september 4, 2017 - fungglobalretailtech.com as whole foods’ customer rewards program and...

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September4,2017

DeborahWeinswig,ManagingDirector,[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

1) TheUSgrocerymarketisestimatedtobewortharound$1trillionin2017,butonlyaround2%ofthatwillbespentonline.

2) Amazon’sacquisitionofWholeFoodswilllikelybringinnovativenewservicesthatintegratethesetwocompanies’onlineandofflineofferings,whichcouldaccelerategrowthintheUSonlinegrocerymarket.

3) WalmartandKrogerhavebeengrowingthenumberofstoresofferinggrocerycollectionveryrapidly.

4) Atthesametime,thebrick-and-mortarUSexpansionofpredominantly-offlineGermangrocerydiscountersAldiandLidlcouldsoftenonlinegrocerygrowthinthoseregionsintheUSwheretheyestablishameaningfulpresence.

Deborah Weinswig

Managing Director,

FGRT

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016

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TableofContentsExecutiveSummary.........................................................................................................................................3

Introduction....................................................................................................................................................5

TheUS:AnImmatureE-GroceryMarketwithGreatPotential.........................................................................6

Outlook:AmazonCouldAccelerateitsExpansionintoGrocery........................................................................6AChallengingSectorLandscape.........................................................................................................8FreshGroceriestheNewFrontier.......................................................................................................9ExpansionofOfflineGroceryDiscountersAldiandLidl......................................................................9

CompaniesintheOnlineGrocerySpace.........................................................................................................10AmazonandWholeFoodsMarket....................................................................................................10DeliveryPartners...............................................................................................................................12Walmart............................................................................................................................................13Kroger...............................................................................................................................................14Peapod..............................................................................................................................................14Target................................................................................................................................................15Costco...............................................................................................................................................15SproutsFarmersMarket...................................................................................................................16Smart&Final.....................................................................................................................................16

WhatDoestheFutureHoldforOnlineGrocery?.............................................................................................16CompetitionfromTakeoutFoodandFoodSubscriptionDeliveryServices......................................17CompetitionfromOnlineRetailStartups..........................................................................................17

KeyTakeaways...............................................................................................................................................18

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ExecutiveSummaryTheUSremainsanascentmarketforonlinegroceryretailing,butweexpectgrocerye-commercetogrowveryrapidlyintheneartermandinthecomingyears.

• Consumerparticipationinonlinegroceryshoppingisincreasing,andaround30%ofUSshoppersarenowpurchasingsomegroceriesonline,upfrom25%oneyearearlier,accordingtoaProsperInsights&AnalyticssurveyconductedinAugust2017.

• Americanconsumerswillspendaround$1trillionongroceriesin2017,weestimatefromBureauofEconomicAnalysis(BEA)data.Weestimatethate-commercewillcapturecloseto2%oftotalUSgrocery-categorysalesthisyear,upfrom1.4%in2016.

• USshopperswillspend$9.3billiononfoodanddrinkonlinethisyear,accordingtoEuromonitorInternational.Thisexcludesothergrocerycategoriesandequatestoroughly1%oftotalfoodanddrinkretailsales,weestimatefromBEAdata.Thisislowerthanthe2%forallgrocerycategories,asrecordedbyKantar,likelybecausenonfoodgrocerycategories,suchashouseholdsupplies,tendtoover-indexonline,whilecertainfoodcategories,suchasfreshproduce,under-index.

• EuromonitorforecaststhatUSonlinegrocerysaleswillgrowby11%in2017andatacompoundannualgrowthrate(CAGR)of10%overthenextfiveyears.However,webelievegrowthislikelytobehigherthantheseestimates,giventhecurrentrapidexpansionofcollectionservicesbygrocerymarketleadersWalmartandKroger,andthepotentialforinnovativedisruptiontoemergefromAmazon’sacquisitionofWholeFoodsMarket.

AmazonwilllikelyleveragetheWholeFoodsacquisitiontodriveitsambitiousfood-deliveryplans,anditsoptionsincluderollingoutcollectionservicesatWholeFoodsstoresorusingthosestoresaspickingstationsforlocalgrocerydeliveries.Aswewrotethisreport,AmazonannounceditsinitialplansforWholeFoods,whichincludesloweringprices,integratingPrimeasWholeFoods’customerrewardsprogramandinstallingAmazonLockersinWholeFoodsstores.WeexpectanyfurthermeaningfulinnovationsfromAmazontopromptaresponsefromcompetitors,consequentlyacceleratingthedevelopmentoftheonlinegrocerymarket.

USshopperswillspend$9.3billiononfoodanddrinkonlinein2017.

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WalmartandKrogerhavebeengrowingthenumberofstoresofferinggrocerycollectionveryrapidly.InthefiscalyearendedJanuary2017,Krogeralmosttripleditsnumberofgrocerypickuppoints,whileWalmartquadrupleditscollectionpointnumbers.Inthiscontext,weexpectthesegrocerymarketleaderstobeseeingverystronggrowthinonlinegrocerysales.

