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E-commerce in food - still modest, but Amazon-deal signals future growth


The top 10 is still dominated by non-food players. However, Wal-Mart’s position as the number two and the relatively low percentage e-commerce share of its total sales (2,9 per cent) indicate room for improvement, especially as it can leverage its physical stores in the distribution process to its customers.

The acquisition of Whole Foods by Amazon is regarded by many retail experts as a watershed moment for the food sector. Of course, online food sales is not a novelty, but the growth rate of e-commerce as compared with other markets is relatively slow. This could change considerably in the years to come.

 

Mid-June Amazon rocked the American grocery sector with the acquisition of Whole Foods. Amazon paid 13,7 billion dollar (12.3 billion Euro) for the multinational, gaining 456 outlets in the US, Canada and the United Kingdom. Whole Foods, generating sales of roughly 15,7 billion dollar (14.1 billion Euro) per annum, is a relatively young chain, established in 1980. It has made a name for itself by focusing mainly on organic and natural food products.
The news sent shock waves throughout the sector and  on the stock market. Stock prices of several grocery retailers dropped both in the US and the UK. Clearly, Amazon’s move into ‘bricks’ has rattled the market, or at least the investors. Several scenarios have been described, such as an imminent price war sparked by Amazon. The rationale behind this reasoning is that Amazon is able to operate on wafer-thin margins and basically can use food sales, a regular shopping excercise, to gain regular access to our households and subsequent sales data which it uses to cross-sell other products. The physical distribution network of Whole Foods also could come in handy as pick-up points for Amazon’s immense product offering.

Expensive last mile
For the time being, these scenarios are pure speculation. First, the deal has to be finalized, which hasn’t happened yet (as this article has been written in the third week of June). Bear in mind that traditional grocery retailers haven’t sat still either.

The grocery channel is no stranger to e-commerce. For example, British Tesco has operated online shopping for nearly two decades. Other retailers have gained expertise via the acquisition of pure online players, such as Peapod or Bol.com in the Netherlands (acquired by Ahold) or Jet.com, bought by Wal-Mart.
Despite these efforts, e-commerce growth  for food products has been and still is relatively modest compared to other sectors, such as apparel, electronics or books. Food is lagging behind because of the complexity of the business, combining various ‘streams’, such as ambient, chilled and frozen. Food products are also bulky and have a relatively low value, compared to size and weight. Therefore, the cost structure is less appealing to consumers as transportation fees are quite high, most notably the ‘last mile’, the last stretch from a hub to the final destination, the consumer’s doorstep.

UK: online sales to double
Slowly but surely, grocery retailers have been tackling this hurdle. For example, by establishing pickup-points at some of their outlets. Consumers are able to order their goods online and pick up their groceries without having to go through the entire shopping process. Clearly, there is a market for convenience, taking out the non-value adding activities for consumers and adding extras, such as the extended product assortment and avoiding out-of-stock experiences as much as possible. Meanwhile, in several countries the infrastructure is in place to facilitate e-commerce, as illustrated by the emergence of broandband internet and the penetration of PCs, laptops, tablet and smart phones.


All of the above factors, combined with the efforts of established grocery chains and newcomers have resulted in rosy forecasts. For example in the UK, Europe’s savviest grocery sector, e-commerce is one of the only channels which is expected to grow in an otherwise deflationary market, the Institute of Grocery Distribution (IGD) says. Valued at 15 billion US dollar (13.5 billion Euro) in 2015, UK online grocery sales are expected to rise in value to 28 billion US dollar (25.1 billion Euro) by 2020. In France, one of the other major grocery market in Europe, online sales are forecast to grow to $16 billion US dollars (14.3 billion Euro) by 2020, coming up from 9 billion US dollar (8.07 billion Euro) in 2015 (Source: IGD).

Millenials and Gen. Z
When looking at the target audience of online (grocery) sales, growth has been driven in part by the maturation of so-called digital natives, i.e. consumers who grew up with digital technology (the Millennials and now Generation Z). In plain English, the generations born between 1980 and 2000.

