The drivers of online grocery adoption
Photo by Nathália Rosa on Unsplash
As online grocery starts to gather pace after the small decline from the pandemic highs, it is a good time to start thinking what is truly important for an online grocery customer?
In groceries, traditionally there is a lot of discussion around assortments. What is good assortment for an online grocery customer? What else is there to buying groceries?
Criteria when selecting grocery stores to visit
Instead of talking about online grocery preferences, maybe we should change the question to what is most important for grocery retailing in general? After all, online is only a channel for buying groceries, a new medium with many similarities and some differences.
The need that the customer is fulfilling online is often the same as buying from a store.
Therefore, it is interesting to see what are the most important criteria for customers when they choose a grocery store. Traditionally, studies about the important aspects when selecting grocery stores have highlighted at least the following criteria:
location
cheap prices
good assortment
quality of products (especially fresh foods)
availability of products
and others…
As the charts in the figure illustrate, groceries are fundamentally a location business.
The closer a store is to a customer, the more likely it is that the customer buys from that store. In the same category with the location, one could also cluster the familiarity of the store, ease of buying and long opening hours (no need to think whether the store is open). Together, these three could be seen as the convenience of buying groceries.
What do these criteria mean when buying online?
For a customer of a pure play online grocer, location is not at all relevant. The customer does not normally care where the retailer picks the products, as long as they get the products they need or want.
If the online retailer is a familiar offline store, then the perception of the store influences the buying decisions online, for better or worse.
Convenient location and other convenience aspects are important because we want to do the grocery buying as easily as possible. One has to remember that an average household buys groceries 3-4 times a week (in Finland). This makes it a rather routine like shopping category. Therefore, the time spent buying groceries can easily become a big part of our week.
For online, the convenience factor comes from two aspects: speed of delivery & the amount and length of open delivery windows. If customers learn that the online retailer has sufficient amount of open delivery windows, the customers start relying on the retailer to deliver on their promise. A bit similarly as with the long opening hours, customers know that they can go and buy from the retailer whenever they need, and don’t need to be afraid of closed delivery slots.
Availability of products
Assortment is another important criteria for customers when groceries. Besides the pure size of the assortment (number of products), also the freshness/quality of the products and the availability are important.
Availability in the grocery store reflects whether the retailer has the product on the shelves. The lack of availability (empty shelf) is naturally the worst case for a grocery retailer. Low availability is the small amount of product in the shelf. Even though the customer can buy the product she needs, the shelf looks bad if it has only one or two products.
For an online grocer, the availability is more binary.
The product either is available or it is not in the online product feed. Low availability does not translate online, as the customer sees only the image of the product, but no inventory of it. Thus, a virtual shelf with one or 100 items of an individual product looks the same.
Substitutions
When the product runs out, the experience is somewhat different for an online customer and the offline customer. In the store, the customer can see that the shelf is empty, and she needs to select an alternative product.
However, for online, that decision is done by the retailer (picker). This is a delicate situation where customers can have very varying tastes for substitutions. Therefore, one big problem for the store based online grocery picking is the high amount of product substitutions.
Each substitution is a potential source of customer disappointment.
Is the size of the assortment important?
As the discussion turns to assortment, one feels compelled to ask, “what is big assortment”? Is it simply a massive number of SKUs? Is it having 500 varieties of coffee or 50 different ketchups?
If yes, then probably Amazon (or any other marketplace) will be the eventual winner. As the marketplace does not need to incur inventory costs and risks, they can utilise warehouse capacity to the fullest. However, this does not concern perishable products.
In his great book Inside the Mind of the Shopper, Herb Sorensen talks about the Big Head and Long Tail of the grocery store assortment. We know from many countries that the best-selling products in the grocery store tend to have oversized sales impact. The classic 80/20 rule seems to be a rather good measure of the grocery assortments as well.
From the book “Inside the Mind of the Shopper” by Herb Sorensen
So, we know that customers to buy rather small assortments. According to Sorensen, an average household buys around 150 products in a month. Experience from the Nordic countries tends to confirm that finding.
After all, as the customer walks around a grocery store, she sees only a fraction of all products on sale in the store. The biggest bulk of products are located in the vast aisles of the store, and the majority of customers mainly walk in the main aisles and pop into the smaller aisles only occasionally. Thus, the customer does not see all the products on sale.
Online narrows the assortment even further
For online, this visual inspection of the assortment is naturally almost impossible. On a small screen where the purchases are made, online narrows down the assortment even further than the store.
Therefore, the endless rows of products on a small screen make it even more difficult for the customer to estimate whether the online store has a large or a small assortment.
Thus, the customer creates a perception of the size of the assortment based on whether she can find the products she wants from the store.
If everything can be found or a suitable alternative is available, the assortment is big enough. Enough being the key word here.
We have been taught that for online, the assortments need to be big. However, with fresh and perishable products, the traditional long tail approach to assortment, which Amazon has made famous with the marketplace, is not as relevant as it is for non-perishable products.
With a proper mixture of products, an online grocery retailer can easily serve its customer with much smaller number of products. For example, a fast-growing Dutch online grocery retailer Picnic offers customers almost 7 000 products at a time. The assortment naturally changes constantly to keep it fresh and interesting for the customers.