Atthesametime,theUSexpansionplansofGermanlow-costdiscountersAldiandLidl—whichremainpredominantlyofflineretailers—couldsoftengrowthinselectedUSregions.

USgrocerswillalsofacecompetitionfromstartuptakeoutfoodandfood-subscription,meal-kitdeliveryservicesthatprovidetheconvenienceandhealthyandfreshoptionsthatconsumersincreasinglydemand.

TwokeyonlinegroceryfulfillmentmodelshaveemergedintheUSmarket:theclick-and-collectmodel,wherebyshopperspickupgroceriesatstoresorparkinglots,andthehome-deliverymodel,whichusesthird-partydeliveryproviders.Grocerycollectionislessmargin-erosivethanhomedeliveryandthusoffersagoodfitwiththeUSmarket,whichseesapreponderanceoflargestoresandhighcarusage.

WeexpectanyfurthermeaningfulinnovationsfromAmazontopromptaresponsefromcompetitors.

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IntroductionTheUSisoneoftheleastmatureonlinegrocerymarketsamongmajorWesterneconomies,withseveralmajorgroceryretailersandmassmerchantsonlyrecentlypushingintogrocerye-commerce.

ThisisthefifthreportinourOnlineGroceryseries,updatingourinitialUSonlinegroceryreportpublishedinOctober2016.Inthatreport,wenotedseveralcharacteristicsoftheUSonlinegrocerylandscape:

• USconsumersaremostlybuyingspecificgroceryitemsonline,andthose,onanoccasionalbasisonly.MostUSonlinegroceryshoppersarenotusingthechannelfortheirregular,big-basketshoppingtrips.

• Amazonisthemostpopularonlineretailerforgroceries,accordingtoanumberofsurveys.Butitsmost-usedserviceisAmazonPrime,notitsfull-serviceAmazonFreshgroceryoffering,accordingtoaCowenandCompanysurvey.ForPrimepurchases,Amazonsendsitemsthroughtheregularmail,makingtheserviceunsuitableforaconventionalgroceryshop.

• USonlinegroceryretaillookssettoboom,asaveragebasketsizesgetpushedupbytheofferingsofconventionalgrocerssuchasWalmartandKroger.

Source:Amazon.com

Inthisupdate,welookat:

• ThecurrentsituationandforecastsforonlinegroceryretailingintheUS.

• Amazon’srecentacquisitionofWholeFoodsMarket,thepossiblerationalebehindthedealandtheimplicationsithasfortheindustry.

• Sectorchallengesandrecentdevelopments,suchastheentranceofLidlandtheexpansionofAldiintheUSmarket.

• Recentactivityfrommajorbrick-and-mortarchainsandwhiche-commercefulfillmentoptionstheyarepursuing.

Amazonisthemostpopularonlineretailerforgroceries.

http://www.fungglobalretailtech.com/research/deep-dive-online-grocery-series-us-market-set-boom-basket-sizes-grow/


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TheUS:AnImmatureE-GroceryMarketwithGreatPotentialUSgroceryretailershavetendedtobeslowtorolloutonlineshopping,andUSshoppershave,inturn,laggedtheirpeersinsomeothercountriesintermsofuptake.

However,consumerparticipationinonlinegroceryshoppingisincreasing,andaround30%ofUSshoppersarenowpurchasingsomegroceriesonline.AccordingtoaProsperInsights&AnalyticssurveyconductedinAugust2017:

• Some70%ofUSadultsdonotmakeanygrocerypurchasesonline,downfrom75%oneyearearlier.

• Atotalof26.1%ofUSadultsmakeuptohalfoftheirgrocerypurchasesonline,comparedto21.8%oneyearearlier.

Figure1.USConsumers:ShareofGroceriesPurchasedOnline,August2016vs.August2017(%)

Source:ProsperInsights&Analytics

Outlook:AmazonCouldAccelerateitsExpansionintoGroceryThisyear,USconsumerswillspendjustover$1trillionongroceries,includingfood,beveragesandhouseholdsupplies,weestimatefromBEAfigures.However,onlyaverysmallshareofthistotalwillbespentonline.

• In2016,USonlinegroceryshoppingaccountedfor1.4%oftotalgrocerycategorysales,accordingtoKantarWorldpanel.Weestimatethisfigurewillrisetoalmost2%oftotalgrocerycategorysalesin2017,boostedbythecontinuedrolloutofcollectionservicesbybrick-and-mortarretailerssuchasWalmartandbyAmazon’songoingpushintothegroceryspace.

