As many millennials are now reaching the age at which they start to take over the grocery shopping responsibilities, it is not surprising to observe significant growth in demand for online shopping. On the one hand, this is nothing new: we have seen the ongoing shift to online shopping across many lines of retail. On the other hand, few (if any) have successfully cracked the code for delivering groceries to the homes of online customers while also generating a profit.
From the perspective of the supermarket, the issue is one of replicating the functions historically taken care of by the customer. In a prior time, the customer would drive to the supermarket, spend significant time walking the aisles filling up the shopping cart one item at a time. The customer would then load the items onto the check-out before paying and carting the groceries to the car. The customer would then load them into the car, drive home and unload the groceries from the car and haul them to the kitchen.
Today, for online home-delivery orders, all of these functions are now the responsibility of the supermarket. Putting aside the investment in the e-commerce technology required to take online orders and payments, the supermarket needs to pay “pickers” to manually walk the aisles and fulfil orders. US giant Walmart employs around 35,000 of these pickers today. For $100 order, it might take a picker 45 minutes to fill. Next, the groceries need to be packed into a temperature-controlled truck (which itself is not cheap) and driven to the customer’s home. This is likely another 15 minutes of an employee’s time at a minimum, not to mention the cost of fuel, maintenance and depreciation of the truck.
These incremental costs might not sound like very much, but in the context of the very thin operating profit margins at which supermarkets operate, they matter a great deal. On that $100 order of groceries, Walmart is used to earning around $5 before interest and tax. Same with Australia’s Woolworths. Others earn even less: Australia’s Coles earns less than $4, the UK’s Tesco around $3, while Kroger in the US earns closer to $2.50.
And the incremental costs? In the US where labor is relatively cheaper, all-in incremental costs could be around $12-14. In Australia, where minimum wages are significantly higher, so too are the incremental costs of online delivery for the Australian supermarkets. Now, some of these costs are pushed back onto the customer via delivery charges, but not all.
Take Kroger, for example: in recent weeks, the business disclosed a 0.93 per cent decline in gross margin, in part due to “investments in supply chain” and an increase in operating expenses due to higher staffing expenses on “digital initiatives”. Even Walmart has disclosed recently that its profit margins are under pressure due to its growing e-commerce business. Could it be true that online grocery sales delivered to the customer’s front door were not actually profitable today? And if so, what is the value of the enormous “growth in online” that is so often touted by management teams?
In Australia, Coles and Woolworths have so far avoided the profit margin headwinds disclosed by their US counterparts. But for how long? Today, online sales at Woolworths account for only around 3.5 per cent of Australian grocery sales – but they are growing at an annual rate of nearly 30 per cent. The circumstances are similar for Coles. As online penetration continues to grow – especially the high-cost home-delivery variety – it is difficult to see how the profit margins of Woolworths and Coles can remain unscathed.
I'd sack the picker if it took them any where near 45 minutes to fill a $100 order. There has to be a better way than picking the shelves! I regularly order full boxes of product online for delivery and ask that it comes in the original packaging but rarely receive it that way. It's usually placed individually in plastic bags, what a waste of time and energy!
I'd be interested to know what the impact of robotic warehousing has on online shopping.
Hi Asad, Robotic warehousing will significantly reduce the operating costs associated with delivering online groceries to customers. There is an enormous upfront investment cost, however, which will ultimately be borne by the current shareholders of the supermarkets.