Grocery 2053: A Data-Driven Gaze into The Future
Channel Proliferation
Table of Contents
SECTION 1
Executive Summary
- Customers have been navigating new channels and spreading their spending across numerous and complex set of retailers. A little more than one out of five Customers order groceries online frequently, and it’s not a surprise that Customers aged 44 and below are more likely to engage in this behavior, whether it’s for pick-up or home-delivery. Younger Customers, like we’ve seen with other trends, are more likely to (a) purchase meal kits or fresh meals in store, (b) order online via the retailer or delivery companies, and (c) buy something recommended on social media.
- In the near term, retailers can vary meal options (meal kits, in-store restaurants, store-bought fresh meals) and delivery options (on-demand and express delivery) which have a higher adoption rate among younger generations. Retailers can also use AI to create efficiencies in delivery and keep delivery fees low for consumers.
- Between now and 2053, we see retailers doing much more: building retail empires via vertical and concentric M&As, and reimagining their spaces to provide a better Customer experience.
Last but not least, channel proliferation and blurring has been top-of-mind for retailers. Customers have been navigating new channels and spreading their spending across a more numerous and complex set of players. The retailer landscape is changing and for good, from Covid as catalyst for online purchases and people moving out of urban centers, to still-being-debated mergers like that of Kroger and Albertson, to third-party actors now playing in the big people league.
SECTION 2
Current Market Forces Driving the Trend (secondary research)
Omnichannel
Though 56% of consumers shop online, a big portion of consumers are still loyal to brick and mortar stores. ref). Due to an increasing need to save money especially in a time of inflation, shopping behaviors are becoming increasingly fragmented – think delivery, click and collect, shop and go, and an increase in multi-banners shopping. Customers now prefer home delivery to click and collect, but some obstacles remain to online growth including delivery fees, freshness, and personalization. Customers are also different in the way they like to shop, and that varies by category.
The rise of Food-At-Home (FAH)
Although inflation is projected to be higher on Food-At-Home (FAH) than Food-Away-From-Home (FAFH), the latter still costs 3.4 times more on average ref. This makes FAH more appealing and is projected to grow at a faster rate in years to come. FAH accounts for 62.5% of the total $1.5 trillion market and is expected to grow in part by the 20M US remote workforce adopting more FAH habits ref. In 2023, all food is projected to increase between 7.1 % in price (prediction interval of 4.2 to 10.1 percent), with FAH at 8% (prediction interval of 4.5 to 11.7 percent) versus FAFH at 8.2% (prediction interval of 6.7 to 9.7 percent) ref. With prices rising at a lower rate for FAH and the growing number of employers offering remote and flexible options for work, we can expect FAH to keep increasing in share. Other customers are looking to save time with prepared meals that take less than 30 minutes to make. Thirty percent of customers said they take less than 30 minutes to prepare food versus 15% who said the same two years ago. It’s a big opportunity for retailers. Most customers go to restaurants not because they don't want to cook, but because they simply don't think about getting prepared foods in-store ref.
Urban Exodus
Urban centers adjacent to expensive cities saw more people moving in than out during the pandemic. Post Covid, 91% of suburban counties experienced more people moving in than out. The trend was driven by remote work, incentive programs, income fluctuations, and the higher cost of housing in major cities. The increasing price gaps between suburban (trending up) versus urban real estate (trending down, or up at a slower rate) means people are moving to urban adjacent centers ref. New York City and Los Angeles experienced the highest net domestic migration loss in 2021 (385k and 205k to be exact) whereas Phoenix and Dallas gained the most. That translated to 1.4 M net domestic gains for outlying counties outside urban centers in 2021. Although we don’t expect Covid to remain the main driver of the exodus, remote work on the other hand will only become more common, so we can expect these numbers to increase.
