SUMMARY: Four mega trends—convenience, Generation Y consumers becoming of age, increased broadband penetration and customization—have come together to fuel growth in the online grocery market. While the online channel is still small for the food and beverage sector, it is poised for growth. What are the key drivers behind the revitalized online grocery movement and how do consumers use the web, social media, and other online tools to plan purchases? Now is the time for retailers and manufacturers to maximize opportunities in this re-emerging market.

Since the early days of the Internet, companies have tried to capitalize on online grocery. Some have failed, some have held their own, but none have revolutionized the way consumers think about shopping for groceries. But now—almost a decade after the dot.com bubble burst—online grocery is beginning to show resurgence, powered not by venture capital dollars but by sustainable growth plans, broadband Internet and increasing consumer interest.

Online grocery shopping is poised for growth, currently at the intersection of four key mega trends:

1. Convenience—the growing need for convenience has already transformed the packaged goods industry
2. Generation Y—Gen Y shoppers are approaching grocery-buying age, and are comfortable doing so online
3. Broadband Internet—Almost two-thirds of Americans have broadband Internet access, making online grocery shopping easier and quicker
4. Customization—Digital platform allows online grocers to personalize the shopping experience

Poised for growth
With approximately $3.75 billion in online sales in 2008, online is a small but expanding channel for the food and beverage industry. Even though the majority of grocery shopping occurs offline—online purchases accounted for less than 1% of all food and beverage sales in 2008—on average, shoppers tend to spend twice as much online as offline when making food and beverage purchases.

Three variables lead to bigger basket sizes:

• Free shipping and minimum order requirements encourage shoppers to spend more
• Online grocery shoppers tend to be upscale shoppers and purchase expensive, niche products
• No heavy lifting—shoppers avoid lugging groceries

Shopper profiles
Two key differences distinguish the current online grocery shopper from their offline counterpart: income and household size. Online grocery shopping skews to upper-income “established” adults ($100K income per household) residing in smaller households (1-2 members) with no children. These consumers are more willing to pay the shipping fees and premium prices typically associated with online grocery shopping in exchange for the convenience and other benefits of online.

Time-starved large households, on the other hand, represent an untapped opportunity. Online grocers need to ensure that the process is easy and convenient enough to address the hectic lifestyles of large families.

Convenience drives satisfaction
While the majority (70%) of online shoppers reported having a positive shopping experience when purchasing groceries online, some attributes weigh more heavily than others as important drivers of satisfaction, as reported in a March 2009 Nielsen survey. The research revealed three key motivating factors that entice consumers to shop for groceries online: convenience, product selection and pricing.

Convenience—consumers like the ease of filling up a grocery cart with a click of a button any time of day, from any location. Online shoppers can stock up on staples without carrying heavy packages. Many online grocers offer automatic replenishment options so the consumer never runs out. Finally, online grocery shoppers avoid commuting, crowds, waiting in line, and inclement weather.

Product selection—virtual shelf space allows grocers to offer a wider product selection and in-depth product information, which is especially helpful for shoppers with dietary restrictions.

Pricing—comparisons are easier to do online, and running shopping-cart tallies help buyers stick to a budget and avoid impulse buys.

Frustrating fees and wait times
While shopping online has clear benefits, there are some barriers that impede acceptance. In the Nielsen survey, 65% of respondents indicated that the cost of shipping was the biggest barrier to purchasing groceries online. Additionally, a lack of control concerns some shoppers. Not only can shoppers not personally choose products, but waiting for the delivery can be perceived as countering the time-savings and flexibility of shopping online. Forty percent of consumers cited waiting for delivery as an obstacle. Other obstacles include issues with security/privacy (35%), not being able to use coupons (30%) and a perception of online as more expensive (30%).

Despite the clear benefits, many still consider online grocery shopping an indulgence—some who enjoy it seem a bit embarrassed, characterizing their decision to shop online as a form of “laziness.” As the market matures however, this perception should fade. And while most people are not accustomed to buying groceries online, this too will erode over time as Generation Y reaches grocery-buying age.

Lessons from abroad
The online grocery shopping market in the United Kingdom is more mature than that in the United States. Almost one-fifth (16%) of all British households have purchased groceries online in 2008—double that of American households. Similar to the U.S., online grocery shoppers in the U.K. tend to be more affluent. However, unlike the U.S., British buyers have larger, younger households.

