New Data Pegs Online Grocery Penetration Soaring Past 20%

The COVID crisis brought a jolt of urgency to the ongoing consumer convenience and value megatrends that will propel penetration of online grocery shopping beyond 20% in the coming years, two new studies show.

The investment bank UBS said grocery e-commerce penetration is expected to grow to 22% by 2024 from an estimated 4% in 2019, while sales at physical stores will decline over that period. A separate report from the financial services firm Cowen pegs online grocery penetration at about 5% in 2019 and growing to slightly more than 20% by 2025.

The new estimates flank the much-discussed Mercatus-Insiciv study released earlier this year calling for about 19% of the grocery industry online by 2024, en route to more than 21% by 2025, and portend big opportunity for retailers with the ability to win shifting consumer modalities—and considerable trouble for those that cannot.

Brick-and-Mortar Sales to Decline

UBS based its projections on its Evidence Lab data, a survey of 2,500 U.S. adults that has been administered annually since 2014. The report, which looked at all categories of U.S. retail, projects overall U.S. e-commerce penetration to grow from 14% in 2019 to 31% by 2024.

The projected growth in grocery, when taken in conjunction with UBS’s estimate for overall grocery category growth of about 3% per year, equates to an e-commerce compounded annual growth rate of about 44%—by far the highest of all categories of retail trade—with sales at brick-and-mortar grocery stores falling at a -1% CAGR over the same period.

This dichotomy portends store closures in the years ahead, but not necessarily a “retail apocalypse,” UBS noted. That’s because the online growth opportunity could strongly favor brick-and-mortar “incumbents” positioning themselves to win online—echoing a conclusion of Insiciv’s Digital Maturity study—and the fact that despite wild virtual growth and threats of the virus, consumers overall still like shopping in stores.

Walmart, for example, today has a leading market share in U.S. online grocery—about 22%, according to Kantar—enabled by an enormous and difficult-to-replicate store footprint giving it the ability to offer convenient pickup for about 90% of the U.S. population, the UBS report said.

Kroger is close behind Walmart with share of more than 20% of the online grocery market today largely on its click-and-collect offering, and is a “forward mover in automation” set to open the first of its robotic picking centers in partnership with Ocado next year, UBS added. Kroger’s concurrent move toward building alternate profit streams in advertising and other areas also gives it a better ability to offset profitability headwinds better than many of its conventional peers.

“These companies are leveraging their scale, high brand awareness, and store bases to carve out defendable marketplace niches,” the report said.

UBS’s latest survey data indicates the COVID-19 pandemic inspired broader digital adoption that cut across categories, geographies and demographics. Online penetration grew by 640 basis points year over year for those ages 55-64 (to 23%) and by 390 basis points fro those ages 65 or older.

“While some of this was situational due to fears about going to stores, it was also driven by retailer investments in fulfillment, experience [and] merchandise,” the report said. “Overall, customers noted that convenience (39%), product selection (36%) [and] low prices (32%) were key reasons for buying more online.” These factors also helped to increase penetration for suburban and rural shoppers.

Among participants in UBS’s 2020 study, grocery e-commerce penetration grew to 21%, up from 13% last year and the 7%-10% level the category had seen over the previous four years.

Despite that growth and the danger of the pandemic favoring perceived safer shopping options, many customers remain hesitant to utilize online grocery.

Having the ability to check the look and feel of the product (46% of respondents) and enjoying shopping for this category in-stores (36% of respondents) were the most frequently cited reasons for not spending more on grocery online, the UBS report noted, although each of these factors were down about 400 basis points vs. 2019’s survey.

“At the same time, larger product selection (up 300 basis points) and shipping costs (200 basis points) increased in consideration as reasons why some consumers are not shopping for groceries online,” the report added. “This highlights that growing online SKU counts is crucial for retailers to attract customers.”

A ‘Clean Slate’ for Disruption

The Cowen report highlighted the transformative consumer effects of the COVID crisis across multiple industries, arguing that event amounts to an imperative to modernize business.

“Disruptive innovation typically spurts forward in times of crisis because innovations tend to do better on a ‘clean slate’ basis,” Cowen said in its report, which looked at a variety of impacts brought about by the COVID crisis this year. “How consumers exit the crisis will be less about legacy decisions carried forward than the new things tried and preferred.”

It projects grocery e-commerce growing from slightly less than $50 billion in 2019 to more than $250 billion by 2025, or what it pegs as 20% industry penetration.

Near-term growth has been powered by online pickup at stores, which reached 26% penetration in the second quarter of 2020 on its way to 35% by the end of next year.