The launch of a pilot online grocery retailing scheme by Wal-Mart Stores this week underlines the fact that so far this sector has been primarily the preserve of niche, specialist players. Ben Cooper examines whether Wal-Mart’s entry has the potential to take online grocery shopping into the mainstream US market.

To describe Wal-Mart Stores as the driving force in the US grocery market would be a fairly uncontroversial statement but there is one area of the market that the world’s largest retailer has hitherto eschewed and that is the online, home delivery grocery sector. That is until now.

The company’s decision this week to launch a pilot online grocery concept, Wal-Mart To Go, in San Jose, California has turned a few heads.

By visiting the website, where customers nationwide are already able to purchase non-food items for home delivery, consumers in the San Jose area can order groceries and consumables to be delivered to their homes. Products on offer will include fresh produce, meat and seafood, frozen foods, bakery, baby products, over-the-counter pharmaceuticals, household supplies and health and beauty products.

Wal-Mart has so far given no indication as to whether it is considering rolling out the concept in other areas. This could be more than the retailer’s customary coyness. Like many observers, Wal-Mart may just have its doubts about the potential returns from online grocery in the US.

In comparison with the UK, online grocery retailing has made relatively slow progress in the US. By the most generous estimates it only accounts for 1% of the US$500bn US grocery market, and some analysts would put it considerably lower.

While the market did see significant activity in the early stages of online retail development, it arguably failed to get back into full swing after the dotcom bubble burst. That said, there have been some relative success stories, such as FreshDirect, and Ahold-owned Peapod.

Interestingly, last month saw the purchase of around 10% in FreshDirect, which operates in New York, New Jersey and Connecticut, by UK supermarket group Morrisons for GBP32m (US$51.6m). This unlikely move by Morrisons into US online retailing would surely have been predicted by only the most clairvoyant of analysts but suggests that there are others who feel the US online grocery market is in line for growth.

In fact, Morrisons was attracting more speculation regarding its possible purchase of UK online operator Ocado. However, the one move would appear not to preclude the other. Indeed, Morrisons stated that its investment in FreshDirect, which CEO Dalton Philips described as “a highly successful and profitable food retailer with a track record of terrific customer service”, was in no small part intended to assist its own moves into online retailing in the UK.

“What we learn from FreshDirect will be invaluable as we plan our own profitable e-commerce business for the UK,” said Philips who has also joined the FreshDirect board.

This ringing endorsement would appear to underline that online grocery can work stateside under the right conditions. The problem of scaling up the market in the way that is being seen in the UK of course comes down to a question of population density.

It is no surprise to find the US online grocery market is focused in urban and relatively affluent locations and similarly unsurprising to see that Wal-Mart has chosen to dip its toe in the water in an area which matches that profile.

“It is very telling that the first test is out in northern California in San Jose, which does fit the characteristics of being fairly urban, fairly dense, fairly upscale,” Neil Stern, senior partner at Chicago-based retail consultants McMillanDoolittle, tells just-food.

Wal-Mart’s move may also have been prompted in part by the progress of the Amazon Fresh online service, which has recently provided a further fillip to the online grocery market in the US.

It is not only the success of some niche operators which gives grounds for optimism. Since the first wave of investment in online retailing a decade or so ago, information technology, notably broadband penetration, and consumer understanding and acceptance of buying online has developed immeasurably.

Stern points out that in comparison with those early days there is now “a generation of customers who are open to this proposition and are very comfortable with online”. However, he adds, “the logistical challenges remain considerable and haven’t gone away”.

Clearly, the entry of a giant like Wal-Mart into the sector has the potential to be something of a game changer, but Stern points out that the particular characteristics of the online market do not make it a natural fit for the retailer. The affluent urban market, Stern explains, represents “a hole in the Wal-Mart retail footprint”.

This may hold back the San Jose pilot but on the other hand online shopping could be a catalyst for Wal-Mart developing an area of the market it has found challenging. As Stern concludes: “From a Wal-Mart perspective, if those characteristics are what make online shopping work, it’s both an opportunity for them and it’s a challenge because they don’t really serve that market particularly well today.”