It could be a bit more

October 2018 – While online commerce is booming in Germany, online food distribution is still in its infancy. This applies above all to fresh fruit, vegetables, fish and meat. But complacency would be dangerous for stationary retailers. Because the history of the Internet teaches us one thing: disruption starts very quietly but can happen very quickly.

Schoolchildren learn the significant difference between "relative" and "absolute" at a young age. In absolute terms, Germans spent around 1.67 trillion euros on consumer goods in 2017. Of this total, 272.3 billion euros or 3,301 euros per resident were spent on food. But online food sales only account for a meagre percentage of these enormous sums. In no other product group in Germany is online turnover lower. For a long time now, every third euro spent on sports and camping equipment is spent online, with a similarly high share for toys and clothing. According to current figures from the German trade association Handelsverband Deutschland (HDE), the average online share of all sectors is around ten percent.

Barely moving

Sales and online share of sales of non-food vs. food products in billions of euros/percent

Barely moving: Sales and online share of sales of non-food vs. food products in billions of euros/percent

Source: IFH, HDE Trade Report "Food Online," 2017

In a new joint study entitled "Lebensmittel-Einzelhandel. Frische macht den Unterschied – kann der Handel liefern?" ("Food retail: Freshness makes the difference – can retail deliver?") retail experts from EHI Retail Institute in Cologne and HSH Nordbank explore why the otherwise online-savvy Germans are reluctant when it comes to online food sales. Since its foundation, HSH Nordbank has focused on the food industry. "We support companies from almost all sub-segments of the food industry throughout Germany and experience first-hand the opportunities and risks of our customers' business models," says Tim Muhle, Head of Food Economics.

Freshness provides returns

For fresh products, stationary retail is still the perfect optimal form of distribution – but this is only a snapshot.
For fresh products, stationary retail is still the perfect optimal form of distribution – but this is only a snapshot.

Online food sales in Germany are playing catch-up, especially when it comes to fresh foods such as fruit and vegetables, meat, fish and baked goods, as well as refrigerated items. It is precisely these products that play a decisive role. "They create special opportunities for a supermarket to set itself apart from the competition, whether by differentiating itself from discounters or from online food retailers," says Muhle. Above all, fresh products are also the most profitable. According to the study, the fresh food segment accounts for 38.7 percent of sales in all markets, but also accounts for 49 percent of gross profit. Apples, pears, fish and meat thus provide the most return at supermarket chains like Edeka, Rewe, Aldi, etc.

“I have several supermarkets and discounters within walking distance in my neighborhood. It would be hard to get fresher products, except maybe at a farmers market. There's no reason for me to buy fruit or vegetables online and then wait at home for the delivery.”

Christian Meyerholz, Junior Relationship Manager Food Industry at HSH Nordbank

Christian Meyerholz, Junior Relationship Manager and head of the Fruit and Vegetables sub-sector in HSH Nordbank's food industry team, knows from his own experience that freshness is crucial for shoppers. "I have several supermarkets and discounters within walking distance in my neighborhood. It would be hard to get fresher products, except maybe at a farmers market. There's no reason for me to buy fruit or vegetables online and then wait at home for the delivery." In other words: “Online commerce can deliver, but consumers don't want fresh products – in contrast to other goods purchased online – to be delivered."

The majority of German consumers today agree with Meyerholz. For fresh products, stationary retailing is still the optimal form of distribution. But as a retail expert, Meyerholz is thinking ahead: "This is just a snapshot of the situation today. It's possible that in the near future there will be coherent business models that will significantly shift the food market towards digitization."

France and Great Britain are leading the way

In Great Britain and France, the proportion of food ordered online is already three to four times higher than in Germany.

A look at other European countries can provide insight into how the German market could develop over the long term. In Great Britain and France, the proportion of fresh food ordered online is already three to four times higher than in Germany. One reason is that consumers in France are significantly more willing to spend more of their money on good, fresh food. In addition, supermarket density there is much lower than in Germany, which in 2017 had almost 38,000 grocery stores of all sizes, and where two out of three citizens could reach at least one local supplier within just two kilometers driving or walking.

Expandable digital quota

Online share of FMCG1 sales in selected European countries 2017
1 Fast Moving Consumer Goods

Expandable digital quota: Online share of FMCG(1) sales in selected European countries 2017

Source: Kantar Worldpanel 2017

For a long time, FMCG (fast moving consumer goods), above all fresh produce, were considered generally unsuitable for web sales and distribution. Those days are over. According to a census by the Brandenburg Consumer Association, which makes no claim to comprehensiveness, almost 1,000 online shops are already active in the German market. Very few of them are full-range retailers like digital market leader Rewe, which are rooted in stationary retail and do not want to leave the field open for the new competitors, the online pure play retailers. As a rule, both pure play companies and multichannel providers primarily only supply large cities and metropolitan areas.

In view of the fierce competition on the German food retail market, the majority of these start-ups are likely to have a hard time in the long term. The pressure is too great, the margins are too low. But others will survive and remain on the market.

“With deals like the Whole Foods Market takeover, Amazon Fresh has linked the digital and analogue worlds”

Tim Muhle, Head of Food Industry at HSH Nordbank AG

Is Amazon a game changer?

Amazon Fresh, who are said to be increasingly interested in stationary food retail in Germany.

One name in particular gets mentioned constantly: Amazon Fresh, who are said to be increasingly interested in stationary food retail in Germany. The announced sale of Real by Metro has added new fuel to the fire of these speculations.

Amazon Fresh was launched in the Seattle area in 2007 and quickly expanded its online offering into other American cities and metropolitan regions such as Los Angeles, New York City and San Francisco. In Europe, Amazon Fresh is now active in Great Britain and Germany. The company caused a sensation in mid-2017 when it took over Whole Foods Market. Whole Foods primarily sells expensive organic products in its almost 500 stores in the United States, Canada and Great Britain. "With deals like this, Amazon Fresh has linked the digital and analogue worlds," says Tim Muhle. In this way, hybrid models such as "Click & Collect" and "Click & Drive-in" could become more popular. With "Click & Collect," buyers pick up goods ordered online during normal opening hours in a nearby store. With "Click & Drive-in," customers drive to a central warehouse to pick up their orders. These warehouses are usually open around the clock every day.

HSH Nordbank experts Muhle and Meyerholz also believe that such hybrids of stationary and digital retail have the greatest potential. In the short term, however, they do not expect any market disruption. "The e-food market in Germany is gaining momentum very slowly. Most German customers will likely continue to want to buy at stationary locations going into the future," says Muhle.

However, according to Muhle, this does not mean that that classic supermarket chains and discounters should be complacent. "It would be irresponsible not to keep a constant eye on market developments," warns the head of Nordbank's food industry team. The former head of the Rewe Group, Alain Caparros, made similar comments in an interview with "Wirtschaftswoche 2013": "No one knows exactly where or how fast the online train is going. All I know is we have to be on board." So: All aboard!

“The e-food market in Germany is gaining momentum very slowly. Most German customers will likely continue to want to buy at stationary locations going into the future – It would be irresponsible not to keep a constant eye on market developments.”

Tim Muhle, Head of Food Industry at HSH Nordbank AG

Industry study „food retail trade“

The industry study (available in German language) shows the risks and opportunities for food retailers in online and stationary retail. Are you interested in the study? Simply send an e-mail with the subject "Food retail - freshness makes the difference" to tim.muhle@hsh-nordbank.com .