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Preparing for the Future: What’s to Come for Online Grocery Distribution

Preparing for the Future: What’s to Come for Online Grocery Distribution

Marketers and business leaders in the grocery sector have been on the retail equivalent of a wild roller-coaster ride for the past few years. Between local grocery delivery start-ups and major takeovers of brick-and-mortar stores, it can be difficult to keep up with the wide-ranging changes that continue to rock the foundations of the industry. In the beginning of 2018, grocery distribution looks very different than it did only 10 years ago. Technology has had a profound impact on distribution from analytics to home delivery. In a landscape that didn’t change significantly for decades, retailers and distributors seem determined to rethink every aspect of their business. The recent $13.7 billion acquisition of Whole Foods by Amazon in June 2017 is one of a string of technological impacts on this newly-revolutionized industry.

Current State of Online Grocery

The massive grocery market exceeded $781 billion in 2017, yet this seemingly immovable behemoth is destined to change dramatically in the next 5 years due to seismic shift in grocery distribution models. Amazon’s acquisition of Whole Foods is only the latest gambit in a maze of smaller purchases and industry moves that continue to stagger the market and keep retailers and distributors of grocery products off-balance. This comes at a time when traditional grocery stores are being faced with competition from a variety of different channels, including online grocery shopping,  meal-prep delivery services and more. American shoppers are focused on finding the easiest and most convenient solution to their shopping needs, and online grocery shopping is a pain point that many are seeing as a growth opportunity for their business. Michael Wystrach, co-founder and CEO of meal delivery service Freshly, recently noted in an interview with Fortune: “The evolution of the grocery store business is going to evolve dramatically over the next five years.”

Industry insiders believe that the moves toward consolidation are in their early stages, and will continue to accelerate as online retailers place more pricing and service pressure on more traditional grocery retailers and independents. A recent study by Euromonitor showed that only a tiny fraction — less than 2 percent — of grocery sales are currently coming through an online platform. What this means is that there are effectively billions of dollars available to be shifted to online grocery retailers, so the race is on to get the right technology, shopper adoption and convenience levels in place to become an e-commerce grocery leader. Categories that tend to do exceptionally well online for the mega-retailer are produce and meats, according to Walmart’s recent earnings release, with 56% of its annual sales coming from grocery. Revenue from its online sales rose 60% year-over-year, but shifts to online models continue to be slower than some e-commerce retailers expected.

Latest Offerings in Online Grocery Distribution

The major players in online grocery distribution are Amazon.com, Instacart, Walmart, Peapod and FreshDirect — all of whom carry a considerable percentage of the total grocery distribution in the past 18 months. Amazon and Walmart together account for 27% of the whole. While growth has been modest to date, online grocery sales are expected to reach nearly a 20-30% market share of all food and beverage sales in the U.S. in the next decade. Although Amazon is a leader in e-commerce, the company is experiencing some challenges. Walmart’s strategy of utilizing their vast network of stores to offer easy online ordering and pickup at the stores may be the fastest growth model; a model which has also been adopted by Kroger and other brick-and-mortar grocery retailers.

Peapod’s strategy evolves around optimizing the efficiency of last-mile deliveries, meal kits and recipe planning as their differentiating factor. FreshDirect has created a local infrastructure in the New York area that has managed to overcome the shopper concern around the quality of meats and produce that are selected by a retail agent instead of the shopper themselves.

What’s Coming in Online Grocery Distribution

With nearly a quarter of American households heading online to buy their groceries today, up from 19% in 2014, retailers are on the lookout for ways to create a superior online grocery shopping experience. Within 10 years, an expected 70% of households will engage with online food shopping and of those who buy digitally, an expected 60% will spend about a quarter of their food dollars online. Younger shoppers are even more likely to be willing to buy perishable goods sight-unseen, with the usage of mobile apps continuing to drive in-store engagement via coupons and other digital tech. The Amazon Go grab-and-go store is the first in what may be a string of stores bought online by the retailer as they seek to transfer their knowledge of digital shopping to a physical environment to take advantage of foot traffic in specific areas. In 2016, online grocery sales were about $20.5 billion and are forecasted to hit over $100 billion by 2025. This blurring of the lines between online and physical stores is expected to continue, allowing grocery shopping to truly become an omnichannel experience in the next five to ten years.

How Retailers Can Prepare for the Future

While there are some relatively unconventional options as far as grocery buying in the distant future, retailers can prep now by having a deep understanding of shopper needs and buying patterns. This information can help inform everything from online suggested selling to proactive reorder recommendations. In-store retailers often make a fair profit from the items that are placed directly in the checkout lines — but how can you encourage shoppers to make these same impulse purchases when they’re skipping not only the line but the entire store experience? These are the questions plaguing retailers who need to keep their basket size high in order to offset the costs of additional technology required to stay relevant.

As the grocery industry continues to be impacted by technological advancements, marketers and business leaders are determined to enhance their growth strategies. Shifts are happening in the marketplace and leaders are more prepared for the future by understanding the challenges from the past. This knowledge will help companies not only stay abreast of changes, but will help to capitalize on these industry developments.