The U.S. may be home to some of the biggest e-commerce companies in the world, but shoppers are slow to adopting one thing online — buying groceries.
American consumers prefer physical retail stores over shopping for groceries online compared with their peers in other developed markets, according to the latest Citi Research. The penetration of online grocery sales in the U.S. has been growing to 3.9% from 1.8% a decade ago , but still below the global average of 6.7%, and a far cry from some East Asian countries like South Korea, which has a penetration rate of 20%.
Some customers say they enjoy the experience of going into the store to touch and pick fresh produce. But the lack of infrastructure and high cost for retailers appear to be the bigger issues. Only 76% of the U.S. population has access to the internet, compared to over 90% in other developed economies. Players in the field, including giants like Amazon and Walmart, are trying to figure out how to offer online groceries in a cost-effective way, providing convenience without eating too much into their bottom lines or burdening consumers with extra costs.
The key to making any delivery service profitable is to scale up and combine trips to reduce cost. The Citi survey finds most food retailers are seeing that home delivery remains unprofitable in major metropolitan areas, such as New York City and Los Angeles. Therefore, it will be even harder to make it a viable service in rural areas, where customer density is lower.
The U.S. has its own answer to home delivery
That hasn’t dampened grocery retailers’ interest in cultivating customers habits of shopping online. After all, the U.S. online grocery market of 26 billion has a higher growth rate than the grocery industry as a whole and is expected to gain at a 16% annual growth rate in the next five years. So retailers want to be in the game early as consumers switch to shopping online.
Amazon, which now accounts for a quarter of online grocery purchases, has been expanding two-hour delivery to more Whole Foods locations. Walmart has been experimenting home delivery with third parties and its own associates. Even Costco, the wholesale giant that provides a unique in-store experience, is investing in same-day grocery delivery.
While testing ways to fulfill the last mile delivery to people’s doorway, traditional retailers like Walmart are also leveraging their physical store bases and the high car ownership in the U.S. by providing order online and pick up in-store services. In the Citi survey, 43% of consumers say they actually prefer to pick up in stores or parking lots after ordering on an app or website.
“I love being right there in the kitchen to see what I need, not in the store aisle wondering. My husband and father will often go pick the groceries. It’s a huge timesaver for me!” Elaine Martinez, a Walmart customer in Oro Valley, Arizona, told Yahoo Finance.
Analysts like the idea, too. Pick-up in-store can leverage existing stores and labor, and Carrefour has proven that it can be profitable in Europe. This has been a bright spot for traditional players like Walmart. Compared to in-store baskets, Walmart Grocery Pickup baskets are much larger as consumers tend to buy more expensive items in the basket, according to a report from market intelligence firm Numerator. Walmart plans to offer Grocery Pickup in 3,100 stores and same-day Grocery Delivery in 1,600 stores by the end of this year.
“Early adoption is key. This service is attracting very valuable shoppers, who are building larger baskets using Online Grocery Pickup than they do in-store. It’s going to be much harder to get customers to switch over in an online grocery world, especially those who have used a competing service like Prime Now multiple times,” analysts at Numerator wrote.