The full-assortment grocery space changed in June 2017 when Amazon announced its intention to acquire Whole Foods for $14 billion. In the subsequent years, Amazon has made largely predictable moves with Whole Foods, offering discounts to Prime customers, selling its 365 Everyday Value brand across Amazon, and replacing Instacart delivery staff with Prime Now couriers in Whole Foods stores. The bigger impact of Amazon’s acquisition of Whole Foods, thus far, is that it lit a fire underneath brick-and-mortar grocers.
The state of online grocery
In 2017, U.S. online shoppers spent more than $10 billion on groceries, accounting for roughly 1.5 percent of U.S. grocery sales. This represented growth of 40 percent compared with 2016. The average size of the typical CPG order, though, is tiny compared with the typical offline grocery basket. In 2017, the average CPG order was just $58, with large, club-like pack sizes of a relative small number of items.
This is principally driven by a dominant Amazon, which enjoys a 45 percent share of online CPG sales, but offers its Prime members free shipping on orders without a minimum order size. Shopping for CPG items online is commonly described as a ‘spearfishing’ exercise, where consumers buy the one item that they have in mind, unhindered by their offline desire to leverage their trip to the grocery store.
What is driving this growth in CPG order sizes? The growth of the full-assortment online-grocery channel, which accounts for less than 5 percent of online CPG orders, but has average order sizes twice that of the traditional .com CPG order shipped from a remote warehouse via third-party shipper. And those orders are growing more than three-times as quickly as traditional .com CPG orders.
On the order-size front, traditional .com CPG order sizes have been flat, up 3 percent in two years, compared with full-assortment online-grocery order sizes that were twice that of traditional .com CPG orders, as illustrated in the chart below. The drop in order sizes that we’ve seen in full-assortment grocery, from $106 to $102 over two years, is the result of the other big change that we have seen in online-grocery market over the past three years, expansion and improvement of retailers’ click and carry operations.
Click and carry versus delivery
In 2014, Walmart launched its first Walmart Grocery Pickup store, in its hometown of Bentonville, Arkansas. Shoppers in that market were able to place online orders for fresh, frozen and shelf-stable grocery items online and pick those orders up the same day.
From this modest beginning, Walmart has been scaling this capability to a growing number of stores, expecting to reach more than two thousand stores by the end of 2018. Walmart wasn’t the first to offer this capability – it had been available at Peapod and other brick and mortar grocers for years. But as the biggest grocery retailer in the U.S., this was a consequential move.
When we looked at the numbers, we saw that the growth of click and carry is the biggest catalyst of growth in the online-grocery category. In the 12 months ending March 2018, 46 percent of orders in the full-assortment grocery channel were through click and carry, up from just 18 percent two years prior.
Because click and carry is currently less expensive for retailers than delivery, retailers have used price incentives to encourage shoppers to absorb the last-mile expense and pick up orders in stores near them. Kroger charges a $5 service fee.
This compares with delivery fees generally in the $10 range. And retailers generally force higher minimum order sizes on consumers for delivered orders than on click and carry. The end result is that average order sizes for click and carry orders are significantly lower than delivery. In the 12 months ending March 2018, the average order size for delivered full-assortment online-grocery orders was $156, compared with just $138 for click and carry.
The ultimate role that click and carry will play in the online-grocery category is a subject of much debate. While this debate will continue for years to come, a world where both options are available to consumers defines today’s grocery landscape.
Download our whitepaper for the full analysis on which fulfillment model will dominate, who’s winning in full-assortment grocery, and what the future holds for the grocery channel. Download whitepaper.