March 5, 2004, 12:00 AM

Online grocery sales rise 40% in 2003 over ’02, study estimates

A shift toward improved customer service in the online grocery industry is paying off in strong growth, with 2003 online sales of food and beverages estimated at $3.7 billion, up 40% from $2.64 billion in 2002, says a study by Michigan State University.

A shift toward improved customer service in the online grocery industry is paying off in strong growth, with 2003 online sales of food and beverages estimated at $3.7 billion, up 40% from $2.64 billion in 2002, says a study by Michigan State University. Online grocery sales volumes are now running 50% higher than their prior peak in 2000, MSU says.

“Despite the relatively small size of this market niche, it is extremely important for these reasons: it is growing rapidly, online customers are fairly price insensitive and they tend to buy higher margin items,” says Kenneth K. Boyer, co-author of the study and associate professor of supply chain management at MSU.

The study, “ITR: Internet Disintermediation of Food Delivery – Spanning the Last Mile,” attributes much of the growth to a strong perception among online consumers that web operations offer a higher level of service than stores. “Customers rate the service quality for online ordering much higher than for in-store shopping,” the study says. “Customers generally feel that employees are more responsive, courteous and understanding of their needs in an online/home delivery setting than in traditional stores.”

The $250,000 study, sponsored by the National Science Foundation, was based on surveys of more than 4,000 online customers and 250 in-store customers of several major grocery companies, including multi-channel grocers Albertsons, Publix and Lowes Foods and online pure-play FreshDirect.

The study also found that online customers cited convenience as the most important reasons they buy groceries online, while offline customers cited price as most important reason for shopping in stores.

Customer views of product quality, however, were mixed. Online customers rated the overall quality, availability and range of products less than did in-store customers. One reason for the discrepancy, MSU says, could be that in-store customers are able to directly compare in-store products for freshness and quality. “Clearly this is an area for improvement for online grocers,” the study says.

But the study also notes that online customers rate the quality of products more highly when ordering from grocers who fulfill directly from distribution centers instead of stores. Customers of NY-based FreshDirect, Toronto-based Grocery Gateway and London-based Ocado--each of which fulfills online orders from a distribution center--“rate the fresh produce and meats they receive as significantly better than from traditional grocers,” the study says.

The growth of online grocery sales is also good for multi-channel grocery strategies, Boyer says. “Customers who are pleased with online ordering tend to view the physical store more favorably also,” he says.

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