Online to make up 21.5 percent of grocery’s sales in five years
Photo: Getty Images/Mary Baratto

Online to make up 21.5 percent of grocery’s sales in five years

Grocery sales made online are expected to grow more than 60 percent from pre-pandemic levels to $250 billion in 2025, accounting for 21.5 percent of the industry’s total, according to a new study.

More than 60,000 Americans were surveyed for the report from Mercatus and Incisv. Sixty-two percent said they were shopping online because of COVID-19. Forty percent of those said they were likely or very likely to continue doing so after the pandemic has passed.

Most grocery shoppers prefer buying goods from retailers that sell online and have nearby physical locations, as well. Increasing consumer acceptance of buy online, pick up in-store and curbside pickup programs are among the factors. Retailers with systems that integrate digital and physical operations seamlessly are more likely to attract and retain customers now and over the long haul, according to the study.

Thirty percent of shoppers surveyed said that they changed their preferred place to shop after the coronavirus outbreak happened. Sixty percent moved their shopping from one physical store retailer to another and 40 percent found new online shopping destinations. Only eight percent of those surveyed said they moved their grocery shopping from a store-based retailer to a pure-play e-tailer.

“We analyzed more than 48 million data points and found that shoppers are highly satisfied and loyal to their preferred grocery store, but this loyalty does not extend to the online channel,” Amar Mokha, COO and benchmarking lead, Incisiv, said in a statement. “While the adoption rate of online grocery has increased significantly, grocers need to improve pickup and delivery slot availability, promotion and coupon availability, and product substitutions to improve customer loyalty online.”

The percentage of shoppers who have gone online to purchase groceries has climbed to 43 percent in the last six months, up from 24 percent two years ago. The biggest reasons for making the shift were concerns about the virus (62 percent), convenience (62 percent) and time savings (42 percent). Real-time inventory visibility is most important to shoppers who go online to buy their groceries.

Looking at the demographics of current online grocery shoppers shows the biggest changes being made by older consumers. Thirty-five percent of shoppers 45+ ordered groceries online for the first time since the pandemic hit. Forty-six percent of respondents said they have begun using new fulfillment methods (curbside) for the first time, as well.

BrainTrust

" I think [seamless omnichannel operations] are table stakes now. It’s just that different chains are in very different places in implementing all the new processes. "

Jeff Sward

Founding Partner, Merchandising Metrics


Discussion Questions

DISCUSSION QUESTIONS: How long will it be before seamless omnichannel operations, including real-time inventory visibility, will become table stakes for grocery chains looking to compete for market share? Should grocers place more value on those shoppers who make purchases online and in stores than those that prefer one over the other?

Poll

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Dr. Stephen Needel
Active Member
3 years ago

First, consider that we’ve been forecasting 15 percent of grocery sales done online for a good 20 years – we just keep on moving out the timeline. So I’m skeptical about the 21.5 percent. Remember that forecasting is hard, especially when it involves the future (to paraphrase Neils Bohr). Given lots of people are going to be omnichannel themselves, it’s probably not good to give primacy to any one shopping mode.

Neil Saunders
Famed Member
3 years ago

There is no doubt that online grocery will grow. However I am extremely skeptical that penetration will reach 21.5 percent in just five years.

First, you cannot look at increased online grocery penetration and shopper numbers which resulted from the pandemic and extrapolate it forward. Not all of the changed habits will stick as the virus abates. Indeed, a lot of habits are already unwinding to some extent.

Second, while a lot of shoppers do like online grocery shopping for some things, they find it very hard to do all of their food shopping online. As the research itself points out, that means there is still a preference for physical stores. More advanced online grocery markets, like the U.K., show there are limits to growth because of this. That should not be underestimated when coming up with future projections.

And finally, even if the demand were there, there is very little chance that grocery retailers could service such a high level of demand in such a short period of time. The build-out of capacity, the cost to transition to digital, and the impact of reduced margins and a new financial model are just too much to cope with in five years. No grocery retailer I have spoken with is working on having such a high online penetration rate in the medium term.

Navneet
Navneet
Member
Reply to  Neil Saunders
3 years ago

I don’t necessarily agree with the observations.

  1. If one goes through the details of the study they seem to have taken into account the post COVID-19 dip. 6 percent to 10 percent of customers who are shopping online will return to stores. the growth might dip marginally post pandemic but once the retailers have taken care of the points of friction growth will accelerate.
  2. Seniors citizen are super likely to return to stores and shop but the younger age groups are likely to shop more online and even in categories like fresh foods, pharmacy and liquor. Newer categories are being bought online.
  3. Retailer readiness is a function of what consumers demand. See how the transition happened in the light of the pandemic. Only 30 percent of grocers offered curbside pickup at the end of last year and now it is almost everyone. It might take one to three years to align operating models, make the right tech investments and optimize cost.
Neil Saunders
Famed Member
Reply to  Navneet
3 years ago

Thanks for the observations, Navneet!