Third- party to overcome retailers
On-demand food delivery providers have almost all expanded into Grocery via partnerships and are expected to make it to the RPI podium by 2025. DoorDash, Instacart, and Uber Eats will exceed the eCommerce sales of some retailers by 2025. Their Gross Merchandize Value (GMV) is expected to grow to $27 B for Instacart and $27 B for Uber Eats. DoorDash will replace eBay as the third biggest after Amazon ($498 B) and Walmart ($62 B) with its $48 B in GMV sales. On-demand food delivery providers are expected to grow to $138 B (about $99 B food service vs $42b grocery) by 2025 with a 16.8% CAGR, a rate 1.7 times faster than that of eCommerce. By 2025, ECommerce is projected to grow to $1.1T ref. We can also envision a future where manufacturers cut the middleman and sell straight to Customers, which would have an impact on all types of providers and retailers if they are able to create their own vertical chains successfully.
SECTION 3
Customer Motivations Driving the Trend
About one out of three Customers order online regularly. As Customer Experience improves and more customers adopt this habit, we expect the percentage of Customers shopping online for groceries to increase over the coming years. We’ll see that younger generations (as we saw in Data 3.0 and Values-Based Consumption) are more likely to adopt new channels or ways of purchasing in Grocery.
When we look at Customers aged 44 and below, they tend to order online frequently. That includes home delivery and in-store pick up.
For two out of five Customers, there are only barriers -- price and personal choice -- to adopting new channels or meal options. Still, only about a third or less are likely to use on-demand food providers, request express delivery from their store, and even fewer to use a meal kit service. The only more common behavior that Customers are likely to adopt in the future is to buy a fresh meal at the store. This represents an opportunity for retailers to capitalize on and improve the in-store experience.
Across all these behaviors, younger Customers are most likely to engage with different channels, delivery, or meal options.
Meal options like meal kits or those prepared fresh at the store appeal more to higher income households due to their higher cost and subscription fees (depending on the model chosen). Although the gap is less prominent for delivery, we know that more price-sensitive Customers will tend to opt for in-store options when inflation is high (in order to avoid delivery fees).
As is the case with Customers most likely to shop online, younger generations were also most likely to buy something recommended on social media.
All the above points to a triple threat to supermarkets with channel proliferation suggesting a shrinking grocery pie for retailers. Other retail formats are taking food at home spend away from supermarkets. Demographic and cultural trends including the aging population, and fewer children, are shrinking food budgets overall. Third party providers such as Instacart, DoorDash and others are quickly nibbling at the edges now, along with virtual reality and social media purchases. All pose a threat if adoption increases and technological advancements are made, or if brands begin selling direct to consumers in a more consistent form.
SECTION 4
What Customers Have to Say
“Some of the challenges are that I have to go to different stores to get what I need. For example, I go to Aldi for produce, meats and other items that might be a lot cheaper than Walmart or Publix. Then I go to Walmart and pick up the soft drinks that I like that Aldi doesn’t carry. I also buy eggs from Walmart. And then if for some reason I don’t find what I’m looking for at Walmart or Aldi then I end up at Publix and normally I would have to pay a little more at Publix.”
- 34-44, 100-150k, rural, no kids
“First you have to know what each of your family likes and dislikes and the different types of ingredients you need to cook for them. Sometimes you don’t always find what you need at the same grocery store. Lastly when you checkout, there is always a line. I need to start making a list for what I need to buy and start doing self-checkout or just order online.”
- 25-34, Urban, 3 Kids
SECTION 5
What Can Retailers Do?
All retailers should align their organization to optimize performance amid the backdrop of channel proliferation. There are certain retailers who are better positioned to capitalize on this trend than others.
Retailer 2053 Ranking Methodology
To determine which retailers those were, we looked at:
- Which retailers have more of the “customer of the future” currently in their stores? In other words, which retailers skewed higher on a shopper base that was younger than 44?
- How much do the needs of their shoppers align with the given trend? In other words, do their behaviors and desires indicate the trend is highly relevant to them?
- How much work does the retailer need to do to better align their value proposition with this trend, so they can ride its currents over the next 30 years?
