The Supermarket Guide to Online Grocery Competition Where It’S Coming from and How It Stacks Up

The supermarket guide to online grocery competition Where it’s coming from and how it stacks up

May 2016 By Brick Meets Click

Bringing the future of food retail into focus.

MyWebGrocer supported the publication of this report.

THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 2

EXECUTIVE SUMMARY

Who competes with multichannel supermarkets for online grocery?

>>> There are 2 main types of competition: Direct competitors, and what we call Basket Bandits. The first will steal your customer, the second siphons off sales, shrinking their basket size. Direct competitors offer the full spectrum of supermarket products, Basket Bandits only a portion of them.

>>> Basket Bandits are the primary competition for multichannel SHARE OF TOTAL ONLINE GROCERY TRIPS supermarkets today. They dominate on all dimensions: number of sites, reach, share of trips and share of spending (p.7). Basket Bandits include Amazon, a host of other online-only retailers (including meal kits), and the online “stores” of mass and club retailers (p.12).

>>> Amazon is the single biggest player in online grocery, even with AmazonFresh in limited rollout. It attracts 48% of all online grocery trips (p.6); its share of spending already equals that of multichannel supermarkets at 32% (p.14); and its share of grocery trips goes up significantly as households increase the number of online trips they make in a month (p.15).

>>> Good news: One-stop grocery shopping clearly has a role to play in the online landscape. Multichannel supermarkets win a significant share of the online business once they get established in a market, and so do their direct competitors (p.9). Absent strong online supermarket services, shoppers lean heavily on Basket Bandits – in those Basket Bandits markets, Basket Bandits capture 25% to 50% more spending. Amazon = 48% Non-Amazon = 21% >>> Bottom line: Consumers are beginning to change where and how they buy groceries. If Mass & Club = 15% multichannel supermarkets don’t move to meet these emerging needs, spending will continue to shift online to direct competitors and Basket Bandits (Amazon chief among them). Local market conditions will determine the size of the shift and where the spending goes. www.brickmeetsclick.com © 2016 Brick Meets Click THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 3

Contents

Executive Summary Contents Introduction

PART 1 – FRAMEWORK 5 ABOUT THE STUDY: The research on which this report is based was Who are the competitors? conducted in the fourth quarter of 2015 • The landscape from 40,000 feet and involved surveys of 12,000 US • Sites, trips, reach, and market share shoppers who are digitally connected to their food retailer in the Northeast, • Market-by-market spending Midwest, and West. The findings • Satisfaction levels provide solid new insights into how the

competitive landscape for online PART 2 – COMPETITORS 11 grocery is developing.

Direct Competitors FOR MORE INFORMATION about Basket Bandits how the data from this or other Brick • Amazon! Meets Click research studies can help • Non-Amazon sites you grow your business, contact Steve • Multichannel Mass and Club Bishop at [email protected]. CONCLUSION 21 Note: As a courtesy to the retailers who Appendix partnered with us for the surveys, we are not disclosing specific retailer names or markets. Contact Information

Introduction The different online grocery executions, like click-and-collect and third-party providers, attract plenty of attention from the media and shoppers, but we feel it’s time for an evidence-based, 360˚ assessment of the competitive landscape for online grocery.

Based on a survey of more than 12,000 digitally connected grocery shoppers across the US, this study: • Identifies and classifies the different types of online competition facing supermarkets. • Describes how they are currently sharing the market. • Evaluates the strengths and weaknesses of these competitors in comparison with multichannel supermarkets.

These findings will help grocery and food retailers make both short-term and long-term decisions about how to: • Protect current business and acquire new business from competitors who are slow to respond to changes in consumer behavior. • Develop a vision of how to win sales as consumers change the way they buy food and groceries.

The data in this study was collected from three regional markets. The averages that result from combining the data provide an understanding of the overall competitive landscape that is evolving, but it’s important to recognize that the progress of online grocery will not be uniform. Therefore, this report also includes information about the differences among markets in the presence and penetration of the main types of competitors. These variations can provide insight into how the competition may unfold in a given market.