• USconsumersspent$8.4billiononfoodanddrinkonlinein2016,accordingtoEuromonitorInternationalestimates.Thisequatesto

75.1%

13.3%

5.1% 3.5% 1.7% 0.7% 0.6%

70.3%

16.0%

5.8% 4.3%1.9% 1.1% 0.7%

0% 1%–10% 11%–25% 26%–50% 51%–75% 76%–99% 100%

Aug2016 Aug2017

In2016,USonlinegroceryshoppingaccountedfor1.4%oftotalgrocerycategorysales.

Around30%ofUSshoppersarenowpurchasingsomegroceriesonline.

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0.9%oftotalfoodanddrinkretailsales,recordedbytheBEA.Thisisalowersharethanthatforgrocerycategoriesoverall,asrecordedbyKantar,likelybecausenonfoodFMCGcategories,suchashouseholdsupplies,tendtoover-indexonline,whilecertainfoodcategories,suchasfreshproduce,under-index.

• EuromonitorforecaststhatUSshopperswillspend$9.3billiononfoodanddrinkonlinein2017,upalmost11%yearoveryear.Thisequatestoroughly1%oftotalfoodanddrinkretailsales,weestimatefromBEAdata.EuromonitorforecaststhatUSonlinegrocerysaleswillincreasebyaCAGRof10%overthenextfiveyears.

• However,wethinktheseestimateslookconservative,giventhepaceatwhichWalmartandKrogerareincreasingthenumberofcollectionpointstheyoffer,andgiventhepotentialfordisruptionfromAmazon-WholeFoodssynergies.

Figure2.USOnlineGroceryMarket:EmergingPush-and-PullFactors

PotentialfordisruptiveinnovationfromAmazon-WholeFoods.

RapidgrowthinthenumberofcollectionpointsofferedbygrocerymarketleadersWalmartandKroger.

Longerterm,expansionbyofflinediscountersLidlandAldicoulddampengrowthincertainregions.

Source:FGRT

Amazon’sacquisitionofWholeFoodscouldpromptawaveofinnovationandrenewedcompetitionintheonlinegrocerysegment.TheWholeFoodsstorenetworkprovidesAmazonwithhundredsoflocationsthatcouldbeusedaspickingpointsforquick,localgrocerydeliveries,orascollectionpointsforonlineordersplacedwitheitherWholeFoodsorAmazon.WeexpectmajorgroceryrivalstorespondtoanymeaningfulinnovationslaunchedbyAmazonwiththeirowne-commerceinitiatives—andthiswouldlikelypromptanaccelerationinmarketgrowth.

WalmartandKrogerhavebeengrowingthenumberofstoresofferinggrocerycollectionveryrapidly.InthefiscalyearendedJanuary2017,Krogeralmosttripleditsnumberofpickuppoints,whileWalmartquadrupleditscollectionpointnumbers.Theseretailershavecontinuedtoincreasethenumberofsuchpointsintothecurrentyear,aswediscussinourcompanyprofileslaterinthereport.Walmartreportedtotalonlinenetsalesup60%yearoveryearin2Q18(thisincludesnongrocerysalesandcommissionfromthird-partysellers).Inthiscontext,itisnothardtoenvisagethesegrocerymarketleadersgrowingtheironlinegrocerysalesverystrongly,fromasmallbase.

EuromonitorforecaststhatUSshopperswillspend$9.3billiononfoodanddrinkonlinein2017.

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Figure3.WalmartandKroger:NumberofGroceryPickupPoints,atPeriod-End

Januaryfiscalyear-ends.KrogerincludesHarrisTeeterandFredMeyer.Somefiguresareapproximate.Source:Companyreports

Atthesametime,omnichannelgrocersandpureplaysalikewillbefacingafiercelycompetitivegroceryspace,whichincludesthebrick-and-mortarUSexpansionofGermandiscountersAldiandLidl.AldiUSrecentlyannouncedatrialgrocerydeliveryoperationinpartnershipwithInstacart,but,globally,thediscountersremainpredominantlyofflineplayers,andweexpectthemtoremainso.Theaddedcostsofgrocerye-commercedonotalignwiththelow-overheads,no-frillsbusinessmodelsofAldiandLidl.

Asaresult,webelievethattheGermandiscounters’forayintotheUSmarketcouldhaveadampeningeffectonthegrowthofonlineadoptioninthoseregionsintheUSinwhichtheyhaveameaningfulpresence.

AChallengingSectorLandscapeTheUSgroceryretailingsectorcontinuestoexperiencechallengesonmultiplefronts,withsubduedgrowthofsalesandprofitmargins.Themarketissaturatedandhighlycompetitive,withmanyplayersandavarietyofretailformats—suchassupermarkets,massmerchants,conveniencestores,dollarstores,drugstorechainsandonlinemealkitproviders—offeringfoodandbeveragecategories.

Webelievethattheprevalenceoffoodoptionssoldatsuchavarietyofretailformatshamperstheadoptionofonlinegroceryshoppingtoacertainextent,astheyprovidenumerousconvenientalternativesforbusyconsumers.

