July 2, 2003, 12:00 AM

Online grocery showing fortified strength, study says

Not only is online grocery doing far better than expected after the fall of such once high-flying players as Webvan and HomeGrocer, but it has shown a 40% growth rate since 2000 while overall grocery sales have remained flat.


After getting off to a rough start marked by online grocers that tried to grow too fast, the web-based grocery business has become well-rooted for strong growth, reports Michigan State University’s Department of Marketing and Supply Chain Management. "Online grocery shopping is alive and growing," says Kenneth K. Boyer, associate professor of supply chain management and co-author of an ongoing MSU study of the online grocery industry. The study notes, for example, that online grocery sales have grown 40% since 2000 while overall grocery sales have remained flat.

The MSU study, "ITR: Internet Disintermediation of Food Delivery -- Spanning the Last Mile," is based on surveys of 4,000 online customers as well as in-store customers of seven online grocers: the U.K.-based J Sainsbury plc and Ocado; the U.S.-based Lowe`s Food Stores Inc., Albertsons Inc., PublixDirect LLC and FreshDirect; and Canadian company GroceryGateway. MSU estimates that the online ordering and home-delivery business of these seven companies totals over $400 million a year. The $250,000 study, which has so far completed the first of three years of research, is sponsored by the National Science Foundation.

Survey respondents indicated a stronger loyalty to grocers` online operations than to their stores, largely due to the online operations` emphasis on service rather than price, MSU says. It notes that online customers rated grocers more highly than did the same grocers` in-store customers in areas such as courteous and knowledgeable service and the appearance of workers and infrastructure (such as the appearance of online delivery trucks and staff compared to stores and in-store employees).

Boyer says that the online grocers in the study have learned from the mistakes made by the early failures in their industry, offering well-planned services that play up to the advantages that online shopping offers over stores, such as highly personalized service. "Prior efforts to develop this market were poorly planned and were ahead of their time," he says. "Companies such as Tesco, Albertsons, Publix, Safeway, Ocado and FreshDirect have all learned lessons from earlier efforts, have carefully developed their business models and have worked to educate customers on the benefits of online ordering."

"Customers of these grocery services are learning to appreciate and value the great convenience, time-savings, improved service and potentially fresher foods," he adds. "After decades of pushing price in huge supermarkets, these home-delivery grocers are offering customers a return to an old concept: grocery shopping where the retailer values them, offers valuable service and not just a commodity product, and, most importantly, treats them as individuals rather than faceless parts of a mass market."

The study notes that, while there is no single approach followed by online grocers to fulfill customer orders, online grocers in general are finding the best ways of getting the freshest-possible goods delivered to homes. One advantage they have over traditional stores, Boyer says, is that they can opt to ship products like meat and vegetables directly from distribution centers, resulting in home deliveries of goods that are fresher than those found in a store.


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