Photo: Canva
Is Grocery’s Path to Online Profitability Getting Any Clearer?
Grocers have significantly expanded e-commerce operations over the pandemic, but only 45% are profitable online, according to FMI’s annual “The Food Retailing Industry Speaks” report.
E-commerce represented 5.6% of grocers’ sales in 2022, more the double the 2.5% penetration reached in 2019, according to the study.
Grocers were found to still be experimenting with e-grocery execution. More than three-quarters (77%) are fulfilling online as of 2020, mainly through their own platforms, although 68% are partnering with third parties. Nearly half (47%) of grocers surveyed plan to change their online sales platform in the next two years.
Fresh or perimeter departments, a challenging category for grocery delivery due to its perishable nature, continue to account for 40% of all online sales.
Wage and fuel inflation as well as consumers seeking bargains in the inflationary climate have lately been putting more pressure on online grocery’s profitability.
“For many supermarkets, online delivery services are perceived as a ‘necessary evil’ — with some losing money on each delivery, due in large part to increased costs, inventory management, and price sensitivity of customers,” Chair of CIM Food Drink and Agriculture Group, Mark Dodds recently told the U.K.’s Grocery Gazette. “One way that retailers have been looking to bridge this gap is by increasing charges for home delivery — though this is a difficult line to tow.”
In March, Amazon began tacking on new service fees for Prime members who order less than $150 worth of groceries through its Amazon Fresh delivery service. Tesco’s move earlier this year to charge suppliers a “fulfillment fee” to cover the cost of scaling online operations received major backlash.
Recent analysis from Statista exploring the various models of online grocery — including having grocers pick up from the warehouse or dark stores, using a third-party delivery partner to pick up from stores, using automated centralized or micro-fulfillment centers, as well as offering in-store pickup — found most models aren’t profitable without charging additional fees. Statista wrote, “The least profitable is when the grocer picks items from the store for home delivery. Only automated micro-fulfillment center click-and-collect online grocery was profitable, with a margin of 2%.”
Discussion Questions
DISCUSSION QUESTIONS: What are the most and least obvious hurdles holding back online grocery profitability? Will extra fees to shoppers or vendors likely be necessary or are other solutions becoming apparent?
Poll
Loading …BrainTrust
We just released a report today w/ FMI and RELEX on the challenges of profitability with omnichannel shopping and fulfillment – Grocers cited legacy technology as inhibiting their ability to fulfill orders profitability and the evergreen issue of being able to analyze the right data as another inhibitor. From an opportunity perspective, almost 90% of grocers cited being able to optimize omnichannel order fulfillment will better their chances for profitability. Third-party delivery continues to be a challenge and while only the largest grocers can think about their own delivery operations, it can be a way to help turn online orders more profitable.
I am an ardent online grocery shopper, and yet as a retail industry veteran, I am constantly concerned that the margins on my orders from most grocers must be abysmal. I don’t know that I have any revelatory, data-driven suggestions for improving profitability, but I can share my personal feelings and say that per-transaction fees feel like a strong deterrent to me. I have often thought, however, that I would happily consider a subscription plan that eliminates per-order fees in lieu of a monthly charge, as long as that subscription came with meaningful perks. Perks like guaranteed delivery/pickup windows, generous substitution policies, no bag fees, and perhaps additional loyalty program reward bonuses might be enough to incentivize me to play along. And I say that despite my ever-increasing subscription fatigue…
Compared to 5-10 years ago, nearly half of the industry being profitable is quite an achievement!
Some of the most obvious barriers remain the incremental labor and platform costs that aren’t always recovered through convenience fees.
But I think automation, shoppers’ increasing willingness to pick up orders, and the proliferation of retail media will help margins continue to grow.
E-grocery profit hurdles include consumer habits, complexity and trust.
Nearly 95% of grocery sales still take place in stores. It’s challenging to accommodate a range of temperatures (frozen, fresh and hot prepared foods). Product availability and quality issues erode trust in e-grocery.
To improve profits, grocers can offer memberships to drive loyalty, automate processes for efficiency and charge supplier fees if inflation persists. Most importantly, grocers will restructure their revenue streams to seize retail media ad opportunities.
Automation is the key to driving per trip profitability, which is by itself tremendous progress. The cost of building those fully automated capabilities is signifiant however and will require high volumes to delivery ROI. Kroger’s online only presence in Florida is probably our best case study. There are challenges to getting that volume – including having to service low population density geographies and competitive pressure on prices – but I believe the industry will get there.
Grocery on its own is already not a high profit margin category, then when you add in in all the costs of online operations, it’s obviously even less profitable. High volume purchasing would be necessary to balance out the costs, and many US consumers just don’t shop for groceries online. Increasing fees for shoppers is not going to help more consumers become interested in online grocery, so I’d be more likely to suggest cutting back on what’s sold online versus continuing to push this channel at high costs to both retailers and shoppers.
Profitability is only going to happen when fees cover expenses.
