Eyes on the Economy
eCommerce Edition
In this article, we take a close look at how eCommerce has progressed at a great time of disruption. While a number of other developments command the attention of grocers — most notably inflation, there are a number of economic trends worth noting as grocers commit further to an omnichannel strategy.
- Inflation and price sensitivity are already increasing and will likely be with us for at least another year or two. This will likely make it more challenging for shoppers to pay fees for delivery or click and collect.
- Examining year-over-year (YoY) growth in Q1, for both online and in-store visit growth for the larger U.S. banners, Amazon Fresh, Lidl, Food Lion, Aldi, Sam’s Club and Winco are out front. These retailers represent a variety of approaches retailers can take, but all are strong on price perception.
Executive summary
- Grocery Web Traffic has been trending down since early 2021 which is when vaccines began to roll out. The visit growth gap is narrowing between online and in-store. Online grocery and its time savings matter for some, more than others, but what matters for most are still prices and assortment.
- Inflation and price sensitivity are already increasing and will likely be with us for at least another year or two. This will likely make it more challenging for shoppers to pay fees for delivery or click and collect.
- Examining year-over-year (YoY) growth in Q1, for both online and in-store visit growth for the larger U.S. banners, Amazon Fresh, Lidl, Food Lion, Aldi, Sam’s Club and Winco are out front. These retailers represent a variety of approaches retailers can take, but all are strong on price perception.
Summary of the Grocery Tailwinds and Headwinds
Source: US Census Bureau Advanced Retail Sales
Grocery Tailwinds
- Household (HH) saving levels are still much higher than 2019 and will continue to be an inflation buffer for some households
- Shoppers are likely to prepare and eat more meals at home compared to 2019
- Strong retail and grocery sales in 2022 Q1
Grocery Headwinds
- Cross shop was lower in 2020 and 2021 due to COVID. We expect competitive intensity and cross shop to increase in 2022 as COVID wanes and food prices remain elevated
- With cross shop, inflation up and disposable income down, price’s importance will increase in 2022
- Consumers’ stimulus checks and higher savings helped them absorb supply side food and labor cost increases over the last two years, but higher inflation and lower disposable income will make continuing to do so challenging for consumers in 2022
- Producer Price Index (PPI) for processed food and feed and Consumer Price Index (CPI) food at home trends are still rising. PPI is a leading indicator and if it is increasing, CPI food at home will likely follow
- Inflation is a nice top-line tailwind if consumers are willing to pay the higher prices, but inflation is now growing faster than wages, which reduces purchasing power and typically increases price sensitivity
- Labor shortages are still with us, particularly for lower wage service jobs, such as grocery. Most grocery retailers will likely be facing higher labor costs in 2022
- Higher inflation will drive top-line growth between 3-5%, but unit growth will likely be negative
- With price becoming more important for shoppers, we will likely see retailers respond with smaller gross margin rates and strategically focused price and promotional investments in 2022
Online Grocery Matters, But More for Some than Others
Shira Ovide, the “On Tech” newsletter writer for The New York Times, is asking the right questions as she ponders the present and future of online grocery shopping. In her recent article “We Can’t Predict the Grocery Future,” Shira analyzes eCommerce and grocery data and industry commentary. She reflects, modestly, “My wishy-washy analysis is that Americans haven’t fallen head over heels for buying bananas over the internet, but we aren’t rejecting it, either.”
We have many of the same questions she has. For the last five years, our team at dunnhumby has been publishing an annual, nationwide study – the dunnhumby Grocery Retailer Preference Index (RPI) – that examines the approximately $1 trillion U.S. grocery market and also includes an online survey of 10,000 U.S. households. For the last two years of our report, digital has increased in importance for shopping preference, with Amazon being ranked as the top U.S. grocery retailer. But price and quality products matter as much if not more, particularly outside of a pandemic. If retailers’ eCommerce program increases costs, raises prices, and negatively impacts price perceptions, the decision to invest in eCommerce comes with significant risk.
Let’s not forget that online grocery has been around for more than 20 years and it took the fear of death to get people to shop for groceries online in a meaningful way. But even so, while digital’s share of total grocery sales more than doubled during the pandemic, nearly all online shoppers still buy in brick and mortar, where roughly 90+% of all customer dollars are still spent. And, grocery web visits have trended down since March 2021 (source: SimilarWeb and dunnhumby).
Moreover, the growth rate in online vs in-store visits grew significantly early in the pandemic, but since about the time the vaccines were made public, the growth gap has started to close (source: SimilarWeb, Placer, and dunnhumby).
There is no doubt that eCommerce matters in grocery today and will play a bigger role in the future. But it matters more for some retailers than others and the investment and focus for each retailer should reflect this reality. It is worth noting that there are several banners that score very low on eCommerce in our RPI study, yet they continue to compete financially and have industry leading emotional connections with their shoppers. This includes Trader Joe’s, Market Basket, Aldi, Fareway and Winco. Each offers strong value across price, product and store experience, which for many shoppers is more important than ordering groceries online.
No matter how good the retailer’s eCommerce app or website, if the prices and products do not align with the shoppers needs, it will be challenging to drive the necessary incremental growth needed to pay for the eCommerce investment. Moreover, inflation and price sensitivity are already increasing and will likely be with us for at least another year or two. This will likely make it more challenging for shoppers to pay fees for delivery or click and collect, which will further erode the profitability of this channel.
Grocery is a trillion dollar plus market and the variation of retailers and customer needs allows for many different value propositions and channels. Some may need a top-notch eCommerce solution today, but others can compete on other dimensions, such as competitive prices, value-focused private brand products, superior locations, and their community connection. There is also the option of evolving their eCommerce solution over time as it becomes more important to the customer base and somewhat more profitable. It is also likely that future eCommerce solutions will be more customer friendly, less expensive, and more battle tested.