Online grocery services: Ready to rocket to over $100 Billion?

For more than a decade, the notorious failure of Webvan scared many potential entrants away from the online grocery business. Now, the field is swiftly becoming crowded with trials by competitors and new operating models, with online grocery services apparently poised to take off on a high growth trajectory, according to Online Food Shopping and Grocery Delivery in the U.S.: Future of Food Retailing by Packaged Facts.

Meeting at the crossroads of technology and service, online grocery shopping is one of the smallest retail segments for food and beverage sales, representing less than 4% of total retail sales of foods and beverages. Yet, it offers the grocery industry’s most exciting potential as the fastest growing channel in the grocery arena, with annual growth rates in the double digits.

The business is changing so rapidly that each day brings news of a new launch or new trial. In just the past 30 days, Amazon.com and Walmart have made big leaps in this business. Halfway through a two-month test using the United States Postal Service (USPS) to deliver AmazonFresh groceries-including perishable foods-in San Francisco, the Postal Service proposed an expanded two-year test to deliver more groceries for Amazon.com and other retailers. “Grocery delivery services are expanding across the nation, with businesses ranging from the nation’s largest retailers, to niche operators, to the popular car service Uber entering the marketplace,” the proposal states. The USPS calculates that it could generate $10 million per year from the service, dependent upon the “number of participating retailers, the scope of their businesses … and the demand for grocery delivery among consumers in the market place.”

Earlier this year, Amazon.com launched another online grocery service, Amazon Prime Pantry, which enables its Amazon Prime customers to fill a box with 45 pounds of brand-name groceries including heavy and bulky items such as popular soft drinks, bottled water, paper and laundry products, as well as conveniently sized shelf-stable food products, and get the box shipped to their home via UPS for $5.99 plus the price of the items.  Amazon counts more than 20 million U.S. households as Prime members.

Meanwhile, in September 2014, Walmart, which previously had been moving slowly in online groceries, opened its first standalone Walmart Pickup Grocery Store in its home town of Bentonville, AR. The 15,000-square-foot facility will stock 10,000 fresh and dry grocery products-from cereal, chips, and bread to fresh produce, meat, and milk. Local customers can register with their email address to use the drive-up service, which allows them to order and pay for groceries online, then pick them up at a kiosk without leaving their car. Its operating model looks remarkably similar to that of Group Auchan’s highly popular Chronodrive drive-thru online grocery store chain in France, which Walmart executives reportedly went to France to study. A drive-thru pick-up option Walmart added to about a dozen of its stores in the Denver area in January 2014 had a 90% customer approval rating. The success of that experiment prompted the chain to begin testing standalone depots or modulars that are used as mini fulfillment centers for online grocery orders. 

Walmart Pickup Grocery Store in Bentonville, Arkansas

Also in September 2014, Instacart a brash online grocery service that is the darling of investors, inked an agreement to provide Whole Foods Market with an online grocery shopping service in the 15 major cities in which Instacart operates.  Instacart has no inventory, warehouses, trucks, or other capital-intensive infrastructure. Instead, it features a phalanx of more than 1,000 “personal shoppers” who use their own smartphones and personal vehicles, handpick groceries from bricks-and-mortar supermarkets, and deliver them to consumers in as little as an hour.

These models have the potential to jump-start the availability of online grocery services to consumers nationwide, and market growth accordingly. Packaged Facts anticipates that over the next five years, online grocery service providers will develop models that solve the logistics problems while being profitable for the operators. As this happens, these services will become more widely available throughout the country and consumers will become more confident in shopping for food and beverages online. Conservatively estimating that consumer spending for groceries purchased online will reach $23.4 billion in 2014, we project that this market will grow in leaps and bounds to nearly $100 billion by 2019.

This blog is based on research featured in Packaged Facts’ Online Food Shopping and Grocery Delivery in the U.S.: Future of Food Retailing.  Add this report to your own intelligence library and receive a 5% discount during our promotional period effective through January 1, 2015. Use code PFONLINEFOOD.

-- By Susan Porjes