Online grocery turns profitable for the first time
The Covid-19 pandemic has resulted in online grocery becoming consistently profitable for conventional UK supermarkets for the first time, according to new research.
“Online delivery is often almost as profitable as in-stores shopping”
For almost two decades, delivering groceries ordered online from shops to customers has been dilutive to big supermarkets’ profits, because the charges levied for delivery rarely covered the actual cost of picking and dispatch.
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But calculations by Atrato Capital suggest that the significant uplift in volumes during the pandemic has transformed the economics of home delivery. Atrato is the investment adviser for Supermarket Income Reit, an investment trust that owns over £1bn of large supermarket freeholds.
“Before the pandemic there was not enough market share for there to be enough drop-offs on each delivery run.”
“A lot of the costs of delivery are relatively fixed, so most of the time home delivery was at best breaking even”. Now, he estimates that online delivery is often almost as profitable as in-store shopping.
“You’re getting four drops per hour instead of two, and supermarkets have taken lots of promotions off websites and set realistic delivery charges,” he said. “A delivery that used to cost the supermarket £10 now costs it £6 and that is what the customer pays.”
Although nationally online grocery now accounts for around 14 per cent of the total grocery market, Atrato says at some supermarkets it is close to half of sales after surging demand resulted in a big increase in capacity — almost all of it provided from stores.
Picking efficiency has also improved, although this is a less significant factor in the overall cost of ecommerce compared with delivery. And there has been a big increase in the use of click and collect, which now accounts for up to a quarter of grocery ecommerce and removes the delivery cost entirely.
Supermarkets have in the past been coy about the financial performance of their online channels, but plans to close some “dark stores” — facilities that exist only to fulfil online orders — suggest that in-store picking has become significantly more efficient.
Both Sainsbury and Asda are consulting on closing dark stores in the London area, although Tesco is maintaining its five units and Waitrose is building more of them around the capital.
With demand for online groceries currently exceeding capacity, there seems little prospect of a return to the irrational pricing that characterised its early days. Ocado, which pioneered grocery ecommerce using large automated picking facilities, currently has around a million people on a waiting list.
Although Ocado provides software and systems for in-store picking to Wm Morrison and others, it maintains that centralised facilities offer greater efficiency for the operator and better availability for the customer.
