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The raw and the clicked

; Retailing
The Economist409.8864 (Nov 30, 2013): n/a.
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Grocery is the biggest category in retailing but the most resistant to the advance of online shopping. Even in Britain, where it has gone furthest, it may account for just 5% of sales this year. But it is growing fast everywhere (see chart). The Boston Consulting Group (BCG) expects the global market to grow from $36 billion this year to $100 billion by 2018. Grocers have held back for good reasons. Like many bricks-and-mortar merchants they fret that online commerce will shrivel sales in stores but not the costs associated with them. Grocery, with its tiny profit margins, adds complications. Virtual shopping-carts contain dozens of low-value items, which must be stored at different temperatures. Safeway, the second-largest supermarket chain in North America, is the only one besides Ahold with a substantial online operation. Walmart, the world's biggest retailer, remains hesitant.

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Grocery has so far resisted the rise of online shopping. That may be about to change

THERE is "a huge difference between being late and being too late," said Dalton Philips, the boss of Morrisons, on November 21st, as he announced the launch of the British grocer's online-shopping service. Morrisons' competitors have been selling broccoli and baby food via the internet for more than a decade. Britain's fourth-largest grocery chain had shunned e-commerce as a profit-sapping distraction. It paid with falling market share and the defection of some of its best customers to Tesco, the country's biggest grocer, and Ocado, an online-only supermarket.

Morrisons' change of heart will be noticed beyond Britain. Grocery is the biggest category in retailing but the most resistant to the advance of online shopping. Even in Britain, where it has gone furthest, it may account for just 5% of sales this year. But it is growing fast everywhere (see chart). The Boston Consulting Group (BCG) expects the global market to grow from $36 billion this year to $100 billion by 2018.

Grocers have held back for good reasons. Like many bricks-and-mortar merchants they fret that online commerce will shrivel sales in stores but not the costs associated with them. Grocery, with its tiny profit margins, adds complications. Virtual shopping-carts contain dozens of low-value items, which must be stored at different temperatures. Retailers can either get in-store staff to pick them off the shelves, which becomes disruptive as volumes rise, or build dedicated warehouses, which is costly. So are home deliveries: even in thickly settled Britain each one costs grocers around Pounds 10 ($16), but shoppers typically pay little more than Pounds 3.

Consumers are also wary. Many want to examine fresh produce before they buy it. They recoil when online grocers deliver "substitutions" instead of what they ordered. Many shoppers try grocery websites but "get discouraged", says David Shukri of the Institute of Grocery Distribution in London.

Among pioneers there have been spectacular wipeouts. California's Webvan expanded at breakneck speed, pampered customers with services like home delivery within half-hour slots, lost control of costs and collapsed in 2001. Its demise deterred imitators. In Britain Ocado has yet to make much money after more than a decade. Tesco claims its online operation, with nearly half the British market, is profitable. But it uses "murky" accounting for the cost of stores, where much of the produce is picked, says Andrew Gwynn of Exane BNP Paribas, an investment bank.

Yet to shun online is to risk losing grocers' best customers, prosperous families and those with children. "It really is a prisoner's dilemma and you can't afford not to play," says Chris Biggs of BCG.

Guess who's delivering dinner

In America, today's Webvans look sturdier. Peapod, the biggest American online grocer, acts as the internet arm of the Giant and Stop & Shop chains; all are part of Ahold, a Dutch giant. It has shown a flair for innovation: Peapod's customers can buy by scanning images of products on delivery lorries and coffee cups with their mobile phones. Lazy Manhattanites have been ordering Thanksgiving feasts from FreshDirect, the second-largest online grocer, which is partly owned by Morrisons. Both ventures prosper because they cater to well-off families, largely in cities.

American behemoths are unlikely to leave the field to specialists. Amazon began fresh-food deliveries in Seattle in 2007 and in Los Angeles last year. It is expected to add maybe 20 cities in 2014, some abroad. Traditional grocery chains will respond. "They are determined not to repeat the mistakes other sorts of retailers made at the turn of the century, when they were too afraid of Amazon," says Robert Hetu of Gartner, a technology-research firm.

Safeway, the second-largest supermarket chain in North America, is the only one besides Ahold with a substantial online operation. Walmart, the world's biggest retailer, remains hesitant. Neil Ashe, its head of e-commerce, has questioned whether the chain's budget-minded customers want groceries (as opposed to bigger items) delivered. But this may be changing. A pilot project in San Francisco and San Jose is being extended to Denver. Walmart Labs in Silicon Valley has imported many of the people who developed the online-grocery business at Asda, its British subsidiary. On November 25th Walmart said that its new chief executive would be Doug McMillon, who as head of the international operation is responsible for Asda. He may speed Walmart's halting American effort.

If a big American retailer plunges in, "others will take it seriously" and the market will expand rapidly, says Mr Biggs. With luck, the newcomers will avoid the mistakes of earlier stumblers. Where internet grocery is still immature, supermarkets can encourage shoppers to "click and collect" from stores rather than spoil them with home delivery. A likelier model for sprawling, car-crazy America is France, where shoppers pick up groceries from drive-through supermarkets. As volumes rise, picking will shift to shopperless "dark stores" and to automated, super-efficient "fulfilment centres" like Ocado's.

BCG reckons that shoppers who become online converts spend 30% more. Another boon is that distribution centres on cheap land consume less capital than urban stores. Online grocers can thus earn a decent return on capital even with thin operating margins, Mr Gwynn says. He expects Ocado, which will share its second fulfilment centre with Morrisons, to achieve its first "proper" profit (before interest and tax) next year. But as more consumers do their bulk buying online, and grocers start shutting their bigger urban stores, there will be a lot of large retail properties looking for new tenants.

Morrisons does not have the luxury of starting slowly. It hopes to make up for its late start by entrancing shoppers. It will post frank ratings of its produce to build trust, a trick learnt from FreshDirect. If a customer doesn't like the look of the fresh food delivered to her door, she can send it back and claim a voucher.

Isn't this the sort of coddling that wrecked Webvan? No, says Mr Philips, for three reasons: Morrisons will exploit its buying power, its emphasis on fresh food brings relatively high margins and it will piggyback on Ocado's operations. The latecomer will beguile shoppers. It may be harder to charm shareholders.