D E B O R A H W EI N S W I G M a n a g i n g D i r e c t o r ,
F u n g G l o b a l R e t a i l & T e c h n o l o g y d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m
U S : 6 4 6 . 8 3 9 . 7 0 1 7 H K : 8 5 2 . 6 1 1 9 . 1 7 7 9
C N : 8 6 . 1 8 6 . 1 4 2 0 . 3 0 1 6
This is the second in our series of reports analyzing onlinegrocerymarketsaroundtheworld.
1) Just 1.4% of all US sales of fast-moving consumer goods(FMCGs) were made online in June 2016, according tomarket-measurement service Kantar Worldpanel. This iswellbelowe-commerce’sshareofsuchsalesintheUKandFrance,andbarelyaboveitsshareindiscounter-dominatedGermany. The US figure belies substantial consumerparticipation,however, some 31%ofUSgrocery shoppersboughtgroceriesonlinein2015,accordingtoresearchfirmMintel.
2) We see two reasons for the mismatch between e-
commerce’s low share of grocery sales and the highconsumer participation rate. First, US online groceryshoppersarebuyingspecificitemsratherthanundertakinglarge shops on the Internet, which depresses averagebasket sizes. Second, these shoppers are buying groceriesontheInternetonlyinfrequently.
3) WethinktheUSonlinegrocerymarket isonthecuspofa
boom: major retailers such as Walmart and Kroger arepilingin,andtheywilldriveupaverageonlinebasketsizesbyfocusingontheircustomers’maingroceryshopsratherthan on small-basket, occasional purchases. We see thisacceleration happening in 2016 and into 2017 as theofferings from retailers change how shoppers use theonlinechannel.
• As of September 2016, some 7% of US consumers had boughtgroceriesviaadesktoporlaptopinthepast30days,accordingtoasurvey by Prosper Insights & Analytics, while a further 3% hadboughtgroceriesviamobiledevices.
However, US consumers are mostly buying specific grocery items online,and those on an occasional basis. Most online grocery shoppers are notusing the channel for their regular, big-basket shopping trips. Just 15%ofonlinegroceryshoppingpurchasesareregular,big-basketshops,accordingtogroceryresearchfirmBrickMeetsClick.
In the US, Amazon is the most popular online retailer for groceries,according to a number of surveys. But its most-used service is AmazonPrime, not its full-service AmazonFresh grocery offering, according to aCowen and Company survey. For Prime purchases, Amazon sends itemsthroughtheregularmail,oftenoneatatime,makingtheserviceunsuitablefor a conventional grocery shop. This further underlines that small-basketshoppingiscurrentlydominatingUSonlinegroceryretailing.
Amazon’spopularityisinpartduetomajorstore-basedretailers’slownessinmovingonline.Walmart,KrogerandPublixarestillintheramp-upstagein terms of e-commerce and, unlike Amazon Prime, these retailers arepredicatedonservingdemandforbig-basketshoppingtrips.
US online grocery retail looks set to boom as average basket sizes getpushed up by the offerings of conventional grocers such asWalmart andKroger.Given already-substantial consumer participation rates, there lookto be opportunities to convert the large body of occasional, small-basketonline shoppers into shoppers who conduct their main grocery shopsonline.
As the pace of growth accelerates, we expect e-commerce’s share of USFMCGsalestojumptoaround2%ormorein2017.
INTRODUCTIONThis is the second report in our Online Grocery series. Our first reportlookedat theUK,which is themostmatureonlinegrocerymarketamongWestern economies. The US, by contrast, is one of the least maturemarkets, with major store-based players such as Walmart only nowwholeheartedlypushingintogrocerye-commerce.
• HowUSconsumersshopforgroceriesonline,emphasizingthattheytend to buy only a few items, irregularly, rather thanmake large-basketpurchasesontheInternet.
• How Amazon has a leading position, by number of shoppers, andwhatthistellsusaboutgrocerye-commerceintheUS.
THE US: AN IMMATURE E-GROCERY MARKET WITH GREATPOTENTIALTheUSgrocerymarketisworth$1.2trillion,butonlyaverysmallshareofthattotalisbeingspentonline.
• IntheUS,just1.4%ofallsalesofFMCGsweremadeonlineinJune2016, according toKantarWorldpanel. Yet that figure represents aneardoublingofshareinjusttwoyears.
• That is equivalent to around $17 billion in annual online sales,weestimate.
In recent years, e-commerce’s share of US grocery sales has grown byaround 0.3 percentage points per year, Kantar’s data imply.However,weexpect the pace to accelerate in 2016 and 2017 as major store-basedretailerspileintotheonlinechannel.
