Our updated forecast for online food and grocery spending has gotten nice pick-up in the press and even generated headlines like “shows explosive growth.” (download now), but as important as the forecast is, we think the bigger story is what’s behind the numbers: The rapid growth of online options is changing how people shop –and this will change the product and profit mix for both online and offline sellers/retailers.

More choices = more participation

Dozens of entrepreneurs, many with no previous experience in food and grocery but who see “problems” they want to fix, are working to carve out market niches where they will serve specific need-based shopping occasions for well-defined sets of products – natural, local, gluten free, environmentally sustainable, etc. These appeal strongly to certain customer segments. These kinds of retailers aim to become destination outlets:
  • Relay Foods wants to make shopping for quality, healthy and sustainable groceries simple and easy.
  • Artizone connects online shoppers with a host of artisan food purveyors in Dallas and Chicago.
  • Front Door Farms cuts days out of the supply chain to deliver fresher produce to shoppers.
And if you want to shop local brick and mortar stores – but do it online – other entrepreneurs and services have stepped up to meet your needs:
  • Want delivery? Instacart, Google Express and Uber’s Corner Store will go get what you want from the stores and bring it to you at home or work.
  • Is picking up your online order more convenient? Click and collect services are becoming increasingly common among traditional grocers like Hannaford Bros., Harris Teeter, Lowe’s, Weis and Walmart.
Some of these options won’t survive, but each one alerts different customers to the fact that the internet is expanding their shopping options in exciting ways. This dynamic is what will drive increasing growth rates for online shopping. It will change shopping patterns and reshape the retail landscape in the coming years.

Shopping behavior is changing

Here are three ways that changes in shopping behavior are playing out.

1. Carving out special purchases

This is likely to be the first major shift in many markets. Specialized online retailers identify households and put a high priority on the types of products they sell. They establish a foothold and then use suggested selling to get them to buy additional products (“if you liked that, you’ll like this”). Tailoring the offer to a specific customer segment based on their purchase patterns is the competitive advantage here. In some ways, this is the most difficult shift for store-based retailers to respond to. The ideal counter would be to tailor the offering of each store to meet the needs of its specific micro-demographic. It’s difficult to do, but this shift may motivate store-based retailers to figure it out.

2. More subscription buying

People like the idea that they’ll never run out of products they use regularly. Subscription buying eliminates the need for them to manage pantry inventory and simplifies their regular shopping. For stores, it removes a reliable regular source of spending, so as demand for subscription purchasing grows, expect some store-based retailers to find ways to serve this need profitably.

3. Getting someone else do the work.

An increasing number of households see outsourcing food and grocery shopping as an advantage (and sometimes even food prep). Some will work with a single source like Peapod, but others will use a mix of several online retailers. Some store-based retailers will find cost effective ways to match this service, and even raise the bar by giving customers access to products and services not typically available in stores.

Everyone will feel the impact

Clearly, food and grocery shoppers have had needs that remained hidden until the market offered them ways to get those needs met. New online options are now activating these latent needs, highlighting even further fragmentation of the mass grocery market.
The shifts in behavior described here will create changes that impact virtually every player in the food distribution system. It’s more important than ever for retailers and suppliers engage in test-and-learn processes that will help them profitably adjust to changing shopper behavior.