Toaddtothis,theUShasalsobeenexperiencingsharpfoodpricedeflationandacutthroatpricewarinthegroceryindustry.

• Walmart,KrogerandAholdDelhaizehavebeenslashinggrocerypricesinrecentyearstocompetewithAmazonandotherplayers.

150

400

600

220

400

640

FY16 1H17 FY17

Walmart Kroger

Walmart,KrogerandAholdDelhaizehavebeenslashinggrocerypricesinrecentyearstocompetewithAmazonandotherplayers.

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• TheentranceofLidlandtheexpansionofAldiintheUSmarket,combinedwiththeAmazonandWholeFoodsmerger,willsurelyaccentuatethegrocerypricewarintheUS.Afterall,Amazonisfamousforloweringpricesandcoststhroughtechnology.

FreshGroceriestheNewFrontierConsumerpreferenceshaveshiftedtowardhealthyandfresheatingandawayfrompackaged,frozenandmanufacturedfoods.Freshstapleitemssuchasproduceandmeatdriveconsumers’decisionsofwheretoshop,asfreshfoodistheheartofgrocery,accordingtoBainConsulting.Webelievethatconsumers’preferenceforfreshandnaturalfoodoptionshasalsostifledtheadoptionofgrocerye-commerceintheUS,asquickdeliveryoffreshfoodiscomplexandcapital-intensiveforretailers.

Asfreshfoodisakeytrafficdriverforretailers,thecategoryhasbecomemoreofafocusforretailersinbrick-and-mortarlocations.However,thegroceryindustryhasbeenstrugglingtofigureouthowtosellfreshfoodonline,duetothemorecomplicatedandcostliernatureofthesupplychainforperishablegroceriesthanfornon-perishablegoods.Freshfooddeliveryistypicallyunprofitable.

ExpansionofOfflineGroceryDiscountersAldiandLidlTheUSdeepdiscountsegmentisestimatedtogrowby8%–10%annuallythrough2020,fivetimesmorethanfortraditionalgrocers,accordingtoBain.

Globally,GermandiscountersAldiandLidlremainpredominantlyofflineretailers,astheirlow-cost,no-frillsformatsdonotfitnaturallywiththehighoverheadsassociatedwithgrocerye-commerce.Nevertheless,theyhavedippedtheirtoesintotheonlinegrocerywatersinselectedmarkets.ThisincludedAldiUSannouncinginAugust2017thatitwouldtrialadeliveryserviceinpartnershipwithInstacart.

WebelievetheaggressiveexpansionplansofthetwoGermandiscounterscouldslowtheadoptionofonlinegroceryshoppingincertainUSregions,giventheexcellentvaluepropositiontheseretailersoffer.

AldiandLidlarefocusingtheirexpansionplansonkeye-commercemarketssuchastheNortheast,Southeast,Midwest,TexasandCalifornia.

• Aldistatedinearly2017thatitplanstoinvest$5.0billionoverthenextfiveyearstoincreaseitsUSstorecountto2,500andtoremodelitsexisting1,600USstores.Thecompanywilladd400USstoresbytheendof2018.TheseexpansionplanswillrankAldiasthethird-largestUSgrocerfollowingWalmartandKroger.

• Lidl:GermandiscountchainLidlopeneditsfirst10USstoresinJune2017,withplanstoopen10morestoresin2017and80storesontheUSEastCoastbysummer2018.Thecompanyplanstoexpandtoover500locationsinthenextfiveyears.

Thegroceryindustryhasbeenstrugglingtofigureouthowtosellfreshfoodonline.

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CompaniesintheOnlineGrocerySpaceAmazonandWholeFoodsMarketAmazonhasbeentryingtopenetratethegrocerysegmentfornearlyadecade,whenitfirstlaunchedAmazonFreshin2007.ItscurrentonlinegroceryofferingincludesAmazonFresh,AmazonPantryandPrimeNow,aswellasasubscriptionservicecalledSubscribe&SaveandWi-Fi-connectedDashreplenishmentbuttons.Theservicesareavailableindifferentgeographiclocations,atvaryingprices,withdifferentitemsavailable.

Inthepastfewmonths,Amazonlookstohavesteppedupthepaceofitsgroceryexpansionambitions.

• Inearly2017,Amazonbegantestingsmall-size,brick-and-mortarstoreformatsinSeattle.TheAmazonGocheckout-freeconveniencestoreallowscustomerstocheckinwithsmartphones,pickupdesireditemsandleavewithoutpayingatacashregister,astheyarebilledautomaticallyusingartificialintelligence(AI)technologyandvirtualpaymentsystems.

• InJuly2017,Amazonfiledatrademarkforpreparedcook-it-yourselfmealkits.Thecompanyisalsoexploringatechnologyfocusedonproducingtasty,preparedmealsthatrequirerefrigeration,whichwasfirstdevelopedfortheUSmilitary.Theready-to-eatdishesmaybelaunchedasearlyas2018.

