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Chapter 2 Global market overview

Chapter 2 Global market overview

Despite the widespread growth of the internet and the continually rising number of users worldwide, the global market for online grocery retailing remains at a relatively early stage of development in many parts of the world. To date, sales of food and drinks over the internet have yet to make the same impact observed in other parts of the consumer goods industry, most notably books, clothing and electronic items such as computer equipment.

However, the online grocery retailing sector is now experiencing an upturn, in line with rising sales of goods through the internet and the e-commerce market in general. This is generally a result of the following important factors: increasing penetration of and familiarity with the internet throughout the world; rising consumer appreciation of the convenience online grocery shopping offers; increasing emphasis on online retailing by many leading supermarket groups, thereby improving the internet shopping experience for customers.

Global sales of food and drinks through online and internet channels were valued at US$19.9bn in 2009. It should be noted that this figure is limited to countries where a quantifiable market exists, all of which are located in either Western Europe or North America, with the exception of Australia. A truly global figure is thought to lie somewhere between US$20bn and US$30bn.

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Table 1: Major online food and drinks markets worldwide by value, 2009 (US$m and %) Country UK France Germany Spain US Canada Australia Total sales via major markets Online grocery sales (US$m) 7,125 660 315 280 7,750 1,000 2,770 19,900 Total retail grocery market (US$m) 220,000 223,000 195,200 104,500 595,000 67,000 79,650 1,484,350 Percentage taken by online channels (%) 3.2 0.3 0.2 0.3 1.3 1.5 3.5 1.3 Source: just-food

The global online grocery retailing market is dominated by the UK and the US, both of which recorded sales worth over US$7bn in 2009. Together, these two countries accounted for almost 75% of the total figure quoted in Table 1. Although historical data is not available in most instances, all indications suggest that the global market continues to expand at a fairly rapid rate, despite the economic downturn. Between 2004 and 2009, the UK market rose by over 200%, while sales in the US increased by a similar amount.

Online and internet channels still account for a very modest share of the global retail grocery market. In 2009, the online sector accounted for just 1.3% of overall grocery sales, a figure which is even lower if the global estimate of more than US$20bn is used. On a global basis, the share of the retail grocery market taken by online and internet channels is highest in the UK and Australia, at 3.2% and 3.5% respectively. However, this figure declines to 1.5% or less for both of the North American countries, and under 0.5% in large Western European nations such as France and Germany.

The food and grocery sector continues to lag well behind other non-food items as far as the online retailing market is concerned. It is only in the UK where groceries account for a sizeable percentage of online sales, estimated at between 15% and 20% in 2009. This figure is much lower within the other countries listed in Table 1. In many of the worlds leading online retailing markets, the internet is used most often for booking travel and holidays, as well as for financial-related tasks such as banking.

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In per capita expenditure terms, Australia is the world leader. In 2009, the average Australian spent a fraction over US$130 buying food and drinks online, a figure which falls to nearly US$116 for UK consumers. Per capita expenditure remains below US$30 per year for both the US and Canada, and is even lower in Europe. At under US$4, per capita expenditure on online grocery shopping is particularly low in Germany, illustrating how the concept has yet to catch on with the vast majority of the population.

Table 2: Online food and drinks per capita expenditure by market, 2009 (US$) Country Australia UK Canada US France Spain Germany Per capita expenditure (US$) 130.04 115.67 29.76 24.62 10.59 6.22 3.82 Source: just-food

Very little detailed data exists segmenting the online food and drinks market by product. However, food accounts for 55% of online grocery sales in the US, a figure which falls to 45% for Europe as a whole. Beverages such as alcoholic drinks make up most of the remainder in each instance. One of the main reasons that food holds a slightly stronger position in the US is the tendency for US consumers to buy foodstuffs in bulk. Furthermore, there are certain foodstuffs which shoppers in European countries such as the UK prefer to touch and feel prior to purchase, such as fresh produce.

By product sector, sales are believed to be especially high for ambient and shelf-stable groceries, since these have relatively long sell-by dates and present few troubles in terms of storage. In contrast, perishable items like chilled and frozen foods and fresh produce are more susceptible to the risk of spoilage during the delivery process, especially if journey times are long. However, it is worth noting that some businesses in both the UK and the US place a strong emphasis on the freshness of the groceries offered, even specialising in these sectors to an extent. Many online food retailers have also tapped into the growing consumer desire for ethically sourced and produced

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foods with relative success this trend is discussed in more detail later in the report.

Beverages also feature strongly within the online grocery retailing market. Alcoholic drinks represent one major area, especially during times of the year such as Christmas and New Year, when consumption increases. As is the case with certain types of food, some varieties of drinks (such as multipacks of beer and lager, and cases of wine) are particularly heavy, and consumers are more likely to appreciate the convenience of having such bulky items delivered to their doorstep. When asked which products were particularly popular with online shoppers, one source from new media consultancy group IMRG mentioned beers, wines and spirits.