PART 1: FRAMEWORK

Who are the competitors?

The competitive landscape for online grocery is big and diverse. The 12,000 consumers surveyed for this study visited a total of 158 different online sites to shop for groceries in the past 30 days. Clearly grocery shoppers have lots of choices. We organized the players into three categories: multichannel supermarkets, direct competitors, and Basket Bandits.

1. MULTICHANNEL SUPERMARKETS Traditional, one-stop-shopping supermarkets that offer online grocery services to their customers.

2. DIRECT COMPETITORS Direct competitors have the potential to capture all of a supermarket customer’s business. They compete for the whole basket, offering the entire range of supermarket products, from fresh to frozen to shelf-stable foods and shampoo to cleaning supplies. These online-only supermarkets include Peapod, Fresh Direct, AmazonFresh, and similar sites.

3. BASKET BANDITS Basket Bandits create sales leakage – they have the ability to siphon off some, but not all of a supermarket customer’s business. They typically carry only some of the product categories that supermarkets carry. Basket Bandits include Amazon-branded sites, a variety of non-Amazon online-only retailers, the online “stores” of mass and club retailers, and meal kit sites. Their impact can be hard to see, but they represent significant incremental competition.

The online grocery landscape from 40,000 feet

Multichannel supermarkets attract 10% of all online grocery trips, direct competitors attract 6% of trips, and Basket Bandit sites attract 84% of trips.

WHO IS CAPTURING ONLINE GROCERY TRIPS TODAY? Share of total online grocery trips

>>> Basket bandits dominate the market today.

Basket Bandits also: • appeal to consumer interest in unique and specialized products • skim off higher margin items • create opportunities for subscription and other automatic replenishment services

Four perspectives: A scorecard on the competition

Our analysis covered four important dimensions of the online grocery landscape: the sites shopped for groceries, the reach of those sites, share of trips, and share of spending. The scorecard below shows how the three types of competitors compare on these dimensions.

ONLINE GROCERY – SITES, REACH, TRIPS, & DOLLARS

>>> Basket Bandits dominate on every dimension. It is important to recognize them as the primary competition for multichannel supermarkets.

>>> The strength of the Basket Bandits means CPG brands need to understand their appeal and decide which ones represent worthwhile routes for marketing to consumers.

Share of Sites measures the availability of online grocery options. Reach measures the percentage of households using each type of site. Share of Trips measures of how frequently customers are going to each type of site. Share of Dollars shows where consumers are spending their grocery dollars online.

www.brickmeetsclick.com © 2016 Brick Meets Click THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 8 Bringing the landscape into focus Sites Reach Trips Dollars 6% mc supermarket 12% mc supermarket 10% mc supermarket 32% mc supermarket 3% direct competitors 9% direct competitors 6% direct competitors 9% direct competitors

91% Basket Bandits 79% Basket Bandits 84% Basket Bandits 59% Basket Bandits

The strong appeal of Basket Share of spending numbers Only 9% of sites were When it comes to reach, Bandits is evident in their show the impact of the bigger operated by multichannel Basket Bandits still rule, but larger share of trips. basket sizes sold by multi- supermarkets and their direct not so much. channel supermarkets and competitors; 91% were direct competitors. operated by Basket Bandits. >>> Higher reach numbers for >>> Basket Bandits are the supermarkets and direct “on ramp” for consumers who >>> Expect market share for >>> Basket Bandits are a competitors compared to are beginning to shop online share of trips shows that one- supermarkets and their direct significant source of sales for groceries. It remains to be stop-shopping retailers still competitors to increase as leakage for supermarkets. seen whether business to have a role to play in online these services become Consumers are spreading these sites will decline as grocery. available in other markets. their shopping broadly across more online one-stop- their online options. shopping options become available in a market.