- How well does the retailer perform on Fiscal Conservatism? Since finances will likely remain the most immediate need for shoppers, any retailer who makes a trend affordable is more likely to win.
Given how distant we are gazing into the future, we’re choosing to focus on our 1st and 2nd quartile retailers from the overall RPI ranking ref, as well as other household names in grocery.
Amazon, H-E-B, Sam’s Club, Target and Walmart have made the online and in-app experience top notch for Customers and are best positioned to benefit from this trend, just like we saw in Data 3.0. However, it isn’t guaranteed that skills from serving customers online and via apps are entirely transferable to other channels that will emerge in coming decades.
Over the next 30 years, all retailers can benefit from some or all the following actions:
Visionary structural moves
1. Build a retail empire via vertical and concentric M&As
If Customers weren’t limited by budget and could buy everything in one place, they would. But even then, you can’t be everything to all Customers. We’ve shown again and again in previous RPI reports that retailers that stand out and perform best are those that have a very clear value proposition and make clear trade-offs. That doesn’t mean that you can’t grow via mergers and acquisitions and diversify your business to capture as much of the Customers’ wallets as possible, generating new efficiencies while doing so. Think of some of the channels we have mentioned: the metaverse, social, FAFH, on-demand providers, and meal kits. With mergers and acquisitions proliferating, the only way to survive in coming decades and compete with major retailers and third-party competitors may be to be present in all channels that reach the same Customers. If you can produce your own private brand products, operate as your own on-demand delivery provider, manage your own instore (and out of store) restaurant and meal kit businesses, you’ll be servicing Customers with all possible touchpoints or consumption occasions. And in a future where brands sell straight to Customers, you will already be a worthy competitor if you are your own manufacturer. Of course, you must diversify in a way that makes sense for your business. But we are talking major moves over three decades
2. If you’re smaller, reimagine your spaces to provide a better Customer experience.
Brick and Mortar store orders will decline over time as online commerce grows. You might not need all that instore space when that happens. Instead, repurpose that space to help people meet their basic needs. We saw finances and wellness topped the list for Customers. Use customer data science to determine what is your Core Priority Assortment and free up say 50% of your space to become your Customers’ trusted financial and health partners (see Fiscal Conservatism and Affordable health & wellness structural moves we recommended). Wellness Centers (with gyms and clinicians for mental health needs) and Financial advisors would help improve the Customer experience by focusing on the Customer’s most important needs. Why not give space to a farmers’ market to help shoppers buy locally? Cooking classes to help Customer cook healthy on a tighter budget? Even the remaining grocery aisles may change over time. While it isn’t new, think of Tesco Homeplus’ virtual store that enables you walk through a semi-virtual aisle with pictures of each product, scan via QR code, add to cart, and get delivered to your home. In short, rethink your Customer Value Proposition and repurpose your space to do so.
Good consistent hygiene moves
- Vary meal options (meal kits, instore restaurants, store-bought fresh meals) and delivery options (on-demand and express delivery) that have a higher adoption rate among younger generations. Make sure you offer the options that matter to your Customer base and consider implementing at larger scale if you’d like to begin attracting Younger Customers.
- Start thinking of Customer journeys and build equity and loyalty to your eCommerce platform. Customers think of retailers as environments as opposed to instore versus online. How they shop will depend on their preferences and the occasion.
- Think of ways to make the online/mobile experience more personal. Can an avatar help with the shopping experience to give the Customer a sense of contact? Also look at leading third-party UX best tools to better engage Customers.
- Use AI to create efficiencies in delivery so you can keep those fees low for consumers during times of inflation. Ask can your most loyal customers save on fees? Remember, saving money will likely remain the top need for Customers.
- To compete with FAFH, educate Customers on the “restaurant experience at home.”
- Adapt the format strategy: flex rural/urban/suburban formats over time and build multi-banner shopping options for one stop shopability.
