Introduction
The online grocery industry has undergone tremendous growth in recent years as more consumers turn to e-commerce for their shopping needs. While grocery shopping was once considered an in-person activity not well-suited for online purchasing, the COVID-19 pandemic accelerated the adoption of online grocery significantly. With convenience and safety top of mind, many people who were previously hesitant to buy groceries online have now experienced it firsthand.
This paper will examine the evolution of online grocery and the key factors driving its rapid growth. It will analyze the business models of leading online grocery retailers and discuss their approaches to order fulfillment. Competition in the industry will be reviewed along with strategies for differentiation. Challenges that still remain for online grocery will also be covered, along with implications for the future of grocery shopping. Overall, this research aims to provide insight into the online grocery space and how it is disrupting traditional brick-and-mortar grocery retail.
History and Growth of Online Grocery
One of the first major online grocery ventures was launched in the late 1990s by Webvan, which raised over $800 million in funding. Heavy upfront infrastructure and delivery costs led to huge losses and Webvan went bankrupt in 2001. Other early entrants like Peapod, which began in 1989, focused more on gradual regional expansion and turned profitable over time.
By the 2010s, traditional grocers like Kroger and Walmart began investing in their own online programs. Pure online grocery retailers also emerged like FreshDirect and AmazonFresh. Online still only accounted for around 2% of total US grocery sales by 2015 according to Food Marketing Institute data. High delivery fees, smaller product assortments, and the perception that grocery shopping required seeing and selecting items in person held many consumers back from adopting online grocery.
That started to change in 2015-2016 as companies found ways to lower delivery costs through dense warehousing and improved fulfillment techniques.Subscription services like Amazon Prime also helped normalize paid memberships for delivery perks. In 2017, Amazon acquired Whole Foods in a major push to disrupt grocery. Younger shoppers who grew up with e-commerce also represented a large demographic increasingly willing to buy groceries online.
All of these factors helped online grocery grow to around 4-5% of total US grocery sales by 2019. The COVID-19 pandemic in 2020 dramatically accelerated consumer adoption out of necessity. With people sheltering at home to avoid infection, online shopping across all categories spiked. Customers who had been hesitant to try online grocery due to perceptions of inconvenience or uncertainty now turned to it given the circumstances. Major markets saw online grocery penetration double or even triple in a matter of months. what was previously a decade long adoption trend was compressed into just weeks and months.
Business Models of Online Grocery Retailers
There are three primary business models employed among leading online grocery companies today:
Pure Online Retailers: Companies like AmazonFresh, FreshDirect and Instacart operate solely as e-commerce retailers without physical stores. They fulfill orders from centralized fulfillment centers or micro-fulfillment facilities. This allows focusing exclusively on online operations but requires high infrastructure costs.
Click and Collect: Traditional grocers like Kroger, Walmart and Albertsons have integrated online ordering with in-store/curbside pickup. Customers shop online and then pick up their pre-packed orders without entering the store. This leverages existing brick-and-mortar assets while capturing some online sales.
Omnichannel: Multi-channel retailers like Walmart and Kroger have both online ordering with delivery/pickup as well as integrated physical and digital experiences. Customers can move seamlessly between channels. They fulfill online orders from dedicated facilities, stores, or with third-party services like DoorDash. This complex model aims to serve all customer preferences.
Order Fulfillment Approaches
Fulfilling grocery orders efficiently and cost-effectively is crucial for profitability given thin margins. Companies utilize several approaches:
Dark Stores: Dedicated warehouses for online fulfillment only, located strategically for fast delivery. Examples include Amazon Fresh stores.
Micro-Fulfillment: Semi-automated warehouses divide inventory into small zones for a human “picker” who gathers items. Schnucks grocery uses Symbotic for this.
In-Store Fulfillment: Grocers leverage existing retail store inventory, staff and infrastructure by having employees pick orders on top of their regular duties. Walmart does this for delivery as well as curbside pickup.
Third-Party Services: Some retailers outsource fulfillment to specialists like Instacart which hires independent contractor shoppers. Kroger has a large partnership with Instacart.