Kantar’sdataeffectivelycaptureonlypackagedproducts,socategoriessuchasfreshproducearenotincludedinthesefigures.Wethinkconsumersareless likely tobuy fresh categoriesonline than theyarepackaged,brandedgoods, as most people prefer to check for quality and freshness whenbuyingfreshfoods.Wethereforeexpecttheonlinechannel’sshareoftotalgrocerysalestobeslightlybelowthelevelrecordedbyKantar.
LaggingComparableMarketsOnlinegrocery tends to takeabiggershare incountrieswhereconsumersprefertoshopinlargegrocerystoresbecauseitoffersabetterfitwithlargestore-based grocers’ propositions and consumers’ expectations—both ofwhich tendtocenteronbig-basketshopping tripsandtheconvenienceofaddedservices.
TheUS,however,isanexceptiontothis.TheshareofFMCGsalestakenbye-commerce in theUS isbarelyaheadof that seen inGermany,acountrywheregroceryisdominatedbyno-frillsdiscountersandothersmaller-storeformats.
WeseemajorUSgroceryretailers’reticencetoofferafullonlineserviceasa major barrier to e-commerce penetration in the US. That barrier,however,isnowbeingliftedasmajorchainspushonline,aswewilldiscusslater.
Other hindrances to grocery e-commerce in the US include a moredispersedpopulation,whichmakeshomedeliverymuchlesscosteffective,andafragmentedgrocerylandscapecharacterizedbyregionalchains.
• Wethinkthisforecastcouldwellproveconservative.Becauseoftheongoing ramp-up of online grocery shopping services from majorretailers, andbecause these retailers are likely to pushup averagebasketsizesconsiderably,wethinktheonlinechannelissettogrowveryrapidlyintheUS.
HOWAMERICANSSHOPONLINEFORGROCERIESA very large number of Americans are already buying groceries online—despite the online channel’s tiny contribution to sector sales. In 2015,approximatelyone-thirdofUSgroceryshoppersboughtonline,andshoppernumbers jumped by about 63% year over year, according to Mintel.Unsurprisingly,Mintelnotedthatmillennialstendtoshowhighere-groceryparticipationlevelsthantheaveragepopulation.
Data for September 2016 from our research partner Prosper Insights &Analyticsshowedthat7%ofUSconsumershadboughtgroceriesonlineviaadesktop/laptop in thepast30days,and that3%hadbought themviaasmartphoneortablet,versus90%havingboughtgroceriesin-storeovertheperiod.
WhyAreOnlineSalesSoLow?Given substantial shopper numbers,why are online grocery sales so low?We identify two factors that account for the small share of grocery salestakenbye-commerceintheUS:
• US online shoppers mainly buy specific grocery products on theInternet;online,theytendnottoperformlarge-basketshopsofthekindtheydoinstores.
• US shoppers buy grocery products online only infrequentlycomparedwithshoppersinothercountries.
Asaresult,theonlinechannel’sshareoftotalgroceryspendisvery low—evenamongthosewhodobuygroceriesonline. IntheUS,themajorityofonlineshoppersdojust1%–10%oftheirtotalgroceryshoppingonline,andan exceptionally small proportion of consumers domost of their groceryshoppingonline,accordingtoProsper.
For comparison, aMintelUK survey inDecember2015 found that11%ofBritishInternetusersdoalltheirgroceryshoppingonlineandafurther12%domostoftheirgroceryshoppingonline.
Big-BasketShoppersAccountforaMinorityofOnlineShoppersAlargemajorityofthosewhosaytheyareshoppingforgroceriesonlineareactually shopping only for specific products. Just 15% of online groceryshoppersaredoingamaingroceryshopontheInternet,accordingtoBrickMeetsClick.
Wethinkthis isvery importanttounderstandingthediscrepancybetweenthesizablenumberofAmericanssaying theybuygroceriesonlineandthetiny contribution the channel makes to category sales. Those looking forspecificproductsmaybepurchasingjustoneortwonicheproductsormaybebuyingveryoccasionallyasgiftpurchases.
Inturn,thissuggeststousthattherearemajoropportunitiesforretailerstopush up channel sales by converting existing online grocery shoppers tomain-shopshoppers.
USOnlineShoppersBuyOnlyInfrequentlyCompoundingthelackofscaleinthechannelisthefactthatmanyshopperswhobuygroceriesonlinedosoonlyinfrequently.Wethinkthisislinkedtothe abovementioned specific-product focus of most online groceryshopping.
The data in the table below are from 2014, but we think the relativeperformance in the countries shown is unlikely to have changedsubstantially since then. Mature e-commerce markets such as the UK,FranceandSouthKoreaaremarkedbytheirhigherfrequencyofpurchaseversustheUS.Thedatashowthatthehindrancetogreateronlinesales isinfrequency of purchasing rather than penetration levels—because agreaterproportionofhouseholdsboughtonlineintheUSthandidinFranceortheUK,forinstance.
