U.S. retailers attempting to balance profitability with affordability in their online grocery businesses are expected to keep delivery fees while rolling out other incentives for cash-strapped consumers in the coming year.
To retain and attract customers, retailers including The Kroger Co. and Walmart Inc. will look to options like tiered pricing through membership models or lower delivery fees for customers willing to wait a bit longer for their orders, retail experts say. Most already offer less costly pickup options as alternatives to delivery.
"They [online retail grocers] want to maintain profitability, but they are realizing that consumers are increasingly under this burden of inflation so they are trying to minimize the hit to their bottom lines," said Gregory Daco, chief economist for Ernst & Young.
Shoppers have flocked back to brick-and mortar-stores over the past year, siphoning demand away from online shopping platforms that boosted the retail grocery business during the height of the pandemic. Nearly two-thirds of consumers surveyed in January said they made at least some of their grocery purchases in-store, according to 451 Research's "Voice of the Connected User Landscape: Connected Customer, Disruptive Technologies 2022" survey.
Subscription savings
Though retailers' online grocery incentives vary, all aim to provide savings for members while maintaining a fee to cover operational expenses.
Grocery delivery service Instacart in June launched Instacart+, a new version of its Express subscription service that gives members free delivery on groceries, a 5% credit on eligible pickup orders and reduced service fees. Kroger in July launched its Boost program, which offers two membership levels for free grocery delivery on orders of $35 or more. Boost's next-day delivery tier costs $59 per year, or members can pay $99 per year for delivery in two hours or less.
Meanwhile, Walmart is rolling out additional perks to its membership program, Walmart+, which costs $98 annually and offers free grocery delivery on orders of at least $35. The company in August announced Paramount Global as the streaming partner for Walmart+. The retailer also now offers a rewards program that allows Walmart+ members to earn additional savings toward future Walmart purchases.
Amazon.com Inc., which was particularly hard-hit by the e-commerce slowdown, last year began charging a $10 delivery fee to customers purchasing Whole Foods Market Inc. orders through Amazon's Prime memberships, which cost $139 annually in the U.S.
It will be tough for retailers to significantly lower fees or remove them because online grocery services are not particularly profitable, said Arun Sundaram, an analyst with CFRA. But Sundaram expects more grocers to offer perks through their membership models to accommodate price-conscious consumers.
"Going into 2023, there's increased risk of a recession and more consumers feeling pinched by inflation so I think we could see some grocers adjust their service offerings," Sundaram said. "I think we will start to see more of those bundling benefits in the grocery space."
Spending pullback
October shopping data indicated more consumers pulling back on spending. Online grocery sales slowed to $7.8 billion that month, down from $8.1 billion a year earlier, according to Brick Meets Click, a retail consultancy in Barrington, Ill. Meanwhile, online prices for groceries rose 14% year over year in October, more than any other category, according to Adobe's Digital Price Index.
"They [consumers] are putting fewer items in the basket; I think that shows a degree of stress," said David Bishop, partner with Brick Meets Click.
Grocers should utilize an updated tiered pricing model, similar to Kroger's Boost program, to accommodate a range of income levels, Bishop said.
Online grocery fees — which take the form of tips, delivery fees and other service charges — have increasingly become a "friction point," leading many cost-conscious consumers to trade down by picking up groceries ordered online as opposed to having them delivered. Instacart delivery fees start at $3.99 for same-day orders over $35 but the company's less costly pickup service starts at $1.99 per order, for example.
A large percentage of consumers, if given the option, would be willing to get their online grocery orders later and forgo an extra charge tied to getting them quicker, Bishop said. "'These aren't purchases that you are making for immediate use," Bishop said. "They tend to be a little more planned out so the urgency of getting that quicker is less necessary."
Instacart attempted to cater to this type of consumer choice by offering its "no rush" option to shoppers willing to wait longer for their delivery to save money. Instacart orders receive a $2 discount when a customer agrees to a delivery arriving within a three-hour window as opposed to a two-hour one. Exact pricing varies depending on whether those orders are delivered the same day, the next day or later in the week.
Market demand
Overall, the market for online groceries in the U.S. is projected to grow, with spikes in demand whenever COVID-19 and seasonal flu cases rise. U.S. grocery retail e-commerce sales are projected to reach $160.91 billion in 2023, up from $108.70 billion in 2020, according to eMarketer, a market research company that specializes in e-commerce.
Walmart, which saw a significant uptick in online grocery orders during the pandemic, stands to gain even more share. It is currently the No. 1 grocery retailer in the U.S., with a 25.5% share of the grocery e-commerce market as of 2022, according to eMarketer. Amazon is the runner-up, with a 22% share. Instacart comes in third, with a 21.6% share, followed by Kroger, at 9.8%.
Affluent consumers who are willing to spend more for convenience will bolster market share for retailers that invested millions into e-grocery operations, said Andrew Lipsman, principal analyst for eMarketer. The market will also be bolstered by inflation itself, which will raise overall sales, Lipsman said.
"More affluent people have less time and more money, so these are the tradeoffs they make," the analyst said.
But with inflation biting into the wallets of all consumers, companies will not raise grocery fees unless they offer shoppers something significant in return, such as quicker delivery times or shorter delivery windows, said CFRA's Sundaram.
"It has to be a win-win situation for the customer and the retailer," Sundaram said. "The last thing you want is the consumer to be like ... 'I'll take my business somewhere else.'"
451 Research is part of S&P Global Market Intelligence.