Online sales of replenishment goods in Europe will surpass the US to total [EURO]55 billion in 2005 — 5% of total sales. A new Report from Forrester Research B.V. (Nasdaq: FORR) analyzes what this crucial shift will mean for the food retail industry. Forrester believes the balance of industry power will shift to a few leading players that will radically diversify online.

“Today, Europe’s food retailers only experiment on the Internet — serving small groups of customers out of existing stores and booking 0.1% of sales. But they expect online sales to grow 20-fold in the next two years alone,” explained Matthew Nordan, senior analyst for Forrester Research. “Online sales will become the food retail industry’s key battleground: Those that dominate will diversify to overcome industry turmoil, while those that don’t will struggle.”

Forrester’s Technographics® survey of 35,000 European households echoes the 40 food retailers interviewed: Today’s online grocery shoppers are young, well-educated urbanites, who earn 50% more than those offline; 40% have children at home. “They gladly trade picking their own fruit for free time: Even though Tesco customers wait up to a week for a delivery slot and see 13% of each order filled incorrectly, 90% recommend the service to others,” said Nordan.

The UK leads in online grocery — aggressive plays from Tesco and Iceland drove a [EURO]99 million online market last year, bigger than the rest of Western Europe combined. Forrester forecasts that 7% of the UK’s grocery sales will go online in 2005. The Nordic countries will follow closely at 6%, while Germany and France will overcome early barriers to reach more than 3% of sales online in 2005. Cultural factors and low technology penetration will constrain growth in Southern Europe.

Forrester believes that well-positioned food retailers will use the Net to reinvent their businesses. They will use online sales to both strengthen their existing competitive position and decrease their dependence on cutthroat grocery products by diversifying into nonfood products and service online. In the report, Forrester developed an expansion matrix, which identified four categories of products and services that contribute to revenue and profit.

“Only a few food retailers will be able to execute this diversification strategy on their own: those with an early-to-market online presence, a powerful, elastic brand, and a demonstrated commitment to online sales,” explained Nordan. “But late-to-market entrants must retaliate by offering better value, hiring logistics knowledge, and partnering with stronger brands for breadth.”

For the report “Online Grocers Diversify,” Forrester interviewed executives at 40 food retailers evenly balanced across Western Europe. Five were online pure plays; the remaining 35 were traditional brick-and-mortar food retailers with an average of 868 stores each. Of these, 54% already sell online today or are running pilots, and 77% will sell online by year-end.