AMAZONDOMINATESUSONLINEGROCERYInmaturemarkets, brick-and-mortar grocery storeshold leadingpositionsin grocery e-commerce: we see this trend in the UK and France. In thenascentUSmarket,however,Amazonholdsadominantshare—atleastbynumberofshoppersorshoppingtrips.
• Amazonattracts48%ofallonlinegroceryshoppingtrips,accordingto a fourth-quarter 2015 Brick Meets Click survey of 12,000consumersinthreeUSregions.
• Some 38% of US shoppers who buy groceries online do so atAmazon, according to aMorgan Stanley survey also undertaken inthe fourth quarter of 2015. The percentage figure was downmarginally from39%inthefirstquarterof2015.
• In a survey of 2,500 US consumers in February and March 2016,Cowen and Company found that49% of online food and beverage
shoppers used Amazon Prime (which offers expedited shipping bymail),while18% usedAmazonFresh (which isAmazon’s full-servicegrocery service that uses its own delivery trucks) and 11% usedAmazon Prime Now (which is Amazon’s rapid-delivery service thatusescouriers).
• Only aminority of Amazon’s grocery customers are using the full-serviceAmazonFresh,whichissetupforbig-basketshopping.
• A much greater proportion of shoppers are using Amazon Prime,whichdeliversgroceriesthesamewayelectronics,apparelandothernonfood items are delivered—through the mail and often inseparate packages (this depends on the dispatch options chosen).This kind of fulfillment is not set up for conventional big-basketshoppingtrips.
ThisAmazonFresh/AmazonPrime split supports the findings noted above,thatthemajorityofUSonlinegroceryshoppersarebuyingspecificproductswhen they shoponline rather thandoing their regular,big-basket groceryshopping.
However,weexpectAmazontopushAmazonFreshinresponsetotheroll-out of online grocery services from major chains such as Walmart andKroger. InOctober2016,Amazoncut the feecharged tocustomers for itsAmazonFreshand itwas reported that the chain could introducecurbsidepick-up services. We also see opportunities for Amazon to introduce thedeliverymodelthatitusesintheUK—usingthird-partycourierfirmsratherthanitsownfleetofdeliverytrucks.
• MorganStanley’sfourth-quarter2015surveyfoundthatinimmaturee-grocery markets, Amazon captures the highest share of onlinegrocery shoppers among the countries surveyed: in India, Amazon
After Amazon,Walmart is themost popular online grocery retailer in theUS. According to Cowen, 30% of online food and beverage shoppers buyfrom Walmart.com; according to Morgan Stanley, some 38% of onlinegroceryshoppersshopthesite.WeexpectaveragegroceryshoppingbasketsizestobesubstantiallyhigheratWalmartthanatAmazon.
• We estimate that, in 2015, Amazon’s North American grossmerchandisevolumewasaround$97billion; this is thevalueofallgoodssold,whethersoldbyAmazonorbythird-partymerchants.Ifwemakeaballparkestimatethat2%–3%ofthesetotalsaleswereingrocerycategories,itsuggeststhatAmazonNorthAmerica’sgrocerysalestotaledapproximately$2–$3billionlastyear.
BRICK-AND-MORTARPLAYERSFINALLYPILEINAmazon enjoys its lead in shopper numbers largely because topUSbrick-and-mortar grocery chains have been laggardly in venturing online.WalmartandKrogerhavepushedintoe-groceryonly inthepastcoupleofyears, and they have been doing so primarily through at-store pickupservicesratherthanthroughhomedelivery.
Offline market leader Walmart rolled out its Pickup at-store collectionserviceacross2014.ThecompanybeganextendingitsPickupservicetonewmarketsandexpandingitinexistingmarketsbeginninginApril2016.Attheend of Walmart’s fiscal second quarter 2017 (latest), the company wasoffering pickup in 60 markets and at nearly 400 locations, up from 150locationstwoquartersearlier.
Some orders are available for same-day collection, shoppers are offeredtwo-to-four-hour windows for collection and the company charges noadditional fees forpickup.Walmartalsooffershomedelivery inanumberofareas,butitsfocusisverymuchonat-storecollection.
Walmartis likelytobetakinglearningsfromitsUKsubsidiary,Asda,whichhas a long-established home-delivery operation and has recently pushedinto click-and-collect for groceries. It is likely thatWalmart has gleaned alesson from Asda regarding the costs associated with delivery versuscollection.
