After almost two decades dabbling in ecommerce, buying groceries online is now a $1 billion business for both Coles and Woolworths.
But even with the supermarket giants enjoying five years of double-digit growth, the sector is still underdeveloped. Online shopping represents an estimated 2.8 per cent of the $108 billion Australian grocery market, at $3 billion, according to research outfit IbisWorld.
And while sales are growing rapidly, ecommerce is expected to account for only 4.3 per cent of total Australian supermarket and grocery sales in 2023.
Despite the small portion of online grocery sales, the sector isn’t immune to a coming wave of disruption brought on by giant global competitors introducing futuristic new grocery store formats and breaking down the barriers that have deterred customers from buying fresh food online.
In its annual list of predictions for the year ahead, Forrester prophesises “2018 will be the year online grocery finally takes off” in the $US800 billion US grocery sector.
“Total retail will grow in the US in 2018, and digital retail for grocery will take hold in earnest,” the analysts write.
The growth will be driven by the war between Walmart and Amazon for American shoppers’ wallets following two big acquisitions: Walmart buying Jet.com for $US3.3 billion and Amazon picking up Whole Foods for close to $US14 billion.
“Watch for Walmart to continue to significantly up its online grocery game,” Forrester argues.
“Notably, we’ll see Amazon deepening its involvement in Whole Foods’ 400-plus stores, from in-store prices and assortments to Alexa-connected grocery shopping. These significant moves also will bolster how consumers perceive and adopt online grocery shopping in the next 12 months.”
The Local Players
Closer to home and the online grocery market is dominated by the supermarket duopoly which account for almost 77 per cent of the market, according to IbisWorld.
Dr Gary Mortimer, an associate professor in Marketing and International Business at the QUT Business School says Coles and Woolies have lifted their game in the online grocery space in recent years.
“Both have made significant updates and changes to their sites, to improve customisation, search and transaction,” Mortimer told Which-50.
Woolies recently announced it plans to open as many as four new ‘dark stores’, which are closed to customers and used solely to pack and ship online home deliveries.
“Woolworths’ move into ‘dark stores’ signals they are serious about growing this channel over the next five years. Coles trialing same day delivery in 12 Melbourne stores also indicates a focus on speed.
“Most importantly, both have owned the delivery stage, and not outsourced. This means that groceries are being delivered by a Woolworths- or Coles-uniformed team member, ensuring a positive digital customer experience.”
The goal, according to Mortimer, is for supermarkets to grow their online channel so consumers use it to do their main shop, while still maintaining their store network for ‘top ups’ during the week.
“The last thing they would want to do is cannibalise their in-store sales with online sales,” Mortimer said.
However issues around scale and the cost of logistics are still major obstacles for the sector.
“Supermarkets are dealing with a small group of regular online grocery shoppers. It is not viable to have delivery trucks driving around, mostly empty. It is only now, we are getting to a stage where the model is viable,” Mortimer said.
“Currently, online orders are fulfilled from local supermarkets. That means, products are unpacked onto shelves each night, then taken off the shelf and placed in a box and sent out the next day. This is not a very cost efficient way to operate. Hence, we are seeing both move towards dark stores, to facilitate supply.”
That whole process seems glacial when compared to a Chinese supermarket concept incubated by Alibaba which promises 30 minute delivery within a 3km radius.
Earlier this month Australian and New Zealand press toured a Hema supermarket in Shanghai which opened in September 2016.
Packed with busy staff, Hema is a both a store and a fulfillment hub.
To facilitate the uber-fast delivery, workers pick the products from the shelves and fill a delivery bag with a unique barcode. The bag is placed on a conveyor belt that carries orders to a delivery centre adjacent to the store.
Alibaba’s Hema supermarkets blur the line between online and in-store shopping, in large part driven by mobile. Shoppers use the Hema app to place online orders or in-store to scan unique QR codes that display product information.
