Online grocery sales will have significant growth over the next five years. Online’s share of overall grocery spending will increase from 11.2% in 2022 to 13.6% in 2027, according to the 2023 Brick Meets Click/Mercatus 5-Year Grocery Sales Forecast.
Projections released by consulting firm Brick Meets Click indicate that online grocery sales will grow at a compound average growth rate (CAGR) of 11.7% over the next five years.
Persistent price inflation, ongoing concerns about illnesses such as COVID, RSV, and the flu, and a maturing online segment are factors contributing to the outlook.
“This forecast reflects that the projected growth of online grocery sales is slowing after the significant gains of the last two-plus years,” said David Bishop, partner at Brick Meets Click.
“Now more than ever, grocers need a grounded view of the future market while simultaneously strengthening the customer experience to protect their base business and improving the profitability of this higher cost-to-serve mode of shopping,” Bishop added.
Total grocery sales, i.e., combined online and in-store sales, excluding the impact of price inflation, are projected to grow at a 2.5% CAGR over the next five years, driven by an approximately 1.7% increase in household spending and a 0.8% gain in the number of households. An aging population and declining household size are weighing down both measures.
Persistent grocery-related inflation is expected to continue at a 5-year CAGR of 4.8%, starting from 2022’s rate of 10.9% versus the prior year and tapering down to 2.8% by 2027. The impact of this ongoing price inflation is not evenly distributed. Inflation fuels nearly three-quarters of the projected gains for in-store sales but accounts for less than half of the gains expected for online sales.
Health concerns drive the demand for online grocery to some degree, which is likely to continue. Concerns about contracting COVID-19 motivate around 10% of online grocery’s monthly active users (MAUs), according to the October 2022 Brick Meets Click/Mercatus Grocery Shopping Survey. The recent rise of other respiratory illnesses, such as RSV and the seasonal flu, motivates customers to shop online for groceries.
In terms of online grocery segments, Pickup sales are expected to grow at a 5-year nominal CAGR of 13.6% compared to 10.8% for Delivery and 8.0% for Ship-to-Home. Consequently, Pickup’s share of online grocery sales is forecast to expand from 45.4% in 2022 to 50.3% during 2027 at the expense of the other two segments.
Pickup is positioned to expand more than Delivery or Ship-to-Home due primarily to expected increases in market availability. This is because a small portion of U.S. households lacks convenient access to any Pickup service, and many U.S. grocery retailers are still in the process of rolling out Pickup services across their base of stores. In contrast, Delivery is already saturated, with most customers having the choice of multiple home delivery options across a wide range of retail banners. Plus, the use of Delivery is more sensitive than Pickup to financial and health concerns.
Spending per order and order frequency rates are anticipated to increase but vary across the three online segments. Over the next five years, average order values (AOVs) are projected to grow at a CAGR between 4.2% and 6.4% (inclusive of inflation), with Ship-to-Home coming in at the lower end, Delivery in the mid-range, and Pickup on the higher end. At the same time, order frequency among active users is anticipated to increase from 1.9% to 3.3%, again with Ship-to-Home at the lower end, Delivery in the mid-range, and Pickup on the higher end.
“When it comes to achieving online channel profitability, my advice to grocery retailers is: Work smarter, not harder, and focus on the fundamentals,” said Sylvain Perrier, president and CEO of Mercatus. “Know who your customers are and the value you provide them. Use that insight to deliver a more personalized brand experience that is consistent and frictionless. Take steps to improve margins using simple tactics like offering lower cost Pickup services, engaging with multiple third-party delivery providers, and leveraging first-party retail media to offset the cost to serve online customers.”