For today’s time poor, tech savvy consumer, online shopping offers the ultimate convenience, allowing consumers to order 24 hours a day and have their groceries delivered to their doorstep; however, online grocery in Australia lags behind other markets.
In the UK, for example, 52 per cent of consumers have bought groceries online in the last month, according to Nielsen, compared to 35 per cent of Australians. Additionally, British consumers are buying groceries online more regularly and placing larger orders.
Despite relatively small online grocery sales in this country, 42 per cent of Australians are using the internet to compare prices, find product reviews, specials and grocery coupons.
Leigh Shaw, Nielsen director of analytic consulting, tells F&DB that Australia is in the early adoption stage with online grocery shopping and Australian consumers are only really “experimenting” with buying their groceries online at present.
However, Shaw believes online grocery retail is “definitely” going to grow in Australia and she views the consumer habit of online grocery research as likely to progress to online purchasing.
“We think there’s real potential for a major tipping point in consumer behaviour [with online grocery retail] over the next couple of years as not only internet connections get faster and more available, but the different ways we can access the internet such as smart phones and tablets become more widely used,” says Shaw.
By the end of 2012, Nielsen predicts that two-thirds of Australians will own a smart phone, and nearly half will own a tablet computer.
Online grocery sales in this country were valued at $1.5 billion in 2011, according to Datamonitor, and they are forecast to increase at a CAGR of 13 per cent to $2.9 billion in 2016. The greatest growth is expected to come from sales on tablets and smart phones, rather than computers. If Australian online grocery sales reached similar penetrations levels to the UK – between three and four per cent – the value of the local online grocery retail market could increase to $4.4 billion.
Whether the Australian market has the potential to grow to similar penetration levels remains to be seen. Shaw maintains that one of the major reasons that online grocery is so underdeveloped is because Australians are satisfied with traditional bricks-and-mortar stores.
“They’re more satisfied in Australia than in other markets,” says Shaw. We measure how much shoppers like their stores (globally) and Coles and Woolworths are actually – despite all the criticisms – rated really highly.
“They have so many stores, it’s not inconvenient [for consumers] to get to them either.
“If consumers are going to switch to online, they need a really good reason to do so and, up until now, they haven’t had that.”
Because there’s not a lot of competition for the Big Two in the Australian retail market either on or offline, they’ve perhaps been a little more laissez faire about encouraging consumers to shop online.
In the UK, where they have the ‘Big Five’ supermarket chains, competition is more intense and, as a result the retailers put a lot more marketing support behind their online offerings to encourage loyalty. This spans from strong customer engagement and personalised special offers using data from their rewards programs to strong above-the-line advertising, particularly when online grocery shopping was in its infancy.
“We’re finally seeing Coles and Woolworths start to do the things now that UK supermarkets were doing about 10 years ago, which is why we’re about eight years behind here,” says Shaw.
David and Goliath
Interestingly, while Coles and Woolworths account for around 70 per cent of all grocery sales made in bricks-and-mortar stores, they only hold 54 per cent of online grocery sales. There are two interrelated factors that could explain this.
Firstly, if consumers want to buy groceries, they’ll generally go for the most convenient option, which usually means the closest store. Coles and Woolworths have a good deal more stores than anyone else, which means they’re the most convenient option in the offline space for the majority of consumers.
Secondly, with a bricks-and-mortar store, retailers need to cater to everyone’s needs, at least everyone in the store’s locality, so they need an extensive product range. Online, however, small retailers are successfully selling more dedicated ranges of products, benefiting from the reach of the internet to sell to niche consumer groups.
“We’re seeing a lot of online retailers pop up that sell very niche products, such as USA Direct which specialises in American grocery goods for expats, there’s even a site just for people to buy beef jerky!” says Shaw. “You’ve got people that want value and they’re being catered for by supermarketdeals.com.au or sites like that, which have much less product but much lower prices.
“Consumers can pick and choose the site that’s right for them much more easily than with bricks-and-mortar stores, which try to cater for everyone.”
Earlier in the year, Australia Post launched a pilot program called Farmhouse Direct, which aims to unite small gourmet food producers and farmers directly with Australian foodies via the internet.
