Analysts have spent years predicting exactly how and when online grocery shopping and home delivery services will revolutionize the way we shop for food. The first company to offer the service, Peapod, was launched in 1989, and it was followed by a number of competitors. Amazon’s recent purchase of Whole Foods led many experts to predict that the time was nigh for drastic changes in the grocery industry. And yet, while online grocery sales have exhibited steady growth, they have yet to truly take the industry by storm. Let’s take a hard look at the factors driving the current growth, and see how developments in the online grocery shopping industry can accelerate growth in the near future.
A Tale of a Few Countries
While online grocery shopping has been slow to catch on in the US, it has been considerably more popular in other countries. In countries such as the UK, Japan, and South Korea, up to 20% of all consumers have been shopping for groceries online, according to Kantar Consulting. Why is this sector thriving in some countries and not others? Industry watchers cite the comfort consumers in Korea and Japan have already established with shopping on their mobile devices. Furthermore, these markets are dominated by a few large population centers, which allow delivery companies to operate in a few large cities, accessing massive amounts of purchasing power with lower overhead costs. This allows retailers to offer far better deals to potential consumers. Korean consumers report that online purchasing allows them to see where the best deals are, and they view it as a cheaper alternative to shopping in brick and mortar stores.
The Last Mile
There isn’t an established concept for integrating brick and mortar stores with the online economy, but entrepreneurs around the globe are developing promising new models for eCommerce. The French chain E. LeClerc has had tremendous success with its Drive offering, which allows consumers to order online then have their groceries loaded into their cars in the supermarket parking lot, a kiosk, or at a distribution center. Kantar Consulting predicts that the program will claim more than a 10% share of the French grocery market within a decade, and US retailers such as Wal-Mart, Kroger and Amazon are developing similar concepts.
Meanwhile, ambitious robotics companies such as the UK’s Ocado and Israel’s CommonSense Robotics are developing super-efficient systems capable of quickly picking customer orders from densely packed warehouses in a fraction of the time it would take humans to complete the same tasks. Elram Goren, the CEO of CommonSense Robotics, envisions a future where every grocery store has a “micro-fulfillment center” on its premises, allowing customers to choose between delivery and click and collect. Meanwhile, Ocado has partnered with US chain Kroger to build at least 20 robot powered warehouses in a bid to compete with Amazon. Ocado’s technology can pick and pack orders of up to 50 items within a few minutes, and they were averaging 283,000 UK orders per week in the third quarter of 2018! Technology and innovation look as if they’re finally poised to solve the problems of scale and high shipping costs that have plagued online grocery delivery.
The Almighty Dollar
American grocers have struggled with finding an ideal pricing model for their delivery services. As CNBC has noted, delivery services generally follow 2 models: pricing items as they would in stores and tacking on a delivery fee, or raising the prices of the goods sold online. Consumers are vaguely aware that the food they buy online is more expensive. As Bain & Company partner Stephen Caine has noted, “people tend to minimize what they buy online because they think they are getting fleeced. You don’t know whether you’re getting a fair price.”
But charging a premium for delivery has been seen as a necessary business practice, at least until now. Peapod has charged a fee ranging from $6.95 to $9.95 for its services, a number which seemed high, but in fact, didn’t come close to the costs of delivering large and varied shopping lists to suburban homes.
Reducing costs will be absolutely crucial to the success of online grocery ventures. According to Kantar analyst Elley Symmes, the #1 reason customers get groceries delivered is because they receive an incentive to do so. But customers are fickle, and as soon as a promotion disappears, they do too. She notes that “delivery costs continue to be a barrier to entry.”
However, Ocado and other companies which have revolutionized the supply chain are making it possible for grocers to substantially reduce the costs involved with shipping online. By utilizing leading-edge technology, Ocado has dramatically reduced delivery fees, so that their average customer pays just $2 per order. As technology continues to shrink the financial barriers to entry, we expect the appeal of online grocery shopping will dramatically increase.
Make The First Time Special
According to Bain & Company, only 42% of shoppers using a delivery service for the first time report that it has saved them time. We’ve written before about the absolute importance of prioritizing convenience, and we know that Adimo’s shoppable marketing technology makes ordering groceries a breeze. This is crucial for retailers, as statistics show that 75% of online grocery buyers say they continue to use the first retailer they bought from. If you aren’t offering an easily navigable platform with quick checkouts, you’ll be left in the dust.
What’s Working Now
One thing that online grocery shopping has been amazing at is product replenishment. Once a shopper knows what they want, and when they want it, buying online becomes incredibly convenient. A recent McKinsey survey found that 32% of all online subscription services were replenishment-oriented. Consumers who need things like diapers and razorblades are already gravitating towards hassle-free services like Dollar Shave Club. Brands that offer both savings and convenience, such as Amazon Subscribe & Save and Instacart are showing the world that buying staples like oatmeal, coffee, and pasta is easier online.
Acquiring a huge share of the total market is the goal of every player in the online grocery game. Once enough people are ordering online, the costs of logistics will begin to make sense, and the profits will roll in. According to the founder of Peapod, “in a perfect world, we’d be like a mailman, going down the street, delivering at every home.” Despite 30 years of experience in the industry, the company is currently profitable in a handful of markets, all of which are densely populated urban centers.
But as logistics evolve, deliveries become cheaper, and customers become more comfortable buying online, momentum for online grocery sales will build exponentially. And since 3 of every 4 shoppers are loyal to the first website they’ve used, making sure that you are an attractive option now will be crucial to future success. As Vince Tibone, an analyst at Green Street Advisors notes, “over time, advances in technology and delivery will gain traction. Grocery stores need to evolve.” We couldn’t agree more.