IDC forecasts US online grocery spending will approach $9 billion in 2004

From less than $200 million in 1999, U.S. online grocery spending will top $8.8 billion in 2004. The ascent in revenues, however, will not come easily or cheaply. IDC believes online grocers will have to overcome many obstacles as the market grows.

"The online grocery market is taking a growth path that no other ecommerce business has tread," said Jim Williamson, a senior research analyst with IDC`s Consumer eCommerce: Consumer Goods research. "Substantial capital costs are required to reach customers, consumer acceptance still remains a major barrier to growth, product margins are low, and competition is everywhere. This market shares many issues that have troubled offline businesses for years, including capital efficiency, obstacles to market penetration, and the price of gas."

According to IDC, to penetrate a new market, some online grocers will spend over $25 million and that cost doesn`t include customer acquisition. Most of the expense is related to building fulfillment centers. Existing grocery stores will have just as difficult a time getting into the online business as the online pure-play start-ups. "Brick and mortar groceries will have to spend big bucks if they want to compete against these nimble upstarts," Williamson said. "For everyone who gets involved, it won`t be an easy process, and the road to a profitable online grocery market will be littered with bankrupt companies and broken hearts."

Some investments, however, will pay off in large ways. "The fundamental value proposition of the online grocery business model we do what you don`t want to, and cheap will resonate with busy suburban families," Williamson said. "As a result, profitability will eventually be achieved, particularly in older markets."

IDC expects prepared foods and convenience services will be big growth areas in online grocery spending. While online spending for traditional groceries will also increase, its market share will decrease from 92% in 1999 to less than 70% in 2004.

"The large capital investment required for traditional groceries will encourage online grocers to expand their product selection into higher-margin categories," Williamson said. "Obvious choices include health and beauty products, pet supplies, household cleaners, dry cleaning, video rental, and prepared foods."

IDC recently published Online Grocery Market Forecast and Analysis, 1999-2004 (IDC #B22126). This report forecasts online grocery spending through 2004 by five categories: traditional groceries, health and beauty products, prepared foods, additional products, and convenience services. The report discusses industry drivers and potential market obstacles. It lists U.S. cities that are most interested in online grocery shopping and includes recommendations for online grocers wanting to increase their market share.