers. She pegs Wal-Mart and Safeway as the two national retailers in the direct line of fire.

“When will Walmart To Go move beyond a pilot phase?” Zybowski wondered, given that it’s been tested since 2011 in San Jose and San Francisco, and more recently rolled out in Chicago and Denver.

As the largest national grocer and one of the few already testing a home delivery model, she wants to know when Wal-Mart plans to expand the Walmart To Go. Wal-Mart grocery executive Jack Sinclair told analysts in October that consumer demand is not enough to justify the economics of online grocery sales and home delivery. He said then that Wal-Mart had the logistics and supply chain in place to roll it out at anytime should the demand or economics be there to support it.

Safeway is a national grocery retailer that offers delivery services in the California market and perhaps the most directly impacted from AmazonFresh, based on the fees charged. Zybowski expects to see Safeway offer more promotions for frequent shoppers that could be enticed away by AmazonFresh.

Kantar also expects to see an increase in the click-and-collect options as more retailers find themselves losing share to Amazon. Such shopping is where a consumer orders their list online. The items are picked from the shelves by a merchant and packed at the retail store where the shopper goes to pay for the completed order. Kantar Retail has covered this concept during the past 18 months. They found several regional grocers such as Harris Teeter, ShopRite and Stop & Shop are experimenting with click and collect models or curbside pickup at the store.

Peapod is has experimented with drive-thru locations in the Chicago area. They also offer home delivery for a nominal fee and Kantar expects to see more experimentation from Peapod in the coming year.


NICHE PLAYERS
Relay Foods is an organic grocer that serves six metro areas between Baltimore and Washington, D.C. Relay president Arnie Katz said the niche grocer continues to grow its customer base each month. He said consumers order their products online and they can chose to pick them up at drop location or have them delivered home for a fee.

“We pack the products into bins and load trucks early in the morning, the truck driver will then set up at general location and the consumers drive up to truck and get their order. This is a sustainable method of delivery. The driver can make more than 20 deliveries in an hour’s time from a stationary site. We have 100 of these pick-up site locations,” Katz said Wednesday (Jan. 22).

As the second largest national grocer behind Wal-Mart, Kroger has been on the forefront of digital marketing, but to date has not taken the plunge into the commerce side. Zybowksi expects to see some new initiative from Kroger this year.

Yummy.com is another niche player that is off to the races in southern California. This limited-item retailer offers store fulfillment for basic groceries delivered within 30 minutes of the order. CEO Barnaby Montgomery said Yummy.com fills an average of 20,000 online orders a month. While the retailer has four physical stores, between 50% and 70% of its business comes from online orders with home delivery. Montgomery said Yummy.com sells convenience and is growing at a healthy clip in the Los Angeles market.

Zybowski said even before AmazonFresh was added into the equation, New York City had become a hot bed of online grocery offers with Fresh Direct, Peapod, and ShopRite aggressively expanding to the metro area and looking to double the size of their businesses.

She expects to see an interesting battle for marketshare to ensue this year in response to AmazonFresh and the growing number of niche players entering the space.