THE MULTICHANNEL MOVEMENT HOW THE RISE OF MULTICHANNEL GROCERY SHOPPING IS CHANGING THE WAY CONSUMERS BUY

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1 THE MULTICHANNEL MOVEMENT HOW THE RISE OF MULTICHANNEL GROCERY SHOPPING IS CHANGING THE WAY CONSUMERS BUY Julian Highley, Jason Nathan, Akshay Nigam, Kamal Verma

2 THE MULTICHANNEL MOVEMENT Online and multichannel shopping has become one of the most discussed retail trends of our time. Commentary around multichannel shopping in the grocery space gravitates quickly to extremes. Many have made profound and hyperbolic statements about how online will fundamentally change grocery shopping, while others are more sceptical about widespread consumer adoption of online shopping in this category. This bipolar debate isn t particularly helpful, nor are the discussions about growth rates for online shopping in other industries. The fact is, consumers are making significant changes in the way they shop for groceries across online and in-store channels and this has important implications for brands and retailers. In the grocery retail category, many brands now see one-fifth to almost half of their sales from online purchases. Growth is expected in all aspects of the market. 20% of total growth in established markets will come from online over the next 5 years. Even the most highly penetrated categories are still enjoying significant growth. The three categories with the highest share of online sales have an average annual online growth rate of 21%. This study presents the findings from a global study of consumer shopping behaviours carried out by dunnhumby. Key Findings Across all levels of market maturity, there is rapid growth in online grocery shopping. Even in established markets growth exceeds 30%. 90%+ in emerging & nascent markets Numerous Brands are now seeing 20% to 50% of sales through online. Brands that develop a winning online strategy now are set to capitalise on future growth. As multichannel shopping continues to mature in grocery, shoppers will shift from upmarket to be increasingly mainstream The impact of online shopping on a brand will translate into changes in behaviour across other channels, as the vast majority of customers will also continue to spend in physical stores. Bulky, shelf stable, frozen and predictable consumption categories particularly are set to shift online most rapidly. Shopping behaviour online and in store has fundamental differences (for example level of healthy purchasing, engagement with promotions). It is critical to understand these fundamental shifts. The path to purchase online is significantly different across and even within categories. Understanding the detail behind these differences is critical for brands & retailers who want to stay ahead of the growth curve. 7 Brands operating in categories popular with new-to-channel customers are especially well positioned to build deeper loyalty. 2

3 DEFINING ONLINE AND MULTICHANNEL SHOPPERS There are many differing definitions of a multichannel transaction and shopper. For clarity, we define this as: Transactions and shoppers who buy in either, or both, physical and digital channels. If a customer completes a transaction on a PC, through a mobile phone app, or on a tablet, this is considered an online transaction, even if the products were home delivered or picked up In the store. If the transaction was completed in the store, this is considered a physical (or in-store) sale. It doesn t matter if the customer created a shopping list online, used digital vouchers delivered through the app or any other digital method. A multichannel customer is therefore understood to be one who shops both online and in-store. 3

4 MARKETS AT ALL LEVELS OF MATURITY ARE EXPERIENCING DRAMATIC GROWTH Online grocery shopping is growing dramatically in all geographic markets. However, online grocery shopping doesn t have the same penetration levels in each area, so it is important to understand how growth varies by the online sales maturity of the market. The 14 countries we evaluated were classified into three groups based on their online sales penetration. Penetration and Growth Rates of Online Grocery Shopping by Market Maturity Market Category Online Sales Penetration (2014) %YoY Growth Countries classified in this category Established 4.8% 31% UK, South Korea, France Emerging 0.9% 97% Nascent 0.5% 89% China, Slovakia, Czech Republic, Poland, Ireland, USA, Japan, South Africa Thailand, Hungary, Malaysia, Turkey, Brazil, Colombia As one would expect, online grocery sales penetration is higher in the established markets and lowest in the nascent markets, but the rate of growth is phenomenally high across all market groups. Nascent markets see 0.5% of their population shop for groceries online, but this is growing at an extraordinary 89% rate. Emerging markets see 0.9% penetration, with growth at an even higher rate, 97%. Even in established markets, where penetration is as strong as 4.8%, year-over-year growth rates exceed 30%. This is outstanding growth in a highly challenging economic environment. 4