• EuromonitorestimatesthatWalmartUSgeneratedonlinerevenuesof $7.24 billion in 2015, equivalent to 2.4% ofWalmart US’s totalsales and up 19% from$6.09 billion in 2014. These figures includesalesofnongroceryitemssuchastoys,electronicsandappareland,given the newness of Walmart’s e-grocery services, nongrocerycategoriesarelikelytoaccountforamajorityofitsonlinesales.Thecompany says it grew its global e-commerce sales by 12% in fiscal2016.
Kroger:AlsoatNearly400Locations
America’s second-biggestgrocery retailer,Kroger,hasbeenmorecautiousstill. The company began limited trials of online shopping and collectiononlyinSeptember2014anddidnotofficiallyrolloutanonlineserviceuntilAugust2015.
Kroger’s merger with Harris Teeter in January 2014 brought the latter’sExpress Lane buy-and-collect service into the group. Kroger subsequently
launched its own ClickList buy-and-collect service. At the end of thecompany’s fiscal second quarter of 2017, these services were offered innearly 400 stores. UnlikeWalmart, however, Kroger charges customers apickingfee,of$4.95.
PeapodLikelytoGainScalefromAhold-DelhaizeMerger
TheUSmarkethasbeen characterizedby anumberof pure-play retailersright from the early days, whenWebvan (now defunct) became an earlymoverinonlinegrocery.
Amazon aside, Peapod is the biggest Internet-only retailer in the US. Itdelivers fromstoresoperatedby itsparent company,AholdDelhaize, andfrom its own distribution centers. The company operated 211 small,freestandingpickuppointsattheendof2015.
Peapod’s coverage spans only the Eastern US, in line with Ahold’s storefootprint. The company makes deliveries in Connecticut, the District ofColumbia,Illinois,Indiana,Maryland,Massachusetts,NewHampshire,NewJersey,NewYork,Pennsylvania,RhodeIsland,VirginiaandWisconsin.
PeapodwasownedbyAholdprior toAhold’smergerwithDelhaize in July2016. The merger suggests that there is scope for Peapod to expand itscoverage, using Delhaize stores as further picking centers. However, thenewlymergedcompanyretainsafocusononlytheEasternUS.
• Euromonitor estimates that Peapod turned over $748 million in2015, up 15% from $649million in 2014. Ahold Delhaize does notsplit out revenues forPeapod,but the company said that thepureplaygrewsalesby45%intheNewYorkCityareain2015thankstoincreasedcapacityatitsNewJerseydistributioncenter.
InstacartOffersaCapital-LightWaytoSellOnlineInstacart is a picking and delivery service that partners with retailers toenablecustomerstoorderfromstoresandhavetheirpurchasesdelivered.Instacartbenefits fromnotholdingany inventory,while its retail partnersbenefitfromhavingacapital-lightwaytooffershoppersanonlineservice.Retailers that partner with Instacart include Whole Foods Market (since2014),Target(since2015)andPublix(sinceJuly2016).
US RETAILERS OPTING FOR LESS-MARGIN-EROSIVE ONLINEOFFERINGSHomedeliverygroceryservicescanhitthemarginsofstore-basedretailershard because of the high costs associated with picking and deliveringorders,includingtheexpenseofrunningfleetsofdeliveryvehicles.Wehaveseen this in the UK, where home delivery is the norm for online grocerypurchases,butwherethefeeschargedtocustomershavefallenovertime.(See our first report in this series for more on the UK online grocerymarket.)
Withafocusoncollectionfromstores,majorUSretailerssuchasWalmartand Kroger are sidestepping the high costs of delivery. Moreover, thosepartnering with Instacart are not only opting for a less-capital-intensiveservice,butalsohavegreaterflexibilitytooptoutofthechannelorswitchtheir online offering to another format than they would have if theyinvestedintheirinfrastructureforservicingorders.
US grocers appear to be striking a balance between tapping a growthchannelandavoidingamajorhittoprofitability,whichmaybeonerewardfortheirslownessinventuringonline.Americanretailershavebeenabletoconsider themistakesgrocershavemade inmorematuremarkets,wheremanyrushedintotheonlinechannelatalmostanycost.
• The US online grocery market is set to boom, driven by majorretailerssuchasWalmartandKrogerchanginghowshoppersusethechannel.
• AsubstantialproportionofAmericanconsumersarealreadybuyinggroceriesonline.Themainreasonse-commerceaccountsforonlyatiny shareof themarket is that averagebasket sizes are small andonlineshoppersmakegrocerypurchasesinfrequently.
• Weexpecttheonlinegrocerymarkettogrowasconsumers’onlinegroceryshoppingbehaviorsbegintomorecloselyechotheirin-storebehaviors. As they start to use the channel for regular, big-basketshoppingtrips,e-commerce’sshareoftotalgrocerysaleswillgrow.
