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.
But….
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.
