Understanding market-level potential for online grocery

Understanding market-level online grocery potential How key factors impact projected growth rates

June 2015 By Bill Bishop, Chief Architect, Brick Meets Click

Brick Meets Click provides guidance to companies that want to leverage the convergence of digital and physical retail to enhance their growth.

UNDERSTANDING MARKET-LEVEL ONLINE GROCERY POTENTIAL 2

www.brickmeetsclick.com © 2015 Brick Meets Click

Introduction

Online grocery is growing across the US, but national averages are of limited use for

market-level planning purposes. The reality is that the share of online grocery spending varies

significantly from market to market, driven by the interplay between shoppers and the services

available in those markets.

The opportunity? If food retailers can better understand how fast online grocery shopping is

likely to grow in their market, they can make better strategic decisions about the best time to

get into the business. That’s why we developed a framework for anticipating online grocery

growth opportunities in specific markets.



This paper draws on more than three years of Brick Meets Click research into the specific factors

that are driving the growth of online grocery shopping.

Our goal has been to identify the impact of and relationships between the key online grocery

growth drivers, and to use these factors to build a framework for analyzing the current level and

expected growth of online shopping in any specific market.

The building blocks of the framework include:

Estimating the total share of grocery spending done online in a given market to establish

the starting point for growth.

Inventorying and weighing the importance of online shopping options available in each

market.

Measuring usage and satisfaction level, which are key drivers of positive word of mouth

for these services.

Determining the likelihood that consumers who are not yet shopping online will shift

some of their spending to this new option.

Anticipating Online Grocery Growth Potential at the Market Level



Inputs: Key Shopper Measures

We have found that the following measures of shopping behavior and attitudes have the most

impact on the expected growth of online grocery shopping in any given market.

Current Online Shoppers

For consumers in the market who already grocery shop online:

The frequency with which they purchased groceries online

in the last 30 days and their average online grocery

spending per household.

The impact that promotional offers played in driving trial.

The degree to which shoppers are satisfied by the overall

online experience.

The amount of positive word of mouth about the services.

The shopper sentiment regarding future use of such

options.

Non-online Grocery Shoppers

For consumers in the market who do not yet grocery shop

online, the percent likely to try it based on:

Social recommendations.

Financial incentives.



Inputs: Key Market Characteristics

The three market characteristics with the greatest influence on the potential growth rate of

online grocery shopping are: Availability, Diversity of Features and Affordability.

1. AVAILABILITY

How many online service options are available in your market?

Today, every market includes the opportunity to buy groceries from pure-play online

retailers like Amazon and even national retailers like Target and Walmart (via common carrier).

This impact is captured by the shopper research and accounted for as part of the base activity

in the analysis.

In specific markets, there are three types of online shopping options that expand availability.

Each of these has a different impact on customer trial and adoption rates.

1. Traditional grocery retailers who offer an online option. These retailers typically have

long-standing relationships with consumers, and given these connections, they are likely

to have the greatest impact on the shift to online shopping.

2. Specialized online providers. These include both pure-play online retailers that are

serving narrow market niches, and third-party providers like Instacart and Google Express

that enable online shopping at stores where it otherwise wouldn’t be available.

3. Pure-play online retailers with dedicated in-market delivery. These include retailers like

Peapod, Fresh Direct and Amazon Fresh.

As the total number

of online providers

(“availability”)

increases, so does

consumer awareness

for the services, due

to advertising and

promotions. This

awareness influences

how fast online

shopping will grow

in a market.



2. DIVERSITY OF FEATURES

What types of features do the online grocery services offer?

The rate at which online shopping grows is affected by the different options and value

propositions that are present in a particular market. In other words, the wider the breadth of

features offered with online shopping options, the larger the group of shoppers who will

perceive online services as an attractive way to get their food shopping done.

If all the online grocery options in a market have the same features, adding more will not

likely broaden the appeal significantly.

If a new provider offers a new online feature in the market – like convenient pickup at

locations different from the store – online shopping tends to expand to a larger pool of

shoppers.

Other services that tend to increase the percentage of online shoppers when they come to a

market include:

Subscription programs like “Subscribe & Save” that provide households with regularly

scheduled shipments of routinely consumed products.

Meal solutions like Blue Apron, Plated, Hello Fresh and even My Fit Foods. These

providers fulfill meal planning, preparation and delivery chores to varying degrees.



3. AFFORDABILITY

How much do shoppers have to pay for the service?

