As long as ecommerce retailers embrace the paradigm of competing on price with brick-and-mortar stores while offering same-day delivery, they can't win.

Online grocery

Kurt Jetta, executive chairman and founder of TABS Analytics

Books, strollers, bagged salad and baked beans. You can buy pretty much anything you want online these days. While online shopping may be convenient for consumers, does that mean it’s genuinely a good business for retailers?

The answer increasingly is “no.” And that is particularly true for online grocery retailers.

In 2016, I began to question the hype surrounding online grocery sales. During an interview with CBS Sunday Morning noted that there was a “follow the herd” mentality as companies entered the business only because others did. Plus, my company’s research showed that consumers were not abandoning their brick-and-mortar grocery stores in favor of ecommerce offerings. That led to questions about whether online grocery would ever have sufficient demand to warrant the massive investment required to support it.

Fast forward three years. These predictions have become a reality. Less than 30% of Americans shop online for groceries regularly versus 99% who continue shopping at brick-and-mortar stores. In fact, despite all the hype about the sector, 44 percent of shoppers never purchase groceries online. Further, the upside of online grocery seems limited, as only one in five consumers saying they are heavy online shoppers, in general.

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While our research uncovered demand limitations with mass-market ecommerce, press reports have started discovering significant issues in the supply side of the equation for these retailers.

Walmart increased its online sales by 40% last year, thanks to an expansion of an online grocery business. But it’s now projecting losses of more than $1 billion for its U.S. ecommerce division in 2019. The company is in a precarious position because groceries account for about 60% of its online sales.

Amazon said that it had to invest more than $800 million to support same-day delivery. Other expenses racked up, as global shipping costs rose 36% in the second quarter of 2019 to $8.1 billion, and fulfillment spending increased 17% to $9.27 billion. The company also has struggled with perishable sales through Amazon Fresh and Prime Pantry services and has yet to capitalize on its acquisition of Whole Foods.

Labor problems are plaguing retailers, too. Amazon expects fulfillment center workers to pick up 400 items per hour–one item every seven seconds–to meet production expectations. And, the inability to fulfill grocery orders fast enough led to the demise of Walmart’s pilot program with Deliv.

For online grocery retailers, the issue is one of simple economics. The variable costs associated with fulfillment and delivery increase with every sale. Large ticket items, like jewelry or perfume, have bigger margins that cover these variables. But typical grocery items have a much smaller margin, which is eaten away by costs of labor to pick and deliver.

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Bottom line: online grocery is a fundamentally flawed business model. Every online transaction incurs high costs that brick-and-mortar grocery stores avoid. The more online grocery retailers sell, the more money they will lose. It’s a business problem with no way out. There is not enough demand to justify significant tech investments. Even if there were, the tech investments can only modestly impact the variable cost nature of the ecommerce business model.

The only way online grocery can make business sense is as a premium service. It will need to be a niche offering that can recoup the costs of providing consumers with convenience and choice. Such a move will likely lose a high percentage of the customer base, but this is a binary choice: Be large and lose money or be small and make money.

As long as ecommerce retailers embrace the paradigm of competing on price with brick-and-mortar stores while offering same-day delivery, they face a no-win situation. Amazon and Walmart will continue to bleed red ink and will take all of their competitors off the cliff with them.

Kurt Jetta is executive chairman, founder and lead product developer of TABS Analytics, a retail and consumer analytics firm. 

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