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Online grocery growth softens as COVID-19 restrictions ease

Coronavirus was a boon for online grocery sales in March and April. But that momentum is starting to wane as stay-at-home orders ease and stores return to normalcy.

For the first half of June, the growth of U.S. online grocery orders in dollar terms slowed to 200% from 300% expansion in April, according to data compiled by Rakuten Intelligence that is based on sales at 34 companies, including grocery delivery service Instacart, The Kroger Co. and Amazon.com Inc.'s Amazon Fresh operations. All three of those companies are digesting slowdowns in online order growth.

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Experts say that coronavirus is still likely to be a turning point for selling groceries online. But they also acknowledge that how much growth slows after the spring peak could determine grocers' future investments in fulfillment options — and how quickly existing ones pay off.

"That is the question on everybody's lips," said Bill Bishop, chief architect at Brick Meets Click, a consultancy based in Barrington, Ill.

Grocers have a lot riding on the fate of grocery e-commerce. Kroger, Walmart Inc., Target Corp. and other players have invested billions in automated warehouses, curbside pickup and other order fulfillment options, with efforts accelerating since Amazon.com Inc.'s 2017 acquisition of Whole Foods Market Inc.

How much the pandemic has changed shoppers' ordering habits is a timely question as grocers plan for a resurgence in coronavirus cases, said Sylvain Perrier, CEO and president at Mercatus Technologies. "Do they accelerate capital investment around e-commerce in case of a second wave?" he asked during a recent webinar. "I think there's a bit of a struggle out there in the market."

To be sure, online grocery sales are growing at a much faster rate than before the pandemic began. But there are signs that not all consumers are eager to do their grocery shopping online.

In May, just under one-third of first-time delivery or pickup customers said it was highly likely that they would order again from the same provider in the next 30 days, a survey conducted by Brick Meets Click and Mercatus showed. That represented a decline from 62% in August 2019.

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And while a May consumer survey by 451 Research found that nearly 24% had tried food delivery services, both for groceries and restaurant takeout, for the first time as a result of the pandemic, a greater number of people — just over 30% — had not used any new products or services. 451 Research is an offering of S&P Global Market Intelligence.

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Consumers' interest in buying online depends on which part of the country they live in, Perrier said. While sales are still increasing in areas hit hardest by the pandemic, they are contracting in states that reopened soonest, he said.

Those consumers that have turned to delivery and pickup during the pandemic appear to be considering multiple outlets. Data from Chicory, which curates delivery for groceries that are part of online recipes, shows a swing in the number of orders to traditional grocery stores from big-box chains like Walmart in the middle of March — a sign that customers may have had to shop around in order to secure limited delivery or pickup windows and find items that were out-of-stock at their usual stores, said Yuni Sameshima, CEO at Chicory.

Those issues early on during the pandemic left a bad taste in shoppers' mouths — experiences that they are likely to remember as stores resume closer-to-normal operations and restaurants reopen their dining rooms, he added. "There were a few slight hiccups early on with so many people trying to order online," Sameshima said in an interview.

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Retailers admit that coronavirus-fueled growth isn't sustainable. Kroger CEO Rodney McMullen told analysts June 18 that the company's digital sales, including orders for delivery, pick up and shipping by courier to customers' homes, grew 92% during the first quarter ended May 23 and by a triple-digit percentage in April and May.

"We don't think it will stay at the higher level where it is today permanently, but we do think, fundamentally, the growth has been accelerated," he said.

Even if online sales remain elevated as a legacy of the pandemic, retailers face potential ramifications for the rest of their finances. McMullen said that individual customers initially become less profitable to Kroger when they switch to delivery or pickup. But those who continue to use the options end up spending more at Kroger over the following three or four years, eventually making them as profitable as store-only customers, he added.

Higher online sales also have implications for grocers' stores, Brick Meets Click's Bishop said. As more retailers fill e-commerce orders using systems like the automated warehouses and don't lure customers back to actual stores to pick up groceries, physical stores' gross margins are likely to take a hit, Bishop said.

"There's enough aversion to going to the store today," he said. Customers "are not doing as much in-store shopping as they used to."