Episode Details

With online grocery shopping growing in popularity, artificial intelligence can improve the customer experience while increasing efficiency.

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Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's U.S. Internet Analyst. 

Simeon Gutman: And I'm Simeon Gutman, Hard lines, Broad Lines and Food Retail Analyst. 

Brian Nowak: On this special episode of Thoughts on the Market, we'll discuss the significant opportunities in online grocery. It's Tuesday, October 3rd at 10 a.m. in New York. 

Brian Nowak: Simeon, our work suggests that online grocery is the largest remaining category of offline spend, which makes it the biggest opportunity in e-commerce. When we talk about online grocery, do you think of it as pure dot-com? Do you think of it as omnichannel? How do you define online grocery and how do you think about the growth outlook for the industry the next few years? 

Simeon Gutman: To settle that debate we think of it as omnichannel. The online market includes both delivery and pickup, which we actually think is a 50/50 mix. The market today, we think, is about 11.5% penetrated. That equates to roughly $190 billion of online and pickup sales. It's growing low double digits and we think over time it reaches about the high teens by 2027. 

Brian Nowak: So 11% adoption now heading to teens penetration a few years from now. That's quite a bit below a lot of other categories in the United States. So let me ask a sort of obvious question. What new types of technologies or innovations have you seen in online grocery that you think are going to really drive faster, more durable adoption going forward? 

Simeon Gutman: It's likely in the micro and macro fulfillment. I mean, online grocery is complicated. There's a lot of SKUs to pick. There's labor involved. We're seeing better ways that grocers are able picking and packing the groceries. I think still getting it to the end user remains a challenge and that's what we're going to see probably evolve over the next, call it, decade. 

Brian Nowak: That's helpful. What are some of the other key debates in the online grocery space and what aspects do you think the market is missing or underappreciated right now? 

Simeon Gutman: I think two key debates are the path to profitability, and if online grocery can reach that profitability threshold and two whether an online only player will encroach on the traditional share and disrupt the market. As for the path to profitability, we think eventually we'll see it. We don't have a lot of examples because we don't think we're there with scale today. But over time we think these models will show some level of profitability. It may not be a fully online model. It'll still be a holistic omni channel model. And then the second piece is we do think there is going to be an encroachment from e-tail or e-commerce only players. The market's big. It's one piece of the market that online only hasn't conquered, but it's such a big TAM, we think everyone has their attention on it. What are some of the most significant advertising opportunities when it comes to online grocery Brian?

Brian Nowak: To your point on profitability within online grocery, we think advertising is likely to be a key lever to drive profitability across the space. Historically, we have seen traditional grocers and retailers benefit from trade spend, advertising dollars spent essentially for NCAP placements, shelf space and really in-store marketing. As consumer wallets move online with an online grocery, we expect those dollars to shift toward the online players. And given the high incremental margin of adve