Yes, Virginia, Online Grocery Is Failing

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Yes, Virginia, Online Grocery Is Failing

By Kurt Jetta, Ph.D., TABS Analytics - 12/01/2016

SupermarketGuru Phil Lempert and I agree on a lot of things. We agree, for example, on looking forward and not back. But how we approach that future is different. Lempert says online grocery is the future. We disagree; I see this market failing as it's currently constituted.

Lempert's enthusiasm is understandable: How can anyone possibly be bearish on the growth of internet commerce in 2016? As he raised in a recent post on this website: "Just imagine what our lives would be like today if people would have made the same dire predictions and calls to pull the plug on the Palm Pilot; there would be no iPhone," he says. "Imagine that."

That's an excellent point – but it ignores an obvious problem: The iPhone was a success that built upon the Palm Pilot's failure. Palm Inc. went defunct in 2011, after a tumultuous lifespan in which its stock value dropped 90 percent in a year –  a NASDAQ record at the time –  and its main source of revenue came from software development, not PDAs. It was left to other well-capitalized companies, like Apple, to take Palm's technology, improve it, generate demand, and scale up production of a winning product line.

Grocery retailers strive to be the next Apple, but have an online business model more closely resembling Palm.

That means not rushing to invest willy-nilly in a supply chain built on qualitative assumptions about our digital world, but investing in data to figure out why penetration and repeat business in the online grocery market are so low –  and what it would take to bring them up.

As TABS Analytics' survey data of grocery consumer preferences has long shown, online grocery represents a tiny share of overall grocery revenue, between 1.5 and 2.0 percent of all sales in the space. Yes, that can amount to more than $12 billion in revenue in the current grocery sector –  but that's an $800 billion sector we're talking about. Moreover, online grocery numbers are flat, and they contain disturbing trends –  including abysmal buyer loyalty numbers that are five times lower than the grocery industry benchmark for loyalty at brick and mortar stores.

Here are the top challenges we see in online grocery's future:

1. Lack of Consumer Choice

 We know from economics literature that grocery buyers place a very high importance on the availability of lots of different offerings.  In theory, online shopping should offer grocery consumers greater choice; there's infinite space for alternative products. But on your computer, you can't really tell a product's size or all of the flavors that are available or the brands or the package types. You're unsure whether you really see all the related products or promotional offers. You take more time to choose between them. In a physical grocery store, you have it all and see it all at once. You're familiar with the layout. So far, most online grocery offerings haven't provided consumers with a similar choice experience.

2. Price

Despite the extra work involved, online grocery shoppers pay a premium for convenience, whether it's for delivery to your doorstep or a physical store. Prices can be up to 25 percent higher than on store shelves,  according to a study by Anthem Marketing. Who wants to pay a premium for all that work?

3. Low loyalty and penetration

Given that everyone with internet access has the ability to buy groceries online, less than one-third of the people actually do so.  Why?  It suggests that there is a fundamental lack of demand; consumers are generally happy with their grocery store experience.  To make matters worse only about 15 percent of the people that buy online are buying there regularly, defined as six or more times a year. Contrast that with benchmarks for loyalty at brick and mortar groceries, which range around 70 to 75 percent.

Add it all up and you have a profound demand problem in the online grocery space, despite years of investment by retailers in supply. Not even Amazon is making a profit on grocery. And there is a world of difference between Amazon –  the 800-pound-gorilla of online sales –  leveraging the scale of its existing customer base of digital deal-seekers, on one hand, and a brick-and-mortar grocery line dipping its toes into Amazon's world on the other, possibly cannibalizing its own walk-in business to goose fleeting online sales.

That's why we caution retailers to pause and think about what's really going on in this space before they invest in it further. It's not enough to *do* something online because everyone else is; companies need to reflect on how exactly they plan to provide online customers value.

So far, drones, curbside pickups, and Uber alliances haven't brought consumers in. Exuberance and futurism are great –  but they need to be tempered by research and planning. That makes the difference between being an iPhone, and a now-defunct brick of a product that made the iPhone possible.