Online grocery delivery sales for 2013 totaled about $6.5 billion, with expected growth to $21 billion by 2016 (roughly 14% of consumers currently purchase groceries online).
To put this into perspective, consider that total U.S. supermarket sales for 2013 hovered around $620 billion, with average weekly sales of $482,160 per store (based on 37,459 supermarkets earning at least $2 million in sales). So while $6.5 billion to $21 billion in sales seems huge, that's really small compared to in-store sales.
So why would Wal-Mart (NYSE:WMT), which operates 4,625 supermarkets, supercenters, and wholesale clubs throughout the United States and whose U.S. net sales totaled $274.5 billion in 2013, even entertain the idea of selling groceries online for a tiny piece of a small, albeit, growing segment of grocery retail?
Two reasons: the power of brand loyalty and because the company is a worthy competitor in this segment.
Good old-fashioned brand loyalty
Rather than appeal to new customers, Wal-Mart hopes to appeal to existing customers with Wal-Mart To-Go. Due to fierce competition, retailers survive on high sales volume. By offering grocery, house wares, apparel, electronics, entertainment, and health and wellness products through its web site and in stores, Wal-Mart has a greater chance of maintaining high sales.
Online competitor Amazon.com (NASDAQ:AMZN) hopes to cash in on this same brand loyalty. The company is currently testing AmazonFresh, a delivery service available in California and Seattle, Washington – these lucky customers now have the ability to order a new toaster and whole wheat bread at the same time.
Meet the Competition
Other competitors in the online grocery delivery segment include Peapod, owned by Dutch grocer Royal Ahold, privately-owned FreshDirect, and brick and mortar chain Safeway (NYSE:SWY).
Even though these three companies have provided online grocery delivery to customers since the early 2000's, Peapod, FreshDirect, and Safeway (and its Safeway.com) remain regional-catering mostly to the East and West coasts and the Mid-Atlantic. Joining them is a slew of smaller, privately-owned companies that provide grocery delivery services throughout the U.S., but typically to specific regions.
With nationwide reach thanks to 1.3 million employees and a solid distribution network of 133 distribution facilities (the company owns 112 and leases 23 from third-parties), a private trucking fleet, and continued investment in online technology, Wal-Mart can serve more areas within the U.S. than any of these companies.
However, the recent merger of Safeway and Albertson's, LLC (owned by AB Acquisition and controlled by Cerberus Capital Management) would allow Safeway.com greater reach to more online and offline customers. The merger will bring together a distribution network of 2,400 stores (some in regions Safeway does not currently serve), 20 manufacturing plants, 27 distribution centers, and 250,000 employees.
Amazon, though able to reach customers nationwide through its website, doesn't have the luxury of brick and mortar store locations or a large fleet of trucks for delivery purposes. It may take several years for the company to build the type of infrastructure needed to deliver perishable goods such as dairy, meats, and produce on a daily basis. Or Amazon could partner with another company and compete sooner.
Amazon does have 26,364 fulfillment centers and 3,416 offices in North America, along with around 56,000 full-time employees--add a fleet of trucks and Wal-Mart could have a strong competitor for the national marketplace.
It's not just the potential profits from Wal-Mart To-Go that Wal-Mart seeks – this seems more about expanding its online presence to create a one-stop shopping environment much like its supercenters. With a top-notch distribution network, Wal-Mart can meet increased demand as online grocery delivery becomes more popular.
So far, Wal-Mart has dipped a toe into this growing segment by testing Wal-Mart To-Go services in San Jose and San Francisco, California, and Denver, Colorado. Perhaps this will cause a small ripple effect that other grocery delivery services should heed as a warning.
Erica Thinesen has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.