Market-by-market share of spending reveals surprising strengths.

HOW THEY STACK UP >>> There’s no time to lose. Multichannel supermarkets win a significant share of the online business if they move aggressively to establish themselves in a market, Markets A & B. The leading food and direct competitors can also capture a substantial share once they arrive. retailer has offered multichannel services for several years in these markets. SHARE OF ONLINE GROCERY SPENDING BY MARKET

Market B. In the only market with multiple direct competitors, they capture nearly 20% of online spending.

Market C. The leading supermarket offered only limited online services in this market, and it appears that consumers have turned to Basket Bandits to fill the void.

Amazon. Penetration of Amazon-branded sites is significant across all markets – but it is substantially higher in markets where multichannel supermarkets are not as well developed. Market A: Supermarkets 51%, Direct 3%, Basket Bandits 46% (Amazon subset 26%) Market B: Supermarkets 35%, Direct 19%, Basket Bandits 46% (Amazon subset 24%) Market C: Supermarkets 11%, Direct 5%, Basket Bandits 84% (Amazon subset 47%) www.brickmeetsclick.com © 2016 Brick Meets Click THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 10

Satisfaction levels: What are the differences?

Compared to the multichannel supermarket offerings, direct competitors don’t deliver the same level of satisfaction on a number of activities, while the Basket Bandits outperformed the supermarket on all but one activity – getting additional discounts on coupons.

SHOPPER SATISFACTION WITH ONLINE GROCERY SHOPPING BY ACTIVITY 5 = extremely satisfied; 1 = not satisfied at all Even though multichannel supermarkets outperform the competition in terms of adding coupons for additional discounts, this is still their lowest area of performance. It will make sense to find ways to remove this vulnerability.

PART 2: THE COMPETITORS The Direct Competitors: Meeting supermarkets head-to-head

Multichannel Direct Supermarkets Competitors 10% of trips 6% of trips 32% of spending 9% of spending

Multichannel supermarkets are defined in this study as Online-only supermarkets that offer the entire range traditional, one-stop-shopping supermarkets that offer of one-stop-shopping products are direct competitors online grocery services to their customers. These because they compete for customer, not just part of include ordering via mobile site, app, or computer and the basket. They carry everything traditional fulfillment via home delivery, click-and-collect, pick-up supermarkets typically carry – from fresh to frozen and locker options, or third-party providers like Instacart, shampoo to cleaning products. Shipt, GrocerKey, Rosie App, etc. Examples: FreshDirect, Peapod’s stand-alone Examples: Hy-Vee, Publix, Kroger, Weis, Hannaford, operations in Chicago, and AmazonFresh. Amazon’s Giant Foods, Safeway, Lunds & Byerlys, Stop & Shop, presence in the direct competitor space will expand as etc. AmazonFresh is introduced in more markets.

The Incremental Competition: Who are the Basket Bandits?

Basket Bandits attracted 84% of all online grocery trips, encompassing a wide range of sites – from Amazon to club and mass stores, and a variety of sites that serve specialized needs. The landscape for incremental competition from Basket Bandits breaks down like this.

See page 17 for non- Amazon site definitions and page 19 for mass and club sites.

Amazon sites attracted 48% of all online grocery trips – up from 39% two years ago.

>>> Amazon is already the biggest The increase in trips is driven by the popularity of Amazon Prime, Prime pplayer in online grocery, capturing Now and Subscribe & Save. AmazonFresh is not yet a large part of nnnnearly half of all trips. the picture, since it was new or not available in the markets we surveyed.