These consumers have an ‘unprecedented enthusiasm for and comfort with technology, and online shopping is a deeply ingrained behaviour’, according to the Nielsen-report The future of grocery, 2015). For example, 30 percent of Millennials (ages 21-34) and 28 percent of Generation Z (ages 15-20) respondents say they’re ordering groceries online for home delivery, compared with 22 per cent of Generation X (ages 35-49), 17 percent of Baby Boomers (ages 50- 64) and 9 percent of Silent Generation (ages 65+) respondents. Patrick Dodd, Nielsen: ‘Millennials are at the beginning of their careers and are starting to form households, while the oldest members of Generation Z will soon be graduating college and joining the workforce. These generations will shape our economy for decades to come. Therefore, it is critical that retailers and manufacturers understand how these consumers are using technology and include digital touch points along the entire path to purchase.’

Mondelez: 1 billion in 2020
For the time being, the reaction of the food industry has been relatively moderate. At the recent Consumer Analyst Group of New York (CAGNY) conference, one of the largest gatherings within the US Consumer Packaged Goods (CPG) sector, most executives were not very outspoken on the topic of e-commerce. Manufacturers remained tight-lipped about their plans in this department. Some, however, are more open about their strategies and future goals.

For example, Mondelez aims to increases its e-commerce business to over 1 billion US dollar (around 900 million Euro) by 2020. This means a tenfold increase compared with its current e-commerce sales. This growth will be mainly facilitated by third-party retailers, such as Alibaba. The Chinese online giant will host a Mondelez store on its Tmall.com platform. The multinational, known for brands like Milka or Oreo, is also experimenting with direct delivery. In 2015, it initiated the Colorfilled-action in the US, enabling consumers to design their own packaging and shipping it out to themselves. ‘The reality is shipping Oreos isn’t actually that obtuse’, a spokeswoman for Mondelez says.

China
Mondelez wasn’t the first retailer to partner up with Alibaba. In 2015, Unilever and the Chinese online retailer signed a strategic partnership agreement which would pave the way for Unilever’s product into the Chinese market. The focus on China, or Asia in general, is not coincidental: the grocery market in general has potential for growth and online grocery sales are expected to grow faster than in other more mature markets such as Europe.

Both companies are not only working together in terms of distribution, but also in data generation and sharing. As mentioned before, consumer insights through online sales are a potential gold mine as they enable all kinds of commercial opportunities, such as cross-selling or personalized offers.


McKinsey: move closer to Amazon

The above example illustrate that at least some manufacturers are teaming up with the major platforms, Alibaba or Amazon (for example Tyson Foods), to build their e-commerce business online. According to McKinsey, this approach is the way to go. However, the strategy requires more than just opening a store on an online platform.

Dedicated teams (functional specialists in category management, shopper marketing and shopper insights) are needed. Furthermore, these teams should have sufficient room for decision-making at the pace required in the e-commerce arena. McKinsey even advises physical relocation, preferably co-locating with the likes of Amazon. ‘This would facilitate strengthening relationships with category managers and other decision makers, access rich data that would otherwise be difficult to obtain, coordinate strategic planning more easily, and learn from leading-edge digital practitioners to build their own capabilities.’

Risk aversion versus success through failure
Also in terms of organizational culture, CPG companies might need an overhaul. According to McKinsey, 9 out of 10 online leaders have digital initiatives fully integrated into their strategic planning process, not as a bolt-on. These companies are extremely flexible. They test the viability of a market, product or segment in near-real time, for example through limited releases and small campaigns in order to compare markets or for prototyping with early adopters.

It remains to be seen whether CPG companies are able or willing to make this transition. The food industry is mostly risk-averse and characterized by conventional organizational structures. It all depends of course what role the realm of the internet plays in their online strategy. Is it purely a sales medium, or does it facilitate brand building and/or consumer loyalty? It could also serve as a learning lab for gaining valuable consumer insights. 

Sniffing
For the time being, online food sales remain modest with percentages in most countries well under the double-digit mark. As shown in the box on the previous page, Wal-Mart’s online sales constitute 3 percent of overall sales. The danger exists that the industry focuses more on the tail than the dog.

As it stands now, some food manufacturers are ‘sniffing’ to gauge what works or not for them.
For example, Heineken has invested in an online platform for specialty beers called Beerwulf. This independent start-up, established by former Heineken marketeers, has international ambitions: it aims to cover most of the European market to gain critical mass (specialty beers are low volume, high margin) and to gather valuable consumer data on this beer segment. This would also be beneficial for Heineken’s marketing department, plus that the multinational will be able to learn from Beerwulf’s modus operandi. As mentioned before, online commerce is a more of a trial-and-error kind of business: a brand new world to be explored.


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