As digital sales skyrocket, profits are a concern for grocery retailers
A new study released Monday by Wynshop (formerly ThryveAI), a leader in digital commerce for local in-store retailers, conducted in partnership with Incisiv, says the biggest challenge grocery retailers face today is 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 huge for revenue (+ 9.5%), it did not translate into profits, due to losses on online orders. (-70%). The study says the average gross margin for digital orders was only 9% in 2020, and many grocers lost money on their online orders.
Additionally, most retailers who have outsourced to third-party fulfillment platforms fear losing contact with their buyers (84%) and that these suppliers will become direct competitors in the future (81%).
“Given the surge in digital grocery shopping since the pandemic, it is shocking that the average gross margin of digital orders was only 9% in 2020, which has cost many money. grocers on their online orders, ”said Gaurav Pant, director of understanding at Incisiv. . “Our latest research with Wynshop shows that the current model is not sustainable for food retailers. If current trends in sales and profitability continue, grocery retailers will lose $ 14 million in gross margin for every billion dollars in sales by 2025. “
The research study is based on a survey methodology covering 206 US-based grocery retailers. The majority of respondents (88%) were at director level and above, and nearly a third (32%) of respondents represent companies with revenues exceeding $ 1 billion. The survey was conducted between April and June 2021.
Third-party platforms like Instacart handled almost as much business as lone grocers in 2020, according to the report. The study summarizes the inefficiencies that retailers experience with digital operations and explains why grocery retailers need to focus on operational levers, upgrade their technology and overcome their dependence on third-party platforms to plug the profit leak.
The study noted a growing unease with third-party platforms for a variety of reasons: 81% of grocery retailers believe third-party platforms will become their direct competitors in the future, while 84% of grocery retailers believe they will lose contact. with their customers, as third-party platforms become the front-end trademark and, in effect, “disintermediate them from their buyers”.
Large retailers (with sales of over $ 1 billion) surveyed say they are focused on reducing their reliance on third-party platforms and predict that by 2025, only 20% of their online orders will be delivered via third-party platforms. However, the study shows that small retailers will need to develop strategies to work more effectively with third-party platforms to improve their margins.
Among other key findings from the study, U.S. grocery retailers reported that:
• 59% of their delivery partnerships with third parties are not profitable
• 92% are dissatisfied with the efficiency of their online order preparation
• 86% are dissatisfied with their use of labor
• 72% do not have an accurate view of their store’s inventory
The study reveals that grocers have a significant technology gap to fill as they attempt to reduce their reliance on third-party platforms and improve their operational efficiency. They also need to upgrade their tech platforms at a much faster rate (1 in 3 large grocery stores ranks it in the top 3 business challenges) than before.
While grocery retailers believe that new technologies such as robotics and autonomous vehicles will have a disruptive impact on their business, their investments are focused on technologies that can generate a clear and 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 that ‘They will test or deploy micro-execution centers over the next 24 years. month.
“For food retailers to continue to grow their digital businesses in a way that does not come at the expense of profitability, they must improve their operational efficiency by rethinking their processes,” said Neil Moses, CEO of Wynshop. “We hope that the research we uncovered with Incisiv will enable retailers to prioritize their online activities and create a roadmap that includes ownership of their brand experience and buyer data, deployment of technology. to improve execution, picking efficiency, last mile delivery and other critical areas that will help lead them to higher profit margins.