48% AMAZON OFFERINGS HEADS UP! These results actually understate Amazon Prime Amazon’s impact. While the data includes 2015 Amazon Prime Now products purchased from other sellers on 4Q Amazon Prime Pantry Amazon, it does not include transactions with 39% Amazon Dash Buttons sites owned by Amazon but operated under a Amazon Dash Replenishment system different name (diapers.com, soap.com, etc.). 2013 AmazonFresh (aka PrimeFresh) Amazon Subscribe & Save 4Q Amazon Family AMAZON-BRANDED SITES SHARE OF TOTAL ONLINE See the appendix for a brief description of each of these services. GROCERY TRIPS

Amazon and multichannel supermarkets capture virtually identical shares of online spending.

The competitive challenge that Amazon sites already pose for the supermarket comes into much sharper focus when Amazon’s share of online grocery spending (excluding AmazonFresh*) is compared with that of multichannel supermarkets. They are virtually identical at 32%.

The difference in share of trips and share of spending is due to significantly larger transactions enjoyed by supermarkets.

AMAZON vs. MULTICHANNEL SUPERMARKETS SHARE OF SPENDING

*AmazonFresh was new or not available to shoppers in the markets studied.

The Amazon multiplier: As online grocery trips per month increase, so does Amazon’s share of those trips.

>>> Amazon’s share of grocery trips goes up significantly as households increase the number of online trips they make in a month.

When online shoppers make just one trip to any site each month, 43% of those one-trips-per-month are to Amazon. By the time shoppers make 6 or more online grocery trips per month, 64% As more households adopt Amazon captures 64% of those trips. Amazon Prime, Amazon will capture a greater share of online grocery spending. This is a growing competitive threat for multichannel supermarkets 49% – Prime memberships grew by 47% in the first quarter 43% of 2016.

AMAZON SHARE OF TOTAL ONLINE GROCERY TRIPS

Trips per month ----- 1 trip ------2 to 5 trips ------6+ trips

Looking across the shopping experience, satisfaction with Amazon exceeded that for supermarkets in all but one area – getting additional discounts with coupons.

AMAZON vs. SUPERMARKET – SHOPPER SATISFACTION 5 = extremely satisfied; 1 = not at all satisfied

>>> Expanding the availability of online coupons would strengthen the advantage multichannel supermarkets have over Amazon in this area.

Multichannel supermarkets also face incremental competition from a large number of non- Amazon online-only sites that are created to serve specific sets of customer needs. While no one group dominates these non-Amazon Basket Bandits, they attract more than a fifth of all online grocery trips as a group.

NON-AMAZON SITES – SHARE OF ONLINE GROCERY TRIPS WHO ARE THE NON-AMAZON BASKET BANDITS?

Multibrand HBC Drugstore.com, Beautybar.com, Vitacost, etc.

Multibrand CPG Jet.com, Boxed, Petsupplies.com, etc.

Better-for-you Thrive Market, Door-to-Door Organics, Abe’s Market, etc.

Meals and meal kits Blue Apron, Hello Fresh, etc.

CPG-branded sites Keurig, P&G, etc.

Non-Amazon sites vs. multichannel supermarkets

REPEAT CUSTOMERS HOW’S THE EXPERIENCE?

Multibrand HBC and CPG-branded Measures of satisfaction across the purchase experience may help to explain sites were most likely to be used differences in “likelihood to use again.” again, while better-for-you products and meals and meal kits were less Across the purchase experience, satisfaction levels are highest for the multibrand likely, but on the whole, the response CPG and CPG-branded sites and and lowest for the sites selling better-for-you products. is favorable.

LIKELY TO USE AGAIN NON-AMAZON SITES – SHOPPER SATISFACTION

Percent to shoppers using each option 5 = extremely satisfied; 1 = not at all satisfied

Basket Bandit competition from mass and club stores captures 15% of online grocery trips.

Basket bandit competition from other multichannel retailers comes mainly from two sources: mass retailers like Walmart and Target, and club stores like Costco and Sam’s Club. Because their online offerings include only some of the product categories that supermarkets typically carry, they are considered incremental competition.

MASS AND CLUB SHARE OF TOTAL ONLINE GROCERY TRIPS Altogether, this group captured 15% of online grocery trips, with 12% going to mass retailers and only 3% going to club stores.

