Online grocery doesn’t pay

The search for profitability in online grocery delivery cannot start with offering the customer even more convenience.

Asda announced today that it is trialing secure delivery boxes outside customers’ homes so that the company can deliver when they are out; chilled and frozen food apparently keeps for four hours in the boxes.

However, in the context of the cost of simply doing a conventional delivery to home, simply adding more value is not going to work. Bain & Company in 2020 found that hand-picking online orders from a physical store, delivering it and charging no customer fees ‘typically’ has an operating margin of minus 15%. This rises for click and collect but is still minus 5%.

Asda is clearly wanting to capitalize on the fact that online grocery accounted for 14% of UK grocery sales in 2020, but where are the economies of scale? I accept that there are some available through wholesale purchasing of capital assets, but there is really no way to contain the labour bill.

Moreover, as the UK returns to normal, there is bound to be a fall in demand for online grocery.

Grocers will therefore need to explore technology that has been proved in mainland Europe to deliver dramatic reductions in labour costs by enabling staff to pick from store much more quickly. Other innovations such as intelligent route planning, which most grocers are already using anyway, cannot yield greater cost reductions. Delivery costs could be put up, but good luck with that in a competitive market. And, switching to dark stores to get closer to Ocado’s profitable (barely) model will take time and investment.

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