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May 1, 2024
Is E-Grocery Entering a New Phase of Growth?
U.S. online grocery growth is expected to significantly slow but still outpace in-store growth by three times over the next five years, according to Brick Meet Click’s new U.S. eGrocery Sales Forecast.
The report, sponsored by Mercatus, predicts that overall grocery sales in the U.S. will expand at a compound annual growth rate (CAGR) of 1.6% from 2023 through 2028. Growth averaged 5.6% over the five years ending in 2023, elevated by the pandemic and inflation.
Online grocery (e-grocery) is projected to increase at a CAGR of 4.5% over the next five years, and though growth has slowed, it is still more than three times faster than the 1.3% rate anticipated for in-store selling. Digital grocery sales surged by 18.4% in 2023 and 19.5% in 2022 with the inflation boost, according to Adobe’s Digital Price Index.
“Two factors are creating significant headwinds that impact our eGrocery forecast,” stated David Bishop, partner at Brick Meets Click, in a press release. “First, the market is maturing. Nearly all of the people interested in online grocery shopping have used it at least once by now. Second, even though inflation has recently fallen faster than expected, its cumulative effect continues to drive a flight-to-value behavior in grocery shopping and that will slow topline sales growth.”
Total e-grocery sales (including delivery, pickup, and ship-to-home) are projected to reach nearly $120 billion per year and account for 12.7% of U.S. grocery sales by the end of 2028, up 170 basis points versus 2023.
Other findings from the report include:
- Fast mass channel growth: As consumers seek to offset inflationary pressures, continued online share gains by the mass channel are expected to keep putting downward pressure on topline growth. Since 2021, the mass channel’s online market share, led by Walmart, has increased 620 basis points to reach 45.4% of e-grocery sales at the close of 2023.
- First-party delivery focus: Grocers are expected to emphasize first-party (1P) delivery services to better control operating expenses and the customer experience amid a slower-growth online market. It costs an average of 9% less to buy a basket of comparable groceries on 1P platforms than it does to buy from the banner on a third-party (3P) marketplace (excluding charges, fees, and tips). Additionally, efforts by 3P marketplace platforms to compete better on price are expected to add further disinflationary pressures.
- Importance of order frequency: With it now being more challenging to expand the active user base, increasing the frequency of orders is anticipated to be the most important driver for online grocery sales growth through 2028, with expectations that it will contribute 40% of e-grocery’s sales growth over the next five years.
- Pickup’s growing appeal: Through 2028, store pickup is projected to grow faster (+5.4%) than delivery (+4.4%) or ship-to-home (+2.8%). Pickup is expected to expand to nearly 47% of all online grocery sales at the end of five years.
Faster growth is forecasted by eMarketer, which predicted in January that grocery would make up 19% of U.S. ecommerce sales in 2026, up from 13.7% projected this year and surpassing apparel and accessories as the largest e-commerce category. E-grocery growth of 17.4% is projected for this year — only slightly down from 18.4% last year — with the gains driven more by increased purchase volume rather than price increases. eMarketer wrote, “Digital grocery wasn’t just a pandemic-era flash in the pan. Consumers have made a permanent shift to purchasing essential goods online.”
Discussion Questions
How do you see the drivers of e-grocery’s growth changing over the next five years?
How might investments have to be adjusted or reprioritized to continue to support online growth?
Poll
Loading …BrainTrust
John Hennessy
Retail and Brand Technology Tailor
Mark Price
Adjunct Professor of AI and Analytics, University of St. Thomas
John Karolefski
Editor-in-Chief, CPGmatters
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Online grocery surged during the pandemic and, while it is still growing, growth rates have come back down to earth. For the foreseeable future, I see modest growth and modestly increasing penetration. From our own data there are two main inhibitors. First, the cost of delivery (including subscription schemes) which many shoppers do not want to pay during a time when finances are tight. Second, the challenges of shopping online which for anything other than habitual purchases is difficult in terms of navigation, search and deciding what to buy: visiting the grocery store is often far easier for this kind of shop. That said, I think within online grocery, there are certain categories, like household essentials, that are growing at a faster pace because of the regular, habitual nature of those purchases.