• AccordingtoresearchfirmMWPVL,Amazonhas18distributioncentersforitsPantryandfresh-foodofferingsintheUS,withafurtherfivesuchcentersinthepipeline,asofAugust2017.Inaddition,MWPVLsaysAmazonhas99USgeneralfulfilmentandredistributioncentersand51PrimeNowhubsforrapiddelivery.

Despiteitsvariousinvestments,Amazonheldonlya0.2%shareoftheUSgrocerymarketin2016,accordingtoGlobalDataRetail.Webelieveitwillleverageitstie-upwithWholeFoodstoaggressivelybuildoutitsonlinefreshfoodgrocerybusinessandintensifythegrocerywars.

WholeFoodsMarketOnAugust23,AmazongainedapprovalfromWholeFoodsshareholderstoacquirethegrocerychain;onthesameday,theUSFederalTradeCommissionconfirmedthatitwouldnotinvestigatetheacquisitiononcompetitiongrounds.

WholeFoodsoperates444storesintheUS,including11distributioncentersfocusedonperishablefoods,seafoodprocessingplants,andkitchensandbakeriesfocusedonpreparedfoods.

• WholeFoodssellsalargevarietyofpopularprivate-labelgoods.

• Thecompanyhastestedbothdirectshippingandclick-and-collectformats,andhasapartnershipwithInstacarttodeliverperishables.Managementstatedthatonlineisoneofthefastest-growingsalesareasandthatmorecustomersareseekinggrocerydeliveries.

Amazonheldonlya0.2%shareoftheUSgrocerymarketin2016.

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• WholeFoodsreportedeightconsecutivequartersofcomparablesalesdeclines,asconventionalgrocersandmassmerchantsstartedofferingorganicproductsandlaunchingtheirownhealthyprivate-labelbrands.Inresponse,WholeFoodswasforcedtocutpricesandmarginshavesufferedasaresult.

WillAmazon’sAcquisitionofWholeFoodsDisrupttheUSGroceryIndustry?Amazon’sacquisitionofWholeFoodshasdramaticallyshakenuptheUSgroceryindustry.FollowingtheannouncementinJune,thesharepricesofseveralUSgrocersandmassmerchantsdived,revealingthattheanalystandinvestorcommunityexpectsthemergertointensifycompetitioninthegrocerysector.

OnAugust24,Amazonannouncedthefollowing:

• WholeFoodswilllowerpricesonselectedbest-sellinggrocerystaplesfromAugust28.

• AmazonPrimewillbeintegratedintoWholeFoods’point-of-salesystemandPrimememberswillenjoyspecialsavingsandin-storebenefits.PrimewillbecomethecustomerrewardsprogramforWholeFoods.

• WholeFoods’privatelabelproductswillbeofferedthroughAmazon’svariousonlinegroceryservices.

• AmazonLockerswillbeinstalledinselectedWholeFoodsstores,forpickupandreturnofAmazonorders.

Amazonalsosaidthatthecompaniesplantooffermore“in-storebenefits”andlowerpricesforcustomersastheyintegrate.Inthemediumterm,weseepotentialforthefollowing:

• OvercomeAmazon’slast-milelogisticshurdle:WholeFoodscouldprovideatleastapartialremedytoAmazon’sfreshfood,last-miledeliverylogisticshurdle.WholeFoods’444USstoreswillprovideAmazonwithaccesstohundredsoflocaldistributionpointsthatcouldbeusedtofulfillgrocerydeliveries,includingrapid,one-hourorsame-dayorders.

• Launchagroceryclick-and-collectservice:AlthoughWholeFoodshastestedclick-and-collect,Amazoncouldlaunchacomprehensiveclick-and-collectserviceundereithertheAmazonFreshorWholeFoodsbanners.ThiswouldbringAmazon’sgroceryofferingtomultiplenewlocationsacrosstheUS.

• Improvedataanalytics:AmazonwillacquirevaluablecustomerdatathroughtheWholeFoodsdeal,andtheduocanapplyAmazon’sdataanalyticstechnologytobetterpredictwhatgoodstocarryinstoresandonlineandtodevelopandbuildbetterprivate-labelproducts.

WecouldultimatelyseeAmazonoperatingahybridonline/brick-and-mortargrocerymodel,includingamixofpickupandhomedelivery.

WholeFoods’444USstoreswouldprovideAmazonwithaccesstoarefrigerateddistributionsystemthatitsregularfulfillmentnetworklacks.

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Amazonhasalreadydemonstratedthatitiswillingtoincurlowerprofitsforyearsinordertoestablishafootprintandbuildmarketshareinagivensector,meaningwecouldseeitinvestininnovativeservicestobuildshareinthegrocerysector.

