As online grocery shopping gains market share, the shift could favor dollar stores and Amazon.com Inc.—and potentially hurt traditional grocery chains, a report from Goldman Sachs Equity Research says.
“While we do not forecast … grocery penetration to exceed categories that we believe are more suitable for online, such as consumer electronics, books, and apparel, we do believe penetration will steadily increase as companies (Amazon, Wal-Mart, Kroger) invest in the channel and customers become more comfortable shopping for groceries online,” the report from Goldman Sachs analysts Christopher Prykull and Bryan Caronia says.
According to the analysts, online grocery sales could reach 11.5% of the market by 2027, up from 2.7% currently. That shift, the analysts say, will be driven for now by a combination of home delivery and buy online, pick up in store services. But, over the longer term, the analysts expect home delivery to be king, giving an advantage to those merchants that do it more efficiently.
The rise of online grocery shopping is bad for large-format grocers, such as chains like, in three main ways, according to Prykull and Caronia.
First, based on an analysis of several potential scenarios, Goldman Sachs believes the model used by Amazon Fresh—delivering to homes from distribution centers—is more cost-effective than either in-store pickup of online orders or delivering food directly from stores. As a result, Amazon Fresh’s model will likely emerge as the preferred option.
Second, the analysts expect larger “stock-up” grocery shopping to increasingly move online. That’s a clear threat to traditional grocery chains, which largely offer in-store pickup of online orders or delivery from stores. Competitors such as Amazon deliver food from distribution centers, which is more efficient, the report says.
Lastly, as consumers stock up via online ordering, it creates opportunities to capture sales from “fill-in” grocery shopping. But there, the advantage goes to dollar stores and “hard discounters,” such as Aldi, that offer “sharp prices in convenient locations and easily shoppable formats,” the report says.
Dollar stores and discounters also have an edge because their core customers typically are less “digitally aware and unable to pay a premium for home delivery or online memberships.” Those factors will make it harder for Amazon and other digital grocers to steal market share. “We believe dollar stores are demographically better positioned to withstand online encroachment, at least in the near term,” the report says.
If Prykull and Caronia are right, grocers that have invested heavily in facilitating pickup of online orders and delivering groceries from their local stores—such as giants The Kroger Co., No. 88 in the Internet Retailer 2017 Top 1000, and Albertsons Inc. (No. 157)— could be putting their money in the wrong places, leaving them vulnerable to Amazon (No. 1).
Earlier this month, Jewel-Osco grocery and drugstore chain, a unit of Albertsons, launched home delivery of online orders in the Chicago area. Those orders will be fulfilled from 11 designated “pick stores.” Six of those stores will also offer in-store pickup.
In October, Kroger announced a strategic plan that includes offering in-store pickup of online orders from more than 1,000 locations by the end of the year, up from about 640 at the end of 2016 and 220 in 2015.
“The grocery industry is evolving faster than ever before and so are consumer expectations and preferences. As industry giants like Amazon and Walmart relentlessly invest in digital experiences, small to medium-sized grocers need to do the same,” says Dan Farmer, vice president of retail solutions for Unata, a provider of digital technology to grocery retailers.
Farmer says grocery chains “should embrace this disruption” and use it to enhance the stores and local brand recognition they already have. “Whether in-store or online, empowering customers with the option to shop however they want, wherever they want, whenever they want is the key to succeeding in this increasingly competitive industry,” he says.
The Goldman Sachs report offers bits of advice to traditional grocers seeking to make that kind of transition to the new, digital realities:
- Going digital is not an option because consumers will demand that grocery stores offer online shopping options.
- Prices will remain the most important factor in determining where consumers shop for groceries. As online shopping increases price transparency, grocers will need to be price-competitive across all products, not just staples like milk and eggs.
- As consumers increasingly stock up online, the line between food at home and food away from home will blur. Consumers who do not plan ahead will represent an opportunity for grocers to sell more prepared and “heat and eat” meals, as well as meal kits.
- The sale of dry groceries and health and beauty products will grow faster online than perishables, so Goldman Sachs believes physical supermarkets “should focus on produce, meat, seafood, deli, bakery, etc. to drive traffic in an increasingly digital world.”
- Private-label goods will become more important.
- Future supermarkets will rely heavily on in-store technology such as digital pricing displays that can be easily changed and facilitate the use of dynamic pricing.
- Grocery chains will continue using customer data to send personalized offers through digital coupons and mobile apps.