In the United States, only a small percentage of groceries are purchased online. Estimates vary considerably, but it’s safe to say that, as one industry analyst puts it, grocery is no air travel. The vast majority of us buy our plane tickets online, just as the vast majority of us get our groceries at a brick-and-mortar store.
But as the news that Amazon is buying Whole Foods Market Inc. made dramatically clear, online’s slice of the pie won’t stay small for long. Rivals that are already ramping up their ecommerce sales will ramp a little faster. And for those who stick stubbornly to the foot traffic model, their jobs just got a lot tougher.
How high can online’s share of the market go? And what does it mean for instore deli, bakery and prepared foods?
Most consumers would have no problem getting a box full of cereal, toilet paper and other shelf stable center-store items delivered to their house. But what about a rotisserie chicken and a couple hot sides? Thanks to packaging and technology innovations — and quality control standards so high that consumers will trust their store’s deli or bakery manager to ship them fresh food they’ll love — that day may be closer than many think.
Big growth ahead
Today ecommerce accounts for about 5 percent of all U.S. food and beverage retail sales, says Jordan Rost, vice president of consumer insights for New York-based Nielsen.
By 2025, however, online grocery sales will approach $100 billion, according to an analysis by Nielsen and the Arlington, Virginia-based Food Marketing Institute. And perimeter store departments stand to be major beneficiaries.
“Fresh departments present the biggest opportunity for click and collect options as consumers want the convenience of researching and ordering online, but actually hand-selecting” products in the store, Rost says.
Instore bakeries and delis in particular should benefit, Rost adds, from the meal-kit trend.
“One area of strong growth in the grocery e-commerce space is meal kits. In 2016, meal kits as a whole grew 109 percent and we only see traction continuing and opening the door for deli prepared and baked goods to make their way into American households through online channels.”
Industry estimates of online’s share of grocery sales range from 5 to 9 percent, says Chuck Winter, retail expert and technology leader with Atlanta-based consulting firm North Highland. By 2025, he says, it could be 20 to 25 percent — and the eventual ceiling could be as high as 35 percent, as other retailers follow Amazon’s lead.
“The only thing that could slow that growth would be rapid inflation or a significant downturn in the economy,” Winter says.
While most of that growth will be generated from center-store items, perimeter sales also will increase, particularly for items that can be delivered quickly, Winter says. Meal delivery featuring perimeter items will play a key role.
To keep up with the pace of ecommerce, grocery deli, bakery and prepared will need to introduce new food concepts, use social media to share meal ideas and preparation tips, offer pickup options and expand fresh, healthful food options, Winter says.
Darren Seifer, food and beverage industry analyst for the Port Washington, N.Y.-based NPD Group, says that about 6 to 7 percent of grocery sales are made online. Like most changes in the food and beverage industry, the shift to more sales will be slow and gradual.
But there’s no doubt, he says, that it’s happening. One in five U.S. consumers bought groceries online in the past three months, Seifer said July 31. Perhaps an even more telling statistic, he says, is that three-quarters of people who buy groceries online will do so again.
“There are very few lapsed users,” he says. “Once they do it, they tend to redo it.”
That 6 to 7% market share puts grocery toward the bottom of retail adoption of online buying, Seifer says. But he also says it’s possible online grocery sales could pick up a percentage point annually for the next several years, reaching double digits.
Driving much of that growth are young urban males, who are taking on more and more of the grocery shopping burden, but on their own terms — namely, doing their shopping from the comfort of their computer, phone or other device.
Retail consultant David Livingston of Waukesha, Wisconsin-based DJL Research cites estimates that online’s current share of grocery sales is under 2 percent. Not that that means much when forecasting what it could be five or ten years from now.
“How much it will grow I don’t know, but I think the sky’s the limit,” Livingston says. “Things are changing so fast in the market. A lot of the ways we will shop in the next five to ten years haven’t even been invented yet.”
In the next five years, Livingston predicts, underperforming brick-and-mortar grocery retailers across the country will be “closing by the bushel.” And much of that lost business will migrate to online sales.
Neil Stern, a consultant with Chicago-based McMillan Doolittle, also puts online’s share of total sales on the low end, at about 1.5 percent. But in five years, it could be 4 to 5 percent; in 10 years, 7 to 10 percent. And each percentage point, he says, represents about $10 billion.
Online currently accounts for about 3.5 percent of total retail grocery sales, according to an estimate from Barrington, Illinois-based Brick Meets Click, says Bill Bishop, the company’s chief architect and co-founder. Like other analysts, he believes that number is on a steady upward trajectory.
“A lot of people who were in the ‘doubt’ category about online are swinging into the ‘believe’ category,” Bishop says. “It’s not hard to believe that in the next five to seven years, it could go into double digits fairly easily.”
The adoption of ecommerce is growing faster than many retailers thought it would, Bishop says — so much so that brick-and-mortar retailers no longer have the option of sitting on the online sidelines.
“Retailers need to have an ecommerce option just to keep up. It’s turning out to be the case that sales are not just growing rapidly, it’ something that you must have to have a balanced offering.”
Perimeter store sales: challenges, opportunities
The roadblock to more rapid growth of online grocery sales can be summarized, Seifer says, in one word: fresh.
“Even young people want to pick out their own fresh items,” he says. “Online sales will probably get to double digits, but they have to get over that barrier.”
The opportunity to increase sales of instore deli, bakery and other departments is there, though, Seifer says. People want more convenience. At the same time, more of them are shopping the perimeter. Pulling those trends together in online sales can be done, if retailers are willing to get innovative.
“If retailers can find ways to make those items more shippable and more enticing, so they look great on a website, then it could be an option for them.”
While DJL’s Livingston emphasizes there’s no crystal ball when it comes to predicting the impact technology will have on grocery shopping, he does think that consumers of even the near future will have little trouble buying their deli, bakery, prepared and other perimeter items online.
“If you can’t provide exceptional service, you won’t stay in business,” he says. “The quality standards will be so high, it won’t matter whether you pick it out or someone at the store does. Maybe there will be live web cams showing foods being prepared. Whatever it is, (buying perimeter-store items online) won’t be a concern to consumers.”
Brick Meets Click’s Bishop also believes that sales of instore deli, bakery and prepared foods and other perimeter-store items will adapt to the online age. The ability, for example, of instore deli/prepared to create restaurant/grocery “hybrids,” then deliver them to customers within an hour of their online order, is a powerful tool.
“The growth is going to be right across the board. It’s a pretty pervasive trend, and in some respects a surprising trend,” Bishop says. “But once people have a good experience (with online ordering of prepared foods), they tend to stick with it. A surprising number of people say, ‘I trust that these folks will get me what I need.’”
As subscription services and devices like Alexa make it easier to quickly order, center-store growth will lead the way in ecommerce, says McMillan Doolittle’s Stern, but it can’t carry the load on its own.
“Long term, real growth must involve a full shop with perishables,” he says. “But that requires growth in pickup or last-mile-home delivery. And prepared foods are being tackled in so many ways — meal kit services, meal delivery, etc. I think we’ll see companies continuing to try and innovate with fresh products and immediacy.”