E-commerce sales may be slowing, but the online grocery wars are still running at full speed.

While health-related concerns during the pandemic pushed many grocery shoppers online for the first time, some are choosing to keep filling their carts virtually as U.S. COVID-19 cases fall. Demand for online grocery options in the U.S. remains high enough above historical norms for retailers like Amazon.com Inc., Walmart Inc. and The Kroger Co. to continue investing in a range of initiatives to improve their capabilities and customer convenience, including more automation at fulfillment centers and additional capacity in pickup and delivery.

"The base [of online grocery sales] is so much bigger now," said Tory Gundelach, senior vice president of retail insights at Kantar. "A lot of the investment that you see is going back and investing in things like automation, robotics and things that can help the scale of the business that we see today run more efficiently."

By the numbers

The U.S. online grocery market posted $7 billion in sales in May, down nearly 16% percent from $8.3 billion in May 2020, according to the latest survey conducted by consultancy Brick Meets Click and sponsored by Mercatus. A combination of relaxed COVID-19 restrictions and increased vaccination rates led to the decline, as well as growth in the food-away-from-home market, said David Bishop, partner with Brick Meets Click, a research firm focused on the U.S. grocery market.

Despite the year-over-year decline, the U.S. online grocery market is more than three times larger than it was in August 2019, when sales totaled $2 billion, according to Mercatus. By 2025, online grocery is expected to account for 21.5% of total U.S. grocery sales, or about $250 billion of the $1.16 trillion grocery market.

"Many customers or households perceive this as an acceptable alternative to the way they shopped, which was primarily in-store," Bishop said. "The market is still healthy."

Pandemic-related federal stimulus programs, including the Child Tax credit and expanded unemployment benefits, will also provide additional funds to keep consumers shopping online, said Garrett Nelson, senior equity research analyst at CFRA. Concerns over the more transmissible delta variant of the coronavirus could play a role in keeping consumers shopping online as well, Bishop added.

Rival investments

Kroger has responded to heightened demand by continuing to invest in new automated customer fulfillment centers powered by online grocer Ocado Group PLC. Kroger's first facility with Ocado opened in Ohio this spring, and the company is planning up to 19 additional Ocado automated centers designed to fulfill Kroger online grocery orders.

As of June, Kroger had more than 2 million delivery time slots available per week to serve customers fresh food and essential products when they want it, CEO William Rodney McMullen said during an earnings conference call in June.

Kroger also doubled down in 2020 on its online grocery offerings, piloting a $79 subscription program called Delivery Savings Pass and launching a contactless payment program and waiving its grocery pickup fees.

Meanwhile, Walmart plans to spend $14 billion this year alone on investments in areas including supply chain and technology to help it expand the company's e-commerce assortment, step up automation and enhance grocery pickup and delivery capacity.

Those investments come on top of last year's rollout of its Walmart+ subscription program, which includes same-day delivery on orders of at least $35, the launch of curbside pickup service at Sam's Club locations and the introduction of Express Delivery, which offers store to doorstep delivery in less than two hours.

"I think people learned to love that online grocery service. And we're right in the perfect place to serve that customer," said Walmart CFO Brett Biggs at a June retail summit.

Amazon, which saw online grocery sales triple in the second quarter of 2020, continues to invest in online grocery delivery capabilities, including expanded two-hour delivery from its grocery brands Amazon Fresh and Whole Foods Market Inc. to more than 5,000 cities and towns in the U.S. Late last year, Amazon also expanded its one-hour grocery pickup service to all U.S. Whole Foods stores.

In April, Amazon announced plans to expand its in-garage grocery delivery service to more than 5,000 locations. The service is designed to deliver groceries securely and conveniently inside the garages of Prime members.

The type of investments retailers are making has shifted somewhat over the past year from building out quick capacity to improving the customer experience, said Kantar's Gundelach. In the grocery business, that means ensuring that online deliveries are arriving at customer's doorsteps on time and at the right temperature, and broadening the selection of substitutions for items that are out of stock.

For example, Walmart announced in June that it was investing heavily in artificial intelligence technology that considers substitution variables, including individual customer preferences in real time, and then preemptively asks the customer to approve a substituted item.

During the pandemic, shoppers were more forgiving of a lack of substitutions and out-of-stock items like toilet paper, Gundelach said. But their tolerance has waned as the barriers to in-store shopping decline.

"That can be kind of the make-or-break between, Do I stay in [the] online channel or is it easier for me to get in the car and go to the store," Gundelach said.

The analyst predicted that fees waived for curbside pickup are unlikely to return in the near term as retailers want to keep customers engaged with their services. For home delivery, fees will stay, but they may decline in major metro markets where retailers can efficiently schedule multiple drop-offs.

"A truck can maybe come and make one stop or two stops and deliver 30 orders," in dense urban areas, Gundelach noted.