Retailers face an online food fight

Online retailer Amazon is trialling a grocery delivery service in the US. Should UK retailers be bracing themselves for total war in the convenience sector?

Amazon’s recent launch of a grocery delivery service in the US could send shockwaves through the convenience supermarket and FMCG communities if it is successful.

Currently being trialled for 90 days in Los Angeles and Seattle, AmazonFresh allows people to get their groceries sent to them for free on the same day as they are ordered – as long as they spend at least $35 and are Amazon Prime customers.

There certainly seems to be a gap in the market for such a service, according to research shown to Marketing Week, which reveals that 75 per cent of the money spent by households on groceries goes to bricks-and-mortar stores because a large proportion of cash goes on food to be eaten on the same day or by people doing top up shopping.

While 40 per cent of the money spent on goods in supermarkets is for a main shop, whether online or offline, 37 per cent goes on top-up shops, according to the figures from Kantar Worldpanel, suggesting that if the Amazon trial works and comes to the UK, it could dent the convenience or top-up market that most supermarkets are chasing.

Morrisons, for example, is to open a new distribution centre in Lancashire specifically for deliveries to its M Local shops, of which it plans to open 100 by the end of 2014. Earlier this year, the supermarket bought more than 60 sites from Blockbuster, HMV and Jessops to convert into convenience stores, and it will also launch a delivery service with Ocado.

Meanwhile, Waitrose will have 10 smaller shops in London by the end of 2013 after launching its Little Waitrose format in Kensington in 2011.

“AmazonFresh is potentially a game-changer. If something dramatically changed whereby it was convenient and affordable for shoppers to top up their groceries online, then there could be chunks of the [UK] population that would do this,” says Kantar Worldpanel expert solutions director Phil Dorsett.

At the moment, when people shop for groceries on supermarket internet sites, 83 per cent of sales go on a household’s main shop, with 11 per cent being spent on replenishment and 6 per cent for a particular occasion.

waitrose

Yet grocery shopping via the internet only makes up a small proportion of overall online spend. FMCG items make up only 5.1 per cent and it could be another 10 years before that figure grows to 10 per cent, if it carries on growing at current rates according to Kantar Worldpanel’s data. Morrisons adding online shopping could add another two percentage points to this, says Dorsett.

The research comes from the company’s panel of 30,000 grocery shoppers in the UK and can be broken down by how and why people buy goods.

Just over 1 per cent of the cash spent online went on groceries in 2003 meaning that share has grown by 4 percentage points in 10 years. This compares with 41 per cent of total online spend going on books and 40 per cent on music (physical copies rather than downloads).

Only 22 per cent of households shopped online for groceries in the past year, although 12 per cent of these spent more than £60 in one go. Households earning over £60,000 a year spend 10 per cent of their grocery budget online.

One reason why people are encouraged to spend more on their grocery shopping online could be the numbers of promotions – a significant 42 per cent of sales by value come from items offered on a deal on retailers’ websites, compared to 38 per cent in-store. Multi-buy offers are more popular online, making up 22 per cent
of sales whereas in the shop itself they make up 16 per cent. “There appears to be less of a barrier to buying multiple packs of heavy things if someone then comes and delivers them,” says Dorsett.

It can also be easier to access all of the deals in one place when someone is on a supermarket website. “The first step is understanding that as a shopper it is easier to browse on Tesco.com rather than in a Tesco store, for example, and you are encouraged to look at the deals pages. So it’s no surprise that deals get a larger part of the share of the money spent online.”

However, manufacturers are less keen on selling their goods in this way, he adds. “Some of them want to get out of the deals – they are worried about the proportion of their sales that are going on promotion.” At the same time, they are spending around 15 per cent of their marketing and research budgets in order to win in ecommerce, the report states.

But what if online grocery shopping did become the norm, regardless of spend? The report speculates that if internet spending grew significantly, in-store main shop sales could decrease. At present they make up half but this could drop to a third.

Added to this, products that are often bought on impulse, such as chocolate or sweets, would be more difficult to shift, because the nature of online shopping is a more planned experience.

“Confectionery features in proportionately fewer main shopping trips made online than in brick-and-mortar stores. It will be harder to win [customers on their main shops] on this mission but the role of these categories in store could provide more opportunity,” suggests Dorsett.

Products that rely more on someone physically touching them in a store might also be affected by the move to online shopping, in a similar way to the challenge facing impulse-buys.

Whether AmazonFresh will be something that goes mainstream in the US is not yet certain. After the free trial period, people will have to pay $299 (£198) a year to get free delivery and become ‘Prime Fresh’ customers. And as to whether it could work in the UK, Dorsett says: “If that is the level of the charge Amazon has
to make for it to be viable, it is hard to see significant numbers of UK households that would be prepared to sign up. It is not necessarily an affordable solution.”

At the moment, only 1 per cent of grocery spend online is for smaller, top-up shops. Dorsett says that people’s habit of going to a physical store to pick up last-minute essentials will be hard to break. “Going to buy your groceries is one thing keeping the internet grocery market relatively small; people like seeing [the food]. Convenience will be a source of growth for [physical] retailers for a good while.”

But he emphasises that being available to everyone, on any kind of shopping ‘mission’ in all types of channel is key for retailers. “The most successful companies will be those winning on all missions and in all channels, and efforts should be scaled accordingly.”

Marketers’ response

Robin Philips

Robin Phillips
Director of ecommerce, Waitrose

[Waitrose has seen the role of its bricks-and-mortar shops change. As people shop using different channels, it says its branches are becoming hubs for ordering and collection – so it is launching concierge-style welcome desks in response.]

At Waitrose we are seeing phenomenal growth in our online grocery business but this is complementary to our overall growth. Customers are increasingly adding an online grocery shop to their repertoire of shops with Waitrose. However, when customers shop on Waitrose.com we see their overall brand spend increase, so these multichannel shoppers are more valuable to us than single channel shoppers. 

Our ecommerce sales in the first quarter of our financial year were up over 50 per cent.

 

Craig Ryder

Craig Ryder
Former head of trading for Asda.com, now consulting director, retail at Nunwood

What stands out in this research is that the retail sector is a long way from getting to 10 per cent for grocery shopping online. 

When Asda was starting out in ecommerce
in the early 2000s, there was a view that 15 per cent was probably where groceries would net out. My feeling now is it is taking so long to get to 10 per cent that I wonder if we’ll ever get to
15 per cent.

Morrisons, for instance, has a 10 per cent stake in [online grocer] FreshDirect in New York. The FreshDirect model works when you have a very high volume of upmarket shoppers concentrated in Manhattan. [If Morrisons were to bring it over here], it will be interesting to see if it works in Lancashire on a cold November day.

 

 

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