Automation: Companies are experimenting with robotics, computer vision and AI to assist with tasks like picking, sorting and packing orders. Walmart uses floor robots in some facilities.
The right approach depends on factors like order volume, delivery area, existing resources and desired customer experience. Many grocers take a hybrid approach based on these variables. Continued tech innovation is also driving lower fulfillment costs over time.
Key Industry Players
While competition is intense, some companies have established strong market positions in online grocery based on various strengths:
Amazon/Whole Foods: Enormous scale advantages online/offline plus Prime membership. Dominates Seattle, Bay Area and other regions.
Walmart: Giant retailer transitioning its massive logistics expertise online. Aggressive expansion of delivery & pickup nationwide.
Kroger: Traditional grocer transformed digitally through acquisitions like ClickList, Ocado deal for automated warehouses.
Albertsons: Aggressively rolled out curbside pickup nationwide in late 2020s with acquisition of Shipt same-day delivery.
Instacart: Provides white-label fulfillment platform for major grocers; also sells directly to more customers than any single retailer.
Target: Popular RedCard customer loyalty program enhances online grocery offering for drive up and delivery services.
Costco: While membership-only, demand for bulk goods online has fueled digital growth during the pandemic.
Strategies for Differentiation
New technologies and partnerships are allowing players to distinguish their offerings:
Experience: Simple, intuitive shopping interfaces. Personalization, loyalty programs, exclusive products/deals.
Delivery: Fast delivery windows, large delivery zones, competitive or bundled pricing for joining membership services.
Assortment: Extensive selection of grocery/household items plus other categories like general merchandise.
Fulfillment: Convenient options for pickup in addition to delivery. New automated warehouses promise 15 minute fulfillment times.
Private Labels: Exclusive owned brands that undercut national brands on price while maintaining quality.
Omnichannel: Seamless handoff between in-store and online experiences, like buy online/pickup in-store. Click & collect and shop-while-you-shop mobile apps.
Remaining Challenges
Despite rapid recent gains, online grocery has some issues to address as the channel matures:
Unit Economics: Variable delivery costs and thin margins make profitability challenging, especially for delivery-only players without stores. Subscription programs help supplement revenue.
Customer Acquisition: High costs to attract new online shoppers, retain fickle customers who may go wherever prices are best. Building brand loyalty takes time.
Last Mile Logistics: Congested urban environments make on-time delivery tough without well-run logistics systems; some services still charge delivery fees.
Cold-Chain Management: Ensuring perishables like meat and produce do not spoil during fulfillment/transit is difficult without high-tech temperature monitoring and insulation.
Labour Shortages: Reliance on human labor makes operations susceptible to strikes or workers demanding higher pay as seen with Instacart workers in 2020. Automation aims to mitigate this risk.
Customer Experience: Meeting expectations around speed, selection and convenience compared to shopping in a traditional store requires constant improvement. Any glitches undermine trust in digital channel.
Future Outlook
Despite lingering challenges, most industry analysts agree online grocery adoption will only continue accelerating due to pandemic behavior changes. Major projections include:
Online grocery sales in the U.S. to reach 10-15% of total grocery spend by 2025, up from 4-5% pre-pandemic.
Online grocery to become a $100+ billion segment in the not too distant future based on 25-30% long term market penetration estimates.
More partnerships between online specialists and physical retailers for various fulfillment capabilities like Uber partnering with Costco.
Widespread rollouts of micro-fulfillment centers shorten delivery times to as little as 15-30 minutes, enhancing convenience.
Emerging technologies around UAV delivery, autonomous vehicle delivery, mobile checkout advance over the next decade.
Online-first grocery startups like Getir targeting hyperlocal delivery model continue growth trajectory.
Overall the COVID-19 pandemic pulled forward online grocery adoption by 5+ years. As consumers grow accustomed to digital conveniences, online grocery purchasing habits formed during health crises are likely to endure long term even after pandemic conditions subside. Integrated omnichannel strategies appear best positioned to thrive in this new era of grocery retail.
Andrew Stroud