Simeon Gutman: Welcome to Thoughts on the Market. I'm Simeon Gutman, Morgan Stanley's Hardline, Broadline and Food Retail equity analyst.
Brian Nowak: And I'm Brian Nowak, equity analyst covering the U.S. Internet industry. And on this episode, we'll be diving into food, specifically the unprecedented changes in the food retail industry driven by the COVID pandemic. It's Tuesday, May 25th, at 10 a.m. in New York.
Brian Nowak: So Simeon, food retail is one of those areas where you and I have some overlap. we recently conducted a survey of three thousand grocery shoppers around online grocery shopping trends. What were some of the biggest takeaways from your perspective?
Simeon Gutman: The biggest takeaway is that online grocery shopping doesn't look like it's going backwards. This was adopted by many more consumers during the pandemic. And even though we modeled some rate of reversion, we're just not seeing it. It seems like this is sticky and it's here to stay
Brian Nowak: I completely agree with you. And the demographics are broadening. You're seeing even older demographics move online. In addition, 52 percent of the people that we surveyed who shop for groceries online said they expect to do it at the same rate as they did during covid going forward. So there's no turning back from here.
Simeon Gutman: Yeah, and I think if you look into the results, we're at about 40% of all respondents now shop for online grocery. If you were to look at the same number pre pandemic, we were around 27% in 2019.
Simeon Gutman: So, Brian, where do you think this is headed?
Brian Nowak: I think we're heading demonstrably higher. We think full-year 2020 ended about at 9-10% penetration of online grocery and we see it heading toward 15% by 2023. It's important to keep in mind that by our estimates, 45% of the remaining offline consumer expenditure in the United States is associated with grocery. And so bigger picture, we think that grocery is going to drive about 25% of overall U.S. ecommerce growth going forward.
Simeon Gutman: Yeah, food retail has been the biggest under-penetrated category in all of retail. If you look at overall e-commerce penetration, I think it was around 15%-ish pre pandemic, moving up to 20. Now that food retail is so much higher, these online penetration numbers overall will jump way into the 20% range.
Brian Nowak: So Simeon, in the survey data, what was your biggest takeaway on pickup versus delivery preferences?
Simeon Gutman: So both of them are very popular. Over half used either pickup or delivery. What's interesting is that we saw a tilt towards pickup during the pandemic by an incremental 10% of customers, and that's because they were trying to avoid the delivery fee. What's interesting about that is it tells us that consumers don't want to pay delivery fees and therefore, over time, they either won't exist or consumers may gravitate towards platforms that don't charge them. And that reinforces this notion that those online players or traditional brick and mortar players that don't charge delivery fees will likely take market share over time.
Brian Nowak: Table stakes are high. That means competition is coming. So Simeon, how do you think about the competitive environment in the online grocery space going forward?
Simeon Gutman: Yeah, we fear for the traditional grocer. And I say that because the traditional grocer is in the middle of this battle, you have small grocery formats where people go to out of value and convenience. And then you have the very large companies: the e-tailers and the big discount stores. So if you have a national grocery chain that has scale and a presence across many markets, they should have the wherewithal to invest in capabilities, namely distribution. They have to move product to get them to consumers. And most likely it will be absorbed, the costs will be absorbed by them. Whereas some of these smaller companies, they're not going to be able to absorb that in a pretty low margin structure already. And so some of the large national grocers should be well equipped, whereas the small regional mom and pop chains might be under more pressure. Brian, in your world, where do you see the competitive landscape shaking out?
Brian Nowak: I agree with you. The large are going to get larger and we think Amazon in particular is going to get larger into grocery going forward. But it's not just Amazon. We expect more of the shared economy players to continue to partner with traditional retailers and grocery stores to deliver groceries to consumers on a same-day basis. So look for ecommerce players like Amazon and look for the shared economy to be bigger players in the overall online grocery space. And what that means is delivery fees could come into question going forward. So, Simeon, how do you think about delivery fees going forward in online grocery?
Simeon Gutman: Look, we think delivery fees are ultimately going to zero and they become table stakes, which means that the companies that we follow in the brick and mortar land are going to have to absorb those costs over time. And I think the inspiration for this going to zero are these subscription models that already offer it as part of their services.
Brian Nowak: Yes, I think subscription revenue streams will replace delivery fees. Prime is one example, but even the shared economy players are rolling out more subscription-based products that have lower delivery fees for grocery and other offerings. So look for more subscription products across the board to deliver people groceries.
Simeon Gutman: And we're seeing the influence of subscription in our space too. Walmart plus is an example. And if you think about how the competitive landscape evolves, Wal-Mart will be able to offer a number of services and convenient locations. Think about a regional grocer and how they can compete with these national subscription services. It's just going to be that much tougher.
Simeon Gutman: Brian, thanks for taking the time to talk.
Brian Nowak: Anytime, Simeon. Great speaking with you.
Simeon Gutman: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts App. It helps more people to find the show. Thank you.