It is also interesting to reference this Retail Wire discussion from some years back when people were predicting online grocery would be 21.5% of sales by 2025. As many of us said at the time, these forecasts were wildly exaggerated and inaccurate:
https://retailwire.com/discussion/online-to-make-up-21-5-percent-of-grocerys-sales-in-five-years/
Right, that was a wildly high number. What we are actually seeing is much more what I expected and, of course, online grocery fluctuates by type of market as well, with higher penetration in more urban markets and less so in other markets.
E-grocery is entering a new phase of growth but it will be slow. The reasons are age-demographics, the economy, and lack of new approaches that the industry is taking in delivery methods, but some retailers are now using AI technologies which will speed up growth in certain retail chains. One of those will be Kroger, and eventually Kroger-Albertsons, should that merger materialize.
Delivery and click-and-collect remain the two main business models in the digital grocery sector. There are delivery fees, service fees, and subscription fees associated with each model, but consumers are often willing to pay for convenience, even despite 20% inflation since President Biden’s inauguration, as well as other Bidenomics including higher interest rates, credit card debts, and paycheck to paycheck living and expenses.
First-party platforms, like Walmart+ and Amazon Fresh, allow retailers to manage their deliveries themselves and can control the customer experience, gain better access to customer data, and enhance their brand identity. Third-party platforms may reach a greater number of consumers, but they require much more investment in technology and personnel. For that reason, first party methods will remain for the time being in just monster-size retailers.
A click-and-collect method involves customers shopping online and picking up their orders in-store, curbside, or from lockers or pickup hubs. It is used by major retailers such as Walmart, Target, Kroger, and Albertsons, but I don’t believe this will be a growth segment. Many consumers don’t think its much of a convenience, and retailers don’t love it because it discourages in-store shopping for extra impulse and profits.
That said, I am working my my retail chain clients on methods to drive impulse right at the point of pick up inside the stores. This was one of the strategic topics I addressed with my retailer clients at NACDs Annual Meeting this past week in Palm Springs. I also involved some premium and niche brands in the dialog. It went well!
Curbside pickup, which I categorize as a subset of click and collect, involves pre-ordering items and picking them up at designated curbside locations. As an alternative to in-store pickup, this grocery pickup service is quicker and more convenient, and whereas it peaked during the pandemic, I believe it will remain popular but with very slow growth.
Walmart and Sam’s Club, and Amazon, are the two largest players in grocery e-commerce. That shocks you, right? No, I didn’t think so! Together, they do about 45% of the business.
Amazon is second to Walmart and doesn’t yet dominate this part of the business. I think they’d like to, though. Amazon Fresh is trying to convince more Prime members to use the service by revitalizing its strategies but good luck with that, because it isn’t an easy sell, due to some buying oddities and glitches that I won’t get into right here and now.
Instacart is the leading third-party grocery delivery company though its share is diminishing, as are other third party services, and frankly, there are too many of them for splitting the business that exist. I suppose the strong might survive but whether that will be a service like Instacart is yet to be seen.
With its AI-powered fulfillment centers, Kroger maintains a competitive edge in fourth place. Other players to watch include Target and Albertsons, though Albertsons and Kroger might soon be one of the same.
In the next few years the overall e-sector will be a slow but major growth driver. If heaven forbid we have another pandemic or other stifling crisis, it will be a replacement driver more than a growth driver, as it was in 2020.
In order to reach Gen Z, and Millennials, brands should focus on digital strategies, as they prefer to discover new products online rather than in-store. Duh, right?
Grocery products are more likely to be discovered on search engines than in stores by Generation Z even more so than Millennials.
In terms of willingness to try new products, millennials and Gen Zers are more likely to branch out than Gen Xers and baby boomers.
Boomers still enjoy an in-store shopping experience, go figure! But once we boomers get old and crumbly, we like the conveniences of e-shopping. Db
It definitely has slowed post pandemic. It has gone from receiving product in two days, to the same day in some cases. There is still a demand for it, click and collect as mentioned above is popular (once retailers figured it out) but I think it still has room for growth in the future. We don’t know what the next gen will like, but the foundation is in place to the next phase of e-grocery. And yes David, I am a Gen X and I still love the shopping experience.
“Crumbly” boomers! No way. Spry and limber.
Not sure about adoption by younger generations. Online still costs more and the younger generations have the least available disposable income. Good overview.
These forecasts for grocery ecommerce growth are not unreasonable but are based on passive grocery ecommerce. The also include putting store sales at risk. Faster grocery ecommerce growth will be unlocked by the retailer who addresses a few barriers to faster growth and chases ecommerce business.