Thetie-upwillcertainlyactasacatalystforotherfoodretailerstoaccelerateandimprovetheire-commerceinitiatives—andtheserivalscouldbepromptedtoinvestfurthershouldAmazonunveilfurtherinitiativesonthebackoftheWholeFoodsacquisition.

Source:iStockphoto

DeliveryPartnersDeliveryservicescompanies,suchasSanFrancisco-basedInstacart,donotownrefrigeratedwarehouses,butinsteadsendthird-partycourierstosupermarketsandconveniencestorestopickupgoodsanddelivertocustomers’homes.

GoogleExpress• GoogleExpressletsonlineshoppersorderhealthandbeautyitems

anddrygoodgroceries;itnolongerdeliversfreshgroceries.AsofSeptember2016,GoogleExpresshadapresenceinaround75%oftheUS.

Instacart• Instacartisagrocery-deliverystartupvaluedataround$3.4billion,

asofMarch2017.Instacartchargesaflatfeeof$14.99amonthforunlimitedgrocerydeliveries.Thecompanyiscurrentlyunprofitable,butisexpectedtobecash-flowpositivein2017.Instacarthasbeengrowingrapidlyandaimstodoublethenumberofcitiesitcoversbytheendof2017.

• AldiissettotrialgrocerydeliveriesviaInstacartinthreeUScities.

Uber• WalmartisamongthoseofferinghomedeliveryviaUberinselected

areas.Uberbeganpartneringwithretailersin2015,andlaunchedUberEATSforrestaurantdeliveriesintheUSin2016.

SanFrancisco-basedgrocery-deliverystartupInstacartwasvaluedataround$3.4billion,asofMarch2017.

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WalmartWalmartisthelargestfoodsellerintheUS,withnearlyhalfofits$308billioninannualUSrevenuesfromgrocerysalesinthefiscalyearendedJanuary2017.

Approximately90%oftheUSpopulationliveswithina10-mileradiusofaWalmartstore,soleveragingthevaststorebaseforonlinepickupordeliveryisnotonlyconvenient,butmakessenselogistically.

In2016,Walmartacquirede-commerceretailerJet.com,whichoffersatechnologybasedonalgorithmsthathelpsshopperssavemoneythroughavarietyoffulfillmentoptions.Jet.comalsosellsfreshgroceriesonlineinselectUScities.

Walmarthasslowedplanstobuildphysicalstores,with55supercentersandsmaller-formatstoresslatedforfiscal2018,downfrom132infiscal2017.Whendecidingtoopennewstores,Walmarttakesitse-commercestrategyintoconsideration.

OnlinegroceryisafocusforWalmart:

• AsofAugust2017,approximately900storesoffersame-daycarpickupoffreshfood,upfromcloseto400locationsattheendofthesecondquarteroffiscal2017(seeourpreviousonlinegroceryreport).Thecompanyplanstoexpandthistoover1,100storesbytheendofthecurrentyear.

• Walmartreportedtotalonlinenetsalesup60%yearoveryearinthesecondquarteroffiscal2018;thisincludesnongrocerysalesandcommissionfromthird-partysellers.Grossmerchandisevolume(GMV)—whichisthetotalvalueofsales,whethermadebyWalmartorthird-partysellersonitssite—grewby67%inthesecondquarteroffiscal2018.

• Onitssecondquarterearningscallforfiscal2018,managementstatedthatonlinegroceryhasgrownquickly.Ithasbeenabletoapplythe15yearsofASDAfooddeliveryexperienceitamassedintheUKtobuildoutitsonlinegrocerypickupbusinessintheUS.

• Thecompanyiscurrentlytestingautomateddrive-throughpickupkiosksthatallowshopperstoenterapickupcodewhiletheywaitforthekiosktofetchtheorderfrombinsinside.

• Becausethecostsandlogisticsmakeitessentiallyimpossibletoperformsame-daydeliveryoffreshandfrozenfoodfromacentralwarehouse,Walmartistestingsame-daydeliveryat10stores,whichareperformingsolidly,accordingtomanagement.

• InJuly2017,WalmartunveiledEasyReorder,amobileappsimilartoAmazon’sDashbutton,toreorderfrequentlypurchaseditemsandtocollectcustomerdata.

• InAugust2017,WalmartannouncedanexpansionofitstrialpartnershipwithUbertooffergroceryhomedelivery.ThetrialwaslaunchedinPhoenixin2016andtherecentexpansiontakestheservicetoOrlandoandDallas.

Approximately90%oftheUSpopulationliveswithin10milesofaWalmartstore



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KrogerKrogeristhelargestsupermarketchainintheUSandthesecond-largestretailerintermsofgroceryrevenuesin2016behindWalmart,accordingtocompanyfinancialstatements.

• Thecompanycontinuestorolloutclick-and-collectorcurb-pickupservices.Asofthefirstquarteroffiscal2018,itofferedthisserviceatover660ofits2,778stores,upfromnearly400storesattheendofthesecondquarteroffiscal2017.

