What’s the Story? 

Online grocery crossed the tipping point for mass adoption in 2020. The pandemic rapidly accelerated the e-commerce pivot, leading to unprecedented growth in online grocery shopping. Grocery retailers are therefore placing greater emphasis on expanding their e-commerce and omnichannel capabilities. In this report, we discuss the grocery e-commerce market in the US, covering the following topics:

• Online food and beverage market size and growth
• Key operating models in the online grocery market
• Review of major themes across the market
• The outlook for online grocery retail

Why It Matters

Covid-19 has amplified the ongoing digital disruption in the grocery industry. The penetration of e-commerce into the grocery space has lagged behind most other retail sectors, but the pandemic shook this status quo by fueling a dramatic acceleration in online grocery growth with the rapid collapse of consumer uptake barriers. We expect the online channel to see permanent gains as consumers retain their changed shopping behaviors post pandemic. According to a Coresight Research survey conducted on August 19, 2020, a substantial 36.4% of online grocery shoppers do not expect to change their online grocery shopping habits once the crisis eases or ends. Grocery retailers therefore cannot afford to be anything but aggressive and proactive with their e-commerce strategies to thrive in a post-pandemic future.

US Online Food and Beverage Market Size and Growth

The Covid-19 upheaval has strengthened e-commerce in the US grocery industry. With the pandemic keeping consumers at home and away from stores, we expect total US food and beverage e-commerce sales to grow to $55.5 billion in 2020, up 82% year over year—a vastly greater increase than any previous year. The outlook for 2021 remains uncertain, given the current very high rates of infection fueling a recent acceleration in grocery e-commerce. However, on the assumption of an improvement in case numbers through the year and that a vaccine helps bring a return to more normalized spending, and against the lockdown-driven online surge in 2020, we estimate that retailers will see a single-digit year-over-year decline in online demand: We model an approximate 3.0% decline in 2021. Any (partial) return to dining out and regular attendance at workplaces, which could be weighted toward the second half of the year, would hit overall food retail spend in 2021, while online would likely see a second impact from a return to physical grocery stores for food retail purchases. However, if we instead see sustained high case numbers well into 2021, we could see a flat-to-low-positive market. That said, the contraction would be temporary and in part a function of the demanding comparatives from 2020, as the channel stickiness from the pandemic will support solid online growth of retailers for 2022 and beyond. We expect online food and beverage sales to reach almost $85 billion in 2024, growing at a CAGR of 11.1% from 2020 to 2024 (see Figure 1).

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Figure 1. US Food and Beverage Online Sales (Left Axis; USD Bil.) and YoY % Change (Right Axis) [caption id="attachment_121387" align="aligncenter" width="725"] Online sales of alcoholic beverages is not included
Source: IRI E-Market Insights™/Coresight Research [/caption]   The state of online grocery in late 2020 was completely different than it was at the beginning of the year. Online food and beverage growth stayed widely above pre-pandemic growth figures as consumers continued to gravitate toward e-commerce for shopping. The channel was resilient even after the lockdowns were lifted and has shown signs of reacceleration in the latest period. We believe that food and beverage e-commerce will continue to post higher growth figures in the first couple of months of 2021 due to a recent resurgence of Covid cases in the US and a shift of dollars from food services to retail. Once we get to March and April 2021, we begin to lap the heightened growth rates from 2020.

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Figure 2. US Food and Beverage Total and E-Commerce Sales Growth (YoY % Change) [caption id="attachment_121388" align="aligncenter" width="725"] Online sales of alcoholic beverages is not included
Source: IRI E-Market Insights™/Coresight Research [/caption]   Many traditional retailers accommodated the grocery surge by ramping up their e-commerce and omnichannel fulfillment capabilities during the crisis. As a result, these retailers reported exceptional quarterly growth in their online sales during the pandemic. Figure 3 shows the estimated online share of total grocery sales of selected retailers in their latest fiscal quarters, based on company reports.

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Figure 3. Approximate Digital Share of Grocery Sales at Selected Retailers in Their Latest Quarters [caption id="attachment_121389" align="aligncenter" width="725"] Ahold Delhaize’s 2Q20 ended on June 30, 2020; Albertsons’ 2Q20 ended on September 12, 2020; Costco 4Q20 ended on August 30, 2020; Kroger’s 3Q20 ended on November 7, 2020; Walmart’s 3Q20 ended on October 31, 2020
Source: Company reports/Coresight Research [/caption]  

Key Operating Models 

Fulfillment Models Fulfillment models in the US online grocery market fall under two umbrellas: centralized and store-based fulfillment.

