story by Kim Souza
ksouza@thecitywire.com
Online grocery sales continue to grab headline media attention in the U.S. but they remain a small part of the overall market, according to Fitch Ratings.
Fitch analysts don’t see the needle moving significantly in the foreseeable future, citing that online grocery sales account for roughly 1% of the $631 billion U.S. grocery market.
“It’s one of the lowest penetrated categories. Broadly assuming online grocery sales grow at 10% to 15% annually (which is faster than recent growth rates) compared with estimated 3% annual growth for the total market, online sales would grow to only 2% to 3% of the grocery market in the next decade,” noted Phillip Zahn, senior director at Fitch Ratings.
That said, Fitch expects there will be some players to gain share in this category. Existing online-only players like Fresh Direct and Peapod are expanding into new markets but do not offer services anywhere near Northwest Arkansas or 90% of rural America. Amazon is expanding its “fresh” food offerings and Wal-Mart is stretching the boundaries of grocery delivery in test markets this summer, which is likely to payoff in additional market share, according to Fitch.
Bill Simon, CEO of Walmart U.S., recently said the economics of online grocery delivery only work in densely populated areas. He said Wal-Mart is still testing it in a couple of markets, but will remain committed to its own “fresh” campaign and traditional grocery model for the time being. He said if someone else wants to spend their money testing this more broadly, that’s fine with Wal-Mart.
“We have the store count and logistics capabilities to roll it out quickly after the demand is proven,” Simon said.
ASDA, Wal-Mart’s brand in the United Kingdom, has had a successful online grocery business for several years. Simon said the U.S. market density is not there at this time.
Fitch notes several reasons why online grocery sales are not growing more rapidly across the U.S. Near the top of the list is a consumer resistance to delivery fees that can range $6 to $10 per order.
“Most consumers will conclude that the convenience of having their groceries delivered is not worth the added cost,” Zahn notes.
He said online grocers are also confronted by difficult economic factors such as hefty upfront investment costs, logistical challenges associated with delivering perishables, and the inherently low margins associated with the grocery business.
“These factors will limit the number of new market entrants as well as the pace at which existing players expand,” Zahn said.
In a June 20 conference call with analysts, Rodney McMullen, president and chief operating officer of Cincinnati-based Kroger, said Kroger continues to work on getting the scale and profitability needed to make e-commerce a viable service for the company. They have experimented in the Denver market for several years and report modest results. Kroger, a traditional grocer, is the No. 2 retailer in the U.S., according to Stores Magazine.
Wal-Mart, a big box general merchandiser, is heavily invested in grocery. Last year Walmart U.S. had total sales revenue of $274.5 billion, 55% or $150.98 billion of that was grocery.
Kantar Retail analysts said Wal-Mart has become a glorified grocery store and will continue leaning that direction as it expands its Neighborhood Market footprint over the next two years. And home delivery is just one aspect that all retailers will be facing in the future.
Amazon tested its grocery delivery service in Seattle for six years before recently expanding to a limited part of the Los Angeles market.
Fitch expects brick & mortar retailers like Wal-Mart and Kroger to take a more measured approach until the economics of home delivery have proven themselves.