• Inthefirstquarteroffiscal2018,thecompanyreported30%year-over-yeargrowthinnewdigitalcustomersandanover30%riseindigitalvisits.

• KrogeristestingdeliverypartnershipswithUber,ShiptandInstacartinselectedmarkets.Accordingtothecompany,itdoesnotmakesoundeconomicsensetoowntrucks,soitpreferstousethird-partypartnersfordelivery.

• Krogercontinuestofocusonnaturalandorganicproductsandready-to-eatmealsolutions,twoofthehighestgrowthareas.In2016,itsnaturalandorganicsalesreached$19billion.Krogerhasalsolauncheditsownmealkitservice.

Peapod• PeapodisownedbyNetherlands-basedfoodretailerAholdDelhaize,

whichhasaleadingpositionontheUSEastCoast.Foundedin1989,PeapodwasoneofthefirstUSgrocerydeliverycompanies.

• PeapodincreasedthecapacityofitsNewJerseywarehouseby25%yearoveryearinthesecondquarterof2017,andcurrentlydelivers20,000ordersweekly.Itisalsobuildinganewhome-deliverycenterinChicagotoaddcapacitytotheChicagomarket.

• Thecompanyrolledoutanannualsubscriptionservice,thePeapodPodPass,whichchargesafeeforunlimitedhome-deliveryorpickupservices.ThePodPasscustomerbasegrewby14%yearoveryearinthesecondquarterof2017.

• Peapodrecentlylauncheditsownbrandlineoffreshmealkits.

• Managementstatedthatsalesaregrowinginthehighsingledigits.

Peapodsalesaregrowinginthehighsingledigits.

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TargetTarget,rankedthe11th-largestretailerintheUS,haslessfreshfoodgroceryexposurethancompetitormass-merchantretailerWalmart.SinceanewCEOjoinedin2014,Targethasmadeeffortstorevampitsgrocerybusiness,whichaccountsfor22%oftotalannualsalesofalmost$70billioninfiscal2016.

• Tohelpexpanditssame-daydeliveryservice,inAugust,TargetacquiredGrandJunction,adeliverytechnologycompanybasedinSanFranciscothatmanageslocaldeliveryforretailersthroughanetworkofmorethan700carriers.TargethadalreadybeenworkingwithGrandJunctiononasmall,same-daydeliverypilotoutofitsTribecastoreinManhattan.TheservicewillbeexpandedtootherNewYork-areastoresinfall2017,andtoothercitiesin2018.

• Target’sgroceryofferingiscurrentlylimitedtoshelfstaples,althoughthecompanyistestingTargetRestock,anext-day,home-deliveryserviceofhouseholditemsforTargetREDcardholders.

• Thecompanyhasmadeanaggressivepushtoaddorganicandgluten-freebrandsandexpandeditsprivate-labelorganicbrandSimplyBalanced.

• Targetscrappeditstrialcurbside(drive-thru)pickupserviceinJune2016.However,inJuly2017,thecompanylaunchedanewtrialofcurbsidepickupinMinneapolis.Targetcustomerscanalsopickupselectedgroceryitemsin-store.

CostcoCostcoisthelargestmembership-onlywarehouseclubinNorthAmerica.Accordingtothecompany,onlinesalesamountedtolessthan3.5%oftotalsales,representingover$4billioninrevenuesasofthethirdquarteroffiscal2017.

• Onlinesalesincreased11%yearoveryearinthethirdquarteroffiscal2017,thelatestreportedearningsquarter.

• OnlinedeliveryservicesusedbyCostcoallowtheretailertoreachincremental,primarilyurban,customers,whodonotgenerallyvisitCostcowarehouses.ItdoesnotofferfreshfoodonlineotherthanthroughthirdpartiessuchasInstacart,ShiptandGoogleExpress.Instacart,inparticular,hascontinuedtogrowdramatically—itoperatesin40Costcocities,upfrom26ayearago,andutilizes240Costcowarehouses,upfrom132ayearago.

• Costcodoesnotoperateaclick-and-collectoffering.

InAugust,TargetacquiredGrandJunction,adeliverytechnologycompanybasedinSanFrancisco.

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SproutsFarmersMarketSpecialtynaturalfoodsretailerSproutsFarmersMarketoperates268storesin15states.ItalsohasapartnershipwithAmazonPrimeNow—SproutsproductsaredeliveredthroughthePrimeNowservicetoover20markets.

• Intermsofbasketsizeandproductmix,AmazonPrimeNowbasketsareroughlytwicethatofanin-storebasket,withahigherpenetrationofheavieritemssuchasdairyandfrozenproducts.

Smart&FinalSmart&Final(S&F)isavalue-focusedgrocerychainservingbothhouseholdandbusinesscustomers.ItsstoresarelocatedprimarilyintheWesternUS.S&Freportedannualsalesof$4.3billioninfiscal2016.

