Does online grocery shopping still have room to grow?

Welcome to the Retail Wrap-Up, your source of sector-specific news and insights, created by LinkedIn News UK retail editor Aaron Toumazou .

Recent developments in the grocery delivery space have stirred speculation about the future of these ventures. Is there still room for growth in the sector, or would supermarkets reap more from focusing their investments in-store? In this week's edition, experts delve into the current state of online grocery and identify the untapped opportunities for growth.

The Big Read

The online grocery landscape is at a critical juncture. While several businesses that experienced a surge during the pandemic have tapered off in subsequent years, others have pushed ahead with investments in technological innovations that enhance logistics. Notably, Ocado Retail emerged as the UK's fastest-growing grocer in the last quarter.

To gain insights into the current state of the sector after a tumultuous period, LinkedIn News consulted industry experts. Join us as we explore what's been happening and, crucially, what lies ahead in this dynamic industry.

The Covid effect

Covid-19 lockdowns and social distancing measures in 2020 marked a pivotal moment for the online grocery market, driving a surge in online shopping among consumers as supermarkets restricted access and many consumers opted to avoid visiting stores.

"This led the online grocery shopping market to quickly expand, peaking in 2021 at ￡19.23bn, where current prices remain," Harvir Dhillon , an economist at the British Retail Consortium (BRC) economist tells LinkedIn News.?

However, as retail consultant Jonathan De Mello reminds us, the sudden popularity of online grocery shopping presented significant logistical challenges for supermarkets that had previously considered it only a minor aspect of their operations. Many major grocers struggled to meet the escalating demand and found their existing home delivery infrastructures inadequate.

As a result, De Mello notes that several grocers likely over-invested in new warehousing and logistics infrastructure. "Some within these businesses clearly were under the impression that online would continue to attain high market shares today – an eventuality that has not materialised," he explains. "As a result of this investment – and a sensible concurrent increase in delivery fees by most grocers – online grocery delivery is now more profitable than it was, but customer fulfilment is still significantly less profitable than in-store shopping, and much of the investment grocers made in infrastructure during Covid has not yielded a significant return."

While De Mello notes that should the country ever find itself in a similar situation, these investments would serve grocers well. "Until then, they remain a low margin cost sink with a static customer base," he warns.

Who are today's online grocery shoppers?

Over half of UK consumers shop for groceries almost entirely in-store, according to Retail Economics senior consultant Nicholas Found .

"The immediacy and intuition of being able to pick up fresh produce in-store and get a feel for quality, weight and size is difficult to replicate online," he tells LinkedIn News. "It means just 7% of consumers shop almost exclusively online for food, while two-fifths of consumers bridge the two channels, for example ordering heavy items and regular staples online, while fresh and top-up items are purchased in-store."

Kien Tan , senior retail adviser at PwC UK , says the primary target demographic for online grocery services today includes affluent, time-poor customers willing to pay for convenience. Another significant catalyst for adopting online grocery is family expansion, especially with the arrival of a first child, which he notes leads to a larger shopping list and less time for in-store visits.

While Tan acknowledges sustained interest in online grocery for some other groups who embraced the service during the pandemic, ie vulnerable people, he caveats that certain consumer groups have been deterred by high minimum order requirements and have reverted to traditional shopping methods.

Indeed, experts widely agree that cost remains a significant obstacle to more widespread adoption of online grocery shopping.

"Demographics play a key role in shopping behaviours," says Found. "Some three-quarters of the least affluent households can be considered store-first when shopping for groceries, relying on cash for purchases, avoiding minimum spends, and seeking out local markdowns in-store. This compares to two-thirds for the most affluent, who are more likely to pay full-price, be inspired by new recipes, and are less likely to find minimum order values a barrier."

This trend has been accentuated by the cost-of-living crisis that quickly followed the pandemic. "The current financial climate is making shoppers more savvy than ever, so they are keen to seek out the best deals," says food brand consultant Eddie Stableford . "This is much easier to do in a store than online."

