Online grocery forecast: What's impacting how far and fast it will grow

May 2, 2018; 22:56 pm by David Bishop

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Online grocery spending will continue to increase according to Brick Meets Click’s newest sales forecast for the U.S. 

Topline: We project online as a percentage of total grocery sales will climb from under 5% at the end of 2017 to over 8% by the end of 2022. From a compound annual growth rate (CAGR) perspective, online grocery sales will grow 13% as compared to 1.3% for in-store sales (excluding the effects of inflation).

Read on to learn more about the forecast and some key lessons learned from our research.

We’ll aslo discuss what the forecast means for brick-and-mortar retailers in more detail via a live interactive webinar to be held on Thursday, May 10, 2018. Registration details are at the end of this post.

Our forecasting model

We’ve developed a forecasting model over the past 5 years that incorporates market, competitor, and shopper elements from our grocery insights platform, Grocery IP.  All departments sold by brick-and-mortar grocers across fresh and packaged goods are included in the scope of this forecast; only pharmacy is excluded.

Our framework for modeling online grocery growth is based on key drivers like accessibility, attractiveness, and acceptability, as well as a market structure that clusters online providers into two competitive sets. Here's a look at how these factors impact the projected growth for online grocery.

Market structure matters

It’s no longer good enough to analyze online grocery sales as all one uniform format, whether you’re looking at total U.S. sales or a specific metro area. Consumers essentially have two online alternatives to shopping in the physical store: pure-play and in-market providers. Before explaining the importance of this structure, here’s a brief description of each.

• Pure-play providers have either limited or no physical presence in the market(s) served and typically utilize ship-to fulfillment via common carrier.
• In-market providers operate in close proximity to their customer base and fulfill via delivery and/or pick-up methods. 

Companies can operate in both types; however, the appeal of each type is distinct as to the needs it serves and the problems it addresses associated with the in-store experience. (See “Attractiveness varies considerably,” below.)

Accessibility is already high

The size of the potential consumer segment at the end of 2017 includes over 250 million adults in the U.S., based on the percentage of the population that uses the internet.  

Today, 100% of this consumer segment can buy groceries from a pure-play provider like Amazon.com if they wish to, and our market and shopper insights show that nearly 80% of consumers are able to shop at least one in-market provider. 

Not only can a large majority of consumers shop from an in-market provider – we also know that most consumers have several in-market options. For instance, the top-50 US metro areas, which account for 55% of the nation’s population, already have 10 in-market competitors on average. 

Online sales growth will benefit as more consumers go online, but we estimate that only equates to another 5% of the adult population over the next 5 years.

Attractiveness varies considerably

Online grocery shopping isn’t for everyone.  In fact, the general appeal of this alternative is attractive to less than half of potential shoppers, and that’s based on including anyone who has ever bought groceries online before. If we focus on monthly active online grocery shoppers, this metric remains relatively unchanged since 2015 – using the lens of market structure, however, provides valuable insights.

Pure-play’s most prominent proposition revolves around getting the products that you want.  Amazon helps you buy those hard-to-find items – and other offerings, like meal kits, natural foods, and pet products, satisfy specific needs. Collectively, these providers are selling grocery-related products to approximately 10% of potential shoppers based on past 30-day purchase activity.

In-market’s consumer value centers on saving time and possibly aggravation related to shopping the physical store. These providers play a larger role relative to grocery shopping, and the size of orders reflects this. They typically include 30 or more SKUs, sales per order are twice as large, and perishables are present in nearly every basket. In aggregate, in-market providers are shopped by closer to 15% based on the same measures.

It’s important to note that these percentages can’t be simply added together as some households use both provider types, although the cross-over isn’t considerable. With that said, we began seeing shifts in penetration toward in-market providers early last year in related shopper work, which is a good sign for brick-and-mortar retailers.

Acceptability still has room to improve

Online shopping promises to improve shopper outcomes in various ways; however, consumers are still learning how to buy this way, and providers are still improving the ways they sell online.

The reality is that fulfilling the promise is still very much a work in progress, and this creates headwinds for future growth. For example:

• One in five online shoppers can’t find everything that they want to buy. In-market performance trails pure-play providers in this area slightly, but that’s likely because in-market basket sizes are considerably larger.
• What’s worse is when a customer puts an item in the cart, checks out, and expects to receive everything ordered only to find out something is out of stock. Reducing the difference between what’s ordered and what’s received is critical, especially for in-market providers, given the high frequency with which this occurs. 
• Other factors also affect shopper satisfaction, including the direct and explicit cost related to using online shopping options.

For a provider to grow, shoppers need to believe that the promised value is worth the effort and cost. Today we still see high churn rates, and this sizable group of active shoppers is motivated to switch and give another provider a chance to deliver against the promise.  And, for the online format to grow, shopping experiences need to improve so that active online shoppers recommend these alternatives to others.