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Online Grocery
Drivers, Barriers and Opportunities for Online Grocers

Industry Briefs
Online Grocery
Introduction
Almost a decade after the dot.com bubble burst, online grocery is beginning to show a resurgence. While the US online active
universe has roughly doubled (from roughly 100 million to roughly 200 million people) since 2001, the online presence of grocers
has increased more than 13x in the same time frame. More than 13 million US Internet users visited a grocery site in July 2009.

In this industry brief, we will delve into the key drivers behind the revitalized online grocery movement, including the ways
consumers use the Web, social media and other online tools to plan and execute purchases, how retailers and consumer package
goods companies can maximize opportunities and launch themselves into this re-emerging market, as well as what US grocers can
learn from the successful adoption of online grocery shopping in the UK.

This industry brief will examine the following areas:

• The online grocery landscape
––Hits and misses over the years
––Sizing the market
––Who are key online grocery shoppers?
• Drivers and Barriers of online grocery purchases
• What can US retailers learn from the UK?
• Emerging trends & opportunities for US-based grocers

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Industry brief: Online Grocery, September 2009
Online Grocery
Poised for Growth
In the current retail and economic environment, Online Grocery is poised for growth as it sits at the nexus of four macro-trends:

Convenience Gen Y
Online
Grocery

Broadband Customization

• Convenience: Convenience has become a critical need and expectation of consumers.

• Generation Y: Generation Y (generally defined as consumers born between 1983-92) are coming into the grocery-buying age.

• Broadband: As of July 2009, broadband is currently estimated to be at or above 2/3 U.S. penetration.

• Customization: The web platform allows for a consumer-centric grocery browsing and purchasing experience.

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Industry brief: Online Grocery, September 2009
 Online Grocery
The Online Grocery Landscape
In the brief history of online grocery services, two distribution models have emerged as viable: use of regional warehouses for
comprehensive product offerings and use of national shipments for primarily shelf stable items. Players in the space have
included online pure-plays (Webvan, FreshDirect), online retailer generalists (Amazon) and traditional grocery retailers moving
online (Safeway, PublixDirect).

Company Online Product Assortment Distribution Model

Only?
Learning Phase

Peapod Yes All Food & Bev Regional warehouses

Omaha Steaks No Meat, Meals, Gifts National ship
Webvan* Yes All Food & Bev Regional warehouses
Safeway No All Food & Bev Regional warehouses
PublixDirect* No All Food & Bev Regional warehouses
FreshDirect Yes All Food & Bev Regional warehouse
Today

Amazon Yes Shelf stable only National ship

Alice Yes Shelf stable only National ship, directly from manufacturers
Source: Company websites
*No longer exist.

In the US, 2008 online food and beverage purchases were estimated to be $3.5 – 4.0B, or less than 1% of the total category.
Although the bulk of grocery purchases take place offline, online grocery transactions tend to be larger than those made offline -
on average, shoppers tend to spend twice as much online as offline. Drivers of this phenomenon include the following:

• Free shipping and minimum order thresholds

• Upscale shopper profile drives premium/niche item purchases

• No lugging of heavy groceries leads large packages of storable items to thrive online

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Industry brief: Online Grocery, September 2009
Online Grocery
Profile of an Online Grocery Shopper
Based on an examination of online grocery shoppers within Nielsen’s online and HomeScan panels, a picture emerges of house-
holds which are:

• Older, affluent and smaller - thus more willing to pay shipping fees in exchange for convenience

• Geographically correlated with the distribution of online grocers (upscale urban/suburban neighborhoods)

Large households represent untapped opportunity – grocers will need to ensure that their online presence is easy to use, customi-
zable and convenient enough to address the hectic lifestyles of large families.

Online Food & Beverage Buyer Index

Demographic Index
HH Age <35
35 - 64
65+
< $25K
$25K - $49K
$50K - $99K Under index
$100K+ Over index
Not a High School Graduate
College Graduate
HH Size 1–2 members
HH Size 3-4
HH Size 5+
No Children in HH
Any Children (2 - 17)
Cosmopolitan Centers
Affluent Suburban Spreads
Plain Rural Living
Source: Nielsen Online Panel

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Industry brief: Online Grocery, September 2009
Online Grocery
Drivers of Online Grocery Purchasing
According to a recent Nielsen survey, over 70% of respondents reported having a positive experience purchasing groceries online,
while only 3% disliked the experience.

Drivers of Online Purchasing

Avoid crowds 39%
Find products I can’t get at Local Store 38%
Easy 36%
Special promos/deals 33%
Save on fuel costs 32%
Takes less time 31%
Better selection 27%
Avoid bad weather 24%
Less work 24%
Useful info on the website 21%
Easy way to stock up 13%
Stick to a budget/avoid impulse buys 12%

Source: Nielsen Custom Survey, March 2009

A few core drivers of positive experiences emerge from the survey results:

• Convenience
––Consumers fill up their grocery carts with the click of a button, at any time of the day or night, at work or at home
––Consumers stock up on staples without having to lug heavy packages
––Consumers need never run out - automatic replenishment options make for convenient re-ordering
––Consumers avoid driving to stores or lugging bags on public transit, navigating crowded aisles, hunting down specific prod-
ucts and waiting in line
• Selection and product information
––Virtual shelf space allows for a wide product assortment and in-depth product info
––Especially important for those with special dietary needs
• Pricing
––The online grocery shopping experience facilitates price and product comparisons
––Running shopping-cart tallies help deter impulse buys