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Figure 4. Online Grocery Fulfillment Models [caption id="attachment_121390" align="aligncenter" width="725"] Source: Coresight Research[/caption]   Centralized Fulfillment In this model, retailers utilize standalone, large-format, automated facilities to serve customers across a given region within variable delivery windows. This model requires temperature-controlled warehouses and cold-chain logistics networks to support orders of perishables. Building centralized facilities may be prohibitively expensive as it requires significant upfront costs and a high lead time of 18 months or more to go live. Store-Based Fulfillment In this model, retailers use existing physical stores as fulfillment centers for online orders. The stores are already located close to customers, making it easier for these outlets to support same-day delivery. However, since outlets were designed with in-store purchasing in mind, infrastructure upgrades may be required to support digital orders. There are three types of store-based fulfillment model: 1. Manual picking (by in-house staff): Consumers place online orders for products available at retailer’s local store, and in-house staff collect them. 2. Automated picking (micro-fulfillment centers): Manual picking becomes inefficient with increased customer demand and fails to accommodate the shrinking delivery windows promised by retailers. Additionally, an overabundance of pickers in stores reduces the quality of the browsing experience for physical shoppers. Many grocers are therefore seeking to automate the picking process by introducing micro-fulfillment centers that are typically co-located with a store or in the back of the brick-and-mortar footprint. Micro-fulfillment took center stage in 2019. Many retailers saw it as a competing strategy to centralized fulfillment due to its faster implementation potential, smaller footprint, lower initial investments and proximity to customers. Since 2019, multiple grocery chains such as Albertsons, Ahold Delhaize and Walmart have moved into this space by launching pilots in partnership with micro-fulfillment vendors. 3. Hyperlocal Services: Essentially, all hyperlocal services—including Instacart, Shipt (Target) and Cornershop (which made its debut in the US in May 2020)—utilize the store-based fulfillment model through their partnerships with retailers. The service allows customers to order groceries and other goods from nearby stores of participating retailers, with the shopping being done by a network of personal shoppers. Fulfillment Models: A Comparison  There is no one-size-fits-all solution to online grocery fulfillment. Centralized, automated fulfillment suits high-population-density areas. However, in less densely populated areas, the lower volume of sales may not justify the operating costs of a large fulfillment center; micro-fulfillment centers are thus a more suitable option. In even more sparsely populated areas, manual picking through stores will still play a prominent role.

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Figure 5. In-Store Fulfillment, Centralized Fulfillment and Micro-Fulfillment Centers: A Comparison [wpdatatable id=669 table_view=regular]

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Source: Coresight Research Service Models There are also two types of service models in online grocery, which we discuss below.

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Figure 6. Online Grocery Service Models [caption id="attachment_121397" align="aligncenter" width="725"] Source: Coresight Research[/caption]   Home Delivery Delivery is the older of the two service models. Many consumers are attracted to delivery due to its convenience, as it allows them to shop for groceries without ever leaving their homes. BOPIS & Curbside Pickup BOPIS (buy online, pick up in store) and curbside-pickup service models have gained immense popularity amid the Covid-19 pandemic. They are less margin erosive for retailers compared to delivery, and many price-conscious consumers also prefer in-store pickup and curbside services to delivery, as assessed fees are typically lower than those on delivery orders. However, retailers may need to optimize store space and surrounding areas to better support these services. Curbside pickup/drive thru emerged as the principal growth driver of the US online grocery market amid the pandemic, proving a big hit with US consumers by providing a safe and convenient alternative to in-store shopping—and the US boasts high vehicle ownership rates, with almost 93% of households owning a car in 2019. Many retailers ramped up their curbside-pickup access points amid the pandemic and reported unprecedented growth in the service. For example, Target saw more than 500% growth in its curbside-pickup service, Drive Up, and stated that it was entering the holiday season with more than double the number of Drive Up parking spaces versus the year-ago period. Similarly, Albertsons noted in its 2Q20 earnings call that its Drive Up & Go (DUG) service was the fastest growing digital segment—growing over 1,000% during the quarter—and the company plans to have 1,400 DUG locations by the end of its current fiscal year and 1,800 locations by the end of fiscal 2021. We expect that consumers will be more likely to use such services even when the pandemic subsides, and BOPIS/curbside pickup will become a part of a suite of service options that shoppers will expect from retailers in the future. Fulfillment and Service Models Employed by Selected Retailers  Grocery retailers are adopting a mix of fulfillment strategies, using different service models to best serve their customers. Walmart, with its large store footprint and strong digital capabilities, is well positioned to employ store-based fulfillment models. On the other hand, Amazon uses a dual-pronged approach in the online grocery market through two separate services: Amazon Fresh (which uses centralized automated fulfillment) and Prime Now (which uses store fulfillment through Whole Foods and other local stores).