5 MARKETS AT ALL LEVELS OF MATURITY ARE EXPERIENCING DRAMATIC GROWTH There are four important facts about customer behaviour that are consistent across all markets: Very few customers shop exclusively online - most who shop online are multichannel customers The percentage of multichannel customers far exceeds their sales penetration percentage implying that the impact of an online shopping experience is larger than the sales numbers would suggest Multichannel customers are worth more to retailers across all market category levels (between 30% and 67% more than average) Multichannel customers are also more valuable to brands, (28% more than average) Percentage of Shoppers by Type and Index of Multichannel Sales Market Category In-store Only Online Only Multichannel Shoppers Multichannel Sales Index Established 83.5% 0.2% 16.3% 130 Emerging 96.8% 0.1% 3.2% 127 Nascent 97.5% 0.1% 2.4% 167 5

6 MULTICHANNEL SHOPPERS ARE FROM UPMARKET HOUSEHOLDS The multichannel customer is more likely to be an upmarket household and least likely to be categorized as less affluent in each market category. Upmarket households, those who typically buy more expensive and high end products, index at significantly higher rates in both emerging and nascent markets. In established markets where grocery shopping enters the mainstream, mid-market customers become a more established group of shoppers. Comparing Multichannel Shoppers by Household Income Levels 250 ESTABLISHED EMERGING NASCENT 217 Less Affluent Mid Market Up Market dunnhumby

7 BROADBAND INTERNET GROWTH DRIVES MULTICHANNEL SHOPPING When looking at some external factors which impact the evolution of multichannel retailing, the strongest factor is the evolution of internet, both in terms of usage penetration and speed. The urban population percentage is a strong indicator of potential success of an online grocery retail offer. Broadband internet coverage is forecast to increase rapidly in emerging and nascent markets over the next five years. This growth will bolster the near 100% year-over-year growth we are seeing in these markets today. Influence of Internet Users on Multichannel Shopping Market Category % Urban Population Internet Users (%) Broadband Users (%) Average Annual Working Hours Established 81% 86% 38% 1,784 Emerging 61% 68% 17% 1,892 Nascent 70% 50% 12% 1,996 Average annual working hours is the annual hours actually worked per person in total employment according to national accounts. Source: OECD & National Statistics offices. 7

8 TOP PRODUCT CATEGORIES PURCHASED Consumers are purchasing a wide array of grocery products online. While purchases in some areas are negligible, the influence of online shopping in categories like canned foods, frozen meat and vegetables, and baby care is profound. The following chart summarizes the product categories that have a global online share in excess of 3.5%. Most Purchased Grocery Items by Multichannel Shoppers ONLINE SALES PENETRATION % Frozen Meat 16.8% 4.4% 0% 7.4% Baby Food & Care 16.4% 5.8% 1.9% 7.3% Canned Food 18.7% 4.6% 0.1% 7.2% Frozen Vegetables 13.4% 4.7% 0% 6.2% Tobacco 14.4% 2.9% 0% 6.2% Morning Goods (e.g. Bagels, Croissant, Danish Pasties) 11.9% 3.9% 0% 5.2% Tea & Coffee 12.9% 3.3% 1.5% 5.2% Cabinet Provisions 8.6% 3.6% 1.5% 5.2% Vegetables 8.5% 3.8% 0% 5.1% Ready to Eat 6.1% 1.4% 0% 4.9% Breakfast Cereals 14.1% 5.0% 1.5% 4.9% Eating Aids 11.1% 3.5% 0% 4.8% Household Cleaning 10.3% 4.5% 2.7% 4.7% Meat, Fish & Poultry 8.1% 2.9% 0% 4.0% Eggs 5.2% 0% 0% 4.5% Frozen Fish 13.6% 6.1% 0.9% 4.3% Noodles, Pasta & Rice 7.24% 4.7% 1.7% 4.3% Toiletries 10.37% 2.9% 0% 4.1% Biscuits 8.8% 3.7% 1.0% 3.8% Baking Needs 8.8% 2.9% 0.2% 3.7% Soft Drinks 10.8% 3.6% 2.1% 3.6% Frozen Food 10.3% 3.3% 1.1% 3.5% 8

