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July 3, 2013

US: Fitch cool on potential of US online grocery

Heavy up-front investment and consumer resistance to delivery fees are likely to constrain US online grocery growth in the coming years, according to global agency Fitch Ratings.

Heavy up-front investment and consumer resistance to delivery fees are likely to constrain US online grocery growth in the coming years, according to global agency Fitch Ratings.

Online grocery sales account for around 1% of the $631bn US grocery market, making it one of the lowest penetrated categories, Fitch noted this week. Assuming sales grow at 10-15% annually compared with estimated 3% annual growth for the total market, online would grow to only 2-3% of the grocery market in ten years, it said.

Gaining this share will be existing players such as FreshDirect, part-owned by UK retailer Morrisons, and Ahold’s Peapod, which claims to be the largest internet grocer in the US.

Fitch says: “There are several reasons why online grocery sales are not growing more rapidly including consumer resistance to delivery fees that can range from $6 to $10 per order or a minimum order amount.”

“Difficult economic factors that confront online grocers also contribute to slower growth. These include heavy upfront investments, logistical challenges associated with delivering perishable items, and the inherently low margins associated with selling food. These factors will limit the number of new market entrants as well as the pace at which existing players expand.”

E-commerce giant Amazon recently announced plans to expand its online grocery service from Seattle into parts of Los Angeles. The move has created questions about the potential for online grocery sales, which Fitch believes will “gather steam” but remain a small part of the grocery market for the foreseeable future.

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