Digital sales grow steadily as retailers become more adept at e-commerce
Though a small slice of total food retail sales and shopping occasions, the online channel is steadily garnering more grocery dollars as more consumers opt to make purchases digitally and delivery/pickup services become more widely available, new research shows.
At the same time, however, grocery retailers are still working out the profitability equation and operational issues in online grocery fulfillment, as well as trying to rationalize the technology investment, studies revealed. Some retailers, too, have proved more adept than others in e-commerce execution.
This year, online grocery sales have climbed more than 15% year over year and now represent 6.3% of overall grocery-related spending by U.S. households, according to Brick Meets Click.
In its latest analysis of the U.S. e-grocery market, the Barrington, Ill.-based strategic advisory firm found that online grocery household penetration, based on past-month shopping activity, has increased more than five percentage points from last year to almost 25% of all households. The uptick stems primarily from rapid expansion of home delivery and pickup services at physical stores, which altogether are now accessible to 90% of all the U.S. households, up from 81% in 2018.
Customers Going Online Gradually
For its research, Brick Meets Click conducted an online survey with 2,485 adults who participated in their household’s grocery shopping.
Online purchase frequency for groceries remains about the same as last year, with active online grocery customers averaging two orders during the past month. Ship-to-home orders account for half of all online grocery orders, compared with 28% for pickup and 22% for home delivery.
Meanwhile, average order values — including ship-to-home, pickup and home delivery — have grown more than 6% to $70 in 2019, Brick Meets Click noted. And in a positive sign for retailers investing in on-demand services, the average order value swelled 13% to more than $100 across retail trade channels for only home delivery and pickup orders.
“There’s still a fair amount of purchase trial occurring as consumers search for acceptable online shopping alternatives,” explained David Bishop, partner at Brick Meets Click. “For example, we found that approximately one-third of the active households’ most recent online order was the first time they used the service.”
A bigger user base appears in the offing, though. Brick Meet Click’s analysis found that online providers are improving the shopping experience, with the likelihood to use a specific service again jumping from 69% in 2018 to 81% this year. The study noted that improving customers’ ability to find the products they want to buy is key, as the percentage of shoppers who were able to do so rose to 90% in 2019, a 12-percentage-point gain versus last year.
Building the Business Model
With online ordering, grocery retailers see 15.8% incremental revenue growth — nearly double what they expected before enabling the service, according to Incisiv.
The West New York, N.J.-based digital research firm pointed out that most of this growth is net-new revenue. Eight-two percent retailers reported that digital sales didn’t cannibalize in-store sales, Incisiv’s “Online Ordering in Grocery: State of the Industry Benchmark” study found.
Digital grocery sales are projected to double over the next two years and reach $150 billion by 2025, accounting for 14% of overall sales. Helping to drive that growth is third-party delivery, expected to expand 150% by 2021.
“Online ordering is driving unprecedented changes in grocery retailing at a very high rate of speed, and grocers are scrambling to find the right model for their business,” observed Gaurav Pant, co-founder and chief strategy officer at Incisiv.
Despite the bright outlook, online grocery ordering today remains mostly unprofitable, as the top-line growth that the channel generates typically comes at the expense of profitability, Incisiv noted. Besides shipping from distribution centers or drop-shipping by vendors, all other forms of online order fulfillment — third-party delivery, click-and-collect and curbside pickup — squeeze profit margins.
Part of that profitability pressure from digital comes from a lack of real-time inventory visibility and more complex store operations, according to Incisiv’s research. The grocery industry loses $2.5 billion in revenue and $800 million in profit annually because of inaccurate inventory visibility and inefficient fulfillment, the study said. Grocer retailers face supply chain challenges — including managing inventory levels and ensuring on-shelf product availability — as well as technology challenges, such as order status accuracy and availability of real-time inventory data.
As a result, grocers will prioritize technology investments that boost wallet share and lift profits. Incisiv said all of the retailers it surveyed plan to use advanced analytics to grow basket size and seek technology solutions to leverage their unique data. In turn, analytics and data analysis will be linchpins in helping retailers personalize content and offers to drive conversion and spur sales.
“As we’ve seen, online ordering can be a double-edged sword that increases revenue but also puts pressure on grocers’ already-thin profit margins,” Pant said. “Grocers must turn one-time online shoppers into loyal customers while reducing the cost of operations.”
How Do Grocery Retailers Measure Up Online?
Online performance varies from retailer to retailer, but all have their strengths and weaknesses, according to Litmus7 Systems Consulting.
Last week, the retail technology services provider released its latest “Retail Hive” benchmark report on the U.S. online grocery market, comparing 12 leading retailers in various metrics of online performance: Albertsons, Aldi, Amazon, FreshDirect, H-E-B, Kroger, Peapod, Publix, ShopRite, Target, Walmart and Wegmans.
Target offered the most feature-rich experience, followed by Amazon and Walmart. Target scored 3.79 out of 5 across 90 essential features and services comprising Litmus7’s quality of experience dimension.
FreshDirect finished No. 1 in overall site engagement (reflecting pages per visit, average visit duration and total visits/unique visitors). Amazon led in visits/unique visitors, while Albertsons had the lowest bounce rate. Except for Walmart, all of the retailers had a bounce rate of less than 50%.
In terms of app engagement, H-E-B turned in the highest cumulative score (app open rate, sessions per users and time per user), followed by Amazon and Walmart. Kroger, however, was well ahead of the field in app time spent per user, Litmus7’s research found.
Amazon and Walmart hold the top two spots in organic (SEO) and paid-keyword (SEM) search, with Kroger and Publix also having effective SEO and SEM in place, the Retail Hive report said. Amazon, Kroger and Walmart posted the leading scores in email marketing, as email accounted for about 5% of all traffic to the top 100 U.S. grocery sites in the 2019 second quarter.
Interestingly, traditional grocery retailers had the best performance in social media, with H-E-B, Aldi, Publix and Kroger generating the highest overall scores across Facebook, Twitter, Instagram, YouTube and Pinterest.
“Grocers going gung-ho and investing big in the online grocery business has little to do with financial gains,” according to study author Ashish Chaturvedi, manager of digital advisory services at Litmus7, whose U.S. sales office is in San Francisco. “Rather it’s a defensive strategy, driven by the modest goal of not losing customers.”
Date: September 19, 2019
Source: Supermarket News