Since the corona pandemic, e-commerce has been an absolute top priority for food retailers, but the profitability of online shopping remains a major challenge. McKinsey defines three conditions for a successful digital transformation.
Levers for profitability
Even before the outbreak of the coronavirus, online was the most important growth engine for food retailers, and the lockdowns have only accelerated this evolution: more shoppers have switched to e-commerce for their food purchases by 2020, and they have no intention of dropping this new habit. Food retailers are now pushing to rapidly scale up e-commerce capacity and capture a larger online market share. This brings them into direct competition with ‘pure players’ and with innovative business models such as meal boxes and delivery couriers.
The point is, however, that for the time being, physical store sales are considerably more profitable than online activities, which require hefty investments in logistics infrastructure and technology. How can food retailers make their online activities profitable? McKinsey addresses this question in the report “Disruption and Uncertainty – The State of Grocery Retail 2021“, published in collaboration with EuroCommerce. Important levers to profitability are increasing the average order and ordering frequency (through assortment, price, personalisation, charging for delivery…), selling data and digital media space as an additional source of revenue and optimising operational costs.
Partnering with ‘pure players
Three types of suppliers dominate the online shopping market today. Each one uses different strategies.
Pure players do not suffer from the limitations that offline retailers have to deal with, such as the need for consistency across channels in terms of prices, promotions and assortment. Nor do they have to contend with outdated IT systems or infrastructure. This makes it easier for them to focus on differentiation and personalisation to increase conversion, increase the shopping basket, strengthen loyalty, etc. They are relying on cutting-edge technology to optimise the supply chain and are seeking economies of scale through partnerships for purchasing and logistics. A good example is the Dutch company Picnic, which presents itself as a modern, digitalised version of the milkman with electric trolleys, automated distribution centres and a purchasing centre with the German company Edeka.
Established players can learn from this that it pays to focus on differentiation to the consumer, and to align operations with your value proposition. If ease of delivery is not your focus, reduce the number of delivery windows, for example. Traditional retailers can also benefit by partnering with pure players: this allows them to limit their investments and gain expertise. Delivery platforms, for example, increase demand and deliver at a cost that is not feasible for large food retailers.
Online ecosystems
A second model is that of the large online ecosystems, which have also added food to their range. They can use data from other activities (non-food, payment services, social media…) to optimise their offering. Their food division does not necessarily have to be profitable as a separate business: the frequent food purchases support and strengthen the business model of the whole ecosystem. Think of Alibaba‘s Freshippo omnichannel supermarkets or Amazon‘s ambitions in FMCG, with Whole Foods, Amazon Fresh and Amazon Go.
What established retailers can learn is a different view of the customer relationship, with a focus on lifetime value creation and loyalty, by adding relevant services and products. This requires advanced digital and analytical skills. Partnerships with these ecosystems can bring scale and expertise, but then you also relinquish part of the control over your customer data.
Under their own steam
The third model is that of traditional retailers who develop an e-commerce activity under their own steam. This requires not only significant investments but also adapted business models. The online offer must be optimised, prices and promotions are often disconnected from the physical shops, the customer experience is improved with personalisation, loyalty and subscription programmes. Additional revenues are sought by these retailers in supplier bonuses, monetization of customer data and digital media revenues. In terms of operational efficiency, automation is a must.
Conclusion? To be successful online, retailers will have to succeed in their digital transformation in three areas. First is a superior value proposition and user experience across channels. Second is operational excellence: the race to capacity is on. Finally, retailers must be able to use advanced technology and data analytics to differentiate themselves and generate new revenue. This requires flexible and cross-functional organisations.
