Online Shift Will Benefit Biggest Players: Report

The shift of grocery sales from physical to virtual channels will accelerate in coming years and disproportionately benefit large players such as Walmart and Amazon, according to a new report from Duetsche Bank.

The analysis suggests online grocery would grow by six times, or from 2% of the $800 billion grocery market to about 12% of industry sales by 2025—an estimate about as robust as Nielsen and Food Marketing Institute made earlier this year. It notes however that high costs and other barriers to entry indicate that the largest players in grocery e-commerce today—Amazon, Walmart and Instacart—will capture most of that growth at the expense of smaller chains, regional grocers and independents, and that the move online would accelerate an industrywide deterioration in profits as stores lose cost leverage as sales dissipate and retailers invest in online infrastructure.

“We believe the rapid rise of more convenient grocery shopping options, including online, will further bifurcate market share winners and losers within the highly competitive food retail sector, while simultaneously pressuring already razor thin margins,” the report noted. “We think we stand at an inflection point in an accelerating, fierce food fight for consumer mind and wallet share.”

Duetsche Bank based its projections in part on proprietary survey data of 950 consumers indicating that one-third of them made their first online grocery order within the past two months.

The report identifies Walmart, Amazon/Whole Foods and Instacart as “runaway market share winners” in the coming shift. Walmart will benefit from years of investment in the online space, and owing to expansion of grocery pickup could surpass Amazon as the largest seller of groceries online this year, Duetsche said.

The report forecasts that by 2025, Amazon and Instacart would control the largest of the “online wallet” for U.S. grocery at 19% each, with Walmart controlling 17%. According to the report’s 2017 estimates, Amazon and Instacart each control about 12.5% of the market, or $2 billion each, with Walmart close behind at estimated sales of $1.8 billion. Those companies will see compound annual growth rates of 35% through 2025, or as much as 40% in a “bull case” for growth.

Kroger, estimated to currently control 6.4% of the market with $1 billion in online grocery sales, is projected to grow to 7% of the market by 2025. The report included a “sell” rating on Kroger, with analysts noting its ongoing initiatives under the Restock strategy could be more expensive than planned. 

The online shift will be hard on profits for both winners and losers, the report added. Citing CommonSense Robotics’ estimates that online food margins are negative 10%, “with no other mitigating savings or leverage impacts considered, we should likewise expect total industry margin to deteriorate by approximately 140 [basis points] from a weighted average of 3.7% to 2.3%,” the report said. Players with sales going from physical stores to virtual channels, like Walmart, Kroger and Target, could see the most margin dilution as they invest in technology and delivery.