Business & Investment

You started shopping for groceries online last year, can you make a profit?

At the height of the dot-com boom, a start-up company called Webvan made its debut on the New York Stock Exchange. By the end of the first day, the internet grocery store had a two-thirds surge in stock prices and a market value of over $ 8 billion.

Two years later, I went bankrupt. Since then, the share of groceries purchased on the web in the UK has slowly risen, to just about 7% before the Covid-19 pandemic.

Suddenly, in the last few weeks, online customer orders changed from ripples to floods, and supermarkets had to step up their digital operations.

In the meantime, their income has skyrocketed. Tesco’s online sales surged 80% in the last quarter. In the case of Sainsbury’s, it surged 128%, but Internet grocery pioneer Ocado confirmed retail sales increased by £ 150m.

Online supermarket shopping surged last year as people spend more time at home

However, these increases in sales do not necessarily lead to higher profits.

Third Bridge analyst Ross Hindol said the sector was “eventually caught with his pants down” due to the coronavirus crisis.

“We had to rely on labor-intensive short-term solutions to meet the surge in online demand. Rising labor and shipping costs, along with additional disinfection and safety costs, are impressive benefits. He devoured what was supposed to be. He says that even Ocado lacked the ability to cope with the sudden surge in orders.

That doesn’t mean things were going well before the company pandemic. In the first 20 years since its establishment, 17 of the 20 years have lost money.

The group’s performance proves what Webvan has discovered. It is very difficult to make a profit from online grocery shopping. “This is one of the worst business models that really exist,” a retail analyst told the Financial Times two years ago.

The online-only company Ocado was a pioneer in internet supermarket shopping. However, 17 out of 20 years after its founding, it has been in the red and is struggling to make a profit.

The online-only company Ocado was a pioneer in internet supermarket shopping. However, 17 out of 20 years after its founding, it has been in the red and is struggling to make a profit.

Most supermarkets do not provide a breakdown of the profitability of online operations, but the average profit margin is generally much lower than in stores.

This is because, for many reasons, not only does it require huge levels of capital to build the necessary infrastructure, but supermarkets have effectively relied on subsidizing delivery costs to attract customers. is.

For shopping carts over £ 40, Waitrose offers buyers free delivery, Ocado can charge just £ 2.99, and Morrisons customers can pay an annual fee of £ 35 for mid-week deliveries.

The public may be pleased with such a discount, but it is detrimental to the net profit of the grocery store. Transporting small quantities of goods by van to households that can be miles away from the hub is inefficient and costly.

Companies call this the “last mile” problem and often form the largest share of supply chain costs. Fuel and delivery drivers cost money. If no one is at home, you will need to deliver your purchase again.

Doing this relatively few times does not hurt the grocery store so much. However, the sudden surge in online orders that do not have the technically advanced infrastructure imposes exorbitant costs on them.

Shore Capital Director Clive Black states that the profitable supermarkets for online operations are “large, efficient, click-and-collect and drop-density” supermarkets.

According to an analysis by consultancy Bain & Company last summer, if you manually select an online order from a physical store, deliver it, and do not charge a “normal” customer fee, your operating profit will be minus 15%.

Adam Vettese, an analyst at eToro, said retailers like Tesco wouldn't have invested too much in the online sector if they didn't expect the shift to continue.

Adam Vettese, an analyst at eToro, said retailers like Tesco wouldn’t have invested too much in the online sector if they didn’t expect the shift to continue.

In contrast, orders placed through the free click-and-collect service have a margin of about -5%, even when selected from a third party or “dark store” (a retail store that only processes digital orders). There is. -It can be a break-even point.

Supermarkets can raise delivery prices to cover shipping costs, but risk losing market share. Alternatively, you can quit online shopping altogether, but that could hurt your competitiveness in the future.

It all depends on how much the digital grocery market will continue to expand when the blockade ends. “If we didn’t expect the shift to continue, companies like Tesco and Sainsbury wouldn’t have invested so much in the online sector,” said Adam Vettese, an analyst at eToro.

“Shoppers have now experienced the convenience of online shopping. Many are likely to stick to online shopping even after the coronavirus has passed.”

He adds that a “significant percentage” of British people are likely to make the majority of their purchases on the web. “It happened in many other parts of the retail industry, so there’s no reason why it shouldn’t happen in the grocery sector.”

Shopping in the in-store supermarket has a much higher profit margin than buying groceries online

Shopping in the in-store supermarket has a much higher profit margin than buying groceries online

AJ Bell’s Las Mold has a similar belief. He said he had been a customer of Ocado for about 10 years and said, “I am truly grateful for the convenience of delivery rather than running around the supermarket.”

“It seems logical to expect more capacity and more slots available.

The challenge is to make this growth of online orders sustainable. One way to do this is to further automate both delivery and warehousing operations.

The Ocado warehouse can process orders for 50 items in 5 minutes. Tesco is attempting to deliver drones on the Galway, allowing Milton Keynes co-operative customers to ship products on a six-wheeled robot from Estonian start-up Starship Technologies.

More supermarkets also have micro fulfillment centers. Combining stores with automated warehouses makes picking more efficient, reduces labor costs, and builds faster with minimal cost.

An Estonian start-up called Starship Technologies has created a robot that can deliver shopping to Morrisons and Corps customers in Milton Keynes, Buckinghamshire.

An Estonian start-up called Starship Technologies has created a robot that can deliver shopping to Morrisons and Corps customers in Milton Keynes, Buckinghamshire.

This does not all eliminate fierce competition within the online grocery market. This has been intensified in recent years by emerging discount chains Aldi and Lidl.

Amazon Fresh’s entry into the UK adds to the complexity for legacy brands. We have expertise, warehousing, and more importantly, a very wealthy parent company that can support its development.

Their rise makes things even more difficult for the Internet supermarket industry, which is still looking for ways to solve simple business problems. How do you make more money than you spend?

Vettese said: “Whether this move to online is a problem for supermarkets depends on how fast and profitable home delivery can be.”

“If the coronavirus turns out to be a catalyst for the further growth of online shopping, they need to find a solution quickly.”

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You started shopping for groceries online last year, can you make a profit?

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