MP52264

MAPS : E-Commerce: Internet Grocery Market: June 2004

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EXECUTIVE SUMMARY

Executive Summary

OVERVIEW

Internet shopping is an extension of the home-shopping philosophy and modern consumers now have more options in terms of shopping from home than ever before.

In order for online shopping to work, a long list of conditions must be met. Firstly, the necessary hardware must be accessible to both the customer and the supplier; good telecommunication links must be in place to enable efficient data transfers; the software requirements of the service must be robust; the website must be well designed and operate efficiently; and payment procedures must be secure. In addition, running out of stock and product substitutions must be minimal; and delivery must be smooth and on time, with the correct products in good condition and fresh produce before any use-by dates. However, most importantly, consumers must be willing to accept and recognise the benefits that online shopping provides compared with more traditional methods.

Both value and volume growth in the Internet grocery market are high, and traders are having to cope with rising customer numbers — between 2001 and 2003, the market grew in excess of 90%. In addition, average basket prices are rising and sales of non-food items are growing faster than food, although it remains a relatively small proportion of overall volume.

TESCO DOMINATES

The most successful online grocers are traditional retailers with high profiles and brands that are already familiar to consumers. Large supermarket chains, such as Tesco and Sainsbury's, have realised the potential of the Internet as a distribution channel and dominate the market. Tesco, with its Tesco.com service, remains the market leader and now has the widest coverage of all the e-grocers in the UK. In addition, Tesco processes the greatest number of orders.

Internet-only ventures and smaller specialist suppliers continue to develop a presence in the market, although they still need to establish a reputation and build customer awareness.

OTHERS OPT OUT

Although Tesco has demonstrated that it is possible to make a profit from online groceries, there are still only a handful of major supermarkets prepared to enter the online market. Sainsbury's, Waitrose and ASDA have all made significant investments in their online operations, and Iceland is also involved in the market. However, others, such as Safeway/Morrisons and Somerfield, have either opted out or withdrawn their online services.

PICKING CENTRES DROPPED

Analysis of the success of the Tesco model in this market has focused on the decision by the Tesco management to adopt an in-store picking model for its online operation. Since Key Note last reported on the Internet grocery market in 2001, both ASDA and Sainsbury's have moved away from the warehouse picking method and have adopted in-store picking. Of the main players, Ocado is the only one that uses dedicated picking centres.

INTERNET ACCESS AND THE IMPORTANCE OF BROADBAND

The rate at which consumers are moving online is an important driver within the market. Half of all UK households now have Internet access and the availability of broadband continues to rise. There is no doubt that technological developments are significant in the market, not only because of the role they play in helping consumers to access the Internet, but also, and just as crucially, the way in which they help to improve stock management and logistics within the company offering the service. However, such developments are expensive, and the high capital costs associated with making such improvements adversely effect the rate of growth in the market and are a barrier to entry.

UK OUTSTRIPS GLOBAL TAKE-UP

The high population density of the UK's urban areas makes them more suited to delivery-based businesses than the less crowded areas of mainland Europe and the US. In addition, UK consumers have taken to the idea of Internet grocery shopping more enthusiastically than almost any other country in the world.

CONSUMER DEMANDS AND DYNAMICS

The main advantages associated with Internet shopping are the speed of transactions, convenience, ease of selection and, in many cases, price. Exclusive research carried out for this report shows that although 2% of consumers purchase groceries online each week, 88% have never shopped for groceries over the Internet. The majority of consumers who do use Internet grocery services do so just two to three times a year. In addition, the research shows that younger consumers are the most likely to use online grocery shopping services regularly. Such data suggest that there is still vast scope for both volume and value growth in the market.

TABLE OF CONTENTS

Text © 2004 Key Note

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Last updated by Amanda Porteous November 2004