Next question regarding the size of the assortment is whether the customers can say what is a big assortment and what is small?
Most probably, the majority of customers would struggle in estimating how many products there are in a hypermarket.
If one asks a customer, would they want the grocery store to have a big assortment, most customers would naturally say that they do want to have a big assortment?
Small assortments help customers choose
However, there are several benefits to a small assortment. There is ample research on the paradoxes of too much choice. The most famous of these studies is probably the Jam Experiment done by Sheena Iyengar and Mark Lepper.
The Jam Experiment had two different sampling tables (on two separate days) presenting jams. On the first day the table had 24 different jams and on the second day the table had only six different varieties to choose from. It turned out that the bigger variety gathered more interest from the customers, but maybe a bit surprisingly, customers were 10 times more likely to buy a jam from the table with smaller variety of options.
The research concluded that with the bigger variety, customers had much more difficulty to make a choice.
Efficiency from a small assortment
Another big and rather obvious benefit of the smaller assortment is for the retailer: more efficient operations.
Trader Joes is famous for good customer service, quirky products and raving fans. However, the stores carry only 4 000 products. The small assortment enables Trader Joe’s to operate small stores, which in turn helps the company to have revenues per square foot on their levels.
Other grocery retailers selling with a limited assortment are Costco, Lidl, and Aldi. Each of them carry a minimal number of products compared to traditional supermarkets or superstores.
However, Costco, Lidl, and Aldi are also massive retailers in terms of sales. In fact, they are the world’s third, fourth, and eighth-largest retailers respectively. Small assortment clearly is not a problem, even though majority of grocery retailer have giant assortments.
Stew Leonard’s is one example of a retailer who has been able to generate big revenues despite only a small assortment. The company has six stores, which average around $66 million in revenue with only 3 200 products in the range. Despite the small assortment, Stew Leonard’s stores have been called “Disneyland dairy store” (The New York Times), “Master of Fresh” (Progressive Grocer), “Supermarket Like No Other” (Long Island Press) and with many other names.
Delivery fee — the great differentiator
The single most significant difference between online and offline is naturally the home delivery. From the increasingly self-service-based experience of a big grocery store where the majority of work is outsourced to the customer, home delivery offers a service where everything is done by the retailer.
From the perspective of a traditional grocery retailer, it feels that this extra work naturally needs to be paid by the customer. Hence, delivery fees, which tend to be rather high during the early years of the online grocery channel in each country. As the competition intensifies, the delivery fees tend to decrease.
For a pure play online (grocery) retailer, it is a natural way to differentiate from the incumbent store-based retailers by offering free delivery for all or some orders. This happened in basically all fields of online retailing, from groceries to fashion and everything in between.
The most famous example of removing friction for online is Amazon and the invention of Amazon Prime. Jeff Bezos has often talked about the importance of removing friction from buying, whether it is about the delivery fees or One-click buying or buying books in Kindle.
“Anytime you make something simpler and lower friction, you get more of it” Jeff Bezos in the Amazon shareholder letter in 2008
In numerous surveys about the most important reasons for being a Prime subscriber, customers stress the importance of free delivery as by far the main reason. Unsurprisingly, delivery fees have been cited many times as a significant barrier for buying groceries online.
Both the Swedish report from 2018 and the Coresight report from 2021 state delivery fees as the most important barrier for purchasing groceries online, whether it is a normal or a fast delivery.
Increasing the frequency
The importance of delivery fee to online grocery retailing is two-fold. It influences who buys online and on the other hand it influences how often customers buy. Together, these will influence whether online will remain a niche part of the market with market shares ranging between 5-10 %.
As for who buys online, high delivery fees skew the customer profile in the online channel to customers and purchasing needs with big baskets. This includes the weekly purchases from families with children, small & medium-sized businesses and occasional buying for food festivities such as Easter and Christmas. As important as this is, it is only a small section of the entire Total Addressable Market for buying groceries.
Increasingly households in the Western markets are small households with one or two people. For this kind of household, the delivery of 10 € is too big share from the average grocery basket worth around 40-50 €. This is especially true with older people living with their pensions. For them, online would be a critical service, especially when going to the grocery store becomes ever more difficult. Paying 20% off the value of the basket for delivery fees, seems unfair.
Another approach to this same phenomenon of reaching the potential of online grocery is to look it from the perspective of the classic Recency, Frequency and Monetary (RFM) framework to assess the value of the customer. When considering both Recency and Frequency, delivery fees play a crucial role in identifying how often customers buy.
It is clear that only a tiny portion of customers are willing to spend 40 € per month for simply delivery fees, not including the prices of the products themselves.
After all, we tend to buy groceries several times a week (3-4 in Finland). With high delivery fees, the online channel remains a niche part of the grocery spend for the customer with monthly frequency for the vast majority of customers.
Some might argue that the online channel has such a high Monetary value in the form of high average baskets (driven by the high delivery fee), that it could become a big channel. This is dwarfed by the lack of Frequency that could have been driven by the lower delivery fees. That has been the real force behind the spectacular success of Amazon Prime, probably one of the most significant service launches in the history of retailing.
Never underestimate the importance of reducing friction for the customer.