As has been established, online grocery shopping is most evident in the more developed parts of the world, namely Europe, North America and parts of the Asia-Pacific region. Each of these will now be discussed in more detail.

Europe Although online and internet channels still account for a very small percentage of the European retail grocery market, their share of sales continues to grow. At present, the largest and most established markets are within the UK, France and Germany, for reasons such as relatively large and affluent populations, high household internet penetration rates and the existence of a number of sizeable food retail groups within the online sector.

Besides these three countries, many industry sources feel that online grocery retailing markets are set to develop in other parts of Western Europe over the next few years. Considerable growth potential exists in the Scandinavian countries (where internet usage levels are high), Ireland and the Netherlands, as well as further south in Italy, Spain, Portugal and Greece. Although online grocery sales are likely to lag well below levels observed in the UK, the fact that more people are becoming used to making purchases over the internet augurs well for the online grocery sector. Added to this is the fact that all of these countries have strong and established retail grocery markets.

It has been suggested that a so-called third generation of online grocery markets may well develop in Europes more easterly countries. At present, the retail food and grocery market is still developing in countries such as Poland,

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Hungary and the Czech Republic, although the fact that disposable income levels are rising and more people are more inclined towards purchasing Western-style goods suggests that online sales may develop at some point within the next decade. To these examples can also be added Russia, where increasingly affluent urban consumers in the major cities are driving growth within the countrys retail food market. Within Western Europe, the UK has the regions largest and most well documented market for online grocery retailing. Although estimates of market size vary greatly according to source, all agree that online grocery sales have experienced a significant rise during the course of the present decade, with growth outpacing the overall food and drinks market by some margin. In 2009, the UK market was worth an estimated GBP4.55bn, up by over 21% from the previous years figure of GBP3.75bn.

Table 3: UK online food and drinks market by value, 2004-2009 (GBPbn and %) 2004 Online sales (GBPbn) % change Online sales as a percentage of the total market (%) 1.45 1.3 2005 1.78 22.8 1.5 2006 2.25 26.4 1.8 2007 3.05 35.6 2.3 2008 3.75 23.0 2.7 2009 4.55 21.3 3.2

Source: just-food

Value sales have more than tripled since 2004, when the market was worth an estimated GBP1.45bn. Much of this growth has been driven by major retailers such as Tesco, which have invested in their online and internet operations, expanding distribution networks and improving the functionality of their websites. However, annual growth levels fell slightly during both 2008 and 2009 due to the economic downturn, with more people trading down to cheaper groceries. However, increased levels of price-sensitivity are believed to have contributed towards an increase in the number of consumers buying groceries over the internet during this time.

As a percentage of the overall retail food and drinks market, online and internet channels accounted for 3.2% of UK grocery sales in 2009. This figure has increased from 1.5% in 2005 and 2.3% in 2007. Although growth levels may slacken as the sector matures, the UK is expected to retain its position as Europes leading online grocery retailing market.

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Besides the UK, France has the regions second-largest market for online grocery shopping. Sales were worth an estimated EUR475m in 2009, having more than doubled from EUR205m in 2004, mainly as a result of more French consumers becoming comfortable with purchasing goods over the internet. Nevertheless, online channels still account for only 0.3% of retail sales of food and drinks within France, a figure unlikely to increase to any significant degree in the near future despite the expansion plans of retail group Carrefour. Groceries accounts for less than 4% of consumer purchases made over the internet in France, trailing well below books, music and other leisure accessories.

Although Germany has the highest number of regular internet users in Europe, its online grocery market has developed only very slowly to date. This is mainly because its shoppers are highly price-conscious, and remain yet to be convinced that bargains can be found on the internet. Online sales of food and drinks were worth an estimated EUR225m in 2009, equivalent to less than 0.2% of the overall grocery market. Although the number of online shoppers in Germany is expected to increase over the coming years, it seems unlikely that this will benefit the grocery sector.

The only other country in Europe with a quantifiable market for online food and grocery retailing is Spain, where sales are currently worth in the region of EUR200m per annum. This represents less than 0.3% of the Spanish retail grocery market, with online purchasing of groceries thought to be fairly high among the countrys expat population. The Spanish market also benefits from the presence of a major food retailer with an active online business, in this case Groupe Auchan, which is also present in nearby Portugal.

Elsewhere in Europe, the largest markets for online grocery retailing are thought to exist in Switzerland, Ireland and the Netherlands, although reliable market data remains scant. The Swiss market has grown in recent years as a result of the expansion activities of the countrys leading retail groups Coop Switzerland and Le Shop, the latter of which has established a next-day delivery service by express post. Tesco is believed to be responsible for much of the recent growth in Ireland, having achieved nationwide coverage for Tesco.ie in 2004. The Irish e-commerce market is now worth over EUR4bn per annum, although online grocery retailing only accounts for a small percentage of this figure.