• S&Fcurrentlyoffersdeliveryoronlinepickupoptionsinover150storesacrosssevenstates,representingover50%ofthestorebase.

• Onlineorderstendtobeslightlyhigher-marginandmorenaturalandorganicinnaturethanin-storeorders.

• S&Fhassloweditsstoreexpansionplans,with19storesslatedin2017,downfrom37in2016,loweringnewstoregrowthto6.5%infiscal2017from15%infiscal2016.

WhatDoestheFutureHoldforOnlineGrocery?WeexpectUSgrocersandmassmerchantstocontinuetoexpandbothclick-and-collectandhome-deliveryservices.However,duetothecostanddifficultiesoflast-milelogistics,margingenerationinthegroceryindustrywillbeevenmorechallenging,especiallyasUSgrocersarealreadydealingwithlowmarginsinthefaceofpricewarsandrisinglaborcosts.

Grocerycollectionlookstobetheobviouschoice,asitislessmargin-erosivethanhomedeliveryandoffersagoodfitwiththeUSmarket,whichseesapreponderanceofverylargestoresandhighcarusage.

Althoughthird-party,home-deliveryplayershavebeengainingmomentumintheUS,somefood-deliverystartupshavestruggledtomaketheirbusinessmodelswork.Atsomepoint,deliveryplayerswillhavetopostprofits,otherwisetheywillsoonrunoutofinvestmentfunding.

S&Fcurrentlyoffersdeliveryoronlinepickupoptionsinover150storesacrosssevenstates,representingover50%ofthestorebase.

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CompetitionfromTakeoutFoodandFoodSubscriptionDeliveryServicesUSgrocersarealsofacingsomecompetitionfromtakeoutfoodandfoodsubscription-boxdeliveryservicesthatprovidetheconveniencethatconsumersdemand.

Source:Blueapron.com

• NewYorksubscriptionserviceBlueApronoffersweeklymealkits,ingredientsandrecipesformake-at-homemeals.BlueApronrecentlycompletedanIPOinJune2015,valuingthecompanyatabout$1.9billion.Thecompanypostedsalesof$795millionin2016.

• Othermeal-kitcompaniesincludeHelloFreshandSunBasket,whichhasreceivedinvestmentfundingfromUnilever’sventurearm.

• GrubMarketandSanFrancisco-basedGoodEggsdeliverproductstoconsumersfromlocalfarmers,fisheries,foodmakersandrestaurants.

• AccordingtoaUPS/comScoresurveyconductedinearly2016,9%ofmillennialsand4%ofnon-millennialshavesignedupforamealdeliveryservice.

CompetitionfromOnlineRetailStartupsNewonlineretailstartupsarealsovyingforonlinefoodshare,andwecouldseeanevengreaterproliferationoftheseinthefuture.

SanFrancisco-basedBrandlessstartedsellingorganic,healthandenvironmentally-friendlyfoodandcosmetics.Brandlessoffersnearly200products,andallitemsarepricedat$3.Thecompanyplanstodoubleitsmerchandiseofferingbymid-September2017andeventuallybroadenthepricerange.Thecompanymanagestokeeppriceslow,asitcreatedonlyoneproductpercategorytokeepcostsdowncomparedtolargegrocerychainsthatoffernumerousproductoptions.Thecompanyhasreceivedinvestmentfundingof$50millionfromNewEnterpriseAssociatesandGoogleVentures.

NewYorkweeklymealkitsubscriptionserviceBlueApronpostedsalesof$795millionin2016andisvaluedatabout$1.9billion.

Newonlineretailstartupsarevyingforonlinefoodshare,andwecouldseeanevengreaterproliferationoftheseinthefuture.

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KeyTakeaways• OnlinegroceryintheUSisstillanemergingchannel.Weestimate

thate-commerce’sshareofthecategorywillapproach2%in2017,boostedbythecontinuedrolloutofcollectionservicesbybrick-and-mortarretailersandbyAmazon’songoingpushintothegroceryspace.

• TheUSgroceryretailingindustryischangingrapidly.Bothtraditionalandomnichannelgrocerswillhavetocompeteinthefiercelycompetitivespace.

• Amazon’sacquisitionofWholeFoodshasbroughtarenewedfocusonUSonlinegroceryshopping,asAmazonwilllikelyleveragetheWholeFoodsacquisitiontodriveitsambitiousfood-deliveryplans.

AmazonwilllikelyleveragetheWholeFoodsacquisitiontodriveitsambitiousfood-deliveryplans.

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DeborahWeinswig,CPAManagingDirectorFGRTNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comJohnMercerSeniorAnalyst

EvaKubickaSeniorResearchAssociateHongKong:2ndFloor,HongKongSpinnersIndustrialBuildingPhase1&2800CheungShaWanRoad,KowloonHongKongTel:85223004406London:242-246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,18thFloorNewYork,NY10018Tel:6468397017

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