1. shopping
2. retail

Click and cash
How to profit in
online grocery
shopping
Contacts
About the authors
Amsterdam
Frankfurt
Coen de Vuijst
Partner
+31-20-504-1941
coen.devuijst
@strategyand.pwc.com
Benedikt Schmaus
Partner
+49-69-97167-437
benedikt.schmaus
@strategyand.pwc.com
Marco Kesteloo
Partner
+31-20-504-1942
marco.kesteloo
@strategyand.pwc.com
London
Marc Hoogenberg
Principal
+31-20-504-1924
marc.hoogenberg
@strategyand.pwc.com
Copenhagen
Richard Rawlinson
Partner
+44-20-7393-3415
richard.rawlinson
@strategyand.pwc.com
Andre Medeiros
Principal
+44-22-7393-3407
andre.m.medeiros
@strategyand.pwc.com
Coen de Vuijst is a partner with Strategy& based in
Amsterdam. He specializes in growth strategy, go-to-market
models and organization design, and commercial capability
development for clients in the consumer goods and retail
industries.
Marco Kesteloo is a partner with Strategy& based in
Amsterdam and leads the firm’s global retail practice. He
has more than 20 years of consulting experience in strategy,
organizational and commercial improvements, and the
collaborative value chain between retail and consumer
goods organizations.
Marc Hoogenberg is a principal with Strategy& based
in Amsterdam. He has more than 12 years of consulting
experience, helping retailers and consumer goods
organizations improve their commercial capabilities using
advanced analytics and customer insights.
Per Hannover
Senior Executive Advisor
+45-3318-70-22
per.hannover
@strategyand.pwc.com
2
Strategy&
Executive summary
Online grocery shopping still hasn’t caught on in Europe, for two
primary reasons. One is a demand-side problem: Consumers don’t like
paying delivery fees, don’t like waiting for deliveries, and sometimes
receive items that aren’t fresh. The second is a supply-side problem:
Most online grocery transactions lose money. We believe profitability
remains such a vexing issue because most retailers continue to use the
“mass convenience” value proposition from their offline stores. This
model is designed to increase sales volume to overcome high fixed-store
operating costs in order to achieve profitability. Online shopping,
by contrast, has high variable costs, which means that the profitability
issue remains largely in place as retailers are growing their online
business.
Retailers need to develop specific online value propositions, rather than
replicating what they have done for decades offline. We see three new
value propositions emerging: premium convenience, basic stock-up
service, and predefined shopping basket. We believe that by choosing
one of these — and, critically, designing a tailored operating model to
support it — retailers can achieve profitability from online grocery.
Strategy&
3
A slow start
After 15 years, online grocery shopping still hasn’t caught on in Europe.
Even where it’s most popular, in the United Kingdom, online accounts for
just 5 percent of total grocery sales. In France, it accounts for 2 percent of
the total, and no other country is even close to 1 percent. As a percentage
of retailers’ revenue, the e-commerce share is similarly low. At leading
retailers such as Asda, Leclerc, Sainsbury’s, and Tesco, e-commerce today
represents 4.5 to 7 percent of total grocery sales.
There are two primary reasons for this low adoption rate — a demandside problem and a supply-side problem. The demand-side issue is
lackluster consumer demand. Shoppers don’t like paying delivery fees,
especially when the time slots for deliveries are often wide and
inconvenient. The freshness of perishable items is often an issue as well.
These are not insignificant problems, and the industry needs to address
them satisfactorily in order to stimulate demand for online buying.
In the United
Kingdom, online
accounts for just
5 percent of total
grocery sales.
The second, supply-side dilemma is that online grocery sales remain
unprofitable. Setting up a technology platform and an initial distribution
network can cost tens of millions of euros. Supply chains are complex,
involving multiple temperature zones, low-value bulky items, and fragile
products. Order assembly is time-consuming, and if the online orders are
picked in the store, they can interfere with otherwise efficient in-store
operations.
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Strategy&
Stimulating consumer demand
Our research has found that current rates for online grocery shopping are
very low (only a few percent of shoppers per year). However, shoppers
that migrated from strictly in-store purchases to a mix of in-store and
online purchases increased their total spending with that retailer by as
much as 60 percent (although also reducing their in-store purchases by
25 percent). This leads us to believe that if a retailer could solve the
profitability challenge, and persuade more people to adopt a
multichannel grocery shopping approach, the additional sales volume
could propel growth significantly.
Stimulating demand is easier said than done. In many non-grocery
e-commerce categories, online shopping offers various benefits that
either don’t exist for online grocery shopping or are offset by downsides.
For example, in most retail categories, online shopping offers a price
advantage to consumers. However, a costly supply chain requires online
grocers to charge a premium, either as separate delivery fees or as a
markup on product prices. So there is no price advantage.
Similarly, online shopping offers convenience to shoppers in most
product categories: They don’t need to travel to a store, and don’t need to
queue up. However, online grocery shopping is not necessarily more
convenient, as it requires consumers to commit to specific delivery times
and/or plan around pickup options. Traveling to a grocery store is
typically not a major ordeal because there are often several grocery stores
within a small radius (as opposed to categories like apparel and
electronics stores, which are often less convenient).
