As digital sales soar, profits are a concern for grocery retailers

A new study released Monday by Wynshop (formerly ThryveAI), a leader in digital commerce for local store-based retailers, conducted in partnership with Incisiv, says that the biggest challenge facing grocery retailers today is the low profitability of their online business, with 86% of grocers indicating that they are dissatisfied with their online profitability. 

The report, State of Digital Grocery: Growth at the Cost of Profitability, shows that while the rapid growth of digital grocery shopping in 2020 was tremendous for revenue ( 9.5%), it has not translated into profit, due to losses on online orders (-70%). The study indicates that average gross margin for digital orders was just 9% in 2020, and many grocers lost money on their online orders.

In addition, most retailers who outsourced to third-party fulfillment platforms worry about losing touch with their shoppers (84%) and that these providers will become direct competitors in the future (81%). 

“Given the spike in digital grocery shopping since the pandemic, it’s shocking that the average gross margin for digital orders was just 9% in 2020, causing many grocers to lose money on their online orders,” said Gaurav Pant, chief insights officer at Incisiv. “Our latest research with Wynshop shows that the current model is not sustainable for grocery retailers. If the existing sales and profitability trends continue, grocery retailers will lose $14 million in gross margin for every billion dollars of sales by 2025.”

Related:U.S. online grocery sales swing back up in August

The research study is based on a survey methodology spanning 206 U.S.-based grocery retailers. The majority of respondents (88%) were director-level and above and nearly a third (32%) of respondents represent companies with over $1 billion in revenue. The survey was conducted between April and June 2021.

According to the report, third-party platforms such as Instacart transacted almost as much business as grocers did on their own in 2020. The study summarizes the inefficiencies retailers experience with digital operations and explains why grocery retailers need to focus on operational levers, upgrade their technology and overcome their dependency on third-party platforms to plug the profit leak. 

There is growing discomfort with third-party platforms for a variety of reasons, the study noted: 81% of grocery retailers believe that third-party platforms will become their direct competitors in the future, while 84% of grocery retailers believe they will lose touch with their customer base as third-party platforms become the front-end commerce brand and, in effect, “disintermediate them from their shoppers.”

Related:Survey: Convenience drives online grocery shopping more than COVID

Larger retailers (with sales of more than $1 billion) surveyed say they are focused on reducing their dependence on third-party platforms and project that by 2025 only 20% of their online orders will be delivered through third-party platforms. However, the study shows, smaller retailers will need to develop strategies to work with third-party platforms more efficiently in order to improve margins.

Among other key findings from the study, U.S. grocery retailers reported that:

• 59% of their third-party delivery partnerships are unprofitable 

• 92% are dissatisfied with their online order picking efficiency

• 86% are dissatisfied with their labor utilization 

• 72% lack an accurate view of their store inventory 

The study finds that grocers have a significant technology gap to overcome as they try to reduce their dependence on third-party platforms and improve their operational efficiencies. They also need to upgrade their technology platforms at a much faster pace (1 in 3 large grocery retailers rate it as a top 3 business challenge) than before.

While grocery retailers believe that new technologies like robotics and autonomous vehicles will have a disruptive impact on their business, their investment focus is on technologies that can drive a clear, established business outcome such as inventory visibility, mobile picking). One technology that will gain traction is micro-fulfillment: grocery retailers expect 3.6% of all their online orders to be fulfilled by these facilities by 2025, and 55% of retailers surveyed say they will test or deploy micro-fulfillment centers over the next 24 months.

“For grocery retailers to continue to grow their digital businesses in a way that doesn’t come at the cost of profitability, they must improve their operational efficiencies by reimagining their processes,” said Neil Moses, CEO of Wynshop. “We hope the research we uncovered with Incisiv empowers retailers to prioritize their online businesses and create a roadmap that includes owning their brand experience and shopper data, deploying technology to improve fulfillment, picking efficiency, last-mile delivery and other critical areas that will help lead them to higher profit margins.”