Grocery delivery during times of inflation

September 4, 2023
Trends

By Rachel Kubik, Senior Content Writer for the Association of Retail and Consumer Professionals 

During the COVID-19 pandemic, shoppers opted for grocery delivery services during times of isolation. Three years later, they are grappling with high delivery fees and increased costs due to food and other consumer goods inflation. As delivery numbers are down, it’s time for brick-and-mortar retailers to take that business back. 

Shoppers have returned to stores over the past year.  

In August 2019, sales were $1.2 billion and grew to $4 billion in March 2020, a 233% increase. December 2022 saw the highest sales, at $7.6 billion. As of May 2023, online grocery deliveries and in-store pickups only reached $5.7 billion, according to a Statista report. 

Though consumers still value the expediency of digital commerce, they aren’t always willing to pay a premium for online services when budgets are tight. Grocers, in-store or online, must adjust accordingly or risk losing the ground they’ve gained in the past year, according to an August 2022 report from Forbes. 

COVID’s impact 

Analytics and strategic insight firm Brick Meets Click Partner and Research Lead David Bishop said the COVID-19 pandemic caused people to stay indoors because of quarantine and isolation rulings, but others even pre-pandemic utilized grocery delivery for various other reasons, including having physical injuries, disabilities or conditions that didn’t allow them to leave their homes. “COVID triggered a health emergency for everyone that drove mass adoption,” Bishop said. “70% of all U.S. households gave online shopping a try.” 

The concerns consumers had for their health and avoiding illness was enough to keep them out of the grocery stores. However, as restrictions loosened, and inflation struck families, people returned to stores because consumers enjoy seeing and feeling the product they’re buying rather than basing their perceptions of a product on a photo online. 

They can also have products catered to exactly what they want, such as thinly-sliced ham from the deli counter. Now consumers are asking themselves if they value the convenience of online shopping and grocery delivery enough to want to pay the premium costs of such. “Inflation still is nagging the pocketbooks of consumers,” Bishop said. “Consumers are saying, ‘I like shopping online, but I just don’t have enough money to do that. I’m going back to the store.’” 

The decline 

In an August 2023 report from The New York Times Instacart reported grocery orders in 2022 grew 18% from 2021, but orders in the first half of this year were flat compared with a year earlier. Like other retailers, Instacart has shifted its business away from reliance on low-margin delivery services to higher-margin online advertising. That change has helped the company’s bottom line. The company earned $740 million from ads and other revenue last year, making up nearly 30% of Instacart’s overall revenue, which was $2.5 billion.  

Digital grocery sales dipped nearly a full percentage point in the first quarter compared with the same period last year, as shoppers seek deals to mitigate high food costs, according to “State of Digital Grocery Performance Card for Q1, 2023,” a joint report from Incisiv and Wynshop, as cited in an April report from Winsight Grocery Business. 

Nearly two-thirds of shoppers (63%) were actively looking to cut costs in Q1, according to the Grocery Doppio report. Also, brick-and-mortar stores earned a bigger slice of the sales pie in the first three months of the year, with digital sales share dropping to 13.9% for the quarter from 14.8% a year ago. The report noted a 13% increase in the digital basket size over the quarter, but the number of items per basket remained flat, similar to in-store grocery baskets. The report is based on data from 1.7 million grocery orders and polling of more than 27,000 shoppers and more than 2,600 grocery executives.  

Grocers are helping to bolster slumping sales by offering Supplemental Nutrition Assistance Program, or SNAP, benefits for digital orders. Roughly one third (31%) of grocers are now accepting SNAP online, and regional grocers are making these benefits available faster than their national counterparts. The report noted that 53% of regional grocers are accepting SNAP online, while only 15% of national grocers are doing so, according to the Winsight report. 

Digital order growth experienced a substantial year-over-year reduction in the first quarter of 2023, dropping to 0.8% from 1.4% a year ago, according to the report. Online orders had a much stronger foothold with large grocers, where they represent 15% of overall orders, Winsight said. Delivery services fulfilled more of the digital orders for small grocers, though, where 62.2% of all online orders were delivered rather than picked up. That statistic was 45.3% for large grocers. 

Incentive programs 

Online grocery businesses are expected to keep delivery fees while rolling out other incentives for cash-strapped consumers, according to a December 2022 report from S&P Global Market Intelligence. Retailers' online grocery incentives all aim to provide savings for members while maintaining a fee to cover operational expenses. Retailers including The Kroger Co. and Walmart Inc. are going for options like tiered pricing through membership models or lower delivery fees for customers willing to wait a bit longer for their orders. 