Here are some things I considered when making my comment:

First, when you look at the overall growth of grocery (online and stores) noted in the report it suggests sales in 2020 will be $1,039 billion, up from $1,016 billion in the prior year. This is an increase of 2.26%. It is far too low! Census Bureau data has grocery store sales running at 12.2% so far this year and all of the major grocery players have posted growth rates way, way in excess of 2.26%. This makes sense, because there was some stockpiling early on in the pandemic and there is now a transfer from foodservice (eating out) to groceries as people are still dining at home more. So, the overall growth rate is very clearly wrong which has an impact on penetration and the whole basis of the calculations.

Second, the report suggests that, this year, 10.2% of all grocery sales will be made online. However, the online sales penetrations for grocery at Walmart, Kroger, Target, Costco and others are all well below 10% so far this year. If those giant players, and others like dollar stores where online is minuscule, are not reporting massive penetration rates where does this 10% figure come from? It doesn’t stack up against the actual numbers being reported. None of this is to deny that online has grown significantly nor than penetration has increased. Both are true, but the report exaggerates the extent to which this has happened.

Given the above two points, the future penetration projections should be disregarded in terms of the absolute numbers.

In terms of the application of the forecast, this appears to be a straight line forecast where penetration is going up by around 2 percentage points or so each year. Again, this doesn’t tally with the evidence of this year where, since the peak of lockdown, grocery penetration has actually fallen. It certainly remains nicely elevated over 2019, but it is no longer rising to the extent it was. This makes me highly skeptical about the reliability of the longer-term projections.

I would never deny that this is a time of great change for retail. Nor am I a skeptic about digital and technology. However, I see a lot of projections that are really out of kilter from what’s actually happening on the ground and, unfortunately, this is one of them.

Navneet
Navneet
Member
Reply to  Neil Saunders
3 years ago

I think there is a difference between grocery store sales and grocery sales and the sales and overall grocery demand. Agree for top 100 Q2 2020 sales vs Q2 019 are up 8.9%, but the digitally most mature have grown 2X. I am not sure what your source of data for digital contribution of digital sales is. Are you excluding BOPIS and curbside?

Neil Saunders
Famed Member
Reply to  Navneet
3 years ago

There is certainly a difference between grocery store sales and overall spend on food and grocery products. However, neither measure will grow by just 2.26% this year — which is the value given in the report. That is completely out of line with every bit of available evidence — from retailers, from CPG firms, from official data, and from all other research I’ve seen. There have been dramatic uplifts in grocery spending because of the trends previously outlined.

If, as you note, the major grocers grew by 8.9%, then a group of other retailers must be shrinking enormously in order to pull the overall growth rate down to 2.26%. Who are they? Alternatively, you could be assuming that grocery sales will crater in the remaining months of the year. This is completely unrealistic as it is not what current trends show and it would also assume people eating significantly less than they did last year over the last few months of the year.

In terms of the digital number, 2x growth is 100% growth. That is not unreasonable for the peak period. However, the numbers in the report require 207% growth over the whole year to get to 10.2% penetration. There are very few large players reporting that level of uplift. So, where is this growth coming from?

Oliver Guy
Member
3 years ago

Fluid omnichannel operations are table stakes NOW. Real-time inventory visibility is an essential enabler as has been commented on for a number of years. Without the visibility, inventory will likely spiral as new channels and approaches are added. Add to this the promise of Amazon doing same-day grocery delivery in many markets and it is creating the perfect storm. Grocers must operationalize their stores and their data across the business in order to respond.
COVID-19 has become an accelerator of change. The new models and approaches (like curbside pickup) are harming already super slim margins. Action must be taken from a data and operations perspective.

Jeff Sward
Noble Member
3 years ago

Actually, I think they are table stakes now. It’s just that different chains are in very different places in implementing all the new processes. I learned a big lesson from my daughter and three-year-old grandson. She can load him in the car and deal with him all through the store, or she can shop from the kitchen table and pick up curbside. The pandemic may have made this necessary, but the time saved from having to shop the whole store with a toddler is important. Time saved — it’s a permanent behavioral change regardless of what happens with the virus.