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Industry brief: Online Grocery, September 2009
Online Grocery
Barriers to Purchasing Online
The main barriers (pricing, fees, delivery) to online grocery purchasing are, in some sense, the flip side of some of the main drivers
for online grocery:

Barriers of Online Purchasing

Shipping costs 65%

Waiting for delivery 41%

Security, privacy 36%

Can’t use coupons 31%

More expensive 30%

Confusing 31%
Can’t inspect products 17%

Just not in the habit of doing 17%

Concerned products will be damaged 14%

Source: Nielsen Custom Survey, March 2009

• Delivery fees and product pricing

––Higher prices than offline-purchased items and delivery/shipping fees can be perceived as hard to justify
––Consumers dislike not being able to use coupons they could easily use in a grocery store
• Lack of control
––Consumers cannot physically inspect products before purchase, which can be perceived as critical in categories such as
produce
––Having to wait at home during set times for a delivery counters the key benefits of buying groceries online - time-savings
and flexibility - especially when the same items could be purchased nearly immediately offline
• Behavior
––Some consumers do not yet feel accustomed to buying groceries online
––Some consumers enjoy grocery store shopping
––Some consumers are unable or unwilling to plan ahead to the degree necessary to make online grocery shopping effective

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Industry brief: Online Grocery, September 2009
Online Grocery
Learning from the UK
Online grocery penetration in the UK is roughly double US penetration. Given this relative maturity of the marketplace, there are
a few lessons to be learned.

Online Grocery Shopping Penetration Rate

16%

12%
10%
8%

US - Current UK - Dec 06 UK - Dec 07 UK - Dec 08

Source: Nielsen Homescan

As we observed in the US, online grocery shoppers in the UK tend to have higher income levels. However, unlike the US, UK
online grocery buyers tend to have larger, younger households, reinforcing the growth opportunity for US retailers to move
beyond the current niche purchaser profile.

UK online grocery shopper attitudes have also matured in recent years, moving from apprehension about the experience to more
practical concerns. This provides US online grocers with visibility to evolving shopper concerns.

Comparing a January 2009 survey to October 2006 illustrates that:

• Almost a quarter of shoppers have “no concerns” related to purchasing groceries online

• Irritation with delivery charges and delivery times is growing over time

• Concerns about purchasing groceries online – and having someone else select produce – have subsided

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Industry brief: Online Grocery, September 2009
Online Grocery
Learning from the UK (Continued)
Why is online grocery shopping more popular and more mature in the UK than in the US? What else can US retailers learn
from the UK market?

• Strong retailers and competition require strong marketing - with 4 major players in the UK – strongly led by Tesco which cre-
ated and then drove the market through heavy marketing – others were forced to follow suit, including national TV advertising
• Infrastructure improvements matter – distribution networks, product availability, substitution mechanisms, delivery times,
prices all contribute to customer satisfaction
• Price wars create interest – the battle between Tesco and Asda has driven down consumer price while driving up consumer
interest
• Alternative offers create value – “switch and save” mechanisms for easy substitutions (usually private label) achieve a 40%
click-through rate
• National home delivery is an opportunity – major supermarkets use online to fill-in regions where they are thin on the
ground – where demand existed but supply didn’t, representing an even larger opportunity in the (much larger) US
• Online customer service must be as strong as in-store – free delivery, flexible delivery time slots, fewer bags to be more
green

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Industry brief: Online Grocery, September 2009
Online Grocery
Insights and Opportunities
In examining the behaviors of online grocery shoppers, we have been able to determine that these consumers are more than 2
times as likely to:

• Read and/or post online product reviews

• Download coupons

• Search for recipes online

• Access the internet via mobile phone

These insights provide an interesting context from which to build connection and engagement with online shoppers, in 3 key
ways:

• Inform

–– Provide product information

–– Create a framework for consumer product reviews
–– Editorial reviews in key categories
• Inspire

–– Recipes and meal planners

–– Video – cooking demonstrations, celebrity chefs, product/produce guides and ideas
• Customize

–– Consumer-created shopping lists with an intelligent suggestion engine

–– Coupons – mobile coupons are a best practice
–– Advanced filtering, including dietary needs
–– Automated replenishment mechanisms

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Industry brief: Online Grocery, September 2009
Online Grocery
Summary
• Online grocery in the US is a small but expanding market, with plenty of room for innovation. The more mature UK market
provides both causes for optimism as well as watch-outs for US players entering the space. Expanding the market will require
both building awareness and establishing the value proposition of online grocery services.

• The current US online grocery shopping HH is older, wealthier and smaller. The UK market points to younger, larger families
as a key area of opportunity for the US. Ensuring the shopping process is easy and convenient for larger, time-starved families
will drive growth among this group. Educating shoppers about the benefits of shopping online – saving time and money – will
also be critical.

• Convenience is a key driver of shopper satisfaction, while delivery fees, waiting times and general uncertainty about the
experience are key barriers to purchase. Survey data from the UK illustrates that, over time, shopper attitudes will evolve from
conceptual concerns to pragmatic concerns.

• Online grocery sites must engage shoppers; value is not limited to grocers with transactional sites. Supporting the in-store
experience through digital coupons, shopping lists, store availability and more is part of this evolution.

• Emerging media platforms can inform, inspire and customize the online grocery shopping experience.

learn more

To learn more about the data sets and products referenced in this study, please email:
more.preview@Nielsen.com

This brief was based on a Nielsen Online webinar entitled: Online Grocery: Take Two.
Click here to download and view the complete presentation.

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Industry brief: Online Grocery, September 2009
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