In this segment from Market Foolery, Mac Greer trots out the theme of "Yes, No, Maybe So" for Motley Fool analysts David Kretzmann and Matt Argersinger. Each Fool tells us about a trend they feel bullish on, one they feel bearish on, and one that has them on the fence.
Here, we get to hear why Kretzmann sees a big opportunity in the online grocery business. It turns out this is one of the technology trends where the U.S. market is lagging, and if we catch up to countries like the U.K. or South Korea, there is a long path for growth ahead. But how can you invest in this movement?
A full transcript follows the video.
This video was recorded on May 24, 2017.
Mac Greer: David Kretzmann, what are you saying yes to?
David Kretzmann: I'm going with online grocery shopping. This is still, in the U.S., a very small, emerging category. But when you compare the proportion of grocery market sales that are online, in the U.S., it's just 1.4%. In Japan, it's 7.2%. In the U.K., it's 6.9%, and in South Korea, it's over 16%. To me, that leaves a lot of room for that category to grow. I'm not saying that within five or 10 years, 50% of grocery sales will be online. But I think there's a lot of room for that to run in the U.S. We have some start-ups like Instacart, which have partnerships with Safeway, Whole Foods (NASDAQ: WFM), and a lot of others. I just see room for this category to grow. Some projections show this category growing from about $9.5 billion in 2016 to over $15 billion by 2021, so about a 10% annualized growth rate. All in all, it's still a very small category. Most consumers still don't buy a whole lot of stuff online. If they do, it might be stuff like breakfast cereal or chips from Amazon (NASDAQ:AMZN). Frozen and fresh food continues to be the big question mark, like, can a company crack the code where customers are comfortable having someone else buy and deliver that stuff from the store? And no one has really cracked that code here in the U.S. yet.
Greer: You just mentioned Amazon. If I'm an investor and I hear that, and it all sounds great, but what do I do with that information? Do I invest in Amazon? Or is there a pure-play that specializes in that online delivery?
Kretzmann: There's not really a pure-play at this point, at least that I know of. Instacart is still a private company. They've expanded very quickly. I think Amazon is one way that you can get some exposure to the company. But their AmazonFresh initiative is such a small percentage of the company, you don't want to invest in Amazon only with that thesis. But I think Whole Foods is actually a company that could continue to benefit here. They've been an early partner with Instacart, with their 365 stores, the smaller stores, they're getting closer to customers. They only have four of those stores right now, but they are planning to continue to open some more of those stores. And as they get closer to customers, that should improve delivery times, and the ability to offer that type of thing. Whole Foods is one that I see moving in that direction. They've been rolling out a loyalty program in a few different markets. So far, that loyalty program is really driving a good chunk of the sales in those stores where they're testing that concept.
You can take a similar argument here to why we like restaurants doing the same thing, transitioning to digital and the loyalty program, whether it's Starbucks or Chipotle or Panera. You see that loyalty program and that digital presence really driving up volume and throughput in the stores. You're seeing a lot of repeat customers coming back. I think you can extend that same argument to grocers. I think Whole Foods has finally recognized that digital is a pretty key piece of that experience, whether it's delivering groceries itself or meal kits similar to Blue Apron, they're doing some early tests there. Again, I wouldn't invest in Whole Foods solely because of that. But the company continues to produce a lot of cash, it's not going anywhere anytime soon. And Ron Shaich, the founder and CEO of Panera, is going to be joining the board of directors of Whole Foods, amid this latest board shakeup within the last month or so. I think having his presence on board, having John Mackey as the sole CEO, moving away from that dual CEO structure, I think you're going to see a lot more focused initiative from Whole Foods, moving toward digital and online ordering.
Greer: You've had things like Peapod that have been around for a while. People used Peapod eight years ago. What makes this become more mainstream? Because, obviously, you have people getting their groceries online, delivered, it's a nice service, but it's not necessarily a huge service right now.
Kretzmann: Right. With a lot of e-commerce companies, a lot of it comes down to timing. We make fun of Pets.com as an IPO darling of the late 90s that totally fizzled out, and it was a poster child of people getting so caught up in the dot-com craze. But, PetSmart just made the largest e-commerce acquisition ever buying Chewy.com, which sells pet food online.
Greer: Not the Mexican food restaurant.
Kretzmann: Not the Mexican food restaurant, no. As far as I know. That might be a diversification opportunity. But, I think timing plays a big role in that. As people get more comfortable with the technology and the thought of ordering things online as that user interface improves and shipping times and quality and the assurance that you're going to get what you paid for, I think people are just getting more comfortable with all of that. So, I think we are shifting toward that time where it won't be crazy to buy fresh or frozen food online anymore.