Online grocery: Is it delivering?

Online has become an indispensable part of the offering for most of the big UK grocers in the last few years. The appeal to the consumer is clear, but is it a model that delivers for the business too?

The City analyst Philip Dorgan once famously said: “Ocado begins with an o, ends with an o, and is worth zero”. But not only has the business survived (and showing strong operating profit growth), but the idea that underpins it seems stronger than ever. Home delivery may only account for around 5% of the UK grocery market, but that percentage is rising, and there’s no getting away from the fact that consumers really value home delivery for groceries. The challenge is getting them to pay enough for it to make it a genuinely profitable part of the supermarket business model.

If anything, this challenge has become harder, rather than easier, as consumer expectations have evolved. People now expect delivery within a tighter timeframe (usually an hour), which places even greater pressure on the logistics of picking, packing, and transport, and even more so for a store-based delivery operation, rather than one like Ocado. So while the grocers have been moving towards shifting cost onto the consumer within the store, most notably with the greater use of self-service checkouts, the home delivery part of the puzzle is, if anything, going in the opposite direction. The grocers have managed to introduce minimum spend criteria, and delivery charges are now pretty much standard, but a price of around £5 is unlikely to be enough to cover all the costs involved. We say ‘unlikely’ because the big supermarkets don’t split out the profitability of this aspect of their operations, but the suspicion has to be that home delivery is a loss leader, which they have to offer to protect market share.

So what’s the answer?

Step one would be for the grocers to ensure they have the data they need to assess the efficiency of the home delivery operation. Systems set up to manage in-store operations may not offer the necessary transparency on all the elements of the very different delivery dynamic, not least because in-store costs are mainly fixed, and delivery costs are primarily variable (order processing, picking of orders, delivery). The supermarkets were ahead of other sectors in the use of customer data, which goes all the way back to Tesco Clubcard in the 1990s, but they may not be fully exploiting the additional data that online shopping can give them, where it’s possible to monitor not only what people buy, but what they look at. That, in turn, allows for personalised advertising, and opens up the possibility of some profitable partnerships with the consumer goods companies.

There are also other ways to recoup more cost from the customer. Some are hoping to get more take-up of annual subscriptions, which helps both with budgeting and cashflow, and Ocado offers a ‘Smart Pass’ for customers to waive delivery charges with a monthly, bi-annual or annual charge. Amazon Fresh’s new grocery offer charges a monthly fee on top of the cost of Prime, but offers a limited range of goods, so it’s not yet clear whether people will be prepared to pay more for a narrow range that will require them to complete their shopping elsewhere – when it comes to online grocery, people do seem to want a ‘one-stop shop’. Click & Collect is another way to shift the transport cost element back to the consumer, although it seems to be a slightly less appealing option for consumers.

However, the challenge may be more fundamental than that. Consumer expectations (and behaviour) may have evolved in the last decade, but the home shopping model really hasn’t. That may well be because keeping a lid on costs is simply so difficult. And some elements of the digital revolution may actually make it even harder for the grocers to make money: automated ordering via a fridge connected to the Internet of Things may well make life easier for consumers, but it doesn’t solve the cost and logistics issues facing the grocers. That in itself may be a good reason to rethink the model altogether, and check out other more innovative ways to deliver, both to customers and for the bottom line.

Inge Cajot |  Partner, Strategy
Profile | Email |  +44 (0)20 7804 6651


More articles by Inge Cajot

Emily Daw |  Senior Manager, Transaction Services
Profile | Email |  +44 (0)7725 633 114


More articles by Emily Daw