July 3, 2022

How to make online grocery profitable

The surge in online grocery in 2020 has put pressure all the players to prove that they can fulfil profitably.  An augmented workforce doing in-store picking is one part of the puzzle, says Jacob Tveraabak, CEO at StrongPoint.

Something has to give; many grocery retailers are struggling to become profitable from online orders and the demand from UK consumers is soaring.  According to The Grocer magazine writing in March 2021, the number of British households shopping for their groceries online more than doubled in 2020, reaching 41%.  This is equivalent to 11.8m households and is a 132% increase in sales, compared to the same period last year.

This sounds like great news, until you look at the economics of online grocery.  In fact, according to a report by Bain writing in the Financial Times last year, their study showed that using traditional methods of hand-picking online orders from a physical store and then delivering it and charging no delivery fees to the customer typically led to an operating margin of minus 15%.  In short: what many grocery retailers are doing may work for the shopper, but it certainly isn’t working for many of the UK retailers.

Things improve for click and collect, but the in-store picking costs are still high, resulting in minus 5% profitability – according to the Bain analysis.  When a third party is allowed to pick in-store from a partner retailer, things improve again, but it is still barely break even and many charge a high premium on the end customer, sometimes up to 15% on all items ordered.

In a world where online is only 5-10% of the business, grocers can put these losses down to customer retention through service and experience.  When the figures hit 30%, as they did during the pandemic, and not now predicted to ever return to below 10%, grocers will not want to see the business fall to competitors, and particularly as pure online players are opening up scores of dark stores. Or, latterly, Amazon, which owns Wholefoods and is continuing to increase the range in its online grocery offer.

Automation brings many advantages but is only going to cater for a small percentage of the total online demand, so most orders are going to be processed with people hand-picking items for years to come. So, a different solution is needed for retailers that have a store network that leverages grocery assets – namely their stores – and that ensures flexibility but uses the power of technology to drive efficiency and thus profit.

And a more intelligent one as well; for instance, current picking simply replicates what a customer does, with marginal speed gains, whereas it makes more sense to start with order batching so that a single picker is fulfilling multiple orders on their store run.  It also makes sense to specialise, so that a picker can focus on specific categories because of their similarities in terms of packing, storage temperature and location in-store. And the pickers need purpose-built carts with which to pick, not simply standard trolleys.

However, all these processes need to be complimented with smart technology that augments the power of pickers. Wearable devices powered with purpose-built software to maximise efficiency means the picker is served their orders and routes through a hand-held device or mobile phone. 

In short, every element of the picking process needs to be examined and studied to see if a layer of technology can help shave off any millisecond of inefficiency. In addition, the picker can be supported with additional technology such as electronic shelf labels (ESLs), which enable them to ‘pick to light’ to improve efficiency, speed and order accuracy. Just the integration of ESLs can have a substantial impact on the picking time of every item – scale that efficiency across 1,000 stores doing hundreds of orders a day and the potential efficiency savings are astonishing.

These solutions are already bearing fruit in Scandinavia where the high price of labour – which is £25+ per hour – has forced market players to ensure unprecedented in-store levels of efficiency and productivity from their operations as otherwise they wouldn’t commercially viable.

Many retailers who are taking a middle road between manual and full automation by augmenting their workforce with purpose-built technology are turning this into profit, as  many are able to averaging picking rates of 240 items per labour hour across all product categories. Compare that with the average across the industry for grocers using traditional methods and it’s between 50 and 80 items per labour hour. Full manual picking is also very prone to errors, leading to lower basket sizes due to refunds to the customer whereas technology already exists to make it level-pegging with fully automated solutions at 99.99%.

An store owner managing a branch of Sweden’s largest grocery retail chain Grocery retailer based in Sweden has told us that they are making 10% profit on their e-commerce orders and this is partly due to the efficiency gains driven from a laser focus on picking efficiency as they are managing to average in-store picking at  ~270 items per labour hour across all product categories .[1]

So, as demand for online grocery show little signs of abating, an augmented picking workforce can help retailers navigate out of the current maze that is making grocery ecommerce unprofitable. Crucially, retailers can improve margins on meet current demand from shoppers, for whom a new normal is a hybrid of store and online shopping.

[1] https://www.strongpoint.com/customer-stories/strongpoints-e-commerce-solutions-have-enabled-ica-maxi-erikslund-to-become-one-of-the-most-efficient-and-profitable-grocery-stores-in-sweden/