Despite the continued growth of e-grocery sales, few companies make any profits in this retail segment. Increasing market shares and associated drop densities may make profitable operations possible. Higher delivery fees seem essential to profitability. Yet such higher fees may put e-groceries at a disadvantage compared to the traditional store channel, which remains highly competitive.
A new study by Joydeep, Agatz, and Fransoo models customer choice between the e-grocery channel and the store channel and the effects of that choice on those channels’ operational costs and market shares. The researchers identify conditions under which e-grocery retail can be profitable, and they estimate their model’s parameters using secondary industry data.
The results indicate that e-grocery is profitable when household density is high, and store density is low. However, when customer valuation of the e-grocery channel increases substantially, the result may be cannibalization of the store channel’s sales to the extent that stores encounter losses.
There are three paths to e-grocery profitability: a substantial increase in the relative consumer valuation of the online channel, a focus on areas with high household density and low store density, and a long-term subsidy of the online channel until stores begin to close.
Based on current industry data, the e-grocery channel is not profitable at the cost structure estimate; this finding accords with current market conditions, where the e-grocery channel yields very low (or even negative) profitability. Considering the retailer’s optimal overall strategy, the researchers conclude that for almost any realistic estimate of store and households density, it is never optimal to launch an e-grocery channel owing to its high operational costs.
Paul, Joydeep and Agatz, Niels A.H. and Fransoo, Jan C., Towards Profitable Growth in E-Grocery Retailing – the Role of Store and Household Density (September 15, 2021). ERIM Report Series Reference Forthcoming, Available at SSRN: https://ssrn.com/abstract=3924272 or http://dx.doi.org/10.2139/ssrn.3924272