The future of online supermarkets

— Published September 30th, 2009  |  by Elizabeth McGuane

With additional research by Fabrizio Menghini Calderón, Conor O'Sullivan and Peter Keane.

Today's online supermarkets have three major challenges:

• Building customer loyalty
• Overriding resistance to buying food online
• Developing easy-to-use online platforms

Many of the major players in the UK and Ireland today have moved online from the traditional offline sector, bringing some degree of consumer trust with them.

But that trust can just as easily be lost due to a poor on and off-line user experience.

After some false starts during the last dot com bubble, the sector has exploded in the UK over the past few years, alongside wider broadband use and deepening public acceptance of online shopping across all sectors.

Though it's still a 'niche channel' - in the UK, one of the fastest-growing markets, it still amounts to just 3% of total grocery sales - its growth has been significant.

Whether it continues to grow is another matter - and one that has everything to do with supermarkets putting their users' needs and concerns first.

Growth of the online sector

Online supermarkets will start to achieve greater market penetration when they understand who their users are, and what they want.

How many are shopping online?

In Western Europe, just over 36% of the population shop online.

It's a growing market in the region. For example, between 2007 and 2008, Italian e-commerce grew 30.7%, and Italian online grocery sales are expected to grow by 9% in 2009.

This is by no means the highest growth in the region. The Italian statistics agency Casaleggio e Associati reports that income from e-commerce in Italy is still below the European average, but it notes that online food exports are one of the Italian e-commerce sector's most important sources of income.

Two perhaps related factors lie behind this untapped potential:

• Only 22% of Italian internet users go online every day
• Broadband penetration in Italy is still inadequate

Growth - and stalling - outside Europe

In 2006, according to Forrester, US supermarkets had one of the lowest levels of online penetration of all the traditional retail sectors.

The report forecast that grocery sales would account for just 2% of total online sales in the US between 2009 and 2011.

In benchmarking a range of European and North American grocery websites, we've found that many prominent US and Canadian chains still do not offer an online service of any kind.

Their websites, however, do offer social and money saving functions, such as recipe sharing and downloading coupons.

Why aren't US shops stepping up?

Though the Forrester forecast was small in 2006, the problem wasn't lack of consumer interest.

That same year, 30% of US online households said they were receptive to buying groceries online.

Yet at the time, just 10% of active web shoppers - a still-considerable 5 million US households - were actually buying groceries online, often through online-only providers rather than traditional retailers who had moved online.

Understanding the user base

So who is shopping online?

Though the demographic varies from country to country, in Europe, online grocery shoppers tend to be high income (55% versus 44% of non-grocery online shoppers).

On average, most (57%) of online grocery shoppers are female. 75% work outside the home, and 50% have at least one child under 16 living at home.

There are some interesting variations, country by country:

• In Spain, the typical online shopper is a young, highly educated, wealthy male
• In Sweden, they tend to be middle-aged, affluent, and work full-time
• In Germany and the Netherlands, they tend to be young, well educated, and work full-time
• In France, they're typically well-educated, high-income women
• In Italy, they tend to be male, aged 25-49 with a high professional profile, living in the north of the country

So what makes them buy groceries online?

Convenience is obviously a key factor in driving grocery shoppers online.

You can shop from home, and, if you're a parent, avoid the hassle of dragging both children and car to the grocery store and back - avoiding much begging for sugary foods in the process.

But there are downsides, too - ones that have cropped up in independent surveys, new research and online word-of-mouth:

• Food is a tactile, sensory purchase: users like to see and touch food items to assess quality when buying
• Delivery is too expensive
• Users have concerns about items being more expensive online
• They have concerns about freshness and use-by dates
• Delivery service is often limited to certain areas

Countering user fears

Supermarkets need to reassure existing users about specific issues, and offer savings and incentives to bring new shoppers online.

Overcoming prejudices

We mentioned that food is a tactile experience above; users like to see and touch food. Though the clothing industry once battled this same perceived obstacle, and has largely overcome it, the food industry has a steeper hill to climb.

Deeper innovation is required in order to sell food that a user can't touch or taste -an engagement that is deep enough to replace the senses.

Some effective avenues of exploration might be:

• Buying into an ethos, such as organic, local or fair trade food buying
• Harnessing the power of customer reviews (both good and bad)
• Creating shopping assistant personas to assist user choices
• Integrating cookery (celebrity chef promotions) and recipes by creating dinner party planners and other ways to make the shop easier

Essentially, online channels have to exploit their differences to gain an advantage. And use technology wisely to get there (user testing all the way to see what works).

For those already online: encouraging loyalty

Our research has shown that supermarkets are already offering comparison shopping tools on their own sites, such as:

• Tesco's 'cheaper alternative' option
• Sainsbury's "Switch and Save" campaign directing customers to their own-label products which are typically 20% cheaper than leading brands

They are also:

• Promoting cheaper online prices
• Promoting price transparency
• Offering calorie counters, including options that point out lower-calorie alternatives
• Offering points and coupons online, which have a dual benefit - they're cheaper for supermarkets to distribute, and easier for users to benefit from (no clipping of coupons or pausing while in-store to fill in a loyalty card form)

Keeping users happy, on and off-line

The grocery shopping user experience lasts from the first site visit until the groceries arrive at the customers' door - and beyond, when dealing with customer complaints and potential returns. The experience must be personal.

Users are looking for:

• Great online experience
• Prices on par or better than offline, with discounts for regular shoppers
• Coupons and promotional codes

In the UK, Tesco has positioned itself as the online discounter, pre-empting the major offline discounters, Aldi and Lidl, which don't yet sell online.

The future: Buying food online

Online supermarkets have made great strides in the past 5 years and are set to do even more.

However, there's still more to be done to ensure customers get a usable, lovable experience when they shop online:

• Social shopping, including customer reviews, ratings, forums, blogs, and product promotions
• Mobile shopping list applications
• Using loyalty card data to recommend products
• Creating smart shopping lists for reuse
• Sharing recipes that auto-produce a shopping list
• Allowing users to tag and classify the store and decide on the most popular brands
• Partnering with coupon websites
• Offering personalised search

Where we think the effort is best spent

We think the convenience of online shopping will only outweigh the convenience of heading to your nearest store, and widespread concerns about price, freshness and service, when online grocers can offer new technology that serves their audience combined with an holistic view of their user's on and offline experience.

Technology-wise, that means more ways to find products, new ways to speed up your shop, and currently unimagined ways that make it easier than ever to get the food you want from your shopping list to your plate.

Stay tuned - we're currently benchmarking and user testing the major online supermarket websites in Ireland, the UK and beyond, analyzing how well they work - from the laptop to the front door.