A full assortment of online grocery insights

I’m excited to be heading back to Nashville again, this time for a presentation at the annual Category Management and Shopper Marketing conference [or CatMan, as we say in the biz].  We’ve worked up some new Slice research looking into changing trends in CPG shopping trips.  In this presentation, we’re particularly focused on the emerging full assortment grocery channel, composed of retailers like Amazon Fresh, Walmart Grocery, Instacart, and Kroger that offer a full grocery assortment of fresh, frozen, baked, and of course, shelf-stable goods. 

This is a channel within e-commerce that accounts for a relatively small share of CPG sales today [less than 5 percent] but is growing at three times the rate of traditional .com CPG [an order delivered via a third party shipper like UPS, FedEx or USPS]. By my guesstimate, projecting current growth rates forward, full assortment grocery could account for a quarter of online CPG sales by 2025 and 50 percent by 2030.

Within the full assortment grocery channel, we have merchants that deliver, merchants that allow consumers to pick up their orders in store [click & carry] and merchants that offer both. It has long been a source of debate in the industry whether groceries ordered online in the U.S. will be predominantly delivered or picked up in-store in the long run.

I’ve long advocated that click & carry will dominate because of the high cost of getting products from the store to the consumer [the last mile].  The strongest argument countering this is that the costs won’t be TOO bad at scale, and [more plausibly] that a solution without delivery doesn’t make consumers’ lives any easier.

Data that our crack team of analysts compiled tells an interesting story. The first finding is that, within the universe of full assortment grocery providers, click & carry average order sizes are smaller, at $138 per order compared with $156 for delivered orders.  This isn’t terribly surprising, as click & carry is often free to the consumer, so there is less incentive for consumers to try to get the most out of their delivery fee.

The second big finding is that in full assortment online grocery, click & carry now accounts for 46 percent of orders [April 2017 – March 2018], compared with just 18 percent in the same period two years ago.  See the chart below for monthly detail.

This is good news for me, because I like to be right from time to time. But it’s also good news for merchants and the brands that are often asked to share their expenses. Don’t get me wrong – delivery will always have a place in online grocery. It will just be relegated to niche status, uniquely relevant to those that are not fully mobile or that are rich enough to value the time savings.

Amazon has made a lot of news over the past few weeks with the release of Jeff Bezos’ annual letter to shareholders and Q1 2018 earnings.  In the letter we learned that Amazon now has 100 million Prime members globally, that Prime fees were going up by $20, and that Marketplace [or 3^rd party sales] now account for the majority of items sold on Amazon. 

The count of Prime members is pretty amazing and I’d seriously doubt that the 20 percent price increase is going to make a dent in the count of Prime members.  Forget about Amazon Prime Video and all of the other free services; the membership fee makes sense just for the free shipping.  We found that in 2017 the average Amazon customer bought 27 times, and that includes infrequent, non-Prime members.  Amazon hadn’t raised the Prime price since 2014 and has added a boatload of free Prime services at the same time. I’m guessing that it calculated that it’s gotten through the steep growth part of the Prime membership growth curve has decided that it’s now time to claw back some of the expense associated with Prime.

Amazon’s Q1 2018 earnings blew away the high expectations of Wall Street analysts that cover the company.  The big headline was that global net sales increased by 43 percent while operating income increased by 92 percent. 

The challenge is that Amazon’s earnings are getting really hard to interpret because there is so much going on.  Even the North American retail number has comparisons to periods with Whole Foods numbers against periods without Whole Foods. 

There was one number buried on page 13 of the Q1 financial results that surprised me, though.  Sales for online stores [this would be global sales of 1^st party sales for Amazon, Zappos and other online entities owned by Amazon] only grew by 13 percent, adjusted for currency fluctuations. This segment of the business accounted for 53 percent of net sales in the period, and in the past would’ve been the myopic focus of investors [and much more than 53 percent of the business].  But growth has clearly come from other parts of the business.  Some of that growth is acquired, but much of it comes from Marketplace service fees and Amazon Web Services.

Clearly, Amazon’s core retail business couldn’t continue to grow at its historical rate forever, but the difference between overall net sales growth and online stores’ sales growth highlights the fact that Amazon is a very different animal than many of us have in our minds.  Our notion of Amazon as a retailer that takes inventory of products and tries to sell them at a higher price is outdated, with first party sales on track to represent a minority of sales in 2018.  Amazon, in 2018, is about to flip from being a retail company to an infrastructure company, from a pure B-to-C company to a hybrid B-to-B&C company. 

It’s really hard to say that this is anything but good for Amazon, but it is important that the brands that look to Amazon as a critical part of their growth strategies recognize that there is now a disconnect between the value that Wall Street analysts ascribe to Amazon and the value that Amazon represents as a wholesale partner.  It is still the most important such partner in the online landscape by a wide margin, but the lead is shrinking and its retail energy is shifting to the Marketplace. 

For brands, this means that they need to find a way to balance their focus on Amazon.com’s first party business with a growing focus on the Marketplace, Amazon competitors and their own direct-to-consumer efforts.

About Ken

Ken Cassar is vice president, principal analyst at Slice Intelligence, where he looks at trends in the e-commerce industry armed with Slice’s robust set of online sales data. Ken brings a rich online retail background to Slice Intelligence. Most recently, Ken was SVP, Media Analytic Solutions at Nielsen, where he developed several innovative digital commerce measurement and advertising effectiveness solutions. Prior to Nielsen, Ken was an analyst at Jupiter Research, where he was an early thought leader, trusted adviser, and media source on e-commerce. His prescient outlook on fledgling e-commerce industry was a key contributor to Jupiter’s dominance as a digital media zeitgeist at the dawn of the Internet. Ken has an MBA and Bachelors Degree in Political Science from the University of Connecticut. Ken aspires to stay technologically ahead of his teenage children, as evidenced by his ‘Gadget Geek’ Slice profile. He also has the appropriate jacket for every occasion.