Transformation in Grocery

Ubiquitous Commerce

Grocery in the Connected Economy

Today, only 1 percent of grocery transactions occur online, about half the total digital retail market. But as the connected economy matures, growth in online grocery sales is set to accelerate—increasing 17 percent by 2023 and over 20 percent by 2018. This rapid acceleration outpaces the three percent growth experienced by physical supermarkets during the same timeframe. 

In this piece from Razorfish, we highlight the impact of significant trends occurring in the purchase of food items through digital retailers as consumer adoption accelerates in subscriptions, click-and-collect and even home meal-kit delivery services:

  • The foodie culture goes mainstream
  • Fragmentation in the grocery model 
  • Grocers and manufacturers rethink
  • Their business models
  • Conclusions and recommendations

The trend

As shopper behavior trends toward new digital services, online grocery shopping is poised for rapid growth. Twelve percent of consumers already report ordering grocery items for household delivery, and another 55 percent say they plan to do so in the future. This means we could see two out of three households ordering online grocery and delivery in the near future. Fifty-seven percent of this same group say they plan to order online for in-store pickup as the requisite capabilities of their favorite retailers improve.

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The Foodie Culture Goes Mainstream

Just 8 percent of millennials say they would cut back on groceries, even in challenging economic times, as they adopt tools to help them realize their food-obsessed lifestyles (favoring those that add convenience and value since these same shoppers still describe themselves as thrifty). Now, services such as Amazon Prime, AmazonFresh, Peapod, Blue Apron and others are in fierce competition to give these shoppers what they want, when they want it, as evidenced by a skyrocketing number of last-mile delivery services.  

Convenience, value and speed are in constant flux as shoppers alter their decisions as to how, when and where to buy groceries over the course of a week or month. Shoppers also move seamlessly between services, online and off, in a quest to find the best value. In response to this new shopper reality, the once simple landscape of grocery retail is starting to fragment. This fracturing of traditional models will cause manufacturers and retailers alike to be very deliberate in the coming years with their sales and marketing strategies. For example:  

The grocery model will continue to fragment

As shoppers span multiple channels to balance their needs between value, convenience and speed, the traditional grocery model will continue to fragment. 

For the purpose of this discussion, buying grocery items online is not the same as online grocery shopping. Both are/will be important business drivers, but the approach and solutions to expand each will be very different.

1. Traditional grocery

Traditional grocery channels will continue to dominate in both dollars spent and number of transactions. To fuel growth, traditional grocers will need to make adjustments in their business models as markets change. Digital will be the largest (and continuing) impact on traditional grocery. Mobile will influence $1 trillion in U.S. retail sales and consumer spending. Influence from digital channels is expected to grow from $1.2 trillion to $1.6 trillion by 2020. 

2. Click-and-collect

Starting in 2016 and beyond, the participation in click-and-collect is expected to grow dramatically, with a large group of shoppers saying they are willing to give it a try in the coming year. This can be a bonus for retailers who handle it correctly, as Walmart discovered during Holiday 2015 when 69 percent of shoppers purchased additional items while in-store to collect their purchases. Finally, click-and-collect shoppers, as we know from the U.K., rely heavily on repeat purchases from populated lists. For example, Tesco is currently generating 13 percent of its revenue from these purchase types.

3. Online food-item shopping

A large growth area will be the continued adoption of online shopping for nonperishable food items through a variety of retailers. These retailers will provide price competitiveness, expanded selection and stock-up sizes to their shoppers, helping them to reduce trips to the store. CPG is the fastest-growing category for online sales (at 42 percent in 2015) and is growing at more than double the pace of offline sales. Grocery accounts for a large portion of this growth, with three of the top ten product categories being nonperishable food items. 

4. Online grocery shopping

Online grocery, as mentioned above, is seeing major adoption by shoppers under the age of 35 and who are centered in mostly urban areas. This type of shopping will move from a niche (i.e., affluent) audience to the mainstream. Many of these services, once ingrained in a shopper’s lifestyle, become trusted partners to recommend product, recipes and usage occasions. Completely replacing a trip to the store is a big convenience, especially for the millennial audience, 84 percent of whom shop only once a week or less.