For producers, the site says it offers increased margins by shortening the supply chain and cutting out the middlemen; increased market penetration; and allows products to be sold 24/7. For consumers, it promises access to boutique and speciality items and convenience with products being able to be ordered without having to leave the house and delivered to your door.
Similarly, in August, fresh food wholesaler Franco Lagudi established the SOC Exchange Food and Wine Marketplace (SOCexchange.com.au) for independent supermarkets and grocery stores. The platform allows them to create an online shop or just their list specials, connect with their customers, publish blogs and recipes for $10 a month.
Lagudi’s family has set up an online retail outlet on the SOC Exhange for its fresh food store Mother Nature’s Top Fruit Market in Coffs Harbour, Sydney. After five weeks, online sales were growing at around 80 to 100 per cent a week, with customers coming in to pick up their orders.
“About six years ago, I recognised a niche in the online space for a centralised fresh-food and grocery ‘shopping centre’ where consumers can search for, or buy product on special in their local area, and where fresh food retailers can increase shopper traffic to their stores,” says Lagudi.
“Small retailers such as bakeries, fruit shops, butchers, delis, cafes and independent grocers are unlikely to set up their own websites. They are time-poor and hands-on in their stores, rely on local passing traffic, don’t have marketing resources or budgets, and often don’t have the time to learn the technical side required in operating a successful online shop.
“Fresh produce availability changes so quickly based on weather, supply and demand that prices fluctuate, [but with SOC Exchange], consumers can decide whether to buy now or next week.”
A mid-sized Titan
One fresh food company that’s been particularly successful in the online space is Aussie Farmers Direct (AFD). Now in its seventh year, the company started with just one van, 100l of milk and one goal – ‘to bring back the milkman, while supporting Australian farmers’.
Today, it has more than 200 franchises and 700 staff across the broader AFD network, delivering a range of over 170 fresh Australian food and beverage products.
The company moved online four years ago, and since then, it has grown over 500 per cent and gone from 20,000 customers to 130,000 customers. In 2011, AFD’s turnover exceeded $130 million, continuing strong year-on-year growth. Aussie Farmers Direct CEO Braedon Lord believes its success is based on two key factors: its support of Australian farmers and manufacturers and the convenience of its service.
“When AFD started, it was building a strong commercial model to connect Australian food producers with consumers in urban areas and I think it has stayed true to that,” says Lord.
“It’s a very simple and convenient way to shop: our customers can shop 24 hours a day and can contact us between 8am and 8pm and speak to a real, live Australian voice and discuss any queries they have.”
While AFD has a relatively slim product range, it focuses on every day fresh food or as Lord describes it “everything you find in a family fridge”. The benefit of selling this everyday items as opposed to speciality products is that consumers tend to place more regular orders. James Wright, founder of one of the first websites that sell speciality food products, claims AFD’s focus on everyday foods is an integral component of its thriving business.
Early in 2011, Wright launched Cook and Kitchen as a national online channel for small-scale Australian food businesses to sell their products. Despite having a great website that provided consumers with recipes and stories about the local producers that stocked goods on the site, Cook and Kitchen closed a little over six months after its launch. Wright spoke to F&DB after its demise, explaining why the business model proved to be unsustainable.
“While people were spending a lot of time on our site and page views were really good, it didn’t translate into sales. Cook and Kitchen focused on non-perishable discretionary items and our frequency target [for orders] was three to four times a year,” says Wright.
“In contrast, the repeat purchase is built into AFD’s model and its customers very rarely change their weekly orders.”
Lord explains that the AFD website has a ‘Set and Forget’ function that allows its customers to establish a weekly order and, on Friday’s they’ll receive an email that reminds them what they’ll be receiving in the coming week and asks if they want to change their order.
“What we’ll find is they might change their baskets slightly from week to week, but they keep a really consistent minimum order spend and I think that’s the difference we have really focused on building a range of everyday fresh products,” he says.
The company has recently begun expanding its range to include more gourmet products such as quality aged beef from Tasmania and fresh ready meals made with all Australian ingredients. Interestingly, AFD’s core demographic isn’t the expected ‘young and tech-savvy’ online shopper, but the main family grocery buyer, usually 25 to 45 year-old mothers; however, Lord says that the introduction of its ready meals is helping to draw in younger consumers.
