Online will be the fastest-growing channel over the next five years, according to IGD's recently published annual UK grocery forecasts.

By 2019, 8.3% of total grocery sales are expected to be online, compared to 4.4% currently (IGD's channel forecasts are for to the year ending April). But where is the growth coming from and how is it likely to evolve?

Changing shopper habits

Online shopping is not new, but our attitude towards it is. As our lifestyles become busier and mobile technology becomes more integrated into our daily lives, we are increasingly becoming on-the-go consumers. Online shopping is convenient as it saves us time and fuel, while allowing us to fit in grocery shopping around our busy schedules.

Through IGD's ShopperVista research programme we speak to over a 1,000 shoppers each month to analyse their motivations for grocery shopping, currently and in the future. The latest data shows that 27% of us now shop online for groceries, with 10% buying the majority of our groceries via the internet. Click & collect is being used by around a quarter of online shoppers and this figure is growing as more services are rolled out.

Focus on mobile

Online grocery searches from smartphones jumped 94% over the past year, with grocery searches overall up 22%, according to recent Google research.

As mobile shopping increases, leading retailers are beginning to focus on transactional apps as engines for growth. These are already becoming sleeker and more relevant. Ocado sees 45% of online shoppers now checking out via mobile, for example, and retailers including Asda, Tesco and Waitrose have all relaunched their mobile apps recently.

However, we can expect some significant improvements to speed up and personalise the shopping experience over the next five years, as we move towards shoppers, missions and occasions and away from replicating the store layout online.  

Loyalty and convenience

Offering customers new ways to shop online is driving loyalty and spend. There is plenty of evidence that the more channels retailers make available to us, the more we are likely to shop with them and therefore spend. Click & collect is a good example of a trend that has really taken off over the past year. Major retailers, including Tesco and Asda, are investing heavily to roll out the service to the majority of their stores as well as remote locations, such as London travel hubs.

Click & collect is now available at London tube stations (see image, below), but future locations are likely to include travel hubs and workplaces as retailers continue to experiment and innovate.

Asda is now installing collection lockers at some London Underground stations

The service is convenient for shoppers and allows retailers to target new customers outside their regular store catchment and home delivery demographics. There are lots of variants of the service, ranging from drive-thrus to vans in car-parks and chilled lockers, as retailers experiment to see what works best.

We can expect this trend to develop further over the next five years, aimed in particular at busy workers and parents. Possible locations might include workplaces, locations close to schools and nurseries, travel hubs in cities outside London and even regularly serviced lockers in more remote or rural locations.

Loyalty for home delivery has similarly seen a boost from the introduction of competitively priced delivery pass schemes, which lock customers in to shopping with a single retailer. The schemes are proving popular and, once signed up, shoppers are using the service more frequently and therefore spending more with that retailer, despite basket size being typically smaller than for those without passes.

With continued growth in home delivery, retailers can be expected to continue their investment in dark stores to boost capacity in urban areas and enable them to drive harder to make operations more efficient, as well as to improve service and freshness standards.

Inspiration

Recognising how the online channel differs from physical retail will be key to successful growth in the future. Taking advantage of opportunities that exist solely online is a trend that is just emerging, with an increase in targeted online offers and product adjacencies such as pizza and beer or strawberries and stain remover, which cannot exist in-store but have no such boundaries on the web.

Shop-in-shops are among many ways that retailers and suppliers can exploit the online channel to provide inspiration to shoppers.

Successful online retail involves understanding how customers want to shop and making products easier to find based on personalisation, missions, events and occasions. This will be key to growth. Inspiration in the form of recipes with 'shoppable ingredients' is another trend that will continue to develop and could in future include personalised suggestions for those on special diets or based on family type and size. Many retailers are already working on such initiatives.

Digital technology in stores will also evolve to personalise the shopping experience, interacting with customers' smartphones and blurring the online and offline experiences.

New players in the market

Key to the growth that we have forecast within the UK market is also the emergence of new players. Morrisons partnered with Ocado at the beginning of this year to introduce an online grocery service, with plans to cover 50% of the UK by the end of this year. This entry together with retailers such as Waitrose investing significantly to increase online share is both driving the market and heating up competition. Waitrose reported a 79.4% increase in online sales in Q1, after it ran a free Champagne offer to acquire new customers in January.

Other players trialling online over the past year include the Co-op and Iceland with click & collect and even some of the pound stores. There will certainly be more players to add as the channel develops, some of which may be hugely significant.

Implications

Tracking online growth at IGD has shown that there are significant opportunities in the market, but that retailers also need to stay ahead of customers as retailer growth rates begin to diverge. Online grocery retailing is still at a nascent stage and we can expect plenty of exciting development ahead in ordering, delivery and mobile as the multichannel boundaries begin to blur.

If you’d like to hear more about the trends and implications within the online FMCG channel, I’ll be speaking at IGD's Online & Digital Summit in November. We have a great line-up of the UK's major grocers and suppliers together with Google, Twitter and more. 

Lisa Byfield-Green is senior retail analyst for IGD, specialising in online and digital. She will be writing a regular column for Essential Retail over the coming months.

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