Food and beverage is the largest retail category in the United States at $600 billion a year, but online sales of these same items are less than 1%. While books, electronics and apparel have seen significant sales shift online, the food and beverage industry has not.

Food and beverage is the largest retail category in the United States at $600 billion a year, but online sales of these same items are less than 1%. While books, electronics and apparel have seen significant sales shift online, the food and beverage industry has not.

This is about to change. Market drivers are poised to accelerate online food sales to $10.9 billion by 2018. Over the next decade, retailers who invest and develop successful online capabilities will benefit by capturing a profitable customer segment, improving shopper loyalty and protecting their market share from both brick-and-mortar retailers moving online and pure-play online competitors. In this article, we discuss how retailers can get onboard with online shopping.

Several factors have slowed consumer adoption of online grocery to date: price, availability, concerns about freshness and quality, and the high value that many shoppers place on the in-store experience. The ability to touch and feel products, particularly perishables, remains important to many shoppers. In addition, the perceived length of time between online ordering and delivery prevents shoppers from shopping for immediate needs and fill-in items. However, forces are combining to bring the industry to a tipping point, and online food and beverage sales are poised to grow five to six times faster than conventional channels.

With the proliferation of technology and demographic change, online food shopping has become easier and more appealing. Growing urbanization has more people living in urban centers, making target populations easier to reach. Technology is ubiquitous, online ordering via mobile devices is easy, and price comparisons and peer reviews delivered via social media allow consumers to engage with retailers on their own terms. Boomers are becoming empty nesters, and Millennials, digital natives predisposed to transact online, are emerging as the demographic with the highest buying power.

According to A.T. Kearney’s 2014 consumer survey, 70% of shoppers have considered buying groceries online, with Millennials and higher-income consumers leading the way. One-third of consumers are even willing to pay for same day delivery. Retailers are testing home delivery, click-and-carry, and third-party delivery options to speed delivery of online ordering. Mass marketers looking at online food sales as an opportunity to increase purchase frequency and serve additional customer needs should act ­decisively.

Harnessing the online opportunity

When developing a robust online food strategy, retailers need to consider the following: market segmentation, consumer proposition and shopper engagement.

Segmentation: Food retailers should identify high-population and high-density markets, and target customer segments within these markets that represent the best opportunity. Online segmentation can target specific shoppers such as new parents with an integrated total baby offering across food and nonfood, or families with a back-to-school offering including clothing, school equipment, and lunch and snack needs. Personalization can include dinner suggestions with shopping lists, customized pricing, a favorites list based on recently purchased items and online sampling for new products. Segmentation allows retailers to deliver a viable, on-point online food strategy to their most receptive customers.

Consumer Proposition: As the global online food industry experiments with new service models and same-day delivery options become readily available, the consumer proposition shifts in favor of online food sales. Home delivery has already made inroads in Asia-Pacific with 37% of surveyed consumers already using versus 12% in North America. Globally, 55% of consumers say they would be willing to order groceries online for delivery, with younger consumers driving this trend.

Meanwhile, click-and-collect models, which allow shoppers to browse, research and order online and then pick up their order at a specific time, offer a customized buying and delivery experience. Many retailers in the United States have rolled out a click-and-collect program or are testing in selected stores.

A recent market study found that while only 5% of respondents had used click-and-collect, 75% of those were highly satisfied with the experience, and over 50% are repeat users. To solve "the last mile," retailers can leverage third-party providers such as Instacart and Google Shopping Express (and soon, more than likely, Uber) to provide either one-hour or two-hour delivery or scheduled delivery with virtually no additional infrastructure cost to the retailer. Offering convenient delivery and pickup alternatives that integrate seamlessly with the in-store experience and customers’ lifestyles will accelerate the growth of online shopping and help grow and defend market share.

Shopper Engagement: Omni-channel marketing allows food retailers to connect with today’s tech savvy shoppers. Omni-channel describes how today’s shopper engages with a company either in a physical store or through social media, a website or a mobile app. It is more than just using multiple media such as TV, direct marketing or couponing to market to shoppers; rather, it requires creating a personal experience for each shopper regardless of where they shop, when they shop or what device they use. Retailers can interact with their shoppers with tailored assortment, pricing and promotional strategies tied to their shopping preferences and previous purchases.

Online connectivity allows a retailer to offer endless variety to a shopper by category and across digital touch points. Promotional offerings and merchandising strategies can be designed for individual shoppers. Online shopping via mobile device or tablet with seamless delivery or convenient click-and-collect options will allow brick-and-mortar retailers to connect directly with their customers and deliver value in the form of competitive pricing, preferred delivery and greater assortment than in a conventional store environment.

E-commerce is poised to emerge as the single largest source of growth in the North American food retail market over the next five years, with compound annual growth rates expected to significantly outperform in-store grocery sales.

The rate of customer acceptance, especially against the boomer and Millennial target, will depend on how well the industry delivers on the logistical challenge represented by online food sales while understanding and addressing customer needs.

Pure-play online retailers have an edge with their business flexibility and speed to market, yet they may need to develop a physical presence to connect with customers. Traditional food retailers can leverage their existing assets while they build out their omnichannel capabilities and enhance their online supply chain.

Many new delivery options are being tested by U.S. retailers eager to build online sales. Ultimately, successful food retailers will balance their traditional and online capabilities, segment and penetrate the most attractive market opportunities, and deliver a seamless consumer proposition that creates meaningful engagement with their shoppers.

It is no longer a question of whether to enter online food sales — but rather of how to build differentiated online capabilities that will capture the customer’s trust, loyalty and share of wallet across selling platforms.

Randy Burt is a partner with strategy and management consultant A.T. Kearney in the firm’s Global Consumer and Retail Practice. He is based in Chicago and can be reached at [email protected].