Gene Detroyer
Noble Member
Reply to  Jeff Sward
3 years ago

In observing both my son’s family and my daughter’s family I see similar behavior. Each have two teenage children. My son’s family buys all their groceries online. My daughter’s family buys most of their groceries online, but occasionally goes to a specialty store for certain items. Measuring against the 21.5 percent in five years, I would say my son’s family is at 100 percent and my daughter’s family is probably at 90 percent.

Stephen Rector
3 years ago

At this point, those grocery chains that are not providing a seamless omnichannel operation are way behind the curve and have to move extremely quickly to catch up. Customers want to have the option of both online and in-store shopping and the chains that don’t provide that are missing the opportunity.

Richard J. George, Ph.D.
Active Member
3 years ago

Data like this highlight the table stakes investment in omnichannel. I am reminded that omnichannel is about customers, not channels. The goal of omnichannel marketing is creating a seamless, convenient, customer focus to shopping. The gold standard target market are those customers who purchase online and pick up in-store.

Research indicates that these combo shoppers spend more than online only and in-store only.
The heuristic I think that drives this behavior is the empty shopping cart when they enter the store. Customers use the fullness of the shopping cart as an official calculator of spending. If they purchased their necessary groceries online which are ready to be placed in the car, the shopping calculator resets. This gives the shopper permission to visit the high margin front of store perimeter and augment the shopping trip with fresh flowers or a recently baked bread or even tonight’s dinner.

Ben Ball
Member
3 years ago

They already are. Shoppers still shop multiple stores even within a channel. This has been reduced somewhat by pandemic shopping habits and retailers with good online and pickup services have benefited. To steal some of those shopping trips back, retailers who don’t match up online yet will have to.

Gene Detroyer
Noble Member
3 years ago

I don’t know if online will be over 20 percent in five years. But I will make a prediction.

Projecting what we have seen in terms of the acceleration of technological tools over our lifetime, and the greater speed of technology change in the last few years, I will predict that within 10 years 80 percent or more of grocery sales will be online. In 10 years every cost hurdle, technological hurdle, delivery hurdle, will be eliminated. People will be living completely different lifestyles. Even today, at the Samsung Experience, they have a refrigerator that has technology that will order your groceries for you. If you didn’t have to think about what went in the refrigerator or went in your cabinets, why would you even think about going to a grocery store?

Lisa Goller
Trusted Member
3 years ago

Slim margins limit grocers’ tech adoption, so they’ll need a medium- to long-term horizon for omnichannel solutions to become commonplace. Inventory visibility is essential, as consumers’ top complaint in March and April was out-of-stock merchandise, both in stores and online.

Research proves omnichannel shoppers spend more, making them more engaged and valuable than single-channel shoppers. According to Harvard Business Review, omnichannel shoppers spend more per visit, shop more frequently, and are more loyal and likely to recommend a retailer.

Grocers that invest in adapting to consumers’ multi-channel needs can boost loyalty and lifetime value per customer.

Ken Cassar
Member
3 years ago

Online grocery forecasts have always been tricky. I myself dramatically over-forecasted online grocery back in 2000 when Webvan and others had raised tons of money and were building highly automated grocery fulfillment centers. From my own source of credit card transactional data (90 million credit/debit cards) we can see the online percent of groceries growing from 2 percent to 3 percent pre-pandemic, then up to 5 percent through June. 20+ percent of the market in five years is, in my mind, possible, but not the most likely scenario. I suspect that many grocers (not Walmart and Kroger, mind you) will happily shuffle online priorities to the back burner as soon as COVID-19 passes in order to get back to a focus on what they see as their core brick and mortar business. This will be a mistake that will yield share to Amazon and other digital aggressors, but will also inhibit the overall growth of the online grocery market.

Ananda Chakravarty
Active Member
Reply to  Ken Cassar
3 years ago

Great points Ken. There will be a reversion to an earlier point, with a small incremental jump for online for those just exposed to it. Part of problem is that grocery is an activity, not just a transaction buying process. People are selecting and planning for the coming week and there’s always a mix of staple products with the special meal or dinner. Add in all the special events of the year and other activities, from sports snacks to school lunches, and each family has very unique sets of grocery products they’ll be buying. I can’t imagine people buying exactly the same items week after week throughout a whole year. It just doesn’t work that way. Some favorites, I’m sure, but people want variety.

Bindu Gupta
3 years ago

Product accessibility and shopping convenience are extremely important for a positive customer experience. Given that seamless omnichannel operations and real-time inventory visibility are already table stakes in this highly competitive market.

Shep Hyken
Active Member
3 years ago

How long? We need this now, and some grocers are already there. The pandemic moved up the timeline of the existing technology being adopted by retailers. Those that are sitting on the sidelines are going to end up playing catch-up. With more than 20 percent of business coming from online, it’s a viable channel to exploit. And I predict that number is low.