If a retailer could
persuade more
people to adopt
a multichannel
grocery shopping
approach, the
additional sales
volume could
propel growth
significantly.
In most product categories, the online assortment is much broader, so
shoppers have more choice and access to items that are not available in
stores. The risk of out-of-stocks does not exist with online shopping in
non-grocery categories; at worst, the delivery will be made not the next
day but in two to three working days, which is acceptable in most cases.
Online grocery assortments are often identical to, or a subset of, the
range offered in stores. With online grocery shopping, the out-of-stock
risk is reduced (although not completely removed) when orders are
Strategy&
5
picked at a distribution center, but with in-store picking, the usual risk
remains. In addition, out-of-stock online grocery items are not replaced
by alternatives. Shopping in the store at least provides shoppers the
option of finding alternative items when faced with out-of-stocks.
In most product categories other than groceries, online shopping offers
near complete product information: features and specifications, as well as
user and expert reviews. Moreover, as a shopper, you can expect that the
product you receive is what you ordered, and it performs as expected
given its specifications and user comments. With online grocery
shopping, particular problems arise with ordering fresh products: fruits,
vegetables, fish, meat, bread. Such products have varying degrees of
quality, freshness, and ripeness. What you see online isn’t always what
you get. In-store shopping allows people to handpick these items. Online
grocery shopping does not, which is a significant barrier.
These various financial and psychological barriers pose a threat to online
grocery growth. Mitigating them without incurring higher cost-to-serve
is a significant challenge. The answer is likely to be different by situation,
depending on local shopper needs, demographics, retail landscape, and
geography.
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Strategy&
The profitability challenge
The second component that grocery retailers must address is the
supply side. We believe profitability remains such a vexing issue
because most retailers continue to use traditional business strategies
that, when applied to online operations, can actually drive losses. The
problem is this: In the traditional store-based shopping model,
operating costs — such as store rentals, staff costs, and utilities — are
mostly fixed. This means that the company can grow into profitability;
once a store reaches the break-even point, any incremental gross
profit made on additional sales flows straight to the bottom line.
In contrast, e-commerce operating costs — order processing, picking
of orders, loading/unloading the truck, and transportation to a dropoff point — are mostly variable. Our research shows that 90 to 95
percent of these costs are variable. This means that every euro in
online sales needs to generate profit in its own right.
Most retailers
don’t make a
profit on online
transactions.
To make matters worse, online supply chains are costly. Supply chain
costs for a typical €100 basket are €13 higher for home-delivered
e-commerce orders than for the traditional store shopping model
(see Exhibit 1, next page). As a result, most retailers don’t make a
profit on online transactions, and simply increasing the number of
orders will not create a business with profit levels comparable to
those of physical stores.
Strategy&
7
Exhibit 1
Cost-to-serve for traditional store shopping and e-commerce
Delivery costs
for a typical
€100 basket
Store shopping
Inbound and
distribution
Store
operations
Shopping
Transport
to home
€21
Online order with
home delivery
Inbound and
distribution
Production
warehouse
Delivery to
region
Delivery to
customer
€34
Source: Strategy& analysis
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Strategy&
A fundamental reset
The economics of online category management are different from
those of offline operations, yet many retailers treat the online
proposition as a mirror image of the offline proposition. They extend
the “mass convenience” value proposition offered in-store to the
online experience: broad range, same prices, and same promotions.
But, as noted, this merchandising approach is designed to generate
volume and overcome high fixed costs; when applied online the result
is at best breaking even, and often an operating loss.
Instead, grocery retailers need to develop alternative tactics for range,
pricing, and promotions. In other words, a fundamental reset in
thinking must occur, and that starts with the metrics used for online
category management. Today, gross margin is a popular metric in the
offline world, but gross margin can be misleading when applied to
e-commerce; that’s because two items with similar gross margins can
have widely different picking costs (how the item is physically picked
in the warehouse or store) and distribution costs (how the item gets to
the customer).
We believe that a better metric for online category management is net
margin contribution (NMC). NMC is the gross margin minus direct
picking and distribution costs. (Together these costs are calculated
using “activity-based costing.”) Large bulky items, frozen goods, and
slow-moving product groups such as nonfood incur relatively high
handling costs.
A fundamental
reset in thinking
must occur,
and that
starts with the
metrics used for
online category
management.
Exhibit 2 (next page) shows the change in product ranking based on
the gross margins and net marginal contributions of 8,000 grocery
items. For example, a four-pack of soda (in 1.5-liter bottles) drops
considerably in the margin rankings because of relatively higher
picking and distribution costs. We found that unprofitable baskets
tended to have a higher than average number of bulky items (such as
crates of beer, multipacks of soda, and family packs of toilet paper),
along with lower absolute margin items (such as low-end, privatelabel goods), slow-moving items, and items with promotional
discounts.