But, when it comes to the average share of spending, the two are the same: Each captures 4% of online grocery spending.

Online mass and club vs. multichannel supermarkets

Levels of satisfaction are quite similar for multichannel supermarkets, mass retailers and club stores, but supermarkets enjoy a higher “likelihood to use again” than either competitor.

LIKELY TO USE AGAIN ONLINE MASS & CLUB vs. MULTICHANNEL SUPERMARKET Percent of shoppers using each option 5 = extremely satisfied; 1 = not at all satisfied

CONCLUSION A beginning, not an ending – it’s still early days.

The challenge for supermarkets is that when consumers start buying some of their groceries online, they spread their shopping broadly across a variety of sites to find what they want.

Today, the traditional supermarket/CPG marketing channel is being outflanked by these online options. We know that more than 40% of digitally connected shoppers have made the jump to buying some groceries online.1 Current trends indicate that more households are making the shift every day – to get specific items they can’t get in-store, to buy at lower prices, or to take advantage of conveniences like subscription buying and delivery for immediate consumption. If multichannel supermarkets don’t offer similar opportunities, significant sales leakage will occur.

The good news is that this study shows that multichannel supermarkets and direct competitors can capture a significant share of the online business when they establish a strong presence in local markets. There is clearly a role for one-stop-shopping alternatives to play in the competitive landscape for online grocery.

However, customer satisfaction scores show that there are four important areas where multichannel supermarkets have an opportunity to improve. • ease of reviewing product information • limited opportunities to get additional discounts using coupons • receiving all the items ordered • consistent notification of substitutions

1 Brick Meets Click Research Study: How Consumers Are Using Online Grocery and What It Means for Retailers in 2016, March 2016. www.brickmeetsclick.com © 2016 Brick Meets Click THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 22

Looking ahead: What success looks like

Assuming current trends continue, supermarkets will find purchases continuing to shift to new and more specialized shopping options, a shift that will be difficult to neutralize with traditional offers.

So what is the way forward? The findings of this study clearly establish that multichannel supermarkets can find a strong position in the competitive landscape for online grocery. Those who succeed will: • Offer online shopping experiences that are “best in class” or at least on par with other sites their customers are shopping (because consumer expectations are strongly shaped by those experiences). • Become skilled at delivering the blend of product and experience consumers are seeking, and make sure that their online experiences complement the appeal of shopping in- store. • Strike a balance between what’s unique and appealing to customers, and what’s familiar and expected.

Among the biggest challenges will be finding ways to reduce the cost of fulfilling online orders and delivering a personalized online experience that meets shoppers’ expectations.

Among the biggest opportunities will be establishing new collaborative relationships with CPG brands that give the brands a way to grow their business while complementing the retailer’s brand-building effort.

The results will cement customer loyalty, win a greater “share of wallet” from core customers, and expand the appeal to secondary shoppers to shift more sales to your store. www.brickmeetsclick.com © 2016 Brick Meets Click THE SUPERMARKET GUIDE TO ONLINE GROCERY COMPETITION 23

Guidance on what to do next

For supermarkets that are already selling online: • Evaluate your shopper’s online shopping satisfaction across multiple activities. • Identify shopping occasions where there are immediate opportunities to drive sales increases, like ordering food for immediate consumption. • Collaborate with innovative CPG brands to bring shopper insights to digital merchandising.

For supermarkets that don’t yet sell online or have been slow to roll it out: • Take steps to expand the number of customers with whom you have digital connections, and identify what can be done to strengthen digital engagement before offering online shopping options. • Evaluate opportunities to offer online ordering in prepared foods, deli, and bakery, areas where consumers are already familiar with (and expect) online ordering. • Assess the competitive landscape in your market to see how much your customers are spending online and which categories are shifting to online competitors.