Brandon Rael
Active Member
3 years ago

The COVID-19 pandemic has served as a great acceleration for the rise of e-commerce sales to unprecedented levels. However, as most of the other BrainTrust members have shared, I too am quite skeptical that digital grocery sales will make up 21.5 percent of sales in five years’ time.

More realistically, once things stabilize somewhat with the pandemic, we should expect that consumers will return to the grocery store while others who have shifted to online ordering only will continue to do so. In a margin crunched business, a seamless omnichannel operation requires the infrastructure, technology, human capital, process reengineering, and ongoing training to make it successful. So while the percent of online-only business may not be 21.5 percent, it will fall somewhere in the mid- to late-teens.

Grocers are challenged to pivot their operations to meet the relentlessly changing consumer behaviors. The clear winners in the digital touchless commerce race will be those that deliver an excellent and consistent customer experience the fastest, and at a lower cost to serve.

Jeff Weidauer
Jeff Weidauer
Member
3 years ago

A seamless online/offline experience with the option for shoppers to do either on any given day is the Holy Grail. But real-time inventory visibility is the number one barrier to online shopping growth. Until grocers can provide accurate in-stock information, shoppers will be wary of going all-in.

Lee Peterson
Member
3 years ago

I think it’s “on” right now. COVID-19 forced the inevitable; multi-fulfillment options not only for grocery, but all of retail. And the technology is there, that’s not the issue. The issue is grocers (and many retailers) are struggling with huge footprints in both number and size as a hangover from the old “bigger is better” mode of the 1980s. Converting all those aging fleets will be expensive and almost UN-doable. So therein lies the conundrum: do and maybe go bankrupt, or don’t do and definitely go bankrupt.

Think of the advantage newer players like Amazon, Lidl and Aldi have: they can design stores from scratch right now that fit the multi-fulfillment operational model of the next generation. That is, until the drones step in – yikes.

Andrew Blatherwick
Member
3 years ago

It is not surprising that more people were shopping grocery online during the pandemic and also not surprising that many of them may continue to do so. The percentage will continue to increase. However what was very telling from this research is the very low percentage that moved to pure play online retailers. They still want to be able to see and stay loyal to the grocery store they are used to. Also what is so important is that online grocery sort out the really important issues of delivery slots and, critically, substitutions. They need to ensure that short life and fresh product is managed very carefully providing high quality and fresh produce or they will lose out. Once again it comes down to getting the supply chain right.

The growth in BOPIS/click and collect and curbside pickup will be a big factor as this adds to the convenience of grocery shopping. It is no surprise though that Amazon has started opening their new Fresh stores to provide that element of grocery shopping that consumers still have the least trust in as far as the pure online retailers go. These locations also offer an ideal curbside and BOPIS collection point.

Will older people who have time on their hands continue to buy on line when COVID-19 has passed? Some will, but my guess is many will go back to their old shopping habits just to get out of the house and have some social interaction. They are also the ones who would most want to select their own fresh produce!

Ralph Jacobson
Member
3 years ago

Online/”remote” grocery shopping has been around almost as long as online shopping, in general. I believe Peapod started in Chicago around 1989, and I ran one of the first stores to fulfill it. It has had major fits and starts over the decades, however I think consumers still relish the touch and smell of physical food shopping and the online growth will be a drop in the overall bucket for years to come.

David Weinand
Active Member
3 years ago

All good observations. We included multiple inputs in developing the algorithm to come up with this projection including overall grocery sales (historic) and projected growth, historic share and growth of online grocery, incremental sales of online grocery and growth post-pandemic, consumer preferences by age and demographic bands and overall digital maturity projections of grocers. The industry has shown that they can quickly adapt to consumer needs (quicker than we would have thought) so the operating models necessary to accommodate this kind of growth we believe are possible.

Ananda Chakravarty
Active Member
3 years ago

Omnichannel capabilities are already table stakes — almost every grocer (and mass merchant selling grocery), c-store, and specialty retailer is moving towards omni in some capacity or another. Some exceptions for sure, but rare. For market share, omnichannel isn’t the main driver however, it’s just one of the pieces. The trend is clear, and only the timing will differ based on localized circumstances.

The second question is more meaningful, and multiple studies as well as retailer financials clearly show that multichannel purchasers are more profitable, buy more product, and frequent a store more with higher long term value. The causality of this is unclear (it may be that the brand is driving the higher value) but grocers should still pay more attention to servicing these customers or enabling customers to become comfortable with all avenues of engagement.

