"In the year to April 2013, grocery sales reached nearly £170 billion in the UK."

The underlying grocery market in the UK is substantial, while shopping online for groceries is growing in importance for consumers, evidenced by the online growth figures reported across the industry. As the UK's only operator exclusively focused on the online channel, we are strongly placed to benefit from this growing market trend.

Grocery is the largest by far of all retail segments representing around half of all retail spending in most developed markets. IGD estimates that in the year to April 2013, grocery sales reached nearly £170 billion in the UK. Around 64% came from supermarkets, superstores or hypermarkets – the so-called "big box" format stores. The remainder came from discounters, convenience stores and other smaller traditional retailers (grocers, newsagents, forecourts) and online.

Growth in grocery has traditionally been driven by the opening of new store space, either through the extension of existing stores or the opening of new shops. This has created a "space race" model for growth which is dependent on increasingly expensive real estate and growing customer footfall.

Although very large, the grocery sector as a whole grows relatively slowly, particularly once inflation has been taken into account suggesting volume growth is low. Supermarket operators regularly report very low or even declining year on year sales growth from same store space, and indeed in independent data surveys growth is often reported as falling for any particular period among these large supermarket groups. Clearly this challenges the traditional growth driver in the sector – the expansion of retail real estate space.

However, there are three segments that are experiencing more rapid growth – online, food discounters and convenience store formats. Given the relatively rapid growth rates, it is expected each segment will see significant growth at the expense of the big box stores over the coming years, thereby cannibalising this traditional format. Indeed, the supermarkets increasingly face a difficult dilemma – to invest in online and convenience formats and cannibalise themselves, or not make such investment and risk losing customers and market share.

The new dawn for grocery shopping

Store And Online Model
Online Only Model

Once at scale ...

Once A Scale

"Online will be the fastest growing channel in grocery over the next five years."

IGD suggests that online will be the fastest growing channel in grocery over the next five years. While it estimates that around 4% of groceries are currently bought online, it forecasts that this will almost double over the next five years, representing in value terms an increase of over 120%.

As customers adopt the online channel for groceries, retailers are increasingly investing in capacity and in delivering a better service while suppliers are devoting more resources to online. Indeed, the entry of Morrisons, the last of the "big four" supermarket groups to launch an online service (see Morrisons case study for details of how it utilised Ocado's IP and operating services) is likely to further stimulate consumer interest in the channel.

Key to driving online adoption is the quality of the proposition offered to customers. Consumers have seen the benefits of convenience and ease of ordering online for many general merchandise items such as books, music and consumer electronic products, and are increasingly seeking these benefits for their regular grocery shop. Shoppers want good, reliable service and a wide choice of products at competitive prices. Improved technology, faster broadband and better mobile devices all support and facilitate the growth of online shopping. These technology advances, together with improvements to the broader shopping proposition to the consumer help to drive adoption of the online channel.