E-commerce is shifting how European grocery retailers seek profitable growth

Reaching profitability in online grocery continues to be a challenge for retailers. Compared to store-based business models, even leading e-grocery players have been struggling to be profitable, particularly while trying to expand. The ongoing need for investments in operational infrastructure, technology, and so on that are required to keep increasing capacity and staying competitive makes it difficult to improve profitability, even over time.

McKinsey identified three key pathways to profitability:

Purely online players are offering highly tailored customer value propositions, such as value-focused assortments and service levels, fresh meal kits, and farm-to-table concepts.
Online giants and marketplaces are adding groceries to their offerings to support the overall profitability of the ecosystem by driving traffic and engagement.
Traditional incumbent retailers are rethinking the value propositions that they bring to customers through expanding their online assortments, increasing private-label penetration, doubling down on customer experience, and other methods.

Operating cost in distribution networks

Traditional retailers are also reimagining their operating systems—in particular by optimizing their networks, order preparation models, and last-mile mix—given the importance of those systems as cost drivers. To ensure future capacity and maximize profitability, grocers must set up an operational network that fulfills the forecasted demand and service-level mix in a region at the lowest total operating cost.

The right level of automation can make a large difference. For example, grocers can elevate picking productivity from an average of 100 to 150 picks per hour (for picking instore) to up to 500 to 800 picks per hour at automated micro fulfillment centers. If volume and utilization are high enough, this can improve operating cost by two to five percentage points of earnings before interest and taxes margin or more, depending on the starting level. For the last mile, grocers are optimizing vehicles, processes, and routing systems and are also actively steering delivery slots to shape demand to gain efficiency often together with partners.

A leading pure player is Picnic, a Dutch no-frills online grocer that provides its customers with a user-friendly app combined with competitive prices, a low minimum order value, and no delivery fees. Drawing on advanced analytics and a fit-for-purpose technology stack developed entirely in-house, Picnic optimizes order preparation and last-mile logistics. The retailer increases efficiency through a targeted assortment, warehouse automation, and a milkman-run logic where electric delivery vehicles only visit a given area once or twice a day to increase the density of deliveries in the last mile.

E-commerce is shifting how European grocery retailers seek profitable growth

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