grocery-shopping-online-2Retail behemoths Walmart and Amazon are both readying major efforts to gain dominance in the online grocery business, which currently accounts for less than 1% of sales in a $568 billion market. Earlier in June at Walmart’s annual meeting, CEO Mike Duke said the company is investing in logistics infrastructure for online sales. The same week, Reuters reported that Amazon is planning “a major roll-out of an online grocery business that it has been quietly developing for years.”

A battle between Walmart and Amazon in online groceries was exactly what Wharton professor of operations and information management Eric K. Clemons predicted in the mid-1990s, when online grocery shopping was still in its conceptual stages. Now, as online grocery retailing is poised to take off, he expects “a war for control” of the market between the two companies. “This is going to be fun,” he says.

Walmart is testing online grocery retailing at 35 stores, with plans to expand it to 50 this year, The Wall Street Journal reported last week. Groceries accounted for 55% of the company’s U.S. sales of $264 billion last year. Amazon may expand its AmazonFresh grocery service beyond its home market in the Seattle area to San Francisco and Los Angeles later this year, and to 20 other urban centers next year, Reuters reported.

Total online sales in the U.S. last year were $224 billion, or just 5% of all consumer goods sales, according to Forrester Research. In 2012, Amazon posted online sales of $61 billion, compared with Walmart’s estimated $7.7 billion (Walmart expects its online sales to increase to $10 billion this year.) The Bentonville, Ark.-based chain’s network of 4,000 stores and 133 distribution centers dwarfs Amazon’s ecosystem of just 40 warehouses. But Amazon tops Walmart in low online shipping costs, with the former charging $3 to $4 a parcel compared with $5 to $7 for the latter, the Journal said, citing analysts. But shipping costs could fall as Walmart implements an upgraded distribution network, which, according to the Journal, is focused around finding the most efficient way to deliver goods to customers, such as having workers at its stores fulfill online orders by pulling items directly from the shelves.

Strengths and Weaknesses

“Who will win the war?” Clemons asks. “Each player has some strengths and some weaknesses, some of which may not always be apparent.”

Walmart’s strengths include a “great reputation with consumers,” an extensive network of grocery suppliers, a formidable physical distribution system, a national network of retail locations and the ability to implement a hybrid model where customers can order by phone or online and pick up their purchases at a store, Clemons notes. He adds that Walmart can also claim advantage in its 51% stake in Yihaodian, China’s fastest growing online grocer, which has “extraordinary skill in logistics.” Walmart’s notable weakness is perhaps that its customers are “more traditional [and] less savvy than Amazon’s customers,” Clemons says.

Meanwhile, Amazon benefits from a “great reputation as a trusted online retailer,” according to Clemons. The company also has a low-cost distribution system for two-day delivery of shelf-stable items like canned goods and detergents. But Amazon is weaker in the area of perishable goods, Clemons notes, and also has a limited physical presence for fast distribution and limited relationships with providers. Amazon’s limited physical presence would also make it difficult for the company to operate a hybrid model where consumers could order online put pick up their goods at a physical location.

“The future of commerce is an omni-channel approach” with online and offline channels, says Wharton marketing professor Barbara E. Kahn, who is also director of the school’s Jay H. Baker Retailing Center. “There is some evidence that allowing consumers to order online and pick up offline allows for incremental sales. For some consumers in some instances, this is preferable.”

Clemons expects Walmart to develop a physical distribution system for delivering online orders and a hybrid model for store pick-ups. “Walmart will develop these a lot faster than Amazon will develop a network to supply [customers] with meat and produce, and a lot faster than Amazon will develop a local distribution system,” he predicts.

Other Players

As Walmart and Amazon clash, it could cause plenty of stress for smaller grocery chains, including Safeway, Kroger and Whole Foods. “But consumers will enjoy great convenience and great selection, and they are likely to enjoy the benefits of a serious price war,” Clemons says.

But Clemons points out that there is another chain that is poised to dominate the online grocery sales market — Seattle-based warehouse club Costco, the second largest retailer in the U.S., with 622 locations and 2012 sales of $97 billion. Costco’s presence in major metropolitan areas with high population densities makes distribution costs manageable, Clemons says, adding that the chain also has a sufficient physical presence to implement a hybrid model and a global sourcing network for meat, produce and fast-moving consumer goods. Finally, Costco’s customer base “has above-average income and tech sophistication, is loyal and recognizes their superior quality.”