23 Jan 2019
Online grocery was once considered a far fetched concept for internet retailing, but now it has become a reality. The idea that consumers would sit at home and allow strangers to provision and bring home to them something as personal as the food they eat was once strange.
However, Silicon Valley has continued to produce a slew of startups that have made an impact on the culture, with the result being a shift in the way home delivery is perceived. The latest battlefield, for the US at least, is the online grocery industry.
In countries like the UK, there has been considerable progress towards the selling of groceries over the internet. A variety of factors are responsible, including the ease of delivery since UK cities tend to have a higher density of consumers.
Whether the US will catch up in grocery delivery next deserves a cold hard look at the data. If trends are anything to go by, however, online grocery could be set to explode in the US.
The Lagging of Online Grocery
The grocery industry is often portrayed as a laggard in adopting ecommerce technology. This perception is fed in part by the lower pace of consumer adoption for groceries when compared to other items. Consumers who have no problem ordering the latest iPhone over the internet might still be accustomed to lining up in a queue at the local Walmart to ring in their groceries.
In addition, local farmers’ markets which have thrived for centuries offer an advantage that is critical where groceries are concerned: freshness is almost guaranteed and easy to verify. Given the double whammy of convenience and freshness of local produce, the grocery trade has not been as vulnerable to online sales.
This partly explains why online grocery sales lag behind ecommerce sales. In the US, online groceries account for around 5.5% of all grocery sales, based on data from Grocery Dive. Ecommerce sales in other categories, however, as reported by Business Insider, account for around 9% of all retail sales.
This means that the rate of adoption for online purchasing for groceries has been around half of what it is in other shopping categories such as electronics, furniture, and clothing.
VCs and Industry Insiders Bullish on Growth
While online grocery sales are a small percentage of total grocery sales, the data indicates that things are changing rapidly. This is one area of business where there is tremendous year on year growth.
According to a CNBC report, the online grocery industry in the US is now growing at a compound annual growth rate of nearly 20 percent, and is set to keep up this rapid clip until 2025.
Based on this data, the online grocery retailing industry could be worth $100 billion annually in 2025, representing around 20 percent of all grocery sales. At present, the online grocery trade amounts to around $20 billion in the US.
The industry has seen intense focus from major multinationals such as Amazon, as well as VC funded startups that are rushing to claim pole position in online grocery activities.
Instacart, a grocery delivery startup founded in 2012, now has a valuation of $7.6 billion after a $600 million funding round in 2018.
VC firms are eager to pour money into what they see as an industry with potential for exponential growth in the years ahead. A number of factors support that thesis and suggest the industry is just beginning its phase of serious growth.
Why it Could Explode: Smartphone Usage
Increased smartphone usage is a major contributing factor to the increased adoption of online grocery shopping. The ease of buying things online on a mobile device that is never very far from the user makes it convenient to order groceries in between other important things.
The lifestyle changes afforded by smartphones play a major role in the change in consumer culture to be more oriented towards mobile ease and simplicity. The combination of smartphone usage and consumer preference for purchasing things online rather than in stores is likely to lead to a slow attrition from traditional grocery shopping.
According to Progressive Grocer, customer confidence in shopping for groceries online has been steadily increasing. In a survey, 24 percent of customers had bought groceries online in the past 30 days, indicating a good level of adoption for online grocery shopping.
Customers tended to prefer convenience in how groceries were delivered. For example, when retailers offered both pickup and delivery as options, 74 percent of consumers chose for their groceries to be delivered. In contrast, only 26 percent elected to pick up the groceries themselves.
Much in the same way that the internet led to the adoption of ecommerce by consumers, if the online grocery players can figure out the kinks, consumers are likely to adopt online groceries as well.
Rather than trek to the store, the majority of consumers, if assured of quality produce and other requirements, prefer the convenience of having groceries delivered to them from an order placed online.
Why it Could Explode: Gold Rush Mentality
The entry of Amazon into the online grocery delivery and retail has a major impact on the industry and will accelerate the explosion in growth of US online grocery. According to a Fortune report, the purchase of Whole Foods by Amazon in 2017 marks a strategic push by Amazon to dominate the future of online grocery.
Amazon and VC players are contributing to a gold rush mentality, which has encouraged other companies like Walmart to invest in online grocery in order not to miss out.
Where Amazon goes, others follow.
Amazon dominating this phase of the online grocery industry is not a net negative, unlike what some think, because it is helping develop the technology that will make the near-instantaneous delivery of fresh groceries practical.
Despite the projections, it’s by no means a done deal that the online grocery delivery technology, in its current form, will warrant every consumer switching how they buy groceries in the future.
How to Beat Amazon at Online Grocery Retail
Other grocery retailers can learn from Amazon’s moves in the online grocery space. Beating Amazon at the game will be much harder in practice, but studying their strategic moves offers some actionable insights.
Amazon’s strategy so far has been to push a multi-pronged attack, all aimed at making it easy for customers to order fresh produce from Amazon. These different projects include:
- AmazonFresh - Amazon’s first stab at online grocery delivery, launched in 2007
- Amazon Go - Chain of cashierless grocery stores operated by Amazon
- Prime Now - Shopping service with free 2-hour delivery, including for groceries
- Whole Foods - Grocery chain renowned for healthy food and groceries
With such strategic depth, they cover multiple bases, ensuring multiple opportunities to please the customer.
Amazon’s traditional approach has centered around making shopping as convenient and reliable as possible for the customer. Applying this same approach to online grocery shopping promises to pay dividends for Amazon.
Already, according to a Forbes report, the company now owns an 18 percent share of online grocery retail in the US. The acquisition of the popular Whole Foods grocery chain also gives Amazon serious brand value in the grocery trade.
The Switch to Online Grocery
With estimates of compound annual growth rates of over 20 percent, the online grocery industry looks set to explode in the US. Challenges remain. For example, making sure that groceries are delivered on time and that the produce is of sufficient quality to fend off the stiff competition from traditional grocery stores.
However, a number of factors point to a bright future for online grocery stores. The increased time spent on smartphones and online shopping makes it likely more consumers will adopt online grocery shopping.
In addition, ample VC funding and interest from major players like Amazon makes it likely that the online grocery shopping experience will improve rapidly for consumers. In time, buying groceries online could be just as instantaneous as dropping by the local grocery store.
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