Grocery Retailers Face Online Channel Profitability Challenge

Challenges in Online Grocery Profitability: Key Insights 

• Labor Challenges: The surge in online grocery sales during COVID-19 has led to a 125% increase in labor requirements compared to traditional shopping, posing profitability difficulties for grocery retailers.

• Continued Investment: Despite staffing shortages and rising wages, grocery retailers continue to invest in labor-intensive online services, with the online grocery market share projected to grow to 8.3% by 2028.

• Strategies for Profitability: To improve online grocery profitability, retailers should enhance efficiency, invest in automation technologies, optimize delivery models, personalize shopping experiences, and implement sustainable practices like recyclable packaging and optimized delivery routes. 

Online grocery shopping has surged with the COVID-19 pandemic, becoming one of the fastest growing categories in eCommerce, but it remains a costly and labor-intensive endeavor for retailers. Managing this growing yet unprofitable channel is a significant concern for grocery stores.  

Grocery retailers are grappling with how to handle the growing online channel, which is popular among a segment of their customers but remains highly unprofitable. Let's look at ways to turn this around based on recent research. 

A Popular and Growing Channel 

According to U.S. Census Bureau data, online retail sales jumped from 12% in Q1 2020 to 18% in Q2 2020, with much of this growth in grocery. However, the online grocery sales growth brought by the COVID-19 also came with challenges.

A study showed online grocery requires 125% more labor than traditional shopping due to double-handling: moving products onto shelves and then picking and delivering them. Grocery retailers now face the challenge of managing this low-margin yet growing channel. 

An Unsustainable Approach 

Grocery retailers globally are struggling with staffing shortages and rising wage bills. Despite these challenges, they continue to invest in labor-intensive online grocery services.

We expect that the online share of the total grocery market will grow in the close future: 

• While this share was 2.7% in 2019, it increased to 4.7% by the end of 2021.

• After falling to 4.4% the following year, the online share picked up again and closed 2023 at 4.8%.

• Our forecasts show that this share will reach 5.5% by the end of this year and 8.3% by 2028. 

A study with West Monroe Partners revealed that different delivery modes significantly impact labor requirements, with home delivery from store sales floors needing the most additional time (37.4 minutes) compared to the base case of 30 minutes for in-store shopping.

Traditional in-store customers are effectively subsidizing online grocery services, as retailers rarely charge for the additional labor involved in order preparation and delivery. This model is unsustainable as wage rates continue to rise.

How to Improve Online Grocery Profitability 

To address the profitability issues of the online grocery channel, retailers need to adopt new strategies that can balance customer convenience with operational efficiency. 

1. Enhancing Online Efficiency 

Walmart’s Market Fulfillment Centers (MFCs) collocate with hub stores, enhancing efficiency for curbside pickup by leveraging automation and economies of scale, which significantly reduce labor costs and increase profitability. 

2. Leveraging Technology and Automation 

Investing in advanced technologies such as automated warehouses and robotic picking systems can speed up order fulfillment, minimize errors, and lower operational costs. 

3. Optimizing Delivery Models 

Retailers can partner with third-party delivery services and utilize gig economy workers to manage peak times, while offering various delivery options like scheduled deliveries or subscriptions to spread out workload. 

4. Personalizing Online Shopping Experiences 

Using data analytics for personalized recommendations and targeted promotions can create a more engaging shopping experience, driving customer loyalty and increasing average order value. 

5. Implementing Sustainable Practices 

Integrating eco-friendly practices such as recyclable packaging and optimized delivery routes can attract environmentally conscious consumers and differentiate the retailer in a competitive market.

Future of Online Grocery and Quick Commerce: Closing Thoughts

The online grocery and quick commerce sectors have grown rapidly, driven by the pandemic. Getir's retreat to Turkey and Uber Eats' steady growth highlight the challenges of profitability and scalability. 

In the next 5 to 10 years, market consolidation will arguably favor established players like Amazon, Walmart, and Uber Eats, which benefit from diversified offerings and strong infrastructure. In this context, regional differences and consumer preferences will shape which providers succeed. 

The pandemic has cemented the popularity of online grocery shopping, and its growth is expected to continue, adapting to changing consumer demands and technological advances.

Sources: Harvard Business Review, U.S. Census Bureau, Statista, ECDB