How has the online grocery market been impacted by inflation?

“Inflation has hit a record 30-year high” has been the common theme every single month this year as it continues to rise and rise at rates we have never seen before.

As a result, in-store supermarkets have been pushed to the limit to keep prices low, despite production and supply chain costs soaring.

The online grocery sphere benefited massively from the pandemic and lockdowns. But with this behind us, the online grocery sphere has had users slowly dropping, as consumers resort back to their in-store habits.

Additionally, with inflation now the biggest challenge to supermarkets and customers, it has become the driving force behind consumer behaviour, evident in the recent popularity of discounter stores Lidl and Aldi.

However, it begs the question, How has the online grocery market been impacted by inflation?

The online grocery sector has seen a massive drop off in the last few months. Kantar stated in its latest report, that the sector’s shares dipped by 1.5 percentage points.

Speaking to Kantar’s head of retail and consumer insight Fraser McKevitt, he said, “it’s hard to draw from the data available” any possible connection between inflation and the online grocery sector shrinking.

“While online shopping is down double-digits compared to last year, it’s still worth remembering how high its share is pre-pandemic.”

The massive drop-off demonstrates the shopper’s confidence about heading out and back to stores following the lifting of Covid-19 restrictions.

It just so happens the restrictions lifting and the rising inflation rates occurred at roughly the same time, making it extremely difficult to draw any conclusions on whether rising prices had any effect on driving customers back to stores, and if they did, how much of an effect.

Just like in-store supermarkets, the prices of goods sold by online retailers have also gone up as a result of inflation.

In Ocado’s latest retail trading statement, the online grocer revealed that the price of some materials and processes had gone up. As a result, it had increased “certain retail prices, where costs could not be mitigated.”

The news comes not as a shock but ironic as just a month before the statement, Ocado boss Tim Steiner played down suggestions that inflation is hitting food prices.

He said: “So far, we’ve not seen prices rising anything near as much as I’ve been reading about in the newspapers. But we’ll wait and see what happens in the market.”

Granted, his statement came out at the beginning of February, prior to Russia’s invasion of Ukraine, and although inflation rates were high – with food prices rising to 5.4% – this was only the start of the trend.

Customers are experiencing higher prices but as mentioned earlier, you can’t draw any definite conclusions because the online grocery sector was expected to fall before inflation and Russia’s invasion of Ukraine.

“As we have seen since the end of Covid restrictions, the value of the average basket and shape of the week continue to normalise as we return towards the rhythm of our pre-covid lives,” Ocado chief executive Melanie Smith said.

“Given that we are comparing a post-lockdown quarter this year with a lockdown quarter last year, this has meant that sales were down 5.7% in the quarter, not helped by the softening market overall, with smaller baskets offsetting the increase in the number of customer transactions in the quarter.”

If customers aren’t shaken by the increased grocery prices, the increased delivery charges – which come as a result of spiralling electricity and gas prices – are likely to leave a gaping hole in your wallet.

Last week, Sainsbury’s increased its upfront annual fee for its midweek delivery pass from £30 to £40.

“There are some particular challenges for online shopping,” McKevitt said to Grocery Gazette. “There might be a delivery charge – which is outside of the cost of groceries – and they might increase charges just to make them as profitable as possible for them.”

McKevitt stated that he thinks those with particularly tight budgets ‘may occasionally do’ online shopping but they aren’t the target audience or regular customers.

He said: “Remember that the core group for online shopping by all the changes during Covid tends to be more affluent families.

“They don’t mind paying or the delivery, whether it’s upfront or on an individual basis.

“The reason people do online shopping, is they basically weigh up the cost versus the benefits to them.”

A survey conducted by Virtual Store Trials found that cost-concerned shoppers (which claims to be made up of over half of the UK population) are 50% more likely to shop in large stores, compared with online.

As more people become concerned, more shoppers will migrate their shopping away from online,” Virtual Store Trials chief executive Nick Theodore said.

When under pressure, shoppers are more likely to go back to their old shopping habits due to trust in tradition. They want to see the repertoire of products, prices and deals, a feeling that online shopping lacks.

It’s hard to quantify the exact impacts inflation is having on consumer decision to switch from online grocery shopping to in-store because the online sector was expected to drop anyway.

However, we can conclude that online grocery companies and their customers are feeling the same rising cost impacts as in-store supermarkets.

However, the cost of living crisis has a skewed impact on those living in and around the poverty line – who generally don’t use online grocers as much.

Those who order groceries online are less likely to raise concerns or feel the impacts of spiralling prices, and those that do, make their way back to their local supermarket.

However, with prices predicted to continue rising, costs – especially delivery costs – will mount up and consumers who may not feel the initial impacts of inflation might start to look elsewhere in a bid to cut down on costs.

Source: Retail Gazette