Despite Booming E-Commerce Sales, Grocers Struggle With Online Profitability

Since the pandemic hit, e-commerce has been a boon for many merchants. Still there’s one merchant segment that has not fared so well with online sales: grocers. They’re finding the channel not particularly profitable, according to reports.

Despite the number of online grocery shoppers increasing five-fold in 2020 compared to 2019—and the average order size for consumers purchasing groceries online versus in-store being 70% larger—86% of grocers say low profitability tops the list of problems they have with e-commerce. That’s according to a study by Wynshop, a provider of e-commerce tools for the grocery industry.

While the average gross margin for digital grocery orders in 2020 was 9%, many grocers lost money on their online orders, the study says. The study, which Wynshop commissioned, was conducted from April through June of this year.

If current sales and profitability trends continue, grocers will lose $14 million in gross margin for every billion dollars of online sales in 2025, the report says. That’s a sobering figure, as Wynshop projects 20% of all grocery sales will be through the online channel within four years.

Leading factors contributing to the unprofitability of online grocery sales include the cost of third-party delivery services, inefficiencies in picking orders, and poor utilization of labor for the online channel. 

Indeed, 92% of grocers are dissatisfied with the efficiency of their fulfillment, 59% say their partnerships with third-party delivery services are unprofitable, and 86% are dissatisfied with their deployment of labor for online commerce. 

Prior to 2020, e-commerce was a nascent sales channel for most grocers. The advent of Covid-19, however, prompted many grocers to add an e-commerce Web site or expand existing sites fast to meet a surge in demand. But the rapid growth of e-commerce exposed inefficiencies in the execution of order fulfillment, which experts say lies at the heart of profitability.

“When online orders were a small percentage of total orders, grocers were not as concerned about the inefficiencies around fulfillment, but now that online ordering is a bigger part of their business, they are more focused on the profitability of that channel,” says Charlie Kaplan, chief revenue officer for Wynshop. 

The projected losses are spurring grocers to look more closely at ways to make order fulfillment more efficient. Over the next 24 months, Wynshop expects grocers will experiment with such innovations as micro-fulfillment centers, automated picking solutions, and new labor models to lower costs.

“We’re starting to see grocers take a more measured approach to the technology around their e-commerce Web site,” Kaplan says. 

Besides improving operating efficiencies, grocers can boost profitability by partnering with brands that will advertise on their sites. “Brands already pay grocers for space to promote their product in-store,” says Kaplan

In addition to struggling with online operating inefficiencies, grocers are wrestling with their relationships with third-party ordering platforms, such as Instacart. 

Instacart allows customers to order groceries from participating grocers, with the shopping being done in-store by a personal shopper. Instacart also offers consumers the option to pick up orders curbside or have them delivered for a fee.

Complicating grocers’ attitudes toward third-party platforms is that, while 81% of respondents believe third-party shopping platforms will become direct competitors, 66% believe they can’t scale their online business without them. In addition, 84% of grocers believe use of third-party platforms will cause them to lose touch with their customers. 

One major drawback of using third-party shopping platforms is that grocers do not receive data about how customers move through their online store and about the items they view. “They only see the order,” Kaplan says. 

Access to such customer data can help grocers create customized product recommendations, as well as reminders when online shoppers may be running low on regularly purchased staples, Kaplan says.