“The demographic is definitely widening and as we go into other areas and more urban parts of Melbourne and Sydney, obviously we have to appeal to a different customer base because there aren’t as many families in these parts,” says Lord.
Despite encouragement from its customers to expand its product range, Lord says he is wary of broadening the range too much.
“Our focus is on the most challenging delivery area and that’s fresh,” says Lord. “We’re sourcing fruit and vegetables from over 100 farms around the country and delivering those into the major cities. It’s a massive logistical exercise behind the scenes; we receive pallets of fruit and vegetables into a main depot in each of the capital cities on a Monday morning... and by Thursday we’ll have zero stock with anything left over going to charity.
“Broadening the range too much could confuse customers or reduce the quality of our service and the reputation of the product.”
While the primary appeal of online shopping lies in its convenience, the delivery aspect can be troublesome. Wright says the delivery costs were a major stumbling block for the Cook and Kitchen site. The company used Australia Post for delivery, which he says works well for clothing retailers with lightweight products, but could result in charges of over $12 to deliver one jar of jam or heavier items.
“People weren’t willing to pay that much so we ended up subsidising a large portion of the delivery costs, which significantly reduced our margins,” says Wright. “[With redelivery], you had to go to the post office to pick up your order. With couriers, the weight of the order isn’t such an issue but redelivery fees run at about $15 a pop.”
Farmhouse Direct sells a very similar type of product to Cook and Kitchen and Wright describes its website as a “carbon copy” of Cook and Kitchen; however, it has the advantage of being backed by Australia Post, which presumably helps it reduce its delivery costs. Despite this, a quick look at the Farmhouse Direct website reveals that the delivery of a single pot of jam priced at six dollars will still set consumers back eight dollars for delivery.
Delivery can clearly be a major issue for smaller online companies; however, Franco Lagudi explains that with SOC Exchange the focus is on the local grocer which will operate within a five to 10 kilometre radius, simplifying the delivery process.
“One thing with fresh produce, is that it really drills down to local,” says Lagudi. “Deliveries become very expensive over greater distances and if it’s a 30 degree day and you’ve ordered strawberries and blueberries, they’ll quickly turn to mush. Our website is all about local, so that’s not an issue.”
Nielsen’s Leigh Shaw says that consumers often mention their frustration of having to be home at a certain time to receive their deliveries.
“One of the most important things that consumers look for in grocery shopping is convenience and right now that’s not a big plus with online grocery shopping,” she says. “It’s easy to order, but it’s not easy to get the product.”
Retailers are working in a variety of ways to get around this. AFD replicates the traditional milkman service, making deliveries before 8am and, somewhat uniquely, leaving them on the doorstep or in a safe allocated space so consumers don’t have to be in to pick up orders. It also charges no delivery fees. Deliveries of its ‘fruit and veggie boxes’ are made in the later part of the afternoon and the franchisee will knock on the customers door so they can directly deliver the box if the customer is at home, receive feedback on the service and “personalise it”.
Lord says the system works well, but delivering to apartment blocks remains a challenge, although AFD is working on a solution to this at present.
Just over a year ago, Coles began trialling a ‘Click and collect’ program, whereby customers can order their groceries online and then pick them up at their local Coles petrol station. Consumers responded well to the program and Coles is now rolling it out to more stores, as well as a grocery locker concept where customers can pick up their good from unmanned, chilled storage units at the Coles Express in Windsor, Melbourne. Woolworths is also experimenting with a similar concept.
A complementary offering
While there may be concerns that online sales, could cannibalise bricks-and-mortar’ sales, it appears the two complement each other.
Consumers enjoy the ‘experience’ of physical shopping, being able to look, touch, smell and even taste products, but they like the convenience of shopping online. Some consumers go into stores to inspect products before buying (possibly more cheaply) online, and, conversely, some research products and prices online before buying in store.
“Despite the rapid growth of online shopping, physical stores remain crucial and increasingly the boundaries between the two are blurring,” says the AFGC’s recent State of the Industry report.
Consumers are not drawing a distinction between ‘online’ and ‘offline’ – they simply shop.