9 TOP PRODUCT CATEGORIES PURCHASED Fresh produce trails frozen in all instances, and is a relatively under developed, even in the most established markets. This supports the abundance of qualitative data that suggests that customers want to see, touch and smell fresh produce. A number of consistent features stand out among items in the store that already have a healthy online presence or are growing strongly to achieve one. Bulky, homogenous, shelf stable or frozen categories consistently perform well online across all markets. Entry Level Categories for New Online Shoppers BABY MILK WATER SPIRITS CIDER CHAMPAGNE & SPARKLING WINE FROZEN DIETARY NEEDS There are clearly categories that serve as entry points for customers starting to buy groceries online. The most significant is also one of the most joyful life events; having a baby. Time (and sleep) starved parents are drawn to the convenience of being able to shop literally any time they wish, without leaving the family home. Baby food and care products appear in the top three categories across all online development stages. We also see that baby categories are gateway categories for new online shoppers. BABY FOOD FROZEN PIZZA LAGER NAPPIES WHITE WINE FROZEN VEGETABLES SNACK MEALS FREE FROM RANGE Looking at the categories where new online shoppers over-index compared to established online shoppers, three key themes emerge: Baby categories such as milk, food and nappies are all of significance for the new online shopper Alcoholic drinks of pretty much any description are gateway items (bulky & heavy) Frozen / convenience products are of substantial importance RED WINE 112 There are some categories where having a well-defined online strategy with a clear understanding of shopper purchasing dynamics is key. This includes soft drinks; tobacco; household; frozen meat, fish and vegetables; canned food; breakfast cereals; and baby food & care. Given the importance that having young children has on the decision to start using the online channel, we would suggest any brand that has a bias towards young families should consider developing their multichannel strategy. 1. New online shoppers were classified as those customers that had bought at least 3 times in the previous 52 weeks. Established online shoppers bought in both 52 week periods (analysis for the UK only) 9

10 THE WAY PEOPLE SHOP FUNDAMENTALLY CHANGES ONLINE Brands are accustomed to traditional laws of merchandising to maximise the likelihood of selling their products in the physical environment - eye level product placement, end of aisle support for promotions, etc. With the lack of an in-store stimulus online, consumers shopping for groceries in this channel have fundamentally altered the way they purchase items. Without the same visual stimulus and temptations, online shopping purchases are significantly healthier than instore shopping trips 2. This change in purchase behaviour is clear when you look at the path a customer takes to select a product and place it in his or her basket. 53% of purchases are of products that have been bought previously. This great news if you are one of their chosen brands, but a difficult challenge for brands trying to break into the consideration set. How Consumers Make Grocery Product Selections Online PERCENTAGE OF PURCHASES FAVOURITES SEARCH DEPARTMENT 11% SPECIAL OFFERS 6% 31% 53% Only 6% of purchases are the result of shoppers visiting the special offers area of the site. 2 Online shopping trips using the FSA (Ofcom) product scoring criteria are 42% healthier than the average shopping basket. dunnhumby

11 THE ONLINE PATH TO PURCHASE VARIES WITHIN PRODUCT CATEGORIES While the reliance on favourites is the predominant method that shoppers use to place items in their basket, we see a very high degree of product variety, not only across categories, but within categories. It is critically important to understand how customers purchase within the category they operate in, and how the path to purchase between their products and those of their competitors differ. If the predominant purchase path within a category is consistently search, (i.e. low variability) then it becomes vital for marketers to understand what search terms result in their products being purchased. If there is high variability across search, favourites and department then there is a much more complex path to purchase in the category. In this case, marketers need to know about all three purchase paths and what is driving the variability to ensure they can maximise the uptake of their product in customers baskets The chart below illustrates the variability of the ways consumers add products to their basket - favourites, department and search. The closer the spike is to the outer circle, the greater the variability of that method. Conversely, the closer the spike is to the centre, the less variability is seen in adding products to baskets. Comparing the Variability of Purchases in Popular Product Categories SPIKES FARTHEST FROM THE CENTER REPRESENT HIGH LEVELS OF VARIABILITY SPIRITS & LIQUEURS BAKERY PRODUCTS TOBACCO KIOSKS BEER & CIDER TABLE WINES CAKES CEREALS AND SPREADS SNACKS CLOTHING AND FOOTWEAR PROVISIONS COOKING AND EATING AIDS POULTRY DESSERTS PLANTS AND FLOWERS DRINKS AND BEVERAGES PET PRODUCTS OTHER NON FOOD GROCERY FRESH FRUIT/VEG/SALAD FROZEN FOODS & ICE CREAM OTHER B W & S MEAT MAIN MEALS INSTORE BAKERY PRODUCTS HOUSEHOLD HOUSEWARES HEALTH & BEAUTY Favourites Department Search 11