The store also features a large fresh seafood section, allowing shoppers to pick what they want to eat and have it prepared in-store at the dining area or delivered home for later.
Shoppers still need to scan products at the self-serve checkouts, which are a relatively new phenomenon in China. Unlike Aussie self-service checkouts, Hema’s use facial recognition to verify the payment.
Stores key to growing online sales in China
Christina Zhu, President — Greater China Fonterra, is bullish about the growth potential for Hema.
The New Zealand dairy business stocks its products in the Hema supermarkets, as well as selling to Chinese consumers via Alibaba’s platforms and wholesaling to quick-service restaurants.
“We work with Hema Fresh and it’s still very new. I’m very optimistic about the business outlook of Hema Fresh, the volume that will eventually come,” Zhu told Which-50 in a recent interview.
According to Zhu “new retail” — which aims to eliminate any barriers that divide online and offline shopping journeys — will drive another wave of growth for grocery products in China.
“Look at the penetration of the categories: consumer electronics is close to 40 per cent penetration and for apparel and personal care it’s all over 30 per cent. The packaged goods is still at four per cent and fresh groceries only two per cent.”
Zhu explained retailers need an offline presence to build consumer engagement and trust required in the grocery category.
“Grocery is different to other categories … you want to see what you eat, you want to smell it and I don’t think that can be solved by VR,” Zhu said.
“That’s why everyone is so focused on new retail now because that’s where the future is, that’s where the next frontier is, and that’s where we play.”
Alibaba incubated the Hema concept and has now opened 20 stores around China. Three of those are franchised with local supermarkets. Unlike Amazon’s acquisition of Wholefoods, the evidence suggests Alibaba doesn’t want to own a chain of supermarkets across the country.
During the company’s most recent earnings call, Alibaba CEO Daniel Zhang said the company plans to open more Hema stores in key cities around China via franchise agreements.
“We don’t want to open all the stores by ourselves. Instead, we work with our retail partners in different cities and we help them to copy the Hema model into the local cities to franchise the business,” Zhang said.
Speaking of Amazon…
12 months ago Amazon unveiled its own futuristic supermarket, Amazon Go.
The ecommerce giant’s first physical grocery store promised no lines and no checkouts, thanks to computer vision and sensors that detect which products shoppers have taken off the shelves and charges their Amazon account once they leave the store.
For now the concept is limited to one store in Seattle, but a recent Bloomberg report said the concept could be soon rolled out in more locations across the US.
Much more disruptive in the short term is Amazon’s Whole Food acquisition.
Amazon’s early Whole Foods initiatives included price reductions, selling whole Foods products on Amazon.com and installing Amazon Lockers at Whole Foods locations to drive foot traffic.
Amazon CFO Brian Olsavsky said there will be a lot more integration between the two companies in the future.
“I think over time, you’ll see more cooperation and working together between AmazonFresh, Prime Now, and Whole Foods as we can explore different ways to serve the customer,” Olsavsky said during a recent earnings call.
Amazon is expected to launch its online grocery service AmazonFresh in Australia in late-2018, according to research from IbisWorld analyst Nathan Cloutman published in October 2017.
“Industry competition is expected to intensify over the next five years, due to the arrival of AmazonFresh. The grocery division of US-based ecommerce company Amazon will likely offer low prices to drive consumer demand. Industry-wide profitability is projected to fall over the period, as players try to compete with AmazonFresh,” Cloutman writes.
Amazon says it’s committed to launching a full retail offering in Australia, but the company that’s “happy to be misunderstood for long periods” is vague on the details.
Bricks-and-mortar chain Costco is also set to sell groceries online in 2018-19, further increasing competition over the next five years.
“Despite Australian consumers’ initial reluctance to shop for groceries online, demand is growing strongly,” writes Nathan Cloutman.
Just exactly how big that demand will be depends on how consumer behaviour shifts in a market that has been relatively well insulated for disruption brought on by ecommerce.