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Figure 7. Online Grocery Models Employed by Selected Retailers [wpdatatable id=670 table_view=regular]

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Source: Company reports/Coresight Research Online Grocery Models: Profitability Traditional store shopping tends to have an operating margin of 3–4%. With online grocery shopping, the margin is slimmer, as grocery retailers take on tasks such as picking and transporting items but often are reluctant to charge the same amount or higher to make a profit out of the transaction. Coresight Research estimates that the operating margin of the manual, in-house store pick and delivery model drops to (0.3)–(0.5)% when the customer retrieves the order through a free in-store/curbside-pickup service. This decreases even further to an estimated (5)–(6)% with home delivery, even when the retailer charges $7 for the service. Although retailers pivoted quickly to manual models to facilitate increased online orders during the pandemic, the current picker method needs further adaptation to be a viable model going forward. Grocery retailers must stem the cycle of negative operating margins by moving toward more automated fulfillment methods, especially to serve the demand of high-density areas and satisfy consumer demand for increasingly narrower delivery windows. Automation can help grocers to more efficiently scale their online capabilities, both at centralized facilities and micro-fulfillment centers installed within an operating store or dark store. However, such technologies require significant capital expenditure, which the retailers will have to earmark by compromising with other investment opportunities.

Major Themes Across the Market

Hyperlocal Delivery Services Capitalize on Grocers’ Need To Scale Online Quickly The pandemic-induced online shopping surge caught many retailers off-guard as they did not have a substantial—or in some cases, any—e-commerce business to fall back on. Additionally, developing omnichannel capabilities in-house would be an expensive proposition—one that may be unaffordable for all but the most well-resourced brick-and-mortar grocery operators. Hyperlocal delivery companies such as Instacart and Shipt capitalized on this situation by allowing retailers to step up quickly and offer same-day delivery from their stores, without having to invest in building complex e-commerce infrastructure and proprietary delivery networks. Hyperlocal delivery providers benefited strongly from the rapid uplift in online grocery demand amid the pandemic. Instacart has seen a dramatic spike in order volume since the onset of the pandemic in the US, reportedly reaching 500% growth in the first half of 2020. Since March, the company has added more than 100 retail partners and 15,000 store locations across more than 5,500 cities in the US and Canada. Similarly, Shipt’s order volume during April, May and June almost tripled, year over year. Parent company Target saw revenue on orders fulfilled by Shipt grow more than 280% year over year in the third fiscal quarter, ended October 31, 2020. The chart below shows Instacart food and consumables sales as tracked by IRI.

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Figure 8. Instacart Food and Consumables Sales (USD Mil.) [caption id="attachment_121392" align="aligncenter" width="725"] Source: IRI/Coresight Research[/caption]   With many retailers looking to prioritize their online strategy amid the pandemic, Instacart is also rapidly adding new retail partners outside the core grocery business, including apparel (H&M), beauty (Sephora), general merchandise (Big Lots) and prescription delivery (Costco). Shipt has also expanded beyond grocery to include kids and adult apparel delivery from Target stores. Diversification outside of the traditional grocery domain may prove essential if grocery retailers that had outsourced delivery and pickup services to Instacart seek to bring more last-mile operations in-house and build their own e-commerce infrastructure going forward. Globally, the online grocery market is seeing retailers take greater control of last-mile logistics compared to nonfood retailers, including owning fleets of delivery vehicles. Hyperlocal services are expected to find increased competition going forward as delivery providers that focused primarily on the foodservice sector announce their move into the grocery delivery space. On August 20, 2020, DoorDash announced the launch of a new grocery delivery service with partners including Fresh Thyme, Meijer and Smart & Final. The company said that it would add more grocers in the coming weeks, such as D’agostino, Gristedes and Hy-Vee. Dark Stores: Growth amid the Pandemic and Future Prospects Dark stores are repurposed physical grocery outlets that are specifically geared toward fulfilling online grocery orders and do not serve walk-in customers. Dark stores can be manual or combined with some form of automation; they often support delivery and pickup services. Amid the pandemic, retailers turned to dark stores as one of several options as e-commerce volumes grew beyond what can be efficiently fulfilled from an operating store. Several retailers, including Giant Eagle, Kroger, Stop and Shop and Whole Foods, have repurposed some brick-and-mortar locations into dark stores, driven by the lack of available pickup slots for online orders, a reduction in store-operating hours and the introduction of capacity restrictions inside stores. Retailers are seeing the dark-store format as a more efficient way of dealing with the surge in online grocery sales. We believe that dark stores will play a key role in retail well beyond the pandemic. The heightened demand for groceries pushed retailers to develop the infrastructure for automation and fulfillment quickly. With those systems already in place, dark stores will likely turn into permanent fixtures post crisis, to relieve strain on existing stores that are serving both in-store and online shoppers. Additionally, a dark-store strategy would allow retailers to keep some of their stores running as dark stores in a potential future lockdown, working as a local distribution point, rather than having to shut down all operations entirely. Grocery Brands Jump Into DTC Fray Grocery brands have traditionally reached their customers through retail store channels. However, these companies are realizing that heavy reliance on this approach means that they can be negatively impacted by changes in the channel, such as frequent out-of-stocks that occurred at retail stores during the stockpiling and lockdown phase of the pandemic in the US. Additionally, pandemic-induced online shopping will become more ingrained in consumers’ buying habits, underscoring that the online channel will expand at a robust rate. Against this backdrop, some grocery brands had stepped up their digital game and introduced direct-to-consumer (DTC) offerings to circumvent normal retail channels and piggyback on the e-commerce boom. In May 2020, PepsiCo unveiled two DTC-focused websites: snacks.com, which allows consumers to purchase more than 100 snacks and beverage products; and pantryshop.com, enabling customers to buy bundles of pre-selected shelf-stable food items across PepsiCo’s portfolio of brands. Both sites allow consumers to purchase products online and have them directly shipped to their homes. Another packaged food giant, Kraft Heinz, has also jumped into the DTC fray with the April launch of its Heinz to Home online stores in the UK. Embracing a DTC strategy has always been enticing for CPG brands looking to keep a bigger slice of profits for themselves, but in light of ongoing health crisis, the value of being able to reach consumers directly in the safety of their homes is more evident than ever. According to IRI E-Market Insights, online CPG sales soared 65.8% for the four weeks ended November 1, 2020, and as the pandemic stretches on, consumers will continue to gravitate toward e-commerce for CPG shopping, sustaining its growth above pre-pandemic levels. This online uptick will encourage other grocery brands to follow the examples of PepsiCo and Kraft Heinz by creating their own DTC e-commerce portals.

