The U.S. online grocery war began on June 16th, 2017, when Amazon made a bid to purchase Whole Foods for $13.4 billion. Before this date, Amazon’s food and grocery initiatives were exciting but had very low consumer adoption. Since the Whole Foods purchase, Amazon has comfortably taken the lead as the go-to e-commerce grocer in the United States.

Meanwhile, Walmart is in the midst of a dramatic transformation. It has made bold moves and investments that are necessary to maintain its grocery relevance in today’s digital landscape. It is the only retailer that has shown that it has the vision, the drive, the deep pockets, and the muscle to compete with Amazon for the U.S. online grocery customer in a serious and meaningful way.

The U.S. Online Grocery Market

The U.S e-commerce grocery market is snowballing, but it is still small and fractured.

As Bloomberg notes, e-commerce accounts for less than 10% of total U.S. retail spend, compared with almost 25% in China. Although e-commerce is just starting to reach maturity in the United States, shopping habits in grocery always change at a slower pace than in other categories. Less than 3% of grocery sales were made online in 2017, around $13 billion.

On the other hand, it appears that U.S. online grocery is approaching a watershed moment. Nielsen and the Food Marketing Institute have predicted that consumers will spend $100 billion per year on online grocery by 2022. In five to seven years, 70% of U.S. consumers will regularly purchase consumer packaged goods online.

Walmart vs. Amazon

35% of the dollars U.S. consumers spent on retail in 2017 was on food and groceries. Winning a significant share of this massive $1.2 trillion market is imperative for retailers like Walmart and Amazon. 35% is a large percentage of Americans’ wallets, and both retailers are keen to capture every dollar possible.

Background

Walmart successfully created a buying pattern that simultaneously increased its sales and suited its customers’ needs. It sold everything under one roof. Customers could walk in for light bulbs and walk out with a dozen items they didn’t know they wanted.

Amazon has taken Walmart’s model and adopted it for the digital world we live in now. This includes Prime membership, online recommendations, and non-retail offerings such as movies and music that extend far beyond the grocery sphere.

So this creates our billion-dollar questions:

• Can Walmart adapt its brick-and-mortar dominance to encompass the online advantages that Amazon offers?
• Can Amazon build a brick and-mortar ecosystem or physical home-delivery system that consumers find as easy, enjoyable and convenient as walking into a Walmart store?

Current State

Walmart still captures considerably more total U.S. retail spend than Amazon. Last year, U.S. consumers purchased $381 billion from Walmart, which accounts for a very impressive 10% of total U.S. retail spend. By comparison, U.S. consumers purchased $200 billion from Amazon and Whole Foods, which accounts for around 5% of total U.S. retail spend.

From an online grocery perspective, Amazon has an early lead due to its dedication and focus on pure-play digital. Amazon’s heritage is in the online world, and it’s unlikely that Walmart could ever eclipse Amazon’s rate of technology and innovation. According to One Click Retail, Amazon holds an 18% share of the U.S. online grocery market. Walmart holds less than half that amount.

Online grocery is closely intertwined with physical grocery, however, since a growing percentage of online orders are picked up in store. Walmart’s physical footprint gives it an advantage in this category, as it has 5,600 U.S. stores, most between 150,000 and 200,000 square feet. 90 percent of all Americans live within 15 miles of a Walmart.

By comparison, Amazon has under 450 U.S. stores at an average of 50,000 square feet. That number is sure to grow, and it’s possible that Amazon will begin to leverage its 150 U.S. warehouses in new, creative ways.

But Amazon also does not have the history, reach and infrastructure that Walmart has. Walmart’s supply chain and manufacturer relationships are second to none. It is the world’s largest employer, with 2.3 million employees. Amazon has a quarter of that amount, around 560,000.

Who Will Win?

Amazon

Amazon doesn’t need to be the biggest overall grocer to be successful. The company has noted that its goal is to become a top-five grocery retailer by 2025. That would require more than $30 billion in annual food and beverage spending through its sites, up from $8.7 billion in 2016.

This is sensible, as food retail is a notoriously difficult market to penetrate. The U.K. pureplay online grocer Ocado took more than a decade to capture 1% of U.K. grocery market share.

The primary goal of Amazon’s grocery growth is to continue its vision as a one-stop-shop for all of a consumer’s needs. Reaching a top-five position certainly accomplishes this goal. Based on Jeff Bezos’ history, though, cracking the top five is just a starting point, and the ultimate goal will eventually be to dethrone the incumbent Walmart and redefine the way consumers shop for groceries.

Walmart

Walmart has the opposite conundrum. It has been the United States’ top grocer for many years, but it isn’t a main e-commerce destination of choice, particularly for key younger demographics and high-income customers. Its e-commerce growth has been impressive in the United States, however, with 33% growth in Q1 2018 followed by 40% growth in Q2.

Much of this growth is due to improvements to the Walmart website, which is easier to shop, has a much wider assortment, and is now more connected than ever to services like in-store pickup. GlobalData conducted a consumer survey in April 2018 that showed consumers reacted favorably to the new Walmart.com, noting that the site was “easier to shop” and “more inspirational and engaging.” Traffic, conversion and average order values should all increase as a result of these efforts. Time will tell if it is enough to make Walmart.com the #1 online grocery destination or if it will remain in a distant second place.

Conclusion

Most organizations would be delighted to be in the position that Amazon and Walmart find themselves in. They both have undeniable strengths in online grocery, and their prospects for the future are bright. Amazon and Walmart aren’t “most organizations,” though. They expect to be #1 in every venture that they enter into. Part of this is due to their business model, and part is due to their extreme focus on being the best.

There is room in the market for two online grocers, but it’s clear that both will continue battling until one winner stands clearly on top.