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Survey: Online grocery sales, but not profits, soar

Digital grocery profits are not rising in tandem with sales.

A new survey of online grocery retailers reveals the dramatic increase in digital sales since the start of the COVID-19 pandemic is not necessarily driving profits.

According to “State of Digital Grocery: Growth at the Cost of Profitability,” a survey of 206 U.S.-based grocery retailers from Wynshop (formerly ThryveAI) and Incisiv, respondents saw a 70% increase in average basket size for online orders in 2020 (the pandemic broke out in the U.S. in early March) compared to 2019. In addition, online grocery sales increased 5x in 2020 compared to 2019.

Despite these impressive online grocery sales figures, the study finds the number one problem facing respondents is the profitability of their online business, with 86% stating they are dissatisfied with their online profitability. More than half (56%) of respondents lose money or make less than 10% average margin per online order. And more than seven in 10 (71%) respondents say they have not invested adequately in their digital business.

An estimated 20% of all grocery sales will be conducted through digital channels by 2025, according to the study. However, grocery retailers face a projected 14 million margin loss projected per $1 billion in sales by 2025 due to the change in the store/online revenue mix.

The study also examined respondent attitudes toward third-party online delivery platforms. Close to seven in 10 (68%) respondents use third-party online delivery platforms for fulfillment, and two-thirds (66%) believe they can't scale their online business without third-party partners. An estimated 8.3% of all grocery sales will come from third-party platforms by 2025, according to the study.

Yet, almost all (92%) respondents find managing third-party platforms a challenge. In addition, 84% of respondents believe they will lose touch with their customer base because of third-party platforms, and 81% of respondents believe third-party platforms will become their direct competitors in future. Six in 10 (59%) respondents claim their third-party delivery partnerships are unprofitable.

Other findings include:

  • 92% of respondents are dissatisfied with online order picking efficiency.
  • 86% of respondents are dissatisfied with their labor utilization.
  • 79% of respondents rate "improve picking efficiency" as the number one profitability lever.
  • 72% of respondents say they lack an accurate view of their store inventory.
  • 55% of respondents plan to test or deploy micro-fulfillment centers over the next 24 months.

[Read more: Survey: E-commerce growth drives fulfillment transformation plans]

“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 re-imagining 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.” 

“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.”

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