Online grocery shopping was once considered a fresh concept. But it appears to be quickly spoiling. If you look at the latest headlines: Walmart and Google have suspended their partnership for same-day delivery, Amazon grocery sales appear to have stalled, and scores of other companies in the space are struggling.
Retailers are finding it virtually impossible to achieve scale and profitability. And they’re unable to generate sustainable demand due to low repeat levels. The future for grocery e-commerce looks grim. Is a turnaround still possible? Potentially, but it will take a major shift from competing on price to having consumers view e-commerce grocery shopping and delivery as a premium service.
Countering conventional wisdom
Just four or five years ago, the e-commerce grocery sector held great promise, as online retail in other sectors started to really take off. With so much unbridled enthusiasm, analysts projected rapid growth. Back in 2016, an IRI report predicted online food and beverage sales would account for 2.7% of all consumer packaged goods sales in 2020 and more than double to 5.5% just two years later.
But it hasn’t hit these projected heights. While other nonfood CPG categories — such as cosmetics and vitamins — are showing significant growth in e-commerce sales and repeat purchasing, online grocery has stumbled mightily. Currently online grocery shopping accounts for just 1.5% of the $800 billion grocery market.
A TABS Analytics’ 2018 survey on food and beverage consumables purchasing trends showed that after two years of heavy declines, grocery banners were beginning to make a small comeback in their online business. However, the longer-term challenge these e-tailers face is that only a small minority of shoppers purchase groceries online even just one time.
While it may be convenient in terms of not having to physically go to the store, buying groceries from a website is time consuming and takes work. Plus, consumers are unable to see and inspect fresh products to ensure they’re getting exactly what they want, or easily discover new products they would consider trying.
The TABS survey revealed that only one in six consumers purchase online groceries regularly, compared to 99% who shop in brick-and-mortar stores. While loyalty to online grocery has improved over the years, it falls significantly short of the threshold needed to ensure ongoing success of the channel.
The lack of anticipated growth and success of online grocery is evident in the latest headlines from the most prominent retailers. For example, Walmart suspended its alliance with Google-backed logistics firm Deliv for their planned same-day delivery partnership, and While Walmart still partners with other delivery firms, such as DoorDash and Postmates, the viability of these agreements still is in question. Amazon’s year-over-year growth appears to have stalled, according to TABS research, as the company wrestled with perishables sales through Amazon Fresh and Prime Pantry services, and struggled to capitalize on its acquisition of Whole Foods Market. Meanwhile, supply issues plague online retailers, from Amazon Prime customer complaints on late deliveries to labor groups calling for better warehouse working conditions. This evidence is just the tip of the iceberg that could sink the online grocery business in a titanic fashion. There are many other signs that show why e-commerce food and beverage could continue to be unprofitable at best, and unsustainable at worst
The stress on the supply chain — particularly the fulfillment piece — is a significant challenge. In a published report, Amazon fulfillment center workers shared that they are expected to pick up 400 items per hour — one item every seven seconds — to meet the company’s production expectations. Work any slower, take a bathroom break or get injured, and employees say they risk being cited for “time off task,” which could justify job termination. Other anecdotes tell of how regular subscription Amazon Prime deliveries being delayed because drives have more deliveries to make and they face time pressures resulting in poorly organized loading of trucks.
Walmart has not been immune to fulfillment problems either, which apparently caused the demise of its pilot program with Deliv. Drivers from Deliv said they frequently had to wait 40 minutes or more to collect grocery orders for same-day delivery, since Walmart could not “process online grocery orders fast enough,” according to one news story. Even Peapod, one of the earliest online grocery delivery services, still has a tough time. “Convincing customers to order groceries online is still nearly as difficult now as it was in 1989,” said a report from Deutsche Bank Securities, which noted that 22% of apparel sales and 30% of computer and electronics sales happen online today, but only 3% of grocery sales
Unsustainable business model
These examples clearly show that the supply chain for online grocery will never be at parity with brick-and-mortar. But there are cost and scalability issues that further complicate the business model and doom it to unprofitability and unsustainability.
There are two costs that are not borne by brick-and-mortar retailers:
• Order fulfillment — Stores need employees to pick out grocery items and package them for delivery. Depending on the number of orders they’re dealing with on a daily basis, grocery retailers may find it necessary to hire more employees to specifically handle the online orders, or use existing employees and reduce the services they can provide to brick-and-mortar customers.
• Delivery costs — There are costs of cardboard boxes for packaging items, as well as gas, mileage and driver time to factor in. Recent research from Capgemini reveals that retailers’ net profit could fall by up to 26% in the next three years, despite increased online grocery sales, if they don’t “radically improve” last-mile solutions. Some retailers are considering and piloting alternative delivery programs: Think Amazon drones and Kroger’s unmanned delivery vehicles. But these have their own logistical issues to overcome before they could go mainstream.
To address rising costs, many large grocers — including Walmart and Kroger — are investing heavily to expand their click-and-collect services, where customers order online but drive to the brick and-mortar stores to pick up their purchases. However, click-and-collect is not a savior. It’s not scalable, since increasing online orders will require the store to have more employees dedicated to pulling and packing items, increasing the cost of hourly employee wages and potentially disrupting traffic of in-store shoppers.
There’s also a demand problem. TABS documentation over the past six years shows that consumers’ desire for online grocery shopping isn’t there. It may be growing, but there are not enough people on a nationwide scale to sustain the business model. For example, a typical grocery store sees at least 20 trips per year per consumer. In comparison, only about one-third of the population buys groceries online once a year, and only one-sixth claim to make six purchases or more a year.
The convenience factor isn’t strong either. Research from Bain & Co. and Google uncovered that only 42% of shoppers say that the online experience saves them time.
A way out?
To break the cycle of low demand and fulfilment challenges, online grocery companies must concede that they can’t be price competitive. Instead, it should be marketed as a premium service, particularly since many consumers are already paying premiums through third parties, and their markups are quite significant.
Now is the time, too, for retailers to experiment with bounce-back offers to encourage follow-up purchasing, as well as reminders and multi-trip discounts to help move customers from just testing the online grocery shopping waters to creating habit-forming adoption.
Grocery retailers have a long way to go to claim success. They need to spur customer demand, encouraging it to grow faster than it currently is. and customer penetration must increase to achieve the needed scale. The supply chain must be optimized for delivery operations. And they need to undertake expensive investments to automate fulfillment to achieve the necessary scale. Until this sector can check these items off their lists, the outlook for online will remain grim.
Kurt Jetta is founder and executive chairman of TABS Analytics.