Over the past few years, it has proven undeniable that the key to gaining market share in the grocery retail industry lies in online channels. Before the pandemic, many recognized online channels as a growth opportunity but were slow to adapt. For example, in the United Kingdom online sales accounted for more than a third of the industry’s growth from 2015 to 2020. Today, companies realize that e-grocery is the new imperative. Those new to the game are coming up against purely online businesses and alternative business models.
At the onset of the pandemic, some grocery retailers were able to shift online quickly, experiencing a rise in sales growth. However, others experienced capacity and execution constraints that compromised customer satisfaction and ultimately loyalty. Now, grocers are diversifying their online offerings to cater to customer expectations and shape the experience. Offerings now extend beyond the classic home delivery of families’ weekly groceries and address different customer segments and needs or shopping occasions by offering instant grocery delivery, fresh ready-to-cook items, meal delivery, and the like. As with in-person shopping, expanding the value proposition is crucial for grocers.
Reaching profitability in online grocery continues to be a challenge for retailers. Compared to store-based business, 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. Winning online while building a profitable business model is going to be a key challenge for many grocers going forward, but we have 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 grocery 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.
To master the growth and profitability challenge, grocery retailers must effectively manage their online transformation. Online grocery provides a new window of growth opportunity for incumbents and disruptors who choose to join the race. Further transformation, technological innovation, and new partnerships are likely to emerge as top drivers of profitable growth going forward.
The article is a part of the Retail practice’s new annual report on the Grocery industry, which summarizes major trends insights that are new and relevant for the grocery market, giving the reader a content edge and best practice guides. The report is produced in collaboration with EuroCommerce, an organization representing the retail sector in the EU.