Over the last three years, apprehension about online grocery shopping in the U.K. has shifted from fear of the unknown to practical matters. In 2006, the biggest barrier for British shoppers was not being able to personally choose products. This fear has decreased dramatically, and by 2009, the percentage dropped 15 points from 29% to 14%, providing a window of hope that U.S. shoppers will follow suit as the market matures. Similar to the U.S, the main concerns of British shoppers today include delivery charges and delivery time.

Successful endeavors
There are a number of initiatives that have worked successfully to boost the online grocery market in the U.K. One of the reasons online grocery shopping is more popular in the U.K. is the strong competitive market and heavy marketing support that is driven by four major national chains. Unlike in the U.S., British grocers use traditional media to promote their online shopping services—even creating ads that focus on a particular aspect of the shopping services, such as flexible delivery times.

Additionally, U.K. grocers are national chains as opposed to the mainly regional chains in the U.S., which facilitates ‘national’ pricing and makes it less confusing and easer to compete. Price wars between Tesco and Asda, for example, have driven price down and interest up. Another method used effectively includes the “switch and save” offer. Consumers are presented with similar product pop-ups offering much cheaper alternatives (usually private label brands), which have been known to achieve 40% click-through rates.

Importantly, distribution networks and availability of products have been greatly improved. British grocers are using online shopping to fill in regions where they have less brick and mortar stores. For example, Asda (owned by Walmart) has fewer stores in the southeast region and uses online shopping to fill the gap. Finally, customer service in the U.K. is strong, offering free delivery, allowing customers to choose delivery time slots, and using fewer bags to be environmentally friendly.

Making connections
The digital platform provides grocers with the unique ability to connect with and engage shoppers—value is not limited to grocers selling products online. From product selection to meal prep, shoppers are using the Internet as both an informational and inspirational tool. Online grocery shoppers are more than twice as likely as the average Internet user to read and post product reviews, download coupons, search for recipes online, and access the Internet through their phone.

Grocers can use their website to support the in-store experience by providing digital coupons, shopping lists, recipe ideas, advanced filtering by dietary needs, automated re-ordering and store availability searches. Mobile presents grocers with an additional touch point to engage shoppers via mobile coupons and grocery lists. Grocers need not be responsible for all content on the Web site; they can enlist manufacturers to maintain branded or sponsored sections of the web site. For example, a health-oriented brand could power a calorie counter on the grocer’s site, or an ingredient manufacturer might sponsor podcasts with celebrity chefs.

The bottom line is that online grocery represents a largely unrealized opportunity, but grocers must work to build awareness and establish the value proposition. The process needs to be easy and convenient, and online grocers must educate shoppers about the benefits in simple terms: buying groceries online saves time and money—two considerations that every shopper is looking for.

Download: Nielsen Online Grocery Report [pdf]

Perhaps as a sign of the times, the second and third fastest growing sectors were food and cooking, which saw a 56 percent increase in unique UK visitors, and coupons and rewards, up 55 percent.  Promotions offering discounts on holidays boosted traffic to Ribena’s site, from 12,000 unique UK visitors in July 2008 to almost 950,000 in July 2009.  Coupons and rewards web sites saw 10.9 million visitors in July 2009, up from 7 million a year ago.  The ability to earn reward points or getting discount vouchers towards purchases drove traffic to sites such as Nectar and MyVoucherCodes.co.uk.

“Although saving money is a major theme across the fastest growing online sectors, the variety of sectors – from mobile phones to food and cooking, from automotive and health to technology and parenting – shows the diminishing areas of daily life that aren’t being significantly enhanced or touched by the Internet.  Strong growth online isn’t just about social media,” said Alex Burmaster, Communications Director at Nielsen’s Online Division in the UK.

Read the full press release.

Increases in wine and alcoholic beverages indicate that consumers are opting to consume their favorite beverage at home too. At the same time they are continuing to avoid discretionary items, according to the latest monthly update of U.S. Retailing & Consumer Trends from The Nielsen Company.

The non-edible departments were the greatest contributors to an overall 1.2 percent unit sales decline at food, drug and mass-merchandisers, during the 52-week period ending July 11. General merchandise categories suffered most with a decline of 7.9 percent. Non-foods dropped by 3.8 percent and health and beauty aides by 3.5 percent.

Canning and freezing supplies saw the greatest unit sales increases at 18.1 percent followed by seasonal merchandise (8.3 percent), fresh meat (6.2 percent), wine (5.6 percent) and dry mix prepared foods (5.2 percent).

There was also a 3.7 percent unit sales increase in vitamins, a category that typically does well during times of recession as consumers focus on maintaining their own health.

