What's ahead for online grocery? Updated growth forecast & implications

What’s ahead for online grocery?
Growth forecast and implications
October 2014
By Steve Bishop
Co-founder and Managing Director, Brick Meets Click
Brick Meets Click helps organizations understand, plan and drive growth in the space
where traditional and digital food retail are converging.

WHAT’S AHEAD FOR ONLINE GROCERY? 2
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www.brickmeetsclick.com © 2014 Brick Meets Click
What’s the new thinking about online grocery growth?
Brick Meets Click now forecasts that online grocery spending in the US will reach between
11% and 17% in most markets by 2023. The fastest growing markets should reach the top of
the range, but even slower growing markets could see one in ten grocery shopping dollars
move online.
“Think of these curves as
guardrails. A few major
markets like New York and
San Francisco may exceed
the upper boundary, and
markets with little
investment may fall below
11%. But, most markets will
fall within this range.”
Steve Bishop
Co-founder & Managing Director
Brick Meets Click

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Why a market-level analysis?
National averages roll all markets into a single number, so they are of limited value if you are
trying to understand and respond to business and customer conditions.
For each specific market, the share of food buying that shifts online will be driven by:
 The level of shopper readiness and the availability of online grocery shopping services.
 The number of customers who have a positive experience online shopping and are
comfortable recommending to someone else.
 The rate of penetration, driven by the speed/scale of investment.
These considerations shaped our forecast model. The analysis is based on research that polled
22,000+ shoppers affiliated with 7 different grocery banners across three regional markets
(Mid-Atlantic, Midwest, and West Coast). It’s the largest study ever to focus specifically on
online grocery spending in the US, and the only market-level analysis done to date.

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Online spending is growing faster than expected.
What’s driving the accelerated growth?
A year ago, we developed three market based scenarios for online grocery growth in our analysis,
but it’s clear that online grocery shopping is outpacing the most conservative scenario and
growing faster than expected. The conservative estimates we developed are no longer relevant.
The upper ranges are where we’re headed.
Two trends - Greater access and attractive convenience.
 Shoppers now have more access to online options – primarily driven by the newer,
smaller providers. As shoppers in more markets gain greater access, more are
participating.
 The greater convenience, at least for some shopping occasions, is proving attractive
enough to shift part of household grocery spending online.

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New players are increasing access.
We’re all waiting for the big players like Amazon and Walmart to scale up, but meanwhile,
highly focused online grocers like Relay Foods, Fresh Direct, Door-to-Door Organics and other
services are already moving in to serve well defined markets and establish important
customer relationships. In just the past year, many of these smaller providers have
significantly expanded their operations into new territories.

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More options for convenience are attracting more shoppers.
What do I want . . .
Artisanal cheese?
Organic produce?
For some things, I want the
really good stuff.
With online shopping’s improved accessibility and ease of use, consumers are now finding
practical ways to save time, eliminate shopping trips and make automatic pantry stocking easier.
A complete meal delivered –
so all I have to do is cook it?
Bring it on, Plate, HelloFresh, Blue Apron.
This is my favorite way to cook now.
A subscription
for routine
purchases?
I’ll never run out of cat food
again (purrr!), or razors or
butter or toilet paper. That’s
what I call progress!
Delivery or pick up?
At the store or at a depot on my way home? Can it wait till tomorrow, or do
I need it in half an hour? No worries, I can get it whichever way I need it.

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How will online growth affect traditional grocery?
Although online grocery will still represent a fraction of US grocery
spending for many years to come, it’s an important, high-margin fraction.
Online shopping appeals disproportionately to higher income and more
profitable customers, so the loss of sales will have a disproportionately
negative impact on profits.
This puts traditional food retailers in a difficult situation. The growth of
online food shopping will
 shrink the size of the market served by stores,
 put pressure on the costly game of trying to take share from
competitors,
 and increase the importance of finding new areas of growth.
>>> Who will capture these growing online sales? Will lost in-store sales be recaptured and offset by your
online channel, or will they be grabbed by the competition? Now is good time to step up your online game.

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What might the dollars look like on an aggregate basis?
“By 2023 . . . even at
the middle of those two
projections, online grocery
sales would exceed today’s
sales of the nation’s
largest supermarket
chain, Kroger.”
The Food Institute
Press release Oct. 2, 2014
To convey a general sense of the potential sales range represented by the forecast, we
translated the market-level analysis into an aggregate for the overall US grocery market.