1) Online grocery orders are delivered as ordered. Fulfilling from store leads to ecomm orders that are not what the shopper ordered. This is not the shopper expectation for ecomm. Ecomm is all about, “1 left order now!” and getting that last item. A combination of out of stocks and substitutions isn’t conducive to grocery ecomm growth. A high quality shopper experience where shoppers get what they ordered will bring in more orders from existing shoppers and bring in new online shoppers.
2) A retailer decides to be in the ecommerce business. Primary to this decision is offering a different online than store assortment. Online baskets differ from in store baskets. Yet online grocery assortments are restricted (yes, restricted) to what’s available in the shopper’s local store. Online grocery assortments are not tailored to ecomm shopping. A separate, dedicated ecomm assortment based on ecomm buying data will also help address the incomplete order issue.
3) Costs to fulfill orders are reduced. Through a combination of automated fulfillment, improved overall processes and attention to some of the prior points. Online orders with click and collect should be highly profitable. The lists of costs removed versus in store sales is lengthy and in some cases surprising. But profitability comes only with a change in fulfillment process and new assortment considerations.
Grocery ecomm should be like online banking. Once you realize you don’t have to stand in line, and the transaction is still correct, you won’t. A few things need to be addressed to unlock faster online grocery growth. When they are, online has the potential to be the primary way groceries are purchased rather than a hit or miss option.
The grocer or perhaps non-grocery who gets it right first will be rewarded with a lot of unmet demand and a much faster growth rate.
Excellent commentary. Thanks.
“Grocery ecomm should be like online banking. Once you realize you don’t have to stand in line, and the transaction is still correct, you won’t.
100% spot on! This is about convenience. For most consumers, grocery shopping is a routine that consumes valuable time they would rather spend elsewhere. Under those conditions, the retailer that solves the challenges you’ve outlined will win market share for ecommerce for ecommerce grocery!
Nice analogy with banking but it doesn’t reflect the grocery experience. Banking usually entails one or maybe two transactions. Grocery usually means buying dozens of items at a time-each effectively a separate transaction in terms of selecting and committing to buy. Even if it is a convenience to avoid shopping (and it’s not always that way). The shopping experience online is just as if not more cumbersome.
This exactly. And banking is mostly digital – unless you’re depositing cash there’s not much physicality to it. Grocery shopping is still a very physical experience – smell, taste, feeling the ripeness of the produce, etc.
I think it depends on the mission and what is being purchased. A habitual top-up or replenishment shop can be easily done online and it does save time and hassle. A food shop where folks are buying things for an evening meal or the week ahead is often easier in stores (at least that’s what our data shows in terms of consumer views) because people can see what’s available and quickly think about what they fancy. It’s much harder (and less convenient) to do this online.
Over the next five years, more workers will flow back to offices, driving demand for convenience and time savings from e-grocery. Shoppable content on social media and connected TV will increase sales for online groceries. If Amazon’s new subscription model inspires shoppers to make e-grocery a more frequent habit, it will bite into rivals’ grocery share.
When the future’s percent growth rate falls below the past’s, the pundits start pointing out how bad things are. The reality is that today’s 5% growth may be larger in absolute volume than yesterday’s 10% growth. And any analysis that used the pandemic years as part of the base is unnaturally skewed. Maybe more important for future projects is Lisa Goller’s comment, “Over the next five years, more workers will flow back to offices, driving demand for convenience and time savings from e-grocery. “
John Hennessy’s comments are pretty insightful. Grocery e-commerce will grow as retailers naturally fix some of the headwinds customers experience. I am confident that, with time, they will.
I have never been more excited for a retail sector than I am now and with grocery. What used to be a commodity experience is now a literal marketplace of fresh food, farm direct, fish market, flower shop, ready made and more. Unlike shopping malls, grocery stores are becoming the destination to learn about food prep, explore wine and pick up new healthy options. Couple this brick and mortar experience with the growing ondemand delivery services and hard discount/mass expansion, and grocery is ripe for the pickin!
