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The Impact of Online Grocery on CPG Brands

By Matt Lindsay, Senior Principal

The grocery landscape will change dramatically in the next few years

Although online grocery shopping is still in its infancy, it is growing rapidly. By 2025, it will reach $100 billion, representing close to 20% of total grocery sales.

As retailers such as Target push to develop greater online grocery capabilities, and as millennials gain more purchasing power, leading CPG brands are investigating how best to capitalize on the trend in tandem with their retail partners.

However, customer shopping behavior differs across channels, complicating efforts to strategize for online grocery. For example, online grocery pickup customers spend about 30% more per order and shop 18% more frequently. These customers also shop differently, preferring to eschew fresh produce in favor of staples from familiar brands.

As an increasing number of stores introduce pickup or delivery options, customer shopping behaviors will continue to change. To adapt, CPG brands should constantly be monitoring and testing to answer questions around online grocery, such as: How does a store’s new online grocery program affect the sales mix of my products at that store? What about surrounding stores? How can I best optimize my inventory and servicing strategies around online grocery? How can I change assortments and promotions to capitalize on the new channel?

The Impact of Online Grocery on CPG Brands

Optimize around Changes in Customer Behavior

Since online orders for both pickup and delivery draw from the same in-store inventory as traditional sales, optimizing servicing, inventory, and space allocation will be crucial for minimizing stock-outs and maximizing sales.

While many retailers, such as Sprouts, believe the online channel brings incremental sales, the effects on CPG brands themselves are more difficult to discern. For example, if their stores of choice do not offer pickup or delivery, customers may instead opt to shop elsewhere. If the customer shops the same brands, this more or less ends up as a net-zero for a CPG brand. However, it is more likely that changes in purchasing patterns resulting from a switch in stores and channels will impact bottom lines. As online grocery customers shift more towards categories favored in pickup or delivery, CPG brands should be continuously testing to understand how changes in basket composition are impacting revenue and profit overall.

To optimize around shifts in purchasing patterns, CPG brands must work with their partner retailers to access pickup and delivery data feeds, understand how products perform in each channel, and measure how changes in the online grocery landscape impact sales from one store to the next. Doing so can not only inform servicing and inventory strategies, but also enable CPGs to begin working with retailers to highlight the right items in their most effective channels.

Experiment with Assortments for Online Grocery

Similar to how fast-casual pizza shops have introduced new sizes focused on delivery, CPG brands have opportunities to capitalize on the online channel with formats tailored to pickup and delivery. For example, frozen foods—especially those positioned around natural ingredients and health—are experiencing a resurgence in popularity with Millennials. This represents an opportunity for CPG brands to drive online sales from this key segment. Likewise, the popularity of bulk foods in online grocery shopping presents an avenue for experimentation. Offering products in greater volumes or in bundles might resonate more with online shoppers—especially those aiming to do all their shopping in a single delivery or pickup.

For any change in assortment, it’s crucial that CPGs first test at a small scale to understand whether customers are trading up or down from lower-margin items, as well as how the change impacts baskets both online and in-store.

Analyze Cross-Channel Impacts

Over time, the widespread adoption of online grocery shopping, and logistical improvements in pickup and delivery will erode many current barriers, such as concerns over freshness. Additionally, new developments such as the rollout of one-day shipping will likely impact customer shopping behavior in the online channel. As pickup and delivery options mature, it’s crucial that CPGs also take a step back and analyze initiatives across channels.

Most customers don’t shop solely online or in-store; initiatives in one channel can impact performance in another. Just as retailers may accord physical space to popular online items, strong in-store promotions may affect subsequent online purchases. Moreover, opportunities to influence the placement of products in search results may have ramifications on in-store sales as well, as customers develop stronger item loyalties or are introduced to different items. By understanding how promotions and initiatives in one channel affect the performance of other channels, CPG brands can paint a fuller picture of the impacts on loyalty, sales, and profit.

Moving forward, CPG brands should also seek to collaborate with retailers on opportunities to test and optimize online layouts and strategies. Which items should be featured in online searches, how online shoppers should receive product suggestions, and how impulse purchases can be driven in the new channel should be top-of-mind for both CPG brands and their retail partners.

Whether refining inventory and servicing, optimizing assortments, or leveraging promotions across channels, leading CPGs are taking a data-driven approach to stay ahead of the competition. As the online grocery channel matures, continuously analyzing shifts in behavior and adapting strategies accordingly will be the key to driving growth.

Ask Matt Lindsay

Questions about the article? Reach out to Matt Lindsay to learn more about how to effectively navigate and capitalize on the growing online grocery trend.

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