“By and large the categories that are growing the fastest are those related primarily to meal consumption-a notion of back-to-basics,” says Todd Hale, SVP, Consumer and Shopper Insights at Nielsen. “It’s also interesting that the No. 1 item on the list is canning supplies. There’s been resurgence in consumers growing their own fruit and vegetables and canning them.”

Across all departments, dollar sales over the latest 52-weeks experienced a 2.7 percent increase, which was mainly seen in edible department. Fresh meat had the largest increase at 9.7 percent followed by packaged meat (6 percent), dry grocery (5 percent) and alcoholic beverages (4.6 percent). Discretionary departments and the dairy department, which has experienced significant price reductions as a result of falling commodity prices, ranked in at the bottom of the dollar growth scale. Non-foods (3.1 percent) and health and beauty aides (0.1 percent) showed little growth. Dairy (-1 percent) and general merchandise (-5.0) were the only departments reflecting loss.

“As prices for many commodities have dropped this year, retailers are slashing prices broadly to lure shoppers who are very focused on value and low prices,” said Hale. “As their competitors follow suit with price cuts, we are already seeing a number of retailers struggle to maintain positive same-store-sales growth.”

While food staples were also prevalent in the top-15 dollar growth categories, seasonal merchandise and canning and freezing supplies saw the largest increases with 34 percent and 27 percent growth respectively. Dry vegetables and grains, flour, and pasta, all with gains of 18 percent or more, rounded out the top five.

Moving forward, “we’re going to continue to see consumer restraint in terms of where they shop and how they buy,” said Hale. “Food and beverage categories will continue to do reasonably well. Those manufacturers selling discretionary categories are going to have to work very hard to give consumers a reason as to why they should be buying now.”

These changes present a range of challenges for retailers and consumer goods manufacturers, namely, how to adapt to the new environment and continue to grow while watching costs. 

“The industry is at an inflexion point — a time when new habits are being created — and the next 12 months holds both challenges and opportunities in the grocery channel,” said Chris Percy, Managing Director – Consumer Group, Nielsen Pacific.

Nielsen’s Special Report: Forces of Change explores the changes sweeping the Australian grocery channel. Pulling together a range of exclusive data, the report analyses how Australians are spending their money in a difficult economy, which product categories are showing growth and how marketers and manufacturers need to fully understand their customers, the changes taking place and how to reach their targets more effectively.   

Read Nielsen’s Special Report: Forces of Change, which appeared in the July 20-31 edition of Retail World.

Over the latest six (4-week) periods ending 5/16/2009, store brand unit sales averaged a 5.7% increase in consumer-packaged-goods departments tracked by Nielsen in food, drug and mass-merchandisers (including Walmart).  Most of this growth is from edible departments (i.e., fresh meat, fresh produce, packaged meat, dairy, dry grocery, frozen and deli).  While branded unit sales declined, on average by 3.1%, unit sales in the last two periods were up 2.2% and off 1%, respectively.  While this is not a definitive sign that brands are turning the tide in our down economy, it is definitely a positive sign for brand marketers.  Departments contributing to the largest declines in branded unit sales are mostly non-edibles (i.e., health & beauty, non-food and general merchandise), but the dry grocery department is having growth challenges too.

For the latest annual period, store brand unit sales reach a 21.3% share and we see share gains in all departments.  However, this means that branded products still drive the vast majority (79%) of unit sales.  Store brand unit shares range from a high of 40% in the dairy department to a low of 1% in alcoholic beverages.

As we look at the last quarter within the latest annual period, we see unit growth improvements for both store brands and branded departments, but branded sales are negative in most departments.  But the fact that branded unit sales trends are improving is a sign that manufacturer actions in the areas of new products, promotions and advertising are impacting consumer purchase decisions.

It is also interesting to see how the categories driving the greatest unit brand growth are food and beverage categories, the same pattern as noted for store brands.  The categories struggling the most are mostly discretionary categories.

Successful manufacturers will be those who dig deeper into these data and collaborate with their retail partners to drive both brand and store brand sales which yield stronger overall category sales.

Highlights of the report include:

• Food labeled as “natural” generated $22.3 billion in sales in 2008, up 10% from 2007, and up 37% from 2004
• Organic foods (UPC-coded) accounted for $4.9 billion in sales, up 16% from the year before, and up 132% since 2004
• Foods that tout antioxidants produced $1.9 billion in sales, up 11% in 2008 and up 147% since 2004

• Foods that are targeted to those who are “carb conscious” saw sales decline 3% in 2008 to $2 billion, and declined 31% since 2004

• Hormone/Antibiotic-free foods saw sales grow 11% in 2008 to $2.4 billion, an increase of 66% since 2004

• Caffeine content seems to be less of a concern: sales of beverages labeled “caffeine free” declined 3% in 2008, and 5% since 2004

“Although much is written about organics, products labeled “natural” generate much higher sales.  In fact, sales of products labeled “organic” leveled off significantly in 2008 after four years of solid growth,” said Tom Pirovano, Director of Industry Insight at Nielsen. “Looking at the year ahead, it will be interesting to see how the economic downturn affects sales of foods and beverages that are primarily described as organic, which, for many consumers, have a reputation for being more expensive than other foods.”