Picking from store shelves is a bizarre business model. Not only does the retailer have the cost of the pickers, but they have the cost of the store overhead. With the silly major of accounting, a unique service depot eliminates the store overhead and processes the inventory much more efficiently
It’s important to remember that the road to profitability in any new venture is never smoothly paved. Does that mean that grocers should be satisfied trying to keep a flailing online operation afloat or even remaining underwater? Absolutely not. But, to me, it suggests refinement and reconfiguration.
Addressing three critical internal factors should be considered before passing extra fees to shoppers which may dissuade them from remaining a customer:
1) Right size assortment – what really needs to be offered online and how can those items be available more dependably?
2) Optimize fulfillment – retrofitting online fulfillment into a pre-existing legacy system may not be the answer. (I’d suggest starting with a blank page.)
3) Update technology – although it will require a hefty investment, using a well-suited platform can improve performance, outcomes, and profitability.
The rapidly changing grocery consumer behaviors require grocers to adapt their operating models, fuel the flexibility they need with an agile, fully integrated supply chain, and shift their eCommerce fulfillment from a loss leader to a significant revenue-generating business model. There is an imperative for grocers to deliver a profitable eCommerce fulfillment operation while advancing the flexibility of their operating models and an outstanding customer experience.
There are very complex dependencies and strategic prioritizations that need to be considered to reduce the costs to serve, unlock, and drive new revenue streams, which include:
▪️ Providing real-time inventory visibility
▪️ Enabling functional improvement of fulfillment channels (pick from the store, central fulfillment, and last mile)
▪️ Introduce data science and AI-driven capabilities to optimize fulfillment processes
▪️ Modernizing tech stack and retiring legacy technology
▪️ Advancing order management capabilities to flow orders through optimal fulfillment method
While a customer centric mode of thinking may be harder to apply to online grocery than other forms of retail, it’s important to look at the value of a customer across all channels over time, and not for a single transaction. Perhaps while that unprofitable online transaction is uncomfortable, maybe that online shopper is also visiting the store twice a week and buying high margin products. No question a retailer has to make every customer touchpoint efficient, (and online is not there yet) but there’s a forest in those trees.
Without knowing more about why they’re losing money – i.e. is it high fixed costs (which will become less of an issue as volumes increase) or are the variable costs actually too high ? – it’s pointless to offer opinions. The penetration numbers I found sobering, and while I’m not going to jump onboard the “It will never be profitable” Train just yet – at least any more than I already have – I don’t think we can rule it out.
Shoppers won’t like — and may not tolerate — increased fees for deliveries. There has to be a better way to profitability.
Of course. There is a 3rd pathway… quickly profitable ! Think “upside down” to find it
Out of the various online grocery iterations, and in conversations I have with independents, those who have adopted and promoted some form of Buy Online Pick Up in Store are indeed making a profit, and especially compared to the other digital options.
Until ample dark stores or neighborhood distribution sites get built, or home delivery business gets more efficient, or greater percentage of customers are willing to pay extra for delivery, this is likely going to remain the best bottom line option for the foreseeable future.
The challenges for online grocery sales center primarily on the labor costs of picking and performing the local delivery, plus the overhead implied at the store level to complete this process. As the surveys have shown, micro-fulfillment models that leverage automation are likely the only profitable approach. Realistically, only the largest grocers will be able to do this. Smaller grocers will turn to third party services, like Shipt, or Instacart for this type of support. Of course in both cases having very tight inventory management in place to reduce out of stocks and having data on preferred substitutions for customers becomes critical regardless of whether you rely on a third party or attempt this in-house. Ultimately, this is a convenience feature for consumers, and the convenience features that stick with consumers are usually the ones that save time for that consumer – time they then spend on other activities. That tells me the future for online grocery is only going to grow.
On our podcast, we recently spoke with the COO of Shipt about the future of delivery and learned that one of the ways 3rd party offerings are successful is by diversifying the services they offer to their retail partners. In addition to providing pick and deliver services, they are provide delivery only services to retail partners. That has the impact of shifting where these costs are attributed for the retailer – now the same delivery service for online purchases that are picked in the store can also deliver other e-commerce orders fulfilled from stores to gain efficiency and improve customer satisfaction and reduce overall delivery times. So I suggest that another approach is for grocers to look at online grocery in terms of lifetime customer value versus exclusively as online customer purchases. Identify adjacent revenue sources that are impact either directly or indirectly the online grocery revenue, such as retail media, to offset some of those costs.
Grocer’s omnichannel shipping and fulfillment models for online grocery sales is something that is clearly not ready for prime time. The ability for most grocers to exist profitably with their current business model and an online fulfillment model is usually doomed from the start since their business experience does not include experience or knowledge of how to build a profitable business in both an online world as well as the current retail world that they were originally developing expertise in as they developed their grocery model.
The right model is available & has never been fully used
1st key is… the consumer’s “just-in-time”
2nd key is using of… “networks”
Consumers don’t buy technology, they buy convenience.
The profitable solution exists but…
The biggest hurdles holding back online grocery profitability are competition and predicting consumer behavior. The market is flooded with many options from local supermarkets offering online shopping to larger players like Amazon and Walmart. Additionally, consumer preference remains a hurdle as well. There are consumers who prefer to pick out their own groceries, especially produce and getting them to adapt has been a challenge.