Growth…growth…growth. All this talk about growth and zero conversation about profitability. Yes, there is a flight to value. But let’s please define value. Is it about $$$ or time/convenience? Cheaper prices or found time? Or is it some impossible-to-define combination of $$$ and time? Doesn’t it vary wildly by demographic group? I’m waiting for the return of a reeeaallly old model. Milk delivery. Only now it’s groceries. Planned, regular deliveries. Predictable and plannable by the retailer. Go on line a day or two before your planned, regular delivery and fill out your shopping list. The retailer picks, packs and delivers in an efficient, plannable manner. Maximum efficiency = minimum cost. Promising delivery in and hour or two injects maximum chaos into system, or, maximum cost. It’s ridiculous in a lot of ways. The quest for growth and market share has injected burdensome costs into the system. If everybody wants lower costs, how about we talk about how exactly that could be achieved without ridiculous overpromising on the delivery end of the process. What’s the best, most efficient, most cost effective way to deliver real value across both product and process…???
Excellent points, Jeff! The best example of this I’ve seen are local farmers in my area who in addition to frequenting multiple local farmers markets, they also have built their own subscription services and even deliver to the consumers home. It’s repeatable and efficient just as you’ve pointed out. I expect the grocery segment is going to see a fracturing of sorts with consumers branching out and finding these repeatable, and regular, service offerings that allow them to achieve both value points you’ve outlined – saving money, and freeing up valuable time. The model could become consumers receiving their subscription box from local farms or farmers markets, then relaying on ecommerce from large chain groceries for pantry staples. For grocery retailers to believe that the shopping model will remain the same as it has been for the past 100 years into the next 10 years is the one mistake they can’t afford to make.
Time vs convenience…exactly. I beleive retailers have yet to catch up to people’s value of time in their busy lives.
I was on the phone with two smaller grocery chains (one seven stores and the other 11) this week talking about their e-commerce operations. Both told me they are seeing slow but consistent growth in the number of shoppers using their platforms and in order size. They are also seeing a shift to more fresh goods as the pickers have more experience or, in one case, the task of selecting fruits and veggies is handled by the produce team, making customers more comfortable. Both retailers are still investing more in their stores but are working to combine the shopping journey as much as possible by integrating loyalty programs, coordinating promotions and reducing any friction for the customer. This approach seems very sensible, and I expect will be followed by most chains with less than 500 stores.
The quote from David Bishop in the article is the reason the concept of online grocery is slowing. He says, “…the market is maturing. Nearly all of the people interested in online grocery shopping have used it at least once by now.” That may be accurate, but as people continue to simplify their lives and look for convenience, they will continue to move toward the online experience to support or replace how they’ve always bought groceries (by going to the store). This is almost like the passengers of the airlines adopting online reservations and check-in. It’s become more the norm than the traditional way of booking a trip over the phone with a reservationist and going to the airport to stand in line at the ticket counter to wait to check-in.
E-grocery will see a slow and steady rise over the next several years. A key contributor is ‘back-to-office’ directives by many companies who seek more in-person collaborative schedules that require 4-5 days in office. Clearly, this harkens back to the time-starved days with long commutes, but today, with online so popular and seamless, shoppers can easily tap & swipe a grocery order during their ‘office’ lunch break and pick it up on their way home. Productivity. Experience. Loyalty. All of these will play into the frequency game, which underpins sustained and profitable growth for e-grocery.
Grocery ecommerce is about convenience. Yes, consumers generally are still seeking dollar value from their groceries due to inflation and likely more so because of the “shrinkflation” their favorite national brands have imposed on them. This has driven them to private label, and most consumers will be satisfied by that and not return to the name brands. Add to this the convenience of not needing to spend time in the grocery store to buy what is likely the same items week after week on their grocery list, and the incentive to keep leveraging eccomerce, but sticking to lower cost brands is very real.
I agree that those who want to try grocery ecomm most likely already have, so most growth would come from frequency. However, this depends on how you believe consumers shop for groceries. Do they plan a single once per week shopping run, or do they buy multiple times per week when their refrigerators and pantry run out of goods? Like most retail segments, the answer is more likely to come from adding services that consumers can rely on to make the overall experience better for them vs going to another retailer. Grocery retailers that do this wil win share away from competing retailers. Why? Because these winning grocers will ad tot he convenience factor for their consumer. As I said at the beginning, this is about convenience. Time is tho most valuable commodity and most consumers don’t see spending lots of time shopping for essentials goods as a good use of time.
