eGrocery, the numbers don’t add up

Michele Caprini
14/10/2021
In brief
From a simple additional channel of a retail historically anchored to supermarkets, eGrocery is becoming an unavoidable commitment, due to its size and the importance of the relationship with the customer. However, a solution must be found quickly to the weak, and more often than not, non-existent profitability of online operations, just as demand is growing and cannot be circumvented.

The surge in online sales, albeit with different local trends (+38% in Italy this year), makes the issue of eGrocery profitability the top priority for retailers throughout the world.

eGrocery, too much too quickly

According to Marc-André Kamel, leader of Bain’s global retail group: “When online grocery was a small percentage of the overall market – say, 1% to 2%, for instance, in the pre-pandemic Germany – nobody cared”.

Those operating in the supermarkets industry hoped for a slower growth of this segment in order to consolidate a sustainable operating model. In fact, grocery eCommerce is added to the costs already incurred for sales in store, whose average margins do not exceed 4%. Now they need to quickly find a solution to the poor profitability of online operations, just as they need to increase their capacity to meet the growing demand. Economies of scale seem to help, and companies with large volumes of online sales are more likely to be profitable.

But the deciding factor is the ability to find the balance in the ultimate game of profit and loss, such as the costs of the supply chain and last-mile delivery, commercial and promotional expenses, investments in marketing consistent with the method of sale and the new relationship with the customer.

The reasons for the delay

The traditional core business of supermarkets is certainly not oriented towards eGrocery and rapid picking, as it is better to see customers wandering through aisles and shelves, ready for impulse purchases. The increase in the rate and volume of online demand, however, cannot be ignored and must be met accordingly.

Retail has long been reluctant towards digital commerce due to the low business share, high entry barriers and even higher cost of operations. Without adequate growth in consumer demand, there was no valid reason to move away from the established and proven store business. In 2001, online shopping was considered an additional channel, but today the elements for understanding this phenomenon have changed and they do not concern only the shift in shopping behaviours, but the nature of the relationship with those who buy.

In the first large-scale experiences, what is more, retailers were discouraged by the investment costs and technological developments necessary for eGrocery logistics. A good example, always from twenty years ago, is to be found in the failure of Webvan, which deeply affected the American market. Today, however, the decisions to be made cannot be understood as a remedy to an emergency, but as support to a strategy.

The issue of deliveries

The direct costs of the delivery service have become evident to all, and involve a variety of factors, from the structuring of the collection and storage centres to the handling of loads and means of transport, from the management of routes to the packaging of goods, and they depend, of course, on the distribution and balancing of resources and lead times of the various services.

Retailers can aim for the direct management of large and centralized warehouses outside urban centres, where orders are processed and packages shipped to collection points, or the provision of suitable spaces at supermarkets closest to the customer, or make substantial investments in logistics, which of course are not within the reach of all businesses.

Interesting in this sense is the experience of Ocado, a pure-play online retailer, operating since 2000 without a physical distribution network, with nearly 800,000 regular consumers. Its customer fulfilment centre is one of the most advanced in the world, capable of handling many tens of thousands of orders per week. For this reason, other global players in large-scale distribution use Ocado’s technologies for their logistics flow.

The damn last-mile

The widely spread claim “where you want, when you want” or “shopping delivered at your doorstep within 10 minutes” heavily affect, and in a deviant way, the expectations of consumers on the typical pain point of eGrocery: home deliveries. Regardless of whether the option chosen by the retailer involves manual picking or the best automated solution, to date that cart will always be loss making. This is not just about costs, but as in all eCommerce businesses, the fees are nowhere near to cover them. New revenue streams must be created, and the value of the service fairly fixed.

Planning, however, must take into account the irreversibility of this market trend and must therefore always be strategically oriented. “When a customer first switches to online, it typically takes three or four years before that customer’s profitability is the same as when he shops in the store”, says Rodney McMullen, CEO of the American retail company Kroger (2,700 supermarkets, $121 billion in revenues). “But what we find is that we get a significantly higher share of that customer’s total household spend.”

Intermediation and independence

The outsourcing of deliveries has become necessary in the immediate future and, however, represents a great risk in the medium and long term. Steve Hornyak, who recently joined BrightDrop, an electric focused company engaged in the design of eLCVs for last-mile deliveries, said a year ago “If any grocer believes Instacart” (the most important American home food delivery company, ed.) “is a strategic solution for eCommerce then they are proclaiming the death of their company. You are handing the keys to your kingdom to a third-party data and technology company”.

While the risk is clear, the largest distributors are focused on reducing their dependency on third-party platforms, ever more dangerous after the pandemic peak, and predict that by 2025 only a smaller share of online orders will be delivered via external providers. However, distributors with more limited financial capacity will have to accept the relationship with these platforms by developing the most appropriate ways to improve margins or at least contain losses.

A strategic sector

eGrocery will be increasingly important in the future, but in order to achieve profitability there is the need to implement a change process across the entire distribution ecosystem, from its infrastructures to the relationship with partners, from extensive technological innovation to commercial policies.

If sales were to reach as much as 15% of the global volumes, each retailer would be able to improve profitability with the methods most suited to its market presence, target and history, driving larger baskets and reducing the assortment of goods offered online to allow for faster picking from smaller centres while focusing on products with a higher inventory turnover by offering subscriptions.

These are just examples and it is certainly not up to us to say which choices are the most appropriate. But one concept is as simple as it is important: eGrocery is becoming the place where the brand is built and where consumers connect with it: there is no way back by barricading behind the flyer, as it will be impossible to ignore it.