When looking at specific types of food, Nielsen found several interesting facts, including:

• Milk represents 25% of all “fat free” sales although fat-free milk only makes up 18% of milk sales
• Cheese labeled “natural” represents 69% of all cheese sales and 32% of all “natural” food and beverage sales

• 38% of snack foods are described as saturated or trans fat-free

• Beer labeled as “reduced calorie” accounts for half of all beer sales and 41% of sales of food and beverages labeled as such

• 54% of all cereals are labeled as “whole grain” and cereals make up 40% of all foods described as such

Nielsen’s LabelTrends service tracks health and wellness claims for nearly every food product that passes through U.S. cash registers, including 55,000 items labeled “natural” and 21,000 items labeled “preservative-free.”

Sales of standard sliced white bread have climbed sharply since August 2008 – as much as 55% in one month. Baked bean sales rose 22.6% in December 2008 compared to a year earlier, leading some analysts to conclude that the traditional British beans on toast meal is replacing a more substantial meal.

Interestingly, sales of olive oil, once considered a luxury product, showed growth of 6.5% in December 2008 versus 2007, suggesting that consumers have come to believe that it is an essential part of cooking at home.

Not surprisingly, categories that are considered “luxuries” have shown a decline, including sparkling wines (down 2.3% in December 2008), champagne (which is not included in the sparkling wine category).  Sales of organic products fell by 11% in December.

The good news for grocers is that sales of their own private label brands have shown tremendous growth as consumers discover the value offered by them.  From August to November 2008, monthly sales in this category have risen by about 30%.

“Budget own labels are big news at the moment.  Retailers will put more support behind their own label lines and will introduce more product variety, so I expect solid growth in this category all year,” said Danielle Tolson of Nielsen’s Consumer Group in London.

Follow more consumer trends with the Nielsen Consumer Survival Plan.

These “power moms” are also 51% more likely than average Web users to provide frequent online advice on clothes and fashion, food and beverage products (39% more likely than average), home decorating (36% more likely than average), and health, dieting and exercise (27% more likely than average).

“We’re seeing women using online avenues like email, online forums, and social networking websites to extend a role they’ve long held as information seekers and relationship builders,” Chuck Schilling, research director, agency and media analytics, Nielsen Online, noted.  “Moms, in particular, look to the Web to connect with other parents for tips and support, and they aren’t afraid of new technologies – this group is nearly 25% more likely than average to author a blog.”

In September, Scholastic.com and BirthdayExpress.com tied as the number one website, ranked by index, among the “power mom” demographic, with a composition index of 366 — more than 3.5 times the average.

General Mills, The Gap, and FamilyFun.com rounded out the top five sites that draw a high concentration of “power moms.”

View the full press release.

Read coverage of Nielsen’s findings in BizReport and Promo magazine.

Record high fuel prices, soaring commodities costs, and declining consumer confidence have changed the way U.S. consumers shop, according to a recent Nielsen consumer survey.  

Results from the survey indicate that 63% of U.S. consumers have reduced their household spending this year. 

The findings also suggest that consumers will continue to combine shopping trips, eat at home, and seek out at-home entertainment.

Of those surveyed by Nielsen, 78% said they are combining shopping trips and errands — a 10% increase over last year.  Fifty-two percent of respondents reported eating out less — up 14% over last year, while 51% said they are opting to stay home more often — up 12% over last year.

Retailers and manufacturers serving lower income consumers are likely to feel the greatest impact, as these households make more drastic spending reductions. 

In contrast, private label products and low-priced branded products may actually benefit from consumers’ cost-cutting initiatives.  According to Nielsen’s survey, 35% of consumers plan to buy less expensive grocery brands — up 16% over a year ago. 

Online retailers, electronic stores, supercenters, warehouse clubs, dollar stores, and liquor stores all showed an increased number of trips in 2008, as shoppers sought out a mix of value, variety, and convenience.

View complete data from Nielsen’s “Gas Price Impact” survey.

Read more about private label sales in convenience stores.