The corona crisis has accelerated the growth of online grocery shopping at an unprecedented rate. At least part of that growth is permanent and that is bad news: e-commerce in food is not profitable. Is there a way out?
Explosion of demand
Until a few months ago, the market for online groceries grew rather slowly. Food retailers could cherish the illusion that they still had plenty of time to prepare for a breakthrough of e-commerce in food, one day. Then the corona-pandemic broke out, resulting in an explosion in demand. Consumers who wouldn’t even think of ordering their weekly groceries online before, were suddenly virtually queuing for an available time slot. Even now that most of the lockdowns have been lifted and panic buying has long since passed, online sales remain considerably higher than before the outbreak of the virus.
This evolution poses a threat to food retailers, says consulting firm Bain & Company. Both click & collect systems and home delivery are structurally less profitable than in-store sales – in many cases they are even loss-making. If more store transactions shift to online, retailers will get into trouble. They will need to quickly find solutions to make their e-commerce business profitable. The question is: how?
Meaningful figures
How urgent is the problem? At the height of the corona crisis, online penetration in the UK rose from 8.1% to 12.4%. In France it went from 6% to 10.2%. In Italy, a lagging e-commerce market, online penetration doubled to 4.3% and in Germany, a market dominated by discounters without a webshop, it went from 1.5% to 2.9%.
These are very revealing figures, especially if you take into account that offline sales in stores peaked at the same time and that many food retailers had insufficient capacity to meet the increased online demand. A survey conducted by Bain & Company among 7500 European shoppers in May showed that one in five in the weeks before had tried in vain to place an online order. So the potential was much higher. The consultant estimates that the online market will retain between 35% and 45% of that additional corona growth. Suddenly the market is at a level that was only predicted by 2025. And should a second outbreak wave follow, we will also see a new peak in online demand…
Three areas
This growth weighs on the profitability of food retailers. While retail sales on average yield a margin of 2% to 4%, online is often loss-making because retailers do not adequately pass on costs. Pickup of orders prepared in a ‘dark store’ could just about break even, but retailers who deliver groceries from their physical stores are faced with a negative margin of 15%. But those who do not develop an online offer might put themselves out of business in the long run.
So what should food retailers do? Bain suggests three ways out. Investing in supply chain optimisation seems inevitable: centralised e-distribution centres and/or smaller, local dark stores (possibly converting existing stores). Far-reaching automation strongly increases productivity. But: these are heavy investments.
Looking for new sources of income is a second track: selling advertisements and banners in the webshop and the app, offering new digital activation possibilities to FMCG suppliers, selling data…
Finally, food retailers need to give some thought to their pricing and the charging of delivery costs. There is room for improvement, Bain thinks: if meal service providers like Uber Eats can get away with a hefty delivery charge without consumers seeing this as a major problem, why should the weekly groceries be delivered (almost) free of charge?
