The online grocery industry currently makes up a small fraction of the market at less than 1% of its total sales. But according to IBISWorld, online grocery is expected to grow at a compounded annual growth rate of 9.5% and reach $9.47 billion in 2017, up from about $6 billion today.
IBISWorld forecasts the number of industry participants in the U.S. to grow at an average annual rate of 5.8% to reach 2,147 grocery stores by 2017. Online grocery growth is expected to surpass that of traditional markets by 2019 as the industry reaches a saturation point by the end of the decade.
The continued adoption of mobile devices as a shopping method could create a "why not" proposition in the shopper mind-set. Consumers can buy electronics, clothes, books, etc., with these devices, so "why not" food?
The online channel can help satisfy consumers with a convenient and customized shopping experience, just like what is already offered in other categories.
As the market is still in its infancy, there will be a tremendous early mover advantage for whoever figures out an economicall- viable platform, including perishables with broad geographic reach. The Foolish bet would be on companies that have already been experimenting with the channel for several years.
There are three general types of online grocers: the grocery store, such as Safeway (NYSE:SWY), the mass merchant like Wal-Mart (NYSE:WMT), and the category specialist such as FreshDirect. Other non-traditional companies that will command significant market share include Amazon.com (NASDAQ:AMZN), while investors should open up to the idea of a warehouse club company such as Costco (NASDAQ:COST) entering the industry.
AmazonFresh: Experimenting for over six years
AmazonFresh was first launched in Seattle in 2007 in select neighborhoods with a delivery charge of $8 to $10. AmazonFresh offered an extensive product selection that ranged from fresh produce to restaurant deliveries. PrimeFresh members receive free same-day delivery service on grocery orders over $35 with an annual membership cost of $299 a year. AmazonFresh is set to expand to more than 20 urban markets in 2014, potentially including locations outside the U.S.
Amazon benefits from its reputation as a trusted online retailer, and its efficient and low-cost distribution system is well known to customers. However, AmazonFresh only benefits in markets in which it has a physical presence, which is currently limited to only 40 warehouses across the country.
The company has hired four ex-Webvan executives to play roles at AmazonFresh. Webvan was perhaps one of the most famous dot-com bubble bankruptcy cases with $800 million lost in just three years. Webvan was an online grocer that offered home delivery within a 30 minute window. AmazonFresh should (hopefully) have in-depth knowledge of how Webvan failed and how to transform this failed idea into a winning one.
Wal-Mart: International subsidiaries have seen success
Wal-Mart has been beta testing its fresh-food delivery service To Go in San Francisco and San Jose since 2011. The service starts at $5 per order.
According to Eric K. Clemons of Wharton University, Wal-Mart can succeed in the online grocery space if it leverages its strengths such as its reputable customer-friendly brand, its relationships with grocery suppliers, its formidable network of store locations, and its ability to implement a hybrid model.
"Wal-Mart will develop these a lot faster than Amazon will develop a network to supply [customers] with meat and produce, and a lot faster than Amazon will develop a local distribution system," according to Clemons.
Internationally, Wal-Mart can also use supply chain management lessons learned from Yihaodian, China's fastest-growing online grocer, of which Wal-Mart is a majority shareholder. Wal-Mart's U.K. subsidiary Asda and its Japanese subsidiary Seiyu already both possess successful online grocery branches whose experiences can translate to a healthy U.S. business.
Safeway: Could be a safe investment, further clarity needed
Safeway is the second-largest supermarket chain in currently operating in the U.S. The company offers an online grocery shopping experience with shipping service between 6:00 AM to 10:00 PM. Safeway Online also offers the omni-channel savings program Just For U that allows the savings card used in its stores to be used online as well.
The company has been relatively quiet about its plans and ambitions in the online space, but it had the following to say during its 2013 Investor Conference:
And finally, lots of questions and talk about the future of this business. What we do today is physical distribution, physical cards. At some point, I think we all believe that's going to become a digital item, whether it's in a wallet or online or in a mobile phone or whatever. And we're spending lots of time, energy and money to prepare ourselves to have the same kind of position in the digital distribution of our products that we, today, have in the physical distribution of our products.
Watch out for wholesale clubs
Wholesale clubs like Costco have yet to enter the online grocery arena, but discounters like Costco are a huge threat to current and future competitors.
Costco is the second-largest retailer in the U.S. with locations in nearly all major metropolitan areas and an immense network of distribution centers as well as a good global sourcing framework. Its customer base also has above-average income and is considered to be technologically sophisticated. Its members are known to sometimes "brag" about their superior shopping abilities, and they recognize how to maximize quality while minimizing costs.
While Costco has not traditionally focused on its online business, last year's transition to an updated platform gives the company greater visibility on the Costco.com business and should bring more users to the website.
Foolish investors can gain insight into the industry by browsing review sites such as Yelp to gauge how consumers are reacting to the rapidly-evolving industry.
"The future is here! Watch out supermarkets, Amazon Fresh will do to you what Netflix did to Blockbuster," read a review from a user. Another user posted "am really impressed with how fast and reliable afresh is. I set up deliveries for the next day and bam! It's there right on time every time."
While the industry might be a few years away from reaching saturation, investors can do no harm by investing in these companies today.
Jayson Derrick has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, Netflix, and Yelp. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.