5. Service-based grocery

Services based on food and meal preparation will continue to grow and find their place in this new, fractured marketplace. As of 2016, there are more than 170 options for meal-kit delivery, and it already accounts for $1 billion in market sales. This service-based segment will be an important channel for “product placement” and extension of “usage occasions” to drive influence with shoppers who will then add these items to their normal grocery list or online purchases.

Amazon Fresh Grocery Delivery.

Source: Geekwire

 

Grocers and Manufacturers Rethink Their Business Models

In addition to channel fragmentation, retailers and manufacturers will experience a variety of disruptions impacting how they will market, merchandise and sell in years to come. Three disruptions that may cause the most immediate impact are described below.

1. Challenger brands/private label 

The largest driver of disruption during the next five to ten years will be new and “challenger” brands. Much like Warby Parker in the eyewear space, these brands will have hopes of overinvestment in new channels to take share and create awareness without the traditional in-store shelf space and merchandising expense. It will be important for established brands to defend their category leadership positions to ensure their fair share of new channel growth. It will also be important to deliver a consistent brand experience across all channels to build shopper trust and to avoid being defined by the competition. 

Of additional concern in some food categories will be the increased adoption of private label. Within CPG and food categories, usage continues to grow, with one-third of shoppers reporting an increase in buying private label products. 

This group of buyers, that prefers (and in many cases, advocates) the private label brand, outweigh those that go back to their traditional brand choice, evidence that private label purchases are poised for growth.

Example: Amazon sells  its own line of food items including Happy Belly (nuts, trail mix, tea) and Mama Bear (baby food), undercutting  its competition by avoiding traditional retail distribution and shelf-space costs.

2. Food videos

Another driver of disruption: the expansion of food usage occasions, recipes and meal solutions, all presented via video in social channels. Big players such as BuzzFeed’s Tasty videos have been viewed more than 152 million times each, and its Facebook page has 50 million likes with engagement growing by the month. Brands will need to compete in the new service and experience economies to create relevance and participation in the lives of the changing consumer. These videos are being consumed across all demographics and are influencing every aspect of the grocery selection (and buying) experience.

Example: Get in My Belly launched in November 2015 with recipe videos, which are produced by curating recipes found on the Web, or sourced from family and friends. Since its launch, the site  has racked up nearly 650,000 likes on Facebook, and its most popular recipe to date has been a s’mores brownie.

Recipe Video

Source: Buzzfeed

3. CPG subscriptions

Shoppers are subscribing to a variety of CPG items for their homes, and retailers are making it increasingly easy by setting up auto-fulfillment services. Amazon’s Subscribe & Save has been mimicked many times. Furthermore, the addition of its Dash buttons (push to reorder) and voice-operated Echo units make reordering easier than ever. Not to be outdone, subscription-based brands have been seeing great success outside of the traditional retail model. Currently 14 percent of global respondents say they use an automatic online subscription service, but more important is that more than half (54 percent) are willing to do so in the future. Subscription is a win for brands, with more brand-loyalty and higher consumption for their CPG products. However, for those on the outside looking in, getting into a household’s subscription or replenishment schedule will present new challenges moving forward.

Examples: P&G is beta testing Tide Wash Club, a subscription service for the company’s dissolvable Tide Pods capsules that offers free shipping for regular deliveries. If this test succeeds, it is likely that a number of other household brands from P&G will follow in Tide’s footsteps.

Unilever recently acquired Dollar Shave Club, a successful subscription business that has grown quickly over the past few years by offering high-quality grooming products to men at far lower prices than traditional retail

Dollar Shave Club.
Source: Dollar Shave Club

Conclusions and Recommendations

Now is the time to innovate

As attitudes, influences and behaviors around food continue to evolve, the marketplace of retailers and brand manufacturers will need to innovate to stay relevant with today’s shoppers. Fragmentation of the grocery channel will necessitate a wider array of strategies and tactics across the digital landscape, where the majority of influence now takes place.