What We Think

This year has been the year of inflection for the US online grocery industry, and offering a robust online shopping and fulfillment platform has become table stakes for grocery operators. Although e-commerce has its share of challenges in terms of shopper satisfaction, lost impulse sales and increased service costs, retailers have opportunities going forward to erase fulfillment friction and create new meaningful ways for online shoppers to buy and engage with them. Implications for Brands/Retailers

• We believe that there is no one-size-fits-all approach in online grocery, and retailers must look at their inherent strengths to choose a mix of fulfillment and service models that can best reach the greatest number of consumers efficiently.
• Hyperlocal business will become a norm as e-commerce purchase habits continue post pandemic. This opens even more avenues to existing big grocery operators and provides a fair battleground for small and medium-sized retailers that lack a fully fledged e-commerce business, by allowing them to ramp up quickly. It also offers tremendous scope for growth in several sectors beyond grocery, including medicines, apparel and home merchandise. It is in the retailers’ interests to capitalize on this growing trend and make the most of hyperlocal partnerships to stay ahead of the competition in future.
• In light of the current health crisis, grocery brands are realizing that they cannot rely on a single distribution channel and are gearing up to engage directly with consumers. However, doing so may irrevocably harm their partnership with retailers, potentially reducing their primary income source, traditional retail sales. To reduce the channel conflict, we believe that grocery brands must employ an omnichannel strategy, where online engagement with consumers begins on their website but ends at a retailer’s store, thus creating additional foot traffic at their partners’ locations.

Implications for Technology Vendors

• As more grocery shopping shifts online, it becomes easier for retailers to gather and analyze data—technology vendors can help retailers predict demand and create actionable insights from these data, thus helping grocery retailers to forecast accurately, minimize inventory costs and create personalized shopping experiences for consumers.
• Against the backdrop of upward e-commerce trends, we expect retailers and warehouse technology providers’ partnerships to quickly move beyond pilot phases toward wider implementation. Retailers are likely to invest in warehouse automation infrastructure in the next few years to streamline their supply chains and achieve profitability in their online operations. Technology companies must be able to provide flexible automated fulfillment systems that can fit different types of retail locations.

 

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IRI Disclaimer: The information contained herein is based in part on data reported by the IRI E-Market Insights™ solution and as interpreted solely by Coresight Research. The information is believed to be reliable at the time supplied by IRI but is neither all-inclusive nor guaranteed by IRI or Coresight Research, Inc. Without limiting the generality of the foregoing, specific data points may vary considerably from other information sources. Any opinion expressed herein reflect the judgement of Coresight Research, Inc. and are subject to change. IRI disclaims liability of any kind arising from the use of this information.