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How do grocery dollars migrate online?
Spending rises with frequency.
We’ve learned a lot about how shopper spending on groceries migrates online. Since 2012, we’ve
surveyed 45,000 grocery shoppers about their online grocery shopping habits, and we’ve found that as
people get more comfortable and more involved in online grocery shopping, they move more of their
grocery dollars online.
 “Once-a-month shoppers” did 17% of their grocery spending online
 “Twice-a-month shoppers” did 21% of their grocery spending online (a 25% increase)
 “Three-times-a-month shoppers” online spending doubled to 42%

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The implications: What’s at stake?
The greatest vulnerability to brick and mortar food retailers is that a growing proportion of
high-value households – those with higher incomes and more education who spend more per
week on groceries – will shift a significant amount of their grocery spending online.
Improvements in the experience and increased positive word of mouth will encourage more
to try it. And each year, a percentage of once-a-month shoppers will move to twice a month,
and 2x a month shoppers will move to 3x a month.
The trend will accelerate as the following features gain momentum:
 The opportunity to buy both perishables and packaged grocery products online
becomes more available and accessible.
 Increasingly convenient pick-up and delivery options become available.
 The price/value gap between in-store and online shopping narrows.
$$$ As spending
migrates, the impact of
online grocery shopping
will undermine the profit
model of brick and mortar
food retailers by changing
the product mix and
reducing the blended
margins. The timing of this
shift will vary by market,
but ultimately the impact
will be universal.

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How to respond
Online sales will increasingly cannibalize in-store sales, so not responding is increasingly risky.
Selecting your next steps depends on your role in the marketplace; retailers and suppliers will
face different challenges.
For traditional grocery retailers
The goal is to make up the sales lost to online – by enhancing the store experience, via your
own online channel or by finding new growth opportunities.
1. Assess your high-value shoppers.
Learn where are they in terms of shifting to online ordering so you know how fast you need to
respond; then assess where and how you can meet those needs.
2. Maximize the store advantage.
Fully exploit the appeal of the store by combining the power of digital technology to make the
shopping experience unique and compelling. Differentiate in-store experience with superior
service, cleanliness, unique prepared food offerings and tech options such as Beacons, texting,
and other digital communications.
3. Seek new growth opportunities.
Some retailers are developing profitable B2B channels.
“Get in front of the curve
and play larger than you are
by working with progressive
retail partners to conduct
test-and-learn programs.
You want to be active now
and establish early-mover
advantage.”
Steve Bishop
Co-founder & Managing Director
Brick Meets Click

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How to respond (cont.)
For suppliers
The growth of online grocery spending increases both opportunity and challenge. All
suppliers have an opportunity to better connect with and sell to their heavy consumers
online, and participating in online pantry and subscription programs is one way to do
this. Some responses will be shaped by a supplier’s size.
Smaller suppliers have an opportunity to use online tools to gain access to a larger number
of customers, be they retailers or consumers.
Large, branded suppliers need to find new ways to reach the mass market. This means
collaborating with brick and mortar retailers in order to meet short-term sales goals while
simultaneously using digital marketing to increase the effectiveness of marketing and trade
spending. Increasingly, this will involve working with retailers to more efficiently deliver
coupons and other consumer promotions, while at the same time providing them with the
content needed to sell your products online successfully.

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At Brick Meet Click, our roots in retail run deep, especially in grocery. We
combine a lifetime of experience in food retailing with a tight focus on how
today’s shoppers are changing. Our clients include a wide variety of
retailers, suppliers and technology providers.
Leverage our professional offerings, insight and guidance to:
> Achieve faster growth. Ask the right questions so you’ll find the right
answers.
> Deliver improved shopping experiences. Shoppers have significantly
changed the way they engage with retailers. You need to understand
and respond – we can help you gain clarity about what to do.
> Evaluate online dollar opportunity. Be smarter - identify sales gaps
and outline a sales strategy so you realize the full growth potential of
the channel.
To learn more, contact: Steve Bishop at 773.832.1658, or
steve.bishop@brickmeetsclick.com
We’re here to
help you find
new growth
opportunities
in today’s
changing retail
environment.

What's ahead for online grocery? Updated growth forecast & implications

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What's ahead for online grocery? Updated growth forecast & implications