Written by Roger Jackson,
April 06th, 2020 | Views

The three major profitability challenges of online grocery shopping

There is endless discussion about the growth of online grocery shopping. The virus pandemic is going to give it a kick start as well, even after the short term motivations end. But simply persuading shoppers to do something unfamiliar that makes their life “easier” isn’t really the main challenge. The bigger problem to solve is how to make money from it (certainly to make as much money).

Companies are developing their online propositions with a sense of “there is no choice” and not wanting to get left behind. Not really because of a sense of “this model is attractive”.

From our data, three key issues are comparing online to physical retail.

  1. Cost of picking
  2. Loss of impulse/trade up
  3. Increase in promotional impact

Let’s get obvious out of the way; there is the cost of picking a product. No way around this. We taught supermarket shoppers over many years to be happy to self-serve. They go around a store in their own spare time and select their products free of charge, queue to pay, etc. They don’t see that as a “cost” to them so don’t expect now to pay more for not doing it the future. Adding in this extra layer of cost is a hit to the P&L (it’s always going to be more expensive than “free”), regardless of the end delivery mechanism ( of course stores are now pivoting to click and collect as the preferred option giving the massive cost of the last mile). There is now some progress on robotized “micro-fulfilment” tech that can reduce the picking costs by a factor of ten, but the capital cost is enormous.

If you have no physical store cost one can offset picking costs with lower real estate cost (see below*) but that only applies to a few operators.

Second. There is the loss of vast swathes of “impulse” purchases. Not just the obvious candidates like soft drinks and confectionery, but so many categories rely on the sensory appeal of merchandising (ice cream for example!) to trigger a sale or to up-trade to a more premium item. From our data double the number of shoppers says they were “willing to browse” in a physical store (we see that the online shop mindset is so much more “functional”).

Third. Grocery websites are doing an excellent job at placing promotions front and centre of the experience, and shoppers respond accordingly. We see from our measurement programs that a massive 50% of purchases online were bought “on promotion” compared to an already high 35% at physical stores (these are shoppers’ recognition levels). It appears that promotions are necessary to get unplanned items into the basket (hard to get noticed by other routes) but the net impact on margins is very substantial.

A final point. On-line is nibbling away at the sales from brick and mortar supermarkets. *But the fixed costs of physical retail can’t be reduced incrementally. You have a store, or you don’t. Even a 10% shift in share from physical to online isn’t going to enable a store to be closed. It’s just going to make that store barely profitable. At the same time as we shift sales to a lower margin channel, the costs of the existing channel remain, so there is a double whammy taking place.


  • As an industry, we have to work out how to make the online shop more engaging and inspiring to drive additional sales the same way physical stores do and switch focus away from price promotion. Suppliers can play a massive part in this (shifting shopper marketing budgets across?) Can we learn from other retail channels?
  • Sooner or later retailers will need to charge shoppers a fair price for the added convenience benefit of “done for you”. Will that reverse some of the trends to online shopping?
  • Physical stores will change, be fewer in number and will be partly turned over to automated micro-fulfilment operations. But at the same time, they must be more engaging and create more “shopper-tainment”. This is a massive investment and shift in the sector.

I am not sure I’d buy supermarket shares any time soon. But the good news is (self-evidently) grocery shopping isn’t going away. The long term future will be smaller, attractive physical stores combined with robotized fulfilment and both a more convenient and more pleasant shopping experience. How long this will take and who will remain in business in that new world? Hard to say.