Grocery delivery service Instacart in June 2022 launched Instacart+, a new version of its Express subscription service that gives members free delivery on groceries, a 5% credit on eligible pickup orders and reduced service fees. Kroger in July of that same year launched its Boost program, which offers two membership levels for free grocery delivery on orders of $35 or more. Boost's next-day delivery tier costs $59 per year, or members can pay $99 per year for delivery in two hours or less. 

Meanwhile, Walmart rolled out additional perks to its membership program, Walmart+, which costs $98 annually and offers free grocery delivery on orders of at least $35. The company in August announced Paramount Global as the streaming partner for Walmart+. The retailer also now offers a rewards program that allows Walmart+ members to earn additional savings toward future Walmart purchases, the report said. 

Amazon.com in 2021 began charging a $10 delivery fee to customers purchasing Whole Foods Market Inc. orders through Amazon's Prime memberships, which cost $139 annually in the U.S. 

How grocers can cope 

Grocers should strive to mitigate the challenges that make online fees steeper than those in-store, according to the Forbes report. They don’t necessarily need to use third-party delivery services that drain their profitability. According to a recent report Forbes conducted, less than 2% of American adults would choose to pay a premium fee for ultra-fast grocery delivery, so retailers don’t need to provide costly instant delivery.  

They can also make sure their inventory in-store and online is accurate, updated and aligned to give customers as much of their order as possible. If something’s not available, replace that with the next best product. Grocers today should also ponder if they’re fulfilling orders in the most profitable way. Are you using an application to make sure picking orders are cost-effective? Are you considering robotics wherever necessary to alleviate stress? 

Retailers can also use the right mix of in-house delivery drivers versus outsourcing third-party providers to maximize profitability on orders, the Forbes report said. Grocers can actually fulfill orders more efficiently by using their own fleet rather than outsourced ones. Third parties should only be used for peak hours or unusual delivery situations. 

Bishop said stores can additionally focus on service and quality. One aspect of service is having human cashiers available rather than switching everything to self-checkout. Another way is to find ways to save customers money, such as through rewards or loyalty programs. Otherwise, convenience and location is typically most consumers’ main concern. They tend to shop at the store closest to them. However, if the store or products are not performing to their standards, they may go out of their way to bring their business elsewhere. 

“When people become dissatisfied is when people consider their options,” Bishop said. “If they have no reason to go somewhere else, then they won’t.” 

A move to pickup 

A bright north star seems to be grocers offering pickup, which provides both the convenience of online ordering with the low to zero costs of delivery. Bishop said consumers enjoy that they can choose when they go to the store and get their order rather than ordering grocery delivery and having to make themselves available while waiting at home. Grocery delivery somewhat restricts your degrees of freedom, he said. 

“I can’t take a shower, in case the groceries are delivered. I’m not going to want that ice cream or frozen vegetables to sit outside for very long in 90 degree heat,” he said. “If I’m not home and wine is being delivered, I can’t receive my product because I’m not there for the ID check.” 

Consumers seem to prefer pickup, as of July 2023. Pickup has steadily expanded its share of U.S. online grocery sales over the last several years, according to Brick Meet Click. In 2022, pickup gained 0.8 percentage points year-over-year during the second quarter versus the prior year, and in 2023, it captured another 1.9 percentage points, ending the second quarter with a nearly 48% share of the U.S. online grocery market. 

Walmart, in e-commerce grocery sales during the second quarter of 2023, captured more than a third (36%) of the U.S. market, according to a report from Brick Meets Click, as cited in a Winsight Grocery Business article. The study noted that Walmart’s new market high was up 5 percentage points from the same period last year. Rival store Target experienced moderate growth in digital grocery sales during the second quarter, capturing 7% of the market. Target’s prices, which fall somewhere between Walmart and the overall supermarket industry, helped drive its e-commerce traffic, according to the report. 

As retail dietitians remain among the frontlines to shoppers, educating them on the benefits of incentive programs, how to utilize SNAP benefits online and the convenience of less costly pickup programs can be helpful when asked about online options. Time will tell which mode of shopping is most preferred, but pureplay grocery delivery is likely to remain muted until inflation abates.