Optimists viewing the online grocery sector would point to its growth and its ability to attract new entrants. They would say that participation is crucial when convenience is king, and anything can be purchased at the click of a button.
Growth projections remain high. IGD has published its latest forecasts, and whilst rowing back from previous projections of doubling in five years, it is still predicting a 68% growth in the 5 years to 2021 compared with 10% for the grocery trade as a whole. Mintel market researchers are even more bullish forecasting a 73% growth in 4 years.
The Amazon Fresh entry into online grocery has added to the excitement. The move is a further step in its quest to infiltrate every aspect of consumers’ lives and their latest foray shows how seriously they are taking the market, now offering fresh food alongside thousands of packaged grocery products.
It is well known that profits from online grocery shopping are slim to non existent. Whilst this will not bother Amazon who famously have operated for 20 years on a model which more or less ignores its shareholders in favour of investing to expand faster, it is an issue for the major, publicly owned UK grocers, and for smaller retailers too.
Profits versus growth is a constant challenge. Tesco’s CEO Dave Lewis has stated an intent to focus more on profits than sales growth, and in a recent statement said that “online grocery growth continues to moderate”.
A greater focus on profit would suggest that the IGD and Mintel forecasts are still too optimistic. Tesco’s annual growth rates are around 8% -9% as are Sainsbury’s. Ocado, another company with a relaxed attitude to profitability, has seen growth rates moderate to around 13%. Still high, but possibly more to do with having just a 5% market share compared with Tesco at around 40% and Sainsbury at 17.5%.
Adding to the challenges, consumers do not seem to be rushing to embrace online. 20% of people claimed to shop online in 2010, but six years later this has only risen to 29%, despite the massive increase in use of smartphones and tablets whose ubiquity and convenience were supposed to transform shopping, allowing purchase any time anywhere. At least a quarter of the population have declared no interest at all in shopping online.
And the Amazon Fresh entry, at the moment certainly, does not look like a model for either massive growth or improved profits. So far, the Amazon offer does not appear to be much different from what is already available. It has made much of its one hour delivery slots, but Ocado offers this too. It may have an edge with its offering of local artisan foods, but this is unlikely to result in big volumes, and would pose a huge logistical problem once the company expands beyond central London postcodes.
The other show stopper is that Amazon delivers in cool bags rather than refrigerated vans. As a shopper I would be deeply worried about having my perishables delivered like this, wondering how long they had been in transit for, and how hot the van was.
The growth in online grocery shopping and the advent of more competitors means that retailers have to seriously consider an online option, otherwise they risk losing sales to competitors.
The key is to stick with cautious expectations on growth and profitability to avoid nasty shocks, and take a long term perspective.
The alternative is to stick resolutely to bricks and mortar, but ensure that what is offered is so different and exciting that shoppers will stay loyal despite any inconvenience.
Either way presents its challenges.