February 6, 2017, 3:43 PM

20% of grocery sales could be online by 2025

The shift toward online grocery sales creates opportunities, but also big challenges for retailers.

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The expected rapid growth of the online grocery market presents opportunities for retailers, a report says, but that growth may also come with challenges.

By 2025, as many as 70% of U.S. consumers will be buying groceries online and those purchases will total more than $100 billion, according to a report from the Food Marketing Institute (FMI) and The Nielsen Co. That would give online shopping a 20% share of consumer food and beverage spending, or about five times the current level.

The report finds 23% of U.S.  households were buying groceries online in 2016, up from 19% in 2014. Those sales represent about 4.3% of U.S. consumer retail food and beverage spending. Based on the research, FMI and Nielsen expect online grocery penetration to grow quickly. Among millennial consumers (those defined as ages 18-34 in the study), 28% were buying groceries online in 2016, up from 21% in 2014.

The grocery market has been the last big category of consumer purchases to resist significant e-commerce penetration, but that is beginning to change as online grocery shopping becomes more mainstream. The findings of a recent Internet Retailer report show that online food shopping, while most popular among younger consumers, cuts across demographic lines. 

According to the FMI/Nielsen report, 70% of all shoppers say they expect to buy groceries online during the next 10 years. “Combine this with the fact that technology will continually improve over that time and it’s foreseeable that this growth may happen much quicker,” the report says.

The projected $100 billion in online grocery spending would be the equivalent of more than 3,800 stores, the report states.

The research outlines three models of online grocery selling that exist today:

    • The pure-play direct-to-consumer model, which“requires significant investment in regional and local distribution networks and/or supply chain partnerships,” the report says. “Established pure play retailers have yet to figure out how to ship direct-to-consumer cost efficiently and profitably.”  Mark Baum, FMI’s chief collaboration officer, says pure-play grocery of e-retailers include those that don’t currently operate stores, such as Peapod LLC and the AmazonFresh service offered by Amazon.com Inc.
    • The home and local delivery model, which involves “new approaches to store, warehouse, and personnel utilization.” The report says retailers must figure out such things as who picks and packs the orders because this adds to costs without necessarily boosting sales because the staff might end up doing what the consumers would otherwise do.  
    • The click-and-collect approach, in which a shopper buys online and goes to the store to pick up the order. This, the report says, “requires balancing shopper needs with retailer capabilities. Retailers are expected to re-envision the role of their store personnel and absorb incremental shipping and logistical complexity and costs. At the same time, consumers have heightened expectations when buying online, and may not pay a premium for a compromised grocery solution.

The report says cites three principles required selling groceries online successfully: First, the cost of digital collaboration between grocers and technology providers must be significantly reduced, particularly the costs associated with digital platforms. In addition, retailers and manufacturers need to work together very closely–almost as if they are one company, Baum says. Baum says. It also could mean moving away from a simple “pay to play” model—in which manufacturers pay fees for shelf space—to a pay-for-performance model, which could vary, depending on the companies involved.

Faced with those kinds of challenges, the report says, retailers need to develop a clear and concise strategy before investing in technology or changing their company structure.

Tactics, the report says, should include a deep understanding of online shopper behavior, creating supply chain and logistics capabilities that support a digital strategy, integrating marketing investment and measurement, and shifting the merchandising focus from the shelf to reaching the individual consumer.

An unrelated report from research firm NPD Group says 20 million consumers who are current, lapsed or new to online grocery shopping plan to increase their web shopping for food and beverages over the next six months. 

More information about the boom in online grocery sales is available in Internet Retailer’s recently published 25-page research report, “Online Food Shopping Goes Mainstream.” The report identifies the major players driving this sea change in food retailing, estimates the future growth of online food retailing and more.

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