Wharton’s Santiago Gallino gives three recommendations for supermarkets to stop losing money on online sales.
Unlike most grocers, Trader Joe’s has no plans to expand into online sales by offering delivery or curbside pickup. A note on its website explains why:
“We set up our stores with care, finding just the right Crew and creating a rewarding shopping experience, full of discovery and welcome. After considering the options, we’re still just big ‘ole fans of the neighborhood grocery store where we can say hello when you’re looking around wondering - ‘what’s for dinner?’”
The national retailer may be on to something, according to research by Wharton operations, information and decisions (OID) professor Santiago Gallino. Online sales are hugely unprofitable for supermarkets because they require up to 125% more labour - a cost that isn’t passed along to the customer. Most stores do not charge extra for workers to assemble and deliver an order, and there is no noticeable price difference in items purchased online or in store.
“Many grocery retailers have been pushing for this with the hope that scale will bring profitability. But we’ve been in this effort for a number of years now, and it’s not true. There is a physical reality that scale is not going to fix,” Gallino said. “Broadly speaking, it’s very challenging to make a profit.”
In their article published in Harvard Business Review, Gallino and Wharton OID professor Marshall Fisher outlined the omnichannel dilemma faced by grocers. Online shopping surged during the COVID-19 pandemic and now accounts for 16% of all retail sales. But the grocery business isn’t like clothing or electronics or hardware; it’s much more price sensitive.
“Grocery is a retail category with very thin margins,” Gallino said. “While it’s reasonable for retailers in general to offer an omnichannel experience, when you think about the specific retail categories, you need to be careful. If you want to start offering the same things that apparel companies do, you may end up at a loss because the cost to fulfill is way higher.” Grocers are eating online labour costs
Based on the professors’ analysis, traditional in-store shopping requires 30 minutes of employee labour per customer. When a customer comes inside the store to pick up an online order, an additional 27 minutes of labour is needed. Curbside pickup adds 32.6 minutes, and delivery adds 37 minutes.
Those numbers decrease for stores that offer fulfillment in a back room rather than on the floor, but they are still significant. Online pickup adds 17 minutes of employee labour, curbside adds 22.6 minutes, and delivery adds 27.4 minutes.
With wages rising about 4.2% annually and an increasing difficulty in finding retail workers, Gallino said, online sales have become quite a trap for grocers. Executives want to offer the convenience to customers, but they can’t really afford it. Only the largest retailers, such as Walmart, can execute it effectively because their vast assortment of other products subsidises the loss on groceries.
“If you are Walmart, your hope is that customers will have the frequency of transactions and add things from other categories that will make you money,” he said, noting that Walmart also offsets costs by selling ads on its site.
What are the online options for grocers?
Gallino and Fisher laid out three online options for grocers:
Become more efficient. Make investments with the understanding that online sales are not short-term like they were during the pandemic. A long-term commitment may require investing in a separate warehouse that uses a high degree of automation, such as Walmart’s Market Fulfilment Centres. Or money could be spent hiring more employees to retrieve, bag, and deliver items to meet online demand.
“If you cannot justify those investments, maybe that’s because it’s not for you. But if you see the scale is there, you need to think long term,” Gallino said.
Make online customers pay extra. Service fees or higher product prices allow retailers to cover the cost of online shopping while also encouraging more in-store shopping. Just be transparent about it, Gallino said. Wegman’s, for example, uses the third-party vendor Instacart, which charges an average 15% markup on products. That messaging is clear to customers.
“Once you charge more, then you better offer a really good service. Everybody will be happier,” Gallino said. “All of us would love to have a butler, but it’s expensive. If you can rent your butler for a grocery transaction, then customers can have that experience.”
Double down on the in-store model. Grocers who determine that they cannot turn a profit from online sales ought to follow Trader Joe’s lead and abandon the idea. But that doesn’t mean continue with the status quo, Gallino said. Traditional stores need to give customers a reason to bypass online shopping and come inside. A pleasant shopping environment with friendly, knowledgeable staff doesn’t come cheaply.
“That creativity and those investments - put them into the store,” he said. “Invest in your employees and make them want to come to work every day and help the customer have a great experience.”