12 THE ONLINE PATH TO PURCHASE VARIES WITHIN PRODUCT CATEGORIES For example, frozen foods & ice cream has the greatest variability within favourites. Beer & cider, spirits and liqueurs have the least variability in search. Search in general sees the least amount of variability in its use. To bring this to life and underscore the importance of understanding the path to purchase, we examined two of the more pedestrian categories - drinks & beverages, and household products. Neither category has particularly high variations in the use of favourites or search. While variability in the use of department is high for household, it is low for drinks & beverages. In the this table, we detail tea products and the index of usage of favourites, search and department relative to their usage overall. While this is a category driven by search (far more than other areas of the store), instant and leaf tea do not follow this rule of thumb. These are far more likely to be added to the basket through use of favourites. Speciality teas, on the other hand, under index on the use of favourites and are far more likely to be shopped by department. Unsurprisingly, the more homogeneous the category, the less variability we see in the use of favourites, department and search Food & Beverage Products: Methods for Purchase Selection RELATIVE INDEX OF PRODUCTS BY PURCHASE SELECTION METHOD Subcategory Favourites Search Department Decaf Standard Tea Bag Fruit & Herb Tea Bags Green Tea Instant Teas Leaf Tea Rooibos Tea Specialty Tea Specialty Tea Bags Standard Tea Bags

13 THE ONLINE PATH TO PURCHASE VARIES WITHIN PRODUCT CATEGORIES Looking at the laundry category, we are again confronted with significant variability. While overall this category is driven by shopping by department, there are several areas (laundry aids, stain removers and washing powders) that are more dominated by search. Interestingly, while the use of favourites is relatively in line with shopping across the store, laundry tablets over index on the use of favourites and laundry aids significantly under index. Laundry Products: Methods for Purchase Selection RELATIVE INDEX OF PRODUCTS BY PURCHASE SELECTION METHOD Subcategory Favourites Search Department Laundry Aids Laundry Tablets Laundry Detergents Liquid Laundry Capsules Stain Removers Washing Powders Even the most consistent categories in shopper online purchasing behaviour have high levels of variability in how shoppers navigate various areas of the ecommerce site. Brands need to understand these various paths to purchase to ensure they succeed online. 13

14 ONLINE GROWTH (%) DETERMINING LEADERS AND LAGGARDS IN MULTICHANNEL SALES When we asked which brands are leading and lagging online, and if patterns exist across the categories they operate in, our initial hypothesis was that the leaders were dominated by brands within categories that have strong online growth, and that the converse is true for the laggards. We found that this is not necessarily the case. To determine brand leaders and laggards, we looked at all sizable brands (above average sales) in the UK, and the top and bottom 30 brands in online growth relative to in-store performance. A repeating pattern emerged that is best illustrated by brands within the beer, wine and spirits (BWS) category. While BWS has a relatively small online penetration globally (1.9%), in established markets it has a penetration of 6%, growing at an impressive 31% annually. Given this very strong growth rate, it is not surprising that brands in the BWS category feature strongly in the list. However, as one can see from this chart, a rising tide does not lift all ships. Some brands are sinking. 41% of the list is outperforming the category, while 44% are either posting negative online growth or their online performance is worse than instore. The brand showing the largest fall yearon-year is 50 percentage points adrift of the category growth rate. Leading and Lagging Beer, Wine and Spirit Categories Online in the UK Wine 100% Whiskey Beer Cider Other Spirits & Liqueurs 2% 12% -20% ONLINE PENETRATION (%) We see this pattern repeating itself across the brands in many product categories. Regardless of the category performance online, we see wide variance in the leading brands across tobacco, soft drinks, dairy, health & beauty and many others. The message is clear; even in high growth categories success is far from guaranteed. 14

15 CONCLUSION Online grocery is set to become increasingly important to shoppers, and the way people shop on line vs. in store is fundamentally different. It is clear that the pace of change will vary significantly across categories, and that the most popular categories online are still enjoying very healthy online growth rights with little evidence of slow down. Despite the high growth rates brands are not guaranteed success. Brands in entry categories (the first to move online in nascent and emerging markets and trigger categories in established markets) are well advised to establish their online strategy now. Key to this is to understand the path to purchase online for all the areas within the categories they operate. ABOUT THIS STUDY The dunnhumby Global Trends Unit identifies the consumer trends that will shape the future of the retail industry. It uses dunnhumby s behavioural and attitudinal data on over 700 million consumers worldwide to enable decision makers, in both manufacturers and retailers, to formulate superior forward looking strategies. METHODOLOGY To better understand the dynamics behind online grocery shopping, the online and in store behaviour of over seven million shoppers across 14 countries was analysed across South America; Western & Central Europe and Asia. We defined the online development taxonomy of Established, Emerging and Nascent using online sales penetration data by country from Planet Retail and the IGD. While there is obviously variation across countries we have summarised the themes where we saw consistency across all countries in the study (and called out some useful variations). If you would like more information regarding this study, please contact julian.highley@dunnhumby.com jason.nathan@dunnhumby.com VISIT US AT DUNNHUMBY.COM TO PUT THE CUSTOMER AT THE CENTRE OF YOUR BUSINESS DECISIONS dunnhumby