The profitability problem in grocery e-commerce

May 3, 2023
Rebecca Wine profile picture
Rebecca Wine

Growth-at-all-costs is no longer a viable business model, therefore retailers must examine the importance of digital transformation and implement technology that can drive efficiency and profitability for grocery e-commerce.

The rise of e-commerce has transformed the way people shop for everything, from furniture to electronics. With the ease of use and quick delivery associated with online shopping, convenience and tailored customer journeys are the keywords to consumers. Therefore, it comes as no surprise that grocery e-commerce is becoming increasingly more popular as well.

According to Global Data’s Q1 2022 consumer survey, 58% of shoppers worldwide expect to continue or increase their online grocery shopping in the coming months. However, there are significant barriers for large retailers to overcome in order to make online channels profitable. This list includes q-commerce disruptors, the volatility of prices for foodstuffs, fulfillment logistics, a high employee turnover rate, just to name a few.

Retail experts predict that in 2023, utilizing retail media networks can help retailers make the online channel profitable. However, another option is to implement new solutions to fit evolving shopper behavior, which could help retailers overcome some of the profitability barriers. I spoke with Jacob Tveraabak, CEO of Strongpoint, a retail technology company that provides solutions and services to make shops smarter, shopping experiences better, and online grocery shopping more efficient, to investigate possible solutions to the grocery e-commerce profitability problem.

We discussed the importance of digital transformation and how technology is what drives a profitable e-commerce business forward. Moreover, by mixing online and offline, and by incentivizing click-and-collect, you can elevate e-commerce profitability.

How did we get here?

UK grocery retailers were quick to introduce e-groceries before the turn of the millennium. “What they did” explains Jacob, “is say, well, ‘we're going to give you the same prices as in store, and you're gonna get free home delivery’”. Their approach was adopted in other countries, and customers became accustomed to this model. The problem is, “if the only thing you do in the value chain is to add cost, you're not gonna make money”. In this case, you're adding the cost of labor to pick and pack the products, as well as the labor and extra costs associated with delivery.

High cost of labor as a technological driver‍

Interestingly, the region where StrongPoint has had the most success in helping retailers make grocery e-commerce is in Scandinavia, despite their higher labor costs.

Chart showing labour rates across Europe

For Scandinavian grocery retailers, high labor costs have actually pushed tech solutions that increase efficiency. Jacob says that because there is no low-cost labor in Scandinavian countries, that this forces retailers to be super-efficient in their operations. This in turn, drives a greater investment in digital transformation, and makes their tech more advanced than their European counterparts. As a result, in-store picking in Scandinavian countries is the fastest in the market. “If you're a Scandinavian consumer, and you go to Spain or France or Italy, it's like you're going 10-15 years back in time”.

An example of this is electronic shelf labels (ESL). In the Nordic region, ESLs were implemented 13 years ago. Though the rest of Europe has dabbled in implementation, they have yet to follow through with a complete roll-out. According to Sean Taylor, head of retail solutions at ESL provider Panasonic Europe, “retailers do see a continuing upward trend in the cost of labor and are looking at operational efficiencies in the store.”

Retailers who already use ESLs, can implement ‘pick by light’ systems. This technology helps pickers pack groceries even faster as they don’t have to stand and look for the items, but can quickly find them as the ESL will light up. Thus, the retailers who have already invested in their digital transformation journey will have a jump start with improving operational efficiency.

Labor shortage and high employee turnover as a technological driver

High labor costs are not the only thing pushing retailers to look for creative solutions: lack of labor and a high employee turnover is doing this as well.

In the Baltics, “their issue was that it takes time to educate a person to be sitting at the till. If your average tenure is two or three months, it's a hopeless task. So the way that basically all the grocery retailers in the Baltic region have been, not solving, but at least alleviating the situation is by introducing a lot more self-checkout”.

Incentivizing click and collect behavior

Back in Scandinavia, the Swedes have also led the way by incentivizing customers to understand that home delivery of groceries comes at a cost. By charging more for home delivery and offering pick-ups in-store, this results in huge cost savings for the retailer. By combining this strategy with an efficient picking solution, the second-largest grocery retailer in Sweden has announced that e-commerce has begun to break even for them.

Globally, throughout the retail industry there might be some who are hesitant to make the first move to charge for home delivery services, fearing they will lose customers. However, as Jacob states, it's not only about the cost of home delivery; the lack of efficiency in picking and last-mile delivery is also a problem. Retailers must look for ways to increase profitability rather than seeking growth at all costs.

Wrapping up…

Societal drivers will continue to push retailers to implement technological solutions to adapt to the new way things are. Retailers need to step away from the idea of growth at all costs, invest in their digital transformation journey, and utilize technological solutions as a way to increase profitability.

Retailers can achieve greater profitability by implementing a winning strategy that combines digital and brick-and-mortar channels. This involves incorporating store buy-online and pick-up in store options, along with a robust digital transformation plan to enhance the efficiency and scalability of order processing and fulfillment.

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