Online grocery’s pace of growth is only hindered by consumer price/affordability concerns. Most other retailers and delivery service providers have a strong strategic interest in continued expansion, primarily because a digitally engaged shopper is worth more to them than the trips and sales. The data trail a digitally-engaged shopper creates powers increasingly important profit centers in retail media and data sales (e.g. Walmart Connect, Kroger Precision Marketing, etc.).
Susan, you make a very insightful comment.
I do wonder how e-grocers can operate profitably with increasing labor costs (sorry AI can help in some areas, but someone has to pick the products and deliver it to the customer doorstep), and some people realizing they can’t make a decent living doing deliveries. There is an underlying assumption that the labor pool can continue to operate post-pandemic to support e-grocery pick and delivery. Can this continue given inflation as retailers need to pass the additional costs to customers?
I will offer a contrarian view to growth of e-grocery than many in this thread. Specifically because of two critical factors that play a part in adoption of grocery: quantity of purchase and frequency of purchase ( tied to price).
Consumers usually purchase grocery with many items in their baskets. Consumers also purchase certain items from special stores they prefer , hence buying from more than one store. The traditional shopping method means buying groceries for 1-2 weeks at a time. It is time consuming, and although convenience can be found through online, costs are lower and the ability to select, choose and compare for perimeter items are mainly in-store. Even with quality assurances, the amount of product purchased makes it easier to go through in-store shopping than trying to recall all the varieties of items to purchase in an online experience. It’s easier to glance in a shopping cart than scroll through lists of items.
Consumers are also buying frequently- usually from multiple stores and on regular schedules. Purchases can vary greatly from week to week depending on leftovers, eating out and societal eating- who doesn’t have a pizza party with their friends or a dinner out with your partner? This makes regularity in meal selection and variety of meals an important part of grocery buying. This also requires more purchases as circumstances change. Whether buying for family or buying for self, the needs require consistent food purchases with variety of food types. This also tied back to price as the average consumer is price-conscious when it comes to food. Many are focused on coupon usage and millions are enrolled in subsidized food programs. These factors serve to shift any excess costs handed off to the consumer as enormous burdens, especially over many purchases and many products at a time.
I see a slowing in the growth rate of egrocery with only a segment of the population adopting it as their primary method of buying- especially in the US.
Now that external forces such as the pandemic and inflation have been mitigated, the hard work of generating sustained growth in customers and revenue can begin. Growth will now come from traditional factors such as improved customer experience, personalized marketing, and value delivery.
The big benefit of grocery e-commerce is data. By leveraging purchase history from past grocery purchases, as well as other historical purchases from pharmacies, etc., the 3P providers can provide a more customized experience than the retailers themselves. The opportunity to provide delivery services across multiple retailers should give 3P providers some margin insulation to make service fee prices more competitive.
Then, back to the basics – customer acquisition, retention, and encouraging cross-retailer purchasing.
Buy online, pick up in store (BOPUS) is an area of continued growth. Yes, it does present logistical challenges but the opportunity to bring customers into the store to purchase incremental high margins items has yet to be fully exploited.
For the near future, growth of e-grocery sales will be slowed because consumers are watching their spending closely. They are reluctant to pay delivery fees and subscription fees. However, more aging seniors will help growth. At some age, they would rather have food come to them rather then going to the store to buy food.
In fact there are two questions :
How think “upside down” ?
What is the real “just-in-time” for consumers ?
The right solution is here :
A “3rd pathway” between Walmart & Amazon !
I concur with Mr. Bishop’s forecast. For now. Faster growth in digital grocery sales could come as retailers master several foundational capabilities:
Ultra-reliable on-shelf availability is one, as this translates to the virtual elimination of item substitutions in online orders. Automated inventory and order management, including a continuous demand forecast of every item in the store, is the critical skill.
Vastly improved “shop-ability” in online ordering apps. This is no mean feat, since today’s online grocery sites are designed for order management (the store’s priority) not pantry management, which is the core objective of shopping households. Discovery is virtually non-existent for the shopper, which is why so many of them prefer trips to the store to select perishable products.
A pantry-management mindset. Retailers need to build their digital shopping experiences to support the way households truly operate. That means recognizing that their shoppers are “split” and always have been. There is an opportunity to transition from clumsy online ordering and delivery apps to something with greater utility for households – even if they don’t buy their entire list from your store.
These are three key steps toward greater share of trips and wallets for grocery retailers. All are tantamount to a superior service experience for online shoppers. We are still at the end of the beginning when it comes to digitally-enabled grocery shopping.