Strategy&
9
Exhibit 2
Gross margin vs. net margin rankings
Net margin contribution
Median
Fresh fish
High margin
(>median)
Frozen fish
Yogurt
Median
Low margin
(<median)
Frozen
vegetables
Multipack
of soda
Gross margin
Low margin
(<median)
High margin
(>median)
Deep frozen goods
Preservable goods (normal size)
Preservable goods (large size)
Chilled goods
Nonfood
Source: Strategy& analysis
10
Strategy&
Emerging value propositions
Net margin contribution varies not just across product categories but
also across customer segments, which means that some customer
groups are more profitable than others (see Exhibit 3).
To us, this is further evidence that the mass convenience model used
by most retailers is the wrong approach. Instead, they should design
value propositions that target specific customer segments and/or
shopping occasions — meaning a basket composition with a tailored
merchandising mix (assortment, prices, and promotions) — in order
to achieve profitability. We see three such online value propositions
emerging (see Exhibit 4, next page):
Premium convenience. This model provides premium products or
services to a small group of target customers at a premium price. For
example, Instacart in the United States aggregates a grocery order
Exhibit 3
Net margin contribution by customer segment
(indexed, high-income pensioners = 100)
100
High-income pensioners
68
“Double income, no kids”
11
Singles ages 40–65
High-income households with children
Less affluent pensioners
Singles younger than 40
Young families
Less affluent households with children -131
Strategy&
3
-20
-25
-34
Source: Strategy& analysis
11
Exhibit 4
Current and emerging grocery e-commerce models
Broad
Basic stock-up service
Mass convenience
TESCO
Chrono
Drive
Amazon
Waitrose
Fresh
Ocado
Amazon
Target
consumer
segment
Hello
Fresh
matkassen.com
Focused Predefined shopping basket
Focused
Instacart
Premium convenience
Scope of shopping trip
Broad
Source: Strategy& analysis
from several different retailers by actually visiting the stores and
pulling items from the shelves, and then delivers the order to the
customer’s house on the same day (and sometimes within just an hour
or two). These consumers value the service component and are
willing to pay for it.
Basic stock-up service. This approach provides basic staple goods at
regular intervals for a price comparable to in-store or at a slight
premium for home delivery. For example, Amazon and Walmart
provide a limited assortment of non-perishable staple items online.
This allows for efficient picking, not just because the range of
products is limited, but also because the products are all non-fragile
and in a single temperature zone (for example, non-refrigerated).
Delivery of these staples is less time-critical, which makes it easier to
coordinate with a third party to use an efficient, low-cost delivery
network.
Predefined shopping basket. This proposition provides a solution for a
specific shopping trip to a small group of customers. For example,
Matkassen.com (literally, “grocery bag” in Swedish) targets mass
affluent families with five easy-to-prepare meals each week. There are
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Strategy&
three options to choose from: basic, premium, and organic. Bundling
the price of several meals together, instead of pricing individual
ingredients, tends to lower the price sensitivity among consumers.
What’s more, a prepacked basket allows retailers to tailor meal
bundles based on the discounts they receive from suppliers without
needing to pass along those savings to customers. This gives them full
control over the margin mix and keeps the order assembly process
simple and efficient. Last, it provides an element of convenience,
overcoming the shopper’s problem of “what to cook for dinner
tonight” and ensuring a well-balanced, easy-to-prepare dinner, which
is worth a premium price to some consumers.
Strategy&
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Tailoring the operational model
Whatever value proposition a company chooses, it must tailor the
operational model accordingly. Amazon’s basic stock-up model would not
be profitable without a fully automated warehouse that creates a low
cost-to-serve. But a fully automated warehouse is too expensive and
impractical for Instacart or Matkassen, given the scale and type of orders
they handle.
When designing the operational model, the two main considerations are
cost-efficient picking and delivery. Picking methods range from manual
in-store picking (e.g., Instacart) to fully automated darkstore picking
(e.g., Amazon). In recent years, efficiencies at picking facilities have
improved significantly, thanks to pre-replenishment automation, order
assembly, and optimized truck loading. However, investment costs for
these automated systems are significant and require high order volumes
to be profitable.
The other major design consideration is delivery and how to keep these
costs low. A big driver of these costs is the so-called last mile: the final leg
of the item’s journey to the customer’s home from the company’s previous
distribution point. To reduce or avoid last-mile costs, retailers are
experimenting with a number of alternatives to home delivery: pickup in
store (“click and collect”), pickup at a specific central location (including
the use of refrigerated locker systems by companies like Waitrose in the
U.K. and Coles in Australia), and trucks that drive by office locations.
14
When designing
the operational
model, the
two main
considerations
are cost-efficient
picking and
delivery.
Strategy&
Getting it right versus getting
it fast
In traditional bricks-and-mortar retailing, being first was a great
competitive advantage. It meant you could occupy prime real estate,
secure a certain amount of foot traffic, and generate good profits.
Merchandise had to be good but not necessarily great, since location was
the main driver of sales and customers couldn’t easily compare all
competing retail offerings.
But prime locations don’t exist online. It’s more important to get the
e-commerce business model right than to be first. Being first in online
grocery retailing is irrelevant if competition follows with a better value
proposition. Retailers should focus on carefully designing a profitable
e-commerce business that combines a tailored value proposition and
operational model. This takes time, but it’s time well spent.
Strategy&
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