Stableford also highlights Covid's impact on evolving eating habits , with many consumers adopting more flexible meal patterns that benefit from the visual inspiration and meal solutions readily available in stores. Additionally, he notes how the pandemic spurred a surge in home cooking, with consumers now embracing new culinary roles.

Respondents to a LinkedIn News discussion on the matter emphasise factors drawing customers away both from large physical supermarkets and online shopping, one being the growing interest in more sustainable and diverse food sourcing , combining local shopping with meal subscription services like HelloFresh .?

Moreover, food brand founder Yuan Gao highlights the role of population distribution and evolving retail environments, with supermarkets and convenience stores increasingly accessible within local neighbourhoods and reducing the need for the extensive stockpiling of weekly shops.

Found highlights one more behaviour that has influenced online grocery's share over the past few years: remote and hybrid work, noting that individuals working from home are twice as likely to shop for food online compared to commuters.

"The convenience of having groceries delivered fits well with remote work lifestyles that are less bound by time slots," he says. "Nearly a third of work from home consumers are online-first when it comes to shopping for groceries, compared to less than a fifth among commuters."

While many companies have committed to hybrid working since the pandemic, as others recall employees to the office more frequently, could this also spell dwindling appeal for online grocery shopping?

Slower growth ahead

It's widely acknowledged that, in growth terms, the surge in online grocery delivery likely reached its peak during the Covid pandemic.

"While one in four pounds is spent online, the figure for groceries is just one in ten," says the BRC's Dhillon. "And while we expect the online penetration rate for groceries to increase beyond the 10% mark, it will struggle to reach even as far as 15% in the near term. The growth of online was in double-digit territory from 2007-2021, but this has shown clear signs of a slowdown over the past year or two."?

Nonetheless, Dhillon notes that the online grocery market continues to expand, "and in fact growth is faster than when looking at the entire online sales market", he says, though this has been flattered by high food inflation.

Despite the recent slowdown, e-commerce consultant Sue Azari remains optimistic about sustained growth in the UK's online grocery market.

"Recent data looking at December 2024 figures indicates a slight decline in online shopping for grocery shopping, with online orders representing 11% of sales vs 15% during the pandemic," she notes.?

But while this reflects post-pandemic and inflation factors such as consumer spending restraint, Azari highlights that despite the slowdown, projections indicate future growth in the UK online grocery market, with an expected annual growth rate of 9.3% until 2029.

"Looking ahead, although the pandemic might have represented a peak," writes Gao, "the future likely holds a steady growth and development for online grocery delivery."

What comes next?

So what exactly will the next major movements in the online grocery market be??

Francesca White (Wyatt) , managing director of the food business Porky Whites Ltd , points to Amazon's forays into high-street concepts and drone deliveries, alongside partnerships between retailers and popular food delivery services like Uber Eats, Just Eat Takeaway.com and Deliveroo , as just some of the innovations highlighting customers' desire for digital convenience and choice.

Azari predicts that pureplay retailers will further develop rapid delivery services, similar to 特易购公司 Whoosh and Waitrose & Partners 's collaboration with Deliveroo. "Consumers may not be prepared to pay a premium delivery cost for their weekly shop," she says, "but they will for convenience."

The importance of seamless consumer experiences across channels for supermarkets is also something to acknowledge, helping them navigate tight margins and changing consumer sentiment. "Loyalty schemes and data will play a crucial role in this endeavour," Azari explains, "smart AI tools that can be trained on these rich insights will play an important role in understanding consumer habits and creating personalised experiences."

And for some, there remains significant untapped potential in online grocery.

"Sure, there will always be customers who prefer shopping in-store," says Pulkit Khanna , head of commercial solutions at Ocado Retail . "But the headroom for growth is massive – just look at online penetration across other retail categories."?

Khanna also states that the immediate dip seen by the online market post-Covid was temporary. "Today, online grocery penetration is much higher than before the pandemic and is on the rise again," he notes, adding that traditional grocers risk losing customers and market share by deprioritising their online sales.

"Avoiding investment due to concerns about the online channel being expensive to serve is short-sighted," he writes. "If you don't find a way to make money selling online, someone else will."

Do you think the online grocery market still has room to grow? Share your thoughts on the topic in the comments.

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