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Retail View: Online sales small, but future could be bright

CHICAGO — It is difficult to gauge the effect online grocery sales might have on the nation’s brick-and-mortar retailers.

On the one hand, sales are projected to almost double in the next few years. On the other hand, that will represent only 3 percent market share by 2017.

Yet it is hard to discount the impact knowing that both Amazon and Google have set their sights on changing the way America buys groceries.

Panelists Randy Burt, principal at A.T. Kearney Inc., and Tony Stallone, vice president of merchandising and food safety for the online retailer Peapod, discussed the future of that business model at the United Fresh Produce Association convention June 10-12, here.

Burt set the stage for the discussion with a few facts about the proposition. In the first place, it is not as new and cutting-edge as most people think. He showed a 1913 advertisement that featured a grocery store touting home delivery. Of course, the consumer of a century ago couldn’t use the Internet to place an order, but the concept of ordering from afar and have the product delivered was already being explored.

As we all know, home delivery of groceries did not take hold then, nor did it catch on when Webvan stormed cyberspace around the turn of this century to champion the concept. But Burt said that since that famous Webvan flameout, there has been slow but steady growth and the concept may be poised for exponential growth in the relatively near future.

“There are three things driving growth today,” he said.

Burt listed urbanization, consumer demand for convenience and changing demographics as all contributing to what some see as a bright future. He explained that more and more people are moving away from the suburbs and into cities. These growing populations in a smaller geographic area make home delivery more efficient and feasible.

Convenience has always been presumed to be the main driver behind home delivery of any product, and there is no doubt that today’s consumer feels stressed and time-starved. Changing demographics at both ends of the adult spectrum are creating more single households and fewer traditional families, which have always been the target of the nation’s chainstores.

Though these factors are promising, Burt said there is no doubt that online sales have not yet taken off. Sales are projected to grow to $11 billion for 2017 from the current $6.8 billion, but he noted that is still only a 2-3 percent market share.

“It is growing fast, but not taking a significant percent of the market,” he added.

Interestingly, Burt said the concept is much further advanced in Europe, with the United Kingdom, Germany, France, Belgium and the Netherlands all registering much higher online grocery sales than the United States. He said in the United States the jury is still out about what will work online.

However, he did note that Amazon Fresh and Google Express are entering the same space with high expectations. Both have succeeded before in forecasting what Americans will do online, so it is difficult to bet against them.

Stallone of Peapod, which has successfully brought online grocery shopping to several markets in the populated Northeast as well as the Chicago area, believes the entry of these giant online companies to the space “will be a game changer” for the retail industry.

Amazon, he said, wants to become the largest retailer in the world. To do that, it must sell food, since that is a huge part of everyone’s daily buy. He said traditional retailers will have to become more efficient to compete.

Currently, the biggest difficulty in succeeding at online ordering and delivery is the delivery part. It is expensive and it is difficult for any retailer to make it work for the relatively inexpensive delivery charge that most people are willing to pay.

Stallone relayed some of the Peapod experiences over the last decade as it has built its business. One of the most surprising things is that fresh produce is an important driver of the service.

When first launched, critics said the service was more for dry goods than perishables, figuring that consumers wanted to pick their fruits, vegetables and meats by themselves. That has not proven to be the case.

As consumers have gotten comfortable with the logistics of home or office delivery, they have expanded their trust in the program to include the perishables, and they now represent a large portion of the individual ring.

Peapod has altered its business model over the years and it now offers home and office delivery as well as ordering online combined with pickup at a pickup center or even at a traditional store

Initially, Peapod tried various fulfillment options, including filling orders from brick-and-mortar grocery stores that were owned by its parent company, Ahold.

But Stallone said it ended up that the pickers were competing against in-store shoppers for goods, which led to a greater out-of-stock ratio. Today, the orders are filled at warehouses designed specifically for that purpose. Most customers have the choice of home delivery, pick up at a store or pick up at a center.

He revealed that Peapod is the 55th largest online retailer, which is about at the same level as Nike. About 90 percent of the orders include fresh produce, with an average produce buy in the neighborhood of $23 of the total $160 order.

Peapod stocks 700 to 900 produce SKUs on a daily basis. The top produce sellers by volume are nearly the same items that sell in a traditional store: bananas, berries, apples, sweet corn and avocados. By dollar amount, strawberries top the list. Organic produce represents about 22 percent of the produce sales.

The company does offer sales and merchandising opportunities online, often pairing various items together under the banner of “Fresh Deal of the Day.”

For example, its combination buy of mozzarella cheese, tomatoes and basil typically results in a 600 percent lift, with mozzarella registering the biggest increase.

Stallone said when this information is presented to the cheese companies, they will gladly fund the discount on the combo pack to appreciate those gains in sales for their item.