At the same time, traditional grocery store visits will continue to dominate, but retailers and brands alike will need to take new approaches to maintain share and loyalty. Finally, indicators point to massive adoption in digital commerce for grocery, subscription and click-and-collect by 2020, which means that the time to act is here and the learning curve steep. 

New challenges will continue to emerge

For retailers and CPG manufacturers, this expanded grocery landscape will present a continuing wave of new challenges in the way they market, sell and position their products (and stores). Razorfish has extensive experience working with both sides to help create innovative strategies, digital tools, content, social, media and digital commerce platforms to help businesses tackle their unique challenges. Following are key considerations for how to win in each new channel.

Traditional grocery: With the expansion of digital influence and knowing the majority of CPG searches are already on mobile devices, it will be important to reach out to shoppers via owned and retailer digital tools. These tools present the opportunity to provide value via product curation, store locators and digital promotions. Brands can also co-create functionality within retail partners’ digital ecosystems using bespoke action plans against top retailers to leverage these unique capabilities. 

Most important for brands will be to win the digital shelf by becoming the “single URL of truth” for all of their products, controlling how they are perceived and presented everywhere. 

Click-and-collect: Retailers and brands can work together to train their key consumers to utilize these services, understanding the benefits to both. Brands will see increased loyalty via list repurchase, and the retailer stands to gain from additional purchases at the store. Together, retailers and brands can co-create functionality, such as reminders for fulfillment with past purchasers and those who shop in specific categories, helping to retain shoppers. 

For brands specifically, strategies to get on the reoccurring list (and staying there) can drive loyalty and repurchase.

Online single-item purchases: As previously mentioned, grocery has half the digital commerce penetration of other products, which means many existing shoppers (up to 60 percent on Amazon alone) are already digitally shopping, but not in CPG, grocery or food categories. Driving awareness among this group will be key to expanding digital purchases of grocery and individual (nonperishable) food items via traditional digital portals.

Brands and retailers alike can work together to create “stock-up” or “online-only” SKUs to help reframe the value equation for shoppers while providing the convenience of an online purchase.

Online grocery: Understanding the landscape of big (AmazonFresh, FreshDirect) and specialty (Thrive Market) online grocery in a rapidly expanding retail marketplace will be key to success. These services are expanding their reach and building tools to improve shopper efficiency. Communicating and connecting with this new group of adopters, who will push online grocery shopping into the mainstream, will be a priority for successful businesses.

Food brands will need to leverage their deep content (recipes) and breadth of brands to bring service and utility to these customers as they integrate into the retailer’s existing digital commerce ecosystem.

Service-based grocery: This category is most important for brands, since these services are retail channels unto themselves. While this channel will never drive significant revenue or unit sales, the influence for purchase across other channels will be tremendous, as noted earlier. Brands will need to tie bespoke communication of each offering into the larger value proposition of its core service.

Early on, it will be necessary to create a number of tests in the hope of developing programs that will work across multiple services and drive traffic or tie in with owned digital offerings.

 Research sources 

  1. Digital Touchpoint Investments Significantly Influence US Retail Sales. Forrester Research, 2016
  2. The Future of Grocery, Nielsen Global e-Commerce, 2015
  3. Like it or not, ‘click and collect’ is here to stay, CNBC.com, 2016
  4. Tesco internal reports, 2014
  5. CPG E-Commerce Sales Soared 42% Last Year, Advertising Age, 2016
  6. The Retale Millennial Grocery Report, Retale Perspectives, 2016
  7. Sales of meal kit subscriptions surge and show no sign of slowing, Food Navigator USA, 2016
  8. Shopperculture.com, Integer Group / MARC research, February 2015
  9. Hands and Bowls and Melty Cheese!, The Washington Post, 2016
  10. Global eCommerce and the New Retail Survey, Nielsen, 2015
  11. Can subscription services help CPG marketers find mobile success? Mobile Marketer, 2016
  12. Majority of CPG research is Done on Mobile, McKinsey, October 2015

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