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North America Together with the UK, the US represents one of the worlds leading markets for online grocery retailing. The market continues to experience double-digit growth in value terms, despite the economic recession, the downturn in consumer spending and the fact that many leading supermarket operators have yet to establish a major presence within the online sector.

The US online food and grocery market was valued at US$7.75bn in 2009, up by almost 15% from the previous year. Since 2004, the market has more than trebled in size, although growth levels have started to decrease since the middle of the decade. Nevertheless, annual growth continues to outpace the overall retail food and drinks market in the US, which grew by less than 2.5% per annum in both 2008 and 2009.

Table 4: US online food and drinks market by value 2004-2009, (US$bn and %) 2004 Online sales (US$bn) % change Online sales as a percentage of the total market (%) 2.55 0.5 2005 3.25 27.5 0.6 2006 4.45 36.9 0.8 2007 5.40 21.3 0.9 2008 6.75 25.0 1.1 2009 7.75 14.8 1.3

Source: just-food

Online sales of food and groceries have risen as a result of greater penetration of the internet and broadband among US households, as well as the fact that more people are less inclined to drive to supermarkets and can therefore make savings on fuel by purchasing their groceries over the internet. Another encouraging sign is the fact that online consumers tend to spend twice as much as conventional shoppers when buying groceries, possibly because the habit is more evident among higher-income groups.

Although these trends point towards further growth, a number of less positive factors must be taken into account. The online grocery retailing market in the US remains a difficult segment in which to succeed, with the Albertsons and Acme chains having suspended their home delivery operations in 2009. This echoes previous failures experienced at the start of the decade, notably Webvan. This distances involved in delivering groceries to households is very often considerable in the US, which can severely reduce profit margins for

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internet operations. It is mainly for this reason that online grocery shopping is heavily skewed towards major cities and urban locations.

Despite the recent growth in the market, the online sector still accounted for a very modest 1.3% of total retail sales of food and drinks in the US during 2009. Although this figure has risen from less than 1% in 2007 and just 0.5% in 2004, it is unlikely to break through the 2% barrier at any time soon, mainly for the reasons outlined previously. As a result, most industry sources expect traditional store-based shopping to continue to dominate the retail food and drinks market in the US.

The situation is fairly similar in neighbouring Canada, where online grocery retailing was forecast by many to become something of a growth area during the years of the dotcom boom. However, the market nosedived as companies failed (one example of which was the online unit of grocery giant Loblaw), for reasons such as ambitious expansion plans and spiralling costs. Although the percentage of large Canadian companies with a website continues to increase rising from less than 40% in 2004 to around 80% in 2009 many leading supermarket groups have yet to develop a significant online business, like in the US.

Online sales of food and groceries in Canada were worth an estimated CA$1.15bn in 2008, equivalent to almost 1.5% of the total retail grocery market. Food and drinks account for 7.4% of the Canadian online and ecommerce market, a sector dominated by products such as books, clothing and electrical accessories. Further market development is forecast for the coming years, due to the establishment of new online grocery operations in areas such as British Columbia, as well as security and interactivity improvements to websites.

Other markets One developing market in the Asia-Pacific region is Australia. Although the countrys technological infrastructure developed relatively slowly dur ing the latter part of the 1990s compared with elsewhere in the world, internet penetration levels now rank well above the global average. More people have now embraced internet shopping as a result, with online sales believed to be worth up to AU$50bn per annum, with items such as clothing and electrical accessories registering particularly impressive growth at present.

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The online grocery retail segment accounted for just over 7% of this figure, worth an estimated AU$3.55bn in 2008. This represents approximately 3.5% of the countrys retail food and grocery market, up from around 3% during the early part of the present decade. The Australian online grocery retailing market has been fairly static in value terms during recent years, with consumers reluctant to start buying their groceries over the internet in any great quantities. However, increasing online sales of alcoholic drinks suggest that the market may be poised for growth.

The Australian market is also expected to develop further as a result of the entry of the two main supermarket chains into the online arena. To date, both Woolworths and Coles have displayed a reluctance to develop internet operations, having limited online deliveries to major cities such as Sydney and Canberra. During 2008, however, Coles expanded its online business to Adelaide and Perth, with Woolworths expected to follow suit. Given the dominant position of these two retailers together, these account for over 60% of the Australian retail food market it augurs well for the online grocery retailing sector. Growth is most likely to come from higher-income, time-poor Australians.

There are a number of other online food and grocery markets across the AsiaPacific region, although sales are either very modest or unquantifiable. There is a small market in New Zealand, where Woolworths accounts for over 40% of sales via its Progressive subsidiary. Online grocery sales are also believed to be growing in South Korea, where Tesco has established an internet business.

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