For CPG brands, the study findings highlight opportunities to: • Identify which supermarkets are successfully expanding into online grocery, and prioritize them as potential online marketing partners. • Work with progressive supermarkets to establish the presence of your brand online using affinity promotions and personalization with the goal of earning an established position on the customer’s shopping list.

Amazon offerings (as described on Amazon.com)

Amazon Subscribe & Save (free): Features tens of thousands of grocery and household products that can be put on subscription for arrival interval of 1 to 6 months. The first four products receive a 5% discount. When shoppers go to 5 or more, the savings increase to 15%. It is also possible to clip additional coupons for additional savings off the first purchase. Subscription can be canceled or adjusted at any time – no commitments or fees and shipping is always free.

Amazon Prime: ($99/year) Get two-day free shipping, exclusive access to movies and TV shows, ad-free music, unlimited photo storage, and Kindle books.

Amazon Prime Now: Exclusive to Prime members. Two-hour delivery is FREE and one-hour delivery is available in most areas for just $7.99. Available from early morning to late night, seven days a week. Currently available in select areas and via native mobile apps (Android & Apple) but is expected to be incorporated into the main website in May 2016.

Amazon Dash Buttons: Exclusive to Prime members. There are now 100+ branded dash buttons available to Prime Members who hit the button when it is time to reorder and get an email confirmation so that they can cancel or change the order if needed. The program requires that the user has the most up to date mobile Amazon app and needs each button to connect to the home’s WIFI network. Everything else is handled through the default 1-Click shipping and payment information.

Amazon Dash Replenishment System (DSR): For consumables that are associated with a device (such as water filters or printer cartridges), device makers have two options for integrating with DRS: they can integrate a physical button right into their device for reordering, or they can measure consumable usage so that reordering happens automatically. Example of brands working the DSR system include Brita, Brother and Samsung printers, Purell sanitizer dispensers, GE and Whirlpool washing machines, PetNet, Oster and CleverPet automated pet feeders, Gmate blood glucose monitors, etc.

Amazon Pantry: Exclusive to Prime members. Shop for groceries and household products in everyday package sizes (for example, a single box of cereal) and have access to hundreds of brand name product coupons. Fill a virtual box of items from the Prime Pantry store and have them conveniently shipped via Ground (no-two day shipping available) to your doorstep for a flat delivery fee of $5.99 per box – no P.O. Boxes or Amazon Lockers.

Amazon Family: Exclusive to Prime members. Offers 20% savings on diapers subscriptions plus additional family-centric discounts and recommendations, compliments of Amazon Family. Simply create a child profile during signup to begin.

AmazonFresh: Requres a PrimeFresh membership ($299/year) Next-day and early morning delivery of fresh grocery, everyday essentials, products from neighborhood shops & restaurants, plus Amazon.com items. Free delivery for orders over $50. Currently availabe in Seattle, Los Angeles, NYC and Philadelphia.

Brick Meets Click: Business-building expertise

Want a deeper understanding of how these findings impact your business? The large base of information generated by this study can be interpreted to serve the interests of grocery retailers, suppliers of branded package goods, food commodity groups, and those interested in retailer/supplier collaboration and the evolving retail landscape.

Need a second opinion on your customers? Use Brick Meets Click survey methods and benchmarks to:

• Validate your assumptions about current competition and offerings • Show how your customers’ behavior compares on key benchmarks

CONTACT Steve Bishop, Managing Partner [email protected]

Our thanks to MyWebGrocer for supporting the publication of this study.

MyWebGrocer offers the only complete Digital Experience Platform for grocers and Consumer Packaged Goods brands. The platform powers every interaction to attract, engage, transact with and retain grocery shoppers through digital offerings ranging from planning and shopping platforms

to mobile and social tools. The company also offers opportunities for consumer packaged goods brands looking to reach consumers with relevant advertising, promotions and offers throughout their grocery path to purchase. For more information, please visit MyWebGrocer.com, and connect with us on LinkedIn and Twitter.