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]

“Trading over the summer has been volatile, but the underlying trend is a slowing of top line value growths.  Food retailers continue to rely on promotions and price cuts to draw in shoppers, a strategy that seems to be working for most chains as penetration has increased,” said Mike Watkins, Senior Manager, Retailer Services at Nielsen.

Waitrose and Morrisons recorded the strongest growth in value sales during the twelve week period (11.4% and 8.1% respectively), while the launch of Tesco’s Clubcard in August has helped increase spend per visit by 5 percent as shoppers seek to maximize spending within the store.

Overall, men are substantially increasing their average dollar basket size across all channels – especially in grocery where they have increased spending by 56 percent over a five year span.  And while a high percentage of dollars spent by men are in predictable categories such as alcoholic beverages, grooming care and pre-shave products, more than half of the principal male’s shopping basket consists of items that indicate they are shopping for the family, such as canned seafood, refrigerated juices, lunch meats and dishwashing aids. 

As a result of this growing trend, marketers need to evaluate the importance of men’s purchase volume for their brand and those of competitors and determine whether their current media mix reaches these purchasers.  By learning more about where and what these consumers buy, they will be better able to guide brand positioning and media targeting to capitalize on this target when they are in the aisles.

Read more about male shopping patterns in the current edition of Consumer Insight.

Last June, we fielded a survey to our Nielsen Homescan panel which included a question asking primary shoppers about their tendencies for reading labels on food and beverage packages.  Just under two-thirds of U.S. households (61%) agree completely or agree somewhat that they read these product labels, with 31% agreeing completely.  And as you might expect, we do see some differences when we drill down across demographic groups, but we thought it would be interesting to also look at how shoppers at various retailers differ in terms of reading labels.

Here are the demographic groups who tell us they are more apt to read labels and whose response indexed 10% or higher versus the average household response.  No surprise here: better educated, older (probably needing to look at labels due to a health condition), higher income, and those in a professional/managerial occupation.  Is there an opportunity to increase font side on package labels to help older consumers decipher product ingredients?

% Households agreeing completely to “usually reading labels on food & beverage packages”:

• Total Households:  30.5%
• Female Head College Grad:  36.0% (118 index)
• Female Head Age 55 to 64:  35.0% (115)
• Female Head Age 65+:  34.8% (114)
• Incomes of $100k+:  34.1% (112)
• Professional/Managerial:  34.0% (111

Here are the demographic groups least likely to read labels and whose response indexed 10% or lower versus the average household response. These groups were blue collar, lower educated, families with kids of all ages, and larger families.  I suppose it makes sense that those larger, on-the-go families, who are managing tight budgets with more mouths to feed, are less likely to read labels on a regular basis.

However, it is disturbing given childhood obesity rates in this country, but also a good reason why I am pulling for the Guiding Stars program deployed by Delhaize banners to simplify the recognition of healthier products.

• Blue Collar:  24.8% (81)
• Female Head Not High School Grad:  24.9% (82)
• Families w/kids 13 to 17:  25.5% (84)
• Female Head Age 35 to 44:  26.0% (85)
• Families w/kids 6 to 12:  26.3% (86)
• Families w/kids under 6:  26.7% (88)
• 3 to 4 members:  27.1% (89)
• 5+ family members:  27.4% (90)

Here are the retailers whose shoppers (based on shopping in a retailer at least once over the year-ending May 2, 2009) were most likely to read labels and whose response indexed 10% or greater versus the average household response.  No surprise seeing Whole Foods top the list.  With Publix stores located mostly in the state of Florida (our oldest state) it ties with the above demographics insights.  Costco and Safeway probably benefit from a combination of their higher income draw as well as from focus on better-for-you offerings.

• Whole Foods:  52.4% (172)
• Trader Joe’s:  42.9% (141)
• Publix:  35.6% (117)
• Costco:  33.5% (110)
• Safeway Corp Grocery (all banners combined):  33.5% (110)

I’m happy to report that no retailer we tabbed had a response with an index of 10% or lower versus the average household.  However, only 26.8% of households who shop a Tobacco Store (index of 88) agree completely with usually reading labels.  These shoppers obviously forgot about reading labels a long time ago.

For further information or to arrange a comprehensive presentation on consumer shopping patterns, please contact Todd Hale at todd.hale@nielsen.com or 859-905-4615.

The average household has increased overall spending in these categories by 14 percent, with fresh food spend registering an average of 15 percent growth, with the biggest increased among high-income households.  Seventy percent of Singaporeans survey said they changed the way they spend their money with a view toward increasing savings.  Almost 75 percent of shoppers said that they now “buy only the essentials” and were making fewer purchases of chocolates, carbonated soft drinks and salty snacks.  Basics such as rice, bread, cheese, butter/margarine and infant milk were some of the fastest growing categories.

“Modern day Singaporeans lead hectic lifestyles and are generally tight for time, and convenience is the key driver when deciding where to shop.  Supermarkets and hypermarkets meet their needs as shoppers are now able to get all of their fresh food, grocery and household needs under the same roof,” said Ooi Pin Pin, associate director, retailer services for Nielsen Singapore.   As a result, these outlets have seen their sales of fresh foods post solid growth, while traditional wet markets have continued to decline.

Read the full press release on how Singaporeans are changing how they shop for food here.

Grocers, drug stores and mass merchandisers are seeing strong growth in store-brand items.  Unit sales of those items grew an average of 4 percent in the last six months of 2008, led by dairy, packaged meats, frozen foods, deli, dry grocery and beverages.  Meanwhile, branded items declined an average of 3.3 percent during the same period, with all categories except for fresh meat showing drops.

Unit sales during 2008 declined 1.3 percent across the store, with the largest declines among non-edibles.  Unit sales of health and beauty, non-food and general merchandise dropped 2.7, 3.7 and 6.7 percent, respectively.

Store brand sales continue to be strong, as consumers realize their quality and value, as well as the increased range of products available.  Nevertheless, store brand sales slipped slightly in the last month of 2008.  At the same time, sales of branded items declined almost across the board.

“Inflation and the weakening economy have led consumers to switch to store brands and to cut-back their total purchases. Additionally, they are cooking more at home and purchasing more staples than in the past,” said Todd Hale, Senior Vice President of Consumer and Shopper Insights at Nielsen.

“Nothing illustrates the consumer shift more than what categories showed the most growth.  In boom times (2004 to 2005), the top five sales leaders were dessert-dairy, men’s toiletries, tea, yogurt and bottled water.  In the period 2007 to 2008, the top five sales leaders were canning and freezing supplies, wine, vitamins, fresh meat and dry vegetables and grains.  Clearly the economy has shifted many consumers to a back-to-basics approach when it comes to eating,” said Hale.

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.”

Read Corporate Ethics And Fair Trading: A Nielsen Global Consumer Report.