Online grocery seen gaining traction in 2017

Mark Hamstra 1 | Jan 17, 2017

Both consumers and food retailers are becoming more comfortable with online grocery ordering, which could be poised for significant gains in 2017, according to presenters at an event in New York ahead of the National Retail Federation’s annual Big Show.

“The rate of acceleration of change is increasing drastically,” said Bill Bishop, chief architect of Brick Meets Click, who led the session. “We sense 2017 is going to be a year of major change.”

The session was sponsored by Digital Foodie, a Helsinki, Finland-based company that provides end-to-end ecommerce technology and support for Finland’s largest grocery store operator, S Group. Digital Foodie, which has its North American headquarters in Montreal, has been named a preferred partner for IGA and is also working with wholesaler Bozzuto’s, a leading IGA partner.

Bishop said his company’s research indicates that the number of active users of online grocery — those who have ordered groceries online at least once in the last 30 days — nearly doubled from 11% of households in 2013 to 21% of households in 2015, and he expects that proportion to have doubled again since then.

The factors driving the growth include the increasing availability of the offering and the diversity of features available as new players enter the market with a range of alternatives for consumers, such as click-and-collect delivery options and a variety of product assortments.

Online grocery might also be getting more affordable for consumers, said Bishop, as increasing competition helps to moderate prices, and as consumers themselves learn how to better use these services to maximize their own efficiency as grocery buyers.

Impact on operations

Many retailers, particularly independent and mid-sized operators, continue to resist entering the online grocery fray, however, as they fret about the costs, the potential return on their investment, and impact it might have on their store operations.

Jim Walz, VP of brand development at IGA, said many independents are concerned about how to integrate a new online grocery offering with their existing POS technology.

“The POS integration is always the big elephant in the room,” he said. “That triggers everything in the business.”

Walz said he is confident that Digital Foodie, which offers a cloud-based technology, will be able to integrate with IGA retailers’ POS systems as they roll out IGA Groceries Online, or “IGA Go.”

While some independents have partnered with Instacart or other third-party delivery services to launch online grocery services, Walz said he is encouraging members to adopt solutions that allow them to preserve their brand identity and maintain control of the process.

“It’s our view that you are taking the customer experience and handing it off to someone else” when retailers partner with third-party delivery services, he said.

Plowing ahead

Robin Michel, a veteran retail executive with HEB, Ahold and other operators, said retailers are plowing ahead in pursuit of online grocery despite their reservations about its profitability, and she expects significant adoption in the next few years.

“The tipping point is that large grocers are aggressively deploying on-demand [grocery], which is forcing the market forward,” she said.

She noted that while many large food retail chains also are using services such as Instacart for delivery, she does not expect those to be long-term relationships, as more and more large operators implement their own solutions.

In addition to questions about the cost and return on investment, Michel said retailers are also concerned about how online grocery will impact their systems and processes, which have been refined for years to generate maximum efficiencies.

“For years, we have had processes in place,” she said. “Now we have to put processes in place that we’ve never even talked about before.”

Michel also described a model in which operators could theoretically drive increased profitability with online grocery, in part by selling a higher ratio of high-profit products. Online grocery shoppers tend to buy a higher percentage of produce, deli and meat items, she said, which can yield higher gross margins than other categories. Online shopping baskets ordered from food retailers tend to have a lower percentage of general merchandise, health and beauty care and pharmacy items, she explained.

In addition, online baskets tend to be much larger overall — Michel cited Peapod’s recent disclosure that online orders average $175, which Michel compared with typical industrywide in-store baskets of $35.

Leveraging data

One of the most important aspects of online grocery, the panelists said, will be leveraging customer data.

Ilkka Alarotu, senior VP of retail business for S-Group — which operates multiple retail formats across Finland and also owns its own bank — said his company’s goal is to have such a detailed picture of its customers that a shopping list is created the first time a customer logs into the online ordering system or mobile app.

The company has about 46% of the grocery market share in Finland and counts about 2 million households as members of its loyalty program.

Each shopper has an individualized view of the store based on their purchase history every time they log into the website or mobile app.

“It is not about segments any more — it is about individualized services,” he said, noting that the company eventually hopes to expand its offering to include more customized content, such as recipes and nutritional information tailored to individual shoppers. The goal is to make the experience so valuable to the consumer that they would see it as a cost to shop at a different retailer.

Bishop said the industry seems to be moving toward a higher degree of customization and customer-centricity, which could be a key to the success of online grocery retailing.

“I am developing a point of view that unless you can price individually, to each individual household, you may not be able to wring the efficiency out of the promotional cost and spend,” he said. “What I think is going to happen is we are going to see a race now to not only integrate the loyalty data, but actually translate that integration not simply into more information about the people who are buying, but into changing the proposition.

“I think that is where the world is going to go, but the challenge is that, most of the time, we don’t have the software infrastructure.”