Roy White
3 years ago

Whether it’s 15 percent, 21.5 percent or 25 percent, it doesn’t make a difference. Online selling is not going to get smaller, will become an important, sizeable portion of retailers’ sales, and will force changes in how mass market chains function. The role of the brick-and-mortar store will depend on how they evolve with new technology, such as that outlined in yesterday’s post on Amazon Woodland Hills, to restore their ability to draw traffic.

Trevor Sumner
Member
3 years ago

Other people on this discussion are “skeptical.” I call this a load of hooey. It’s a vendor enabling grocery eCommerce saying how big the market will be, and it contradicts what all the independent analysts are saying and what we can see with our own eyes. It’s not happening at this rate. We’ve seen eCommerce share peak in May and already decline. We will see a couple extra point move this year, but we are far from 21.5%. Happy to take a bet from the Mercatus CEO or anyone else. This isn’t even close.

Navneet
Navneet
Member
Reply to  Trevor Sumner
3 years ago

When in 2016 many researchers projected apparel e-commerce sales to be 40 percent by 2020 similar arguments were raised about this motive and that motive and as per 2019 data apparel sales online were already 39 percent at the end of 2019. Grocery is all set for explosive growth online. See you in 2025.

Trevor Sumner
Member
Reply to  Navneet
3 years ago

Fair bet. To be clear, your estimates are far higher than most research in the industry, which is why it has triggered such discussion. I think you have significant tailwinds with the rise of BOPIS and curbside. We are seeing up to 40 percent of digital sales coming through these from Ulta, Best Buy and others. I just don’t see it in grocery, which has lagged because of item bulk, margin erosion, price of delivery, and local vs. national brand affinity. That’s why it has been smaller than other categories by an order of magnitude.

Amar
Amar
Member
3 years ago

Thanks for the comments and feedback.

Lot of focus/comments on the projection of 21.5% as digital share of revenue. We ran 25 simulations with 150 different variables (market size, demographics, digital adoption, category penetration, COVID bump and post rationalisation, consumer behavior etc.) 21.5% is the median projection. We can discuss and debate the methodology at length if required. The key message is digital grocery sales will continue to grow and at an accelerated pace.

The key take-aways for retailers from the report (which is based on insights from respondent base of over 60,000 grocery shoppers) are:

1. Focus of your core Convenience and Product: Product availability and inventory visibility were highlighted as the biggest friction points for shoppers, retailers must focus on services and experience before discounts and promotions;

2. Shoppers have expressed need for more fulfillment options, better inventory visibility, advanced search options and service. Enable those with right tech investments;

3. Make stores your competitive advantage and deliver a seamless OmniChannel experience;

4. Right operating model enabled by the right tech investments will not only bring growth but profitable growth;

5. Retailers who invested in digital early grew 2.5 – 5X the Industry average (5 Year CAGR and Q2 2020).

Trevor Sumner
Member
Reply to  Amar
3 years ago

I think we can all agree on your five points. 😉 I think this is the most up and down voted discussion I’ve seen on RetailWire because of the 21.5 percent prediction.

David Weinand
Active Member
Reply to  Trevor Sumner
3 years ago

You aren’t kidding Trevor. Amazing.

John McIndoe
John McIndoe
3 years ago

These questions depend on the strategies of the retailer, such as store location and the shopper segments they are trying to reach. Stores in urban centers are likely to have smaller footprints and fewer SKUs than those in suburbs or rural areas.

To satisfy shoppers’ comprehensive needs, omnichannel operations will be important. Regardless of geography, younger shoppers are more likely to favor some form of e-commerce over traditional in-store shopping, if these shoppers make up a sizable percentage of the retailer’s high-value shoppers, then again, omnichannel will be important.

Retailers should value shoppers based on their calculation of the shoppers’ contribution to store income – some combination of attributes such as basket size, trip frequency, premium products purchased, and yes, whether they shop via omnichannel if the retailer determines that impacts their value to the store.

Casey Craig
3 years ago

In the years to come, every grocer and retailer will need a digital presence. But delivering a functional omnichannel experience is a key part of any successful digital strategy. It doesn’t matter how loyal a customer is to your brand; if your digital offerings are clunky, siloed, poorly optimized or unintuitive, you will lose their digital business.

By 2022, mobile commerce is predicted to grow by 68%, making a mobile app solution one of the best ways to build an omnichannel digital experience for your customers. Delivering a performant app solution is a win-win: customers will love it for the convenience and simplicity, and retailers and grocers will benefit from securing customer brand loyalty.

But businesses should be wary about building an app solely because it is trendy. A good app solves a real need in your consumer base. A bad app is worse than no app at all. In the case of grocers, it’s crucial that any digital app offering provides real-time inventory visibility and streamlined shopping experiences customers want.