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Digital grocery sales are soaring, but profits are not

Digital grocery sales are soaring, but profits are not

A study released a week ago states that the biggest challenge facing grocery retailers today is the low profitability of their online business. In fact, according to the study, released by Wynshop in partnership with Incisiv and titled “State of Digital Grocery: Growth at the Cost of Profitability,” 86% of grocers are dissatisfied with their online profitability.

The report states that the rapid growth of digital grocery shopping in 2020 was very good for revenue (+9.5%) but it has not translated into profits. Plus, most retailers who outsourced to third-party fulfillment platforms are concerned that they will lose touch with their customers and that these platforms will eventually become direct competitors.

“Our latest research with Wynshop shows that the current model is not sustainable for grocery retailers,” said Guarav Pant, chief insights officer at Incisiv. “If the existing sales and profitability trends continue, grocery retailers will lose $14 million in gross margin for every billion dollars of sales by 2025.”

According to the report, third-party platforms like Instacart transacted almost as much business as grocers did on their own in 2020. In addition, the study summarizes the inefficiencies retailers experience with digital operations and explains why grocery retailers need to focus on operational levers, upgrade their technology, and overcome dependency on third-party platforms to plug their profit leak.

Large retailers (with sales more than $1 billion) are focused on reducing their dependence on third-parties, but smaller retailers still need to develop strategies to work more efficiently with third-party platforms in order to improve margins.

Other findings from the study include the following:

  • 59% of third-party delivery partnerships are unprofitable for grocery retailers
  • 92% of grocery retailers are not satisfied with their online order picking efficiency
  • 86% of grocery retailers are not satisfied with their labor utilization
  • 72% of grocery retailers lack an accurate view of their store inventory