Home delivery of groceries is certainly not a new idea, but its value has evolved over time.

Historically, it often served the needs of the homebound or elderly for whom it was a necessary

option. Then, in the early days of online grocery shopping, affluent households justified paying

more for the service because it allowed them to shift their shopping to a more convenient hour

of the day. This remains true today.

Online shopping with a pickup option has now become a value-added service for busy

shoppers with a range of incomes. These shoppers may be unwilling to pay the cost of delivery,

but are willing to pay a small pickup fee in return for not having to go up and down the aisles

of the store.

It’s already clear that some operators will cut the cost of the service to protect and/or grow their

business as competition increases, and this will increase affordability even more.



To demonstrate how the framework/model captures the interplay between key growth drivers

in different markets, here are projections for three markets with very different profiles: New

York Metro, Chicago and Atlanta.

These projections are based on:

An up-to-date inventory of online grocery options available in each market.

Household usage (prevalence rates, frequency and spending) and consumer attitudes and

behaviors related to online grocery shopping.

For the purposes of this analysis, the household inputs were extrapolated from Brick Meets Click

research on the behaviors and attitudes of more than 23,000 online grocery shoppers in five U.S.

markets.

NOTE: To develop more accurate projections for specific markets,

individuals or companies need to develop up-to-date shopper insights

related to that specific market.

Three different markets, three different scenarios



How Online Grocery Markets Will Differ*

New York Metro Chicago Atlanta

5% today >> 23% by 2023 3.8% today >> 13.5% by 2023 2.3% today >> 8.6% by 2023

The New York metro market is the largest in the

US, and has attracted a significant number of

online retailers including Fresh Direct, Amazon

Fresh, Instacart, Door to Door Organics, etc. It

also has a strong representation of traditional

grocery retailers offering online shopping. Pure-

play online competitors are also aggressively

testing new go-to-market ideas.

Local and specialized online suppliers are

strongly represented in the Chicago market,

and Peapod is a major online provider with

both dedicated delivery and remote pickup.

The absence of any major food chain offering

online grocery services causes lower pene-

tration of online grocery shopping today in

Chicago, and a slower projected growth rate.

None of the major retailers in the Atlanta

market have rolled out online grocery

shopping, and no major pure-play online

retailer with dedicated delivery is serving

the market yet.

*Projections are based on the type and number of online grocery options available in each Metro Statistical Area market and

data extrapolated from BMC research on the behaviors and attitudes of 23,000+ online grocery shoppers in five US markets.

2015 MARKET CONDITIONS # competitors by type

NYC CHI ATL Traditional 3 0 0 Specialized/local 6 6 6 Online-only 6 1 0



Most food retailers are already responding to the growth of online grocery shopping in some

way. They are making significant investments in technology and/or their in-store shopping

environment to get ready for the shift, but many haven’t taken the time to understand their

own customer’s needs and behavior. Without doing this homework, important decisions are

being made based on beliefs and assumptions as opposed to what their customers want and will

pay for. At minimum, it’s worthwhile taking the following steps.

Do shopper research to understand:

1. Customer readiness. What percentage of your customers are buying groceries online

today and how much are they spending?

2. Who’s the competition? - Which online shopping options are your customers using and

how are they using them?

3. Strengths and vulnerabilities of online options. How satisfied are your customers with

the available online shopping options?

What is their level of shopping experience with each option?

How strong is their “word of mouth”?

What’s your market’s online grocery potential?

Relevant research and

actionable insights are

mission critical for many

reasons. Even in major

markets competitive

factors will vary, as these

examples illustrate.

The presence – and

performance – of industry

players makes a big

difference.



What’s your market’s online grocery potential? (cont.)

Look at other information to gauge:

Upside sales potential. If pickup is available at the store, how many orders per week are

picked up and what percentage of total store sales are done online?

Impact on “share of wallet.” If you have a loyalty program, how has total spending

changed since customers have begun to shop both online and in-store?

Online grocery is going to be a part of the competitive landscape from now on for food retailers.

Better understanding the dynamics at work in your market will help you compete, whether or

not you choose to make your own online offering.



Brick Meets Click

Guidance for companies that want to enhance growth by leveraging the convergence of digital and physical retail.

For more information on how we can help you evaluate the online potential in your market and measure key shopper KPIs, please contact: Steve Bishop, Managing Director [email protected]

Understanding market-level potential for online grocery

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