Online Grocery Shopping - Growth Rates a Bit Disappointing?

Grocery market watchers still predict a doubling of growth in online grocery shopping by 2019, and are quick to criticise companies who seem not to be embracing the channel with gusto.

The enthusiasm is perhaps understandable. After all, many product sectors like books and music are nearly all bought on line, clothing is increasingly so, as are household goods.

Certainly, online is growing fast when compared with sales through stores. Tesco’s online sales over Christmas grew by 12.9%, Sainsbury  by 6%, Ocado by 14.8% and Waitrose by 26%.

   

However, the ONS tells us that total online sales of grocery products were up just 6% in December, and a look at trends through major grocers tells us that the rate of increase is slowing markedly. This despite heavy promotions,  the advent of click and collect and increased ownership of tablet computers and smartphones which are supposed to make the whole online shopping experience cheaper, easier, and therefore more attractive.

Retailers are ploughing enormous amounts of money into building their online presence.  Tesco is currently charging just £1 for certain delivery times, and allowing £15 off  the first shop. Ocado is offering £20 off the first shop and free delivery on a Wednesday. Sainsbury offers £25 off the first shop and £10 off plus free delivery for subsequent shops.  Asda charges just £2 per month for delivery. The low delivery charges are especially profit draining given the cost of getting an online order picked, put on to a van which has to be taxed, insured serviced and fuelled, and dropped at the customer’s front door.

Click and collect and the chance of shopping on high tech gadgets do not seem to be catching on in a big way. A look at IGD data examining shopping behaviour shows that as of October 2014 just 26% of online shoppers were using click and collect. Data to April 2014 shows 18% shop on a smartphone and  23% on a tablet computer.

The same data suggests that online is still used infrequently. 21% of online shoppers  use the channel every week, and a further 11% use it every 9 or 10 days.

It is interesting to compare the growth rates of online - heavily promoted, technology friendly, highly service orientated with click and collect or drop at the door – with those of Lidl and Aldi who offer none of that, and yet grew by 15% and 23% respectively in the twelve weeks to beginning of January.

Consumers Unwilling to Splash Out on Groceries– Even at Christmas

Perhaps the most surprising feature of Xmas trading results from the major supermarkets is that even at this traditional “throw caution to the winds and spend” time of year, shoppers were not prepared to loosen their purse strings when it came to food and groceries.

We do not know yet what total supermarket sales were like over Xmas, but given Tesco’s 0.3% decline in like for like sales, Sainsbury’s 1.7% drop,  a not unexpected plummet of 3.1% from Morrisons, and a disappointingly flat performance from Marks and Spencer who are supposed to be immune from penny pinching habits, the picture is unlikely to be rosy. Waitrose fared a little better, recording a 2.8% increase, and discounters Aldi and Lidl are both claiming their “best ever” Xmas, but as the combined market share of these three companies is just over 13% their better numbers will not compensate.

Hence the racheting up of price cutting announcements from the “Big 4”.  In a time of low inflation with shoppers just not prepared to spend on food, the only way for grocers to grow is by stealing market share. Tesco is to drop the price of 350 core lines, and claims that over Xmas some of its vegetables were cheaper than Aldi.  Asda is to spend £300m on cutting prices in the first three months of this year, and Sainsbury £150m.

Where will it end? Many in the industry are saying that prices generally will need to be rebased  regardless of the impact on profit margins. Morrisons chief executive, the second CEO, after Philip Clarke of Tesco to lose his job due to poor performance,  has declared that the only way forward is to “neutralise on price”, and then find ways to differentiate from the competition.

The big grocers will be able to manage their way through price wars more or less unscathed through a combination of slashing costs and offloading real estate. They can cherry pick which products to price reduce, and the scale and duration of any cuts. They can, and will, raise prices on many goods to offset reductions on others.

The unknown and little discussed issue is the knock on effect to others in the supply chain, many of whom are small businesses, already operating on wafer thin margins.  The drop in commodity prices will help. And there may be a boost to demand. Consumption of beef and lamb for example has dropped due to high retail prices. If, on the other hand, goods are already being produced at below cost, as in the case of some dairy farmers, then a boost to consumption does not help at all.

What is clear is that a low price, low growth , low profit world is here to stay for those connected with the grocery supply chain.