Online Grocery Market Treading New E-Commerce Waters

From less than $200 million in 1999, US online grocery spending will top $8.8 billion in 2004, according to research by International Data Corp. (IDC). The ascent in revenues, however, will not come easily — or cheaply. IDC believes online grocers will have to overcome many obstacles as the market grows.

“The online grocery market is taking a growth path that no other e-commerce business has tread,” said Jim Williamson, senior research analyst with IDC’s Consumer eCommerce: Consumer Goods research. “Substantial capital costs are required to reach customers, consumer acceptance still remains a major barrier to growth, product margins are low, and competition is everywhere. This market shares many issues that have troubled offline businesses for years, including capital efficiency, obstacles to market penetration, and the price of gas.”

According to IDC, to penetrate a new market, some online grocers will spend more than $25 million — and that cost doesn’t include customer acquisition. Most of the expense is related to building fulfillment centers. Existing grocery stores will have just as difficult a time getting into the online business as the online pure-play start-ups.

“Brick and mortar groceries will have to spend big bucks if they want to compete against these nimble upstarts,” Williamson said. “For everyone who gets involved, it won’t be an easy process, and the road to a profitable online grocery market will be littered with bankrupt companies and broken hearts.”

Some investments, however, will pay off in large ways, IDC found.

“The fundamental value proposition of the online grocery business model — we do what you don’t want to, and cheap — will resonate with busy suburban families,” Williamson said. “As a result, profitability will eventually be achieved, particularly in older markets.”

IDC expects prepared foods and convenience services will be big growth areas in online grocery spending. While online spending for traditional groceries will also increase, its market share will decrease from 92 percent in 1999 to less than 70 percent in 2004.

“The large capital investment required for traditional groceries will encourage online grocers to expand their product selection into higher-margin categories,” Williamson said. “Obvious choices include health and beauty products, pet supplies, household cleaners, dry cleaning, video rental, and prepared foods.”

Most Popular Online Grocery Sites
Site % Visited 49% 22% 22% 13%
Source: Greenfield Online

A study by Greenfield Online found that buying groceries on a Web site does not appear to be catching on, even among Internet users who normally spend up to $200 a month filling up their offline grocery carts. Less than one-third (31 percent) of Greenfield’s online respondents ever visited an online grocer.

In a 30-day period, a mere 12 percent of those visited grocery Web sites made a purchase, and nearly half spent under $50. Furthermore, nearly 60 percent of the 1,700 Internet users surveyed say they are unlikely to make future online grocery purchases.

The biggest problems facing online grocers appear to be awareness and visibility. Almost half (47 percent) of respondents do not know if an online grocer provides home delivery in their area. Furthermore, 29 percent do not buy groceries online because they don’t know which Web sites to visit.

The primary activities conducted by visitors of online grocery sites were price shopping (58 percent), accessing coupons (30 percent), and researching weekly specials (29 percent). Among those respondents who visited grocery sites, was the most popular.

More bad news for online grocers: a study by PricewaterhouseCoopers found that more than one in five Internet users indicate that nothing would make them more likely to use an online grocery store in the future. The survey also found that while shopping for groceries is something that consumers do frequently, only one percent do their grocery shopping online on a monthly basis.

“The category is not ideally suited for the Internet as it is near impossible to translate the grocery shopping experience online,” said Mary Brett Whitfield of PricewaterhouseCoopers. “It’s also a highly personal process. Consumers are not yet ready to transfer this care-giving function to a detached process such as online shopping.”

Supermarkets garner a 59 percent share of monthly grocery shopping trips, according to PricewaterhouseCoopers, but Internet sites capture just slighly more than one percent. Only 7 percent of the respondents who have ever purchased groceries online indicate that they do more than half of their grocery shopping online while almost half admit to doing it “very little.”

Like other forms of online shopping, the future of the grocery market is likely to come down to convenience and price. According to PricewaterhouseCoopers, 42 percent of Internet users agree they are always looking for ways to spend less time grocery shopping. However, only 11 percent would be willing to pay more for products or services that save them time. Therefore, online grocery offers have to be competitive with supermarket prices.

Many consumers see a continuation of their relationship with their regular supermarket as a way to reduce risk and uncertainty surrounding the online grocery shopping and purchasing process. Forty-three percent state they are more likely to shop for groceries online if the service is operated by their regular supermarket as opposed to an Internet-only grocery store. Only 18 percent of the PricewaterhouseCoopers respondents say they are interested in grocery home delivery of any kind.

Price remains a key driver of online shopping behavior in the grocery category, as shown by these findings of the PricewaterhouseCoopers survey:

  • Internet users rank price as the most important factor when shopping online for groceries, ahead of product brand, site shopability, delivery time, and customer service.
  • 22 percent of online grocery purchasers identified low prices as their primary reason for purchasing the category online.
  • 46 percent of Internet users cited free delivery for large orders as the factor most likely to entice them to use an online grocery service in the future.

“In addition to low prices, consumers shop online for groceries because they want easier access to brands and products and because they either do not have time or dislike shopping at stores,” Whitfield said.

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