The COVID-19 pandemic accelerated online grocery sales, but for traditional grocers, the rise in sales is eroding margins and driving growth in an unprofitable business sector.
That is the big takeaway from a new study of 206 U.S. grocers by Wynshop, a digital commerce technology platform, and Incisiv, an industry consulting firm. Nearly one-third of respondents represented grocers with more than $1 billion in annual sales and 88% work at the director level or higher.
The State of Digital Grocery: Growth at the Cost of Profitability, conducted between April and June, found that grocery retailers saw digital sales result in 9.5% growth in revenue in 2020, but fulfilling online orders led to a 70% decline in margin. The study noted that digital grocery sales will comprise 20% of overall sales by 2025, but if the current trend continues, that will result in grocery retailers losing $14 million in margin for every $1 billion in revenue.
Overall, 86% of respondents said they are dissatisfied with their online profitability. The challenges are many.
“Given the spike in digital grocery shopping since the pandemic, it’s shocking that the average gross margin for digital orders was just 9% in 2020, causing many grocers to lose money on their online orders,” said Gaurav Pant, chief insights officer at Incisiv. “Our latest research with Wynshop shows that the current model is not sustainable for grocery retailers.”
Many grocers face a technology gap, but the survey also revealed issues related to labor, order-picking inefficiencies and even the overreliance on third-party platforms such as Instacart.
Nearly one-third of respondents said upgrading their technology platforms is a top-three business challenge, yet there doesn’t seem to be a lot of investment in this area. A full 71% said they have not invested adequately in their digital businesses. While 55% of grocery retailers said they will test or deploy microfulfillment centers in the next two years, it is one of the few new technologies the retailers are actively exploring.
“While grocery retailers believe that new technologies like robotics and autonomous vehicles will have a disruptive impact on their business, their investment focus is on technologies that can drive a clear, established business outcome (e.g., inventory visibility, mobile picking). The only new technology that will gain traction over the next 24 months is microfulfillment. Grocery retailers expect 3.6% of all their online orders to be fulfilled from micro-fulfillment centers by 2025,” the study said.
Retailers are focused on deploying real-time inventory systems – 72% said they lack an accurate view of store inventory – but technologies such as automated order pickup points and developing analytics to aid in product substitution are viewed to have very low impact and are not being readily adopted.
Despite this, 92% said they are dissatisfied with their online order-picking efficiency and 86% are dissatisfied with their use of labor.
“For grocery retailers to continue to grow their digital businesses in a way that doesn’t come at the cost of profitability, they must improve their operational efficiencies by reimagining their processes,” said Neil Moses, CEO of Wynshop. “We hope the research we uncovered with Incisiv empowers retailers to prioritize their online businesses and create a road map that includes owning their brand experience and shopper data, deploying technology to improve fulfillment, picking efficiency, last-mile delivery and other critical areas that will help lead them to higher profit margins.”
As consumers started shopping online, many grocery retailers were not equipped to handle the sudden shift so they turned to third-party providers such as Instacart and Rosie. Sixty-eight percent of grocery retailers said they use third-party platforms fulfillment and 66% believe they can’t scale their online businesses without these partnerships.
Managing these relationships is challenging, though, with 92% saying it is a top business challenge. These partnerships are costing the retailers money, with a majority of 59% saying their relationship with the delivery provider is unprofitable. On top of that, 84% believe they will lose touch with their customers if they continue the relationships, and 81% believe the third-party platforms will become direct competitors in the future. A full 46% of online sales came through third-party platforms in 2020.
“While the risk is evident, third-party platforms are here to stay,” the study found. “Larger retailers (more than $1 billion) are focused on reducing their dependence on third-party platforms and project that by 2025 only 20% of their online orders will be delivered through third-party platforms. However, smaller retailers will need to develop strategies to work with third-party platforms more efficiently in order to improve margins.”
An estimated 20% of all grocery sales by 2025 will come from third-party platforms. Sales jumped fivefold from 2019 to 2020 and the average basket size increased 70% in 2020 versus 2019.
The study concludes that the “surge in online orders has failed to translate into profits for most grocery retailers” and that “this is unsustainable to a grocer’s business model.”
“Grocery retailers need to sharpen their focus on their operational levers (e.g., picking efficiency, labor utilization), technology platform (e.g., inventory visibility, optimization) and partner relationships to plug this profit leak,” it said.