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Although online grocery sales may no longer be increasing at pandemic-era rates, they are expected to continue grabbing market share for the foreseeable future. That change means grocers will be challenged to continuously improve operational efficiencies in the quest for last-mile profitability.

Emphasizing curbside pickup over home delivery is helping boost e-grocery profitability at some chains.

The Brick Meets Click/Mercatus “5-Year eGrocery Sales Forecast” projects that online sales will grow at a compound annual growth rate (CAGR) of 4.5% between 2023 and 2028, compared to 1.3% for brick-and- mortar stores. Delivery and pickup services combined, including first- and third-party, are expected to account for 10.7% of total grocery sales by 2028, up from 9.1% in 2023.

Brick Meets Click/Mercatus forecasts that pickup sales will grow faster (5.4% CAGR) than delivery (4.4%) and the little-used ship-to-home (2.8%) option in the grocery channel over the next five years. Of the three, pickup, will represent the biggest share (47%) of online grocery order fulfillment by the end of 2028.

LAST-MILE COSTS ADD UP

“The elephant in the room is cost, and cost of last-mile delivery is the most significant challenge. Those last-mile-specific costs are generally the second largest variable that we see on the P&L (profit and loss statement) and can range up to 15% of total sales. So it’s a significant expense versus both in-store shopping or pickup,” says Adam Almond, principal, U.S. Retail and Consumer Products at New York-based Deloitte.

Adam Almond

The costs associated with delivery have led many retailers to pro- mote curbside and in-store pickup services, which typically come with lower fees for customers as well, as a means for keeping expenses under control. In fact, Ahold Delhaize president & CEO Frans Muller attributed a 5% improvement in U.S. first-quarter online sales, in part, to the company’s decision to shift its online fulfillment away from same-day delivery and towards “less asset-intense” pickup services.

Similarly, Target CEO Brian Cornell emphasized the growth of the chain’s Drive Up service during a first-quarter earnings call. “Our same-day services saw high single-digit growth over last year, led by Drive Up, which grew in the low teens. This builds on the explosive growth of Drive Up that occurred during the pandemic, which was followed by double-digit increases in both 2022 and 2023. All together — and more than $2 billion in Q1 — Drive Up sales were more than 30 times larger than we saw in the first quarter of 2019.”

JUGGLING DELIVERY & PICKUP

Almond says that grocers are experimenting to find the right mix of delivery and pickup. He also says that they are looking for answers about when to scale resources up or down based on anticipated demand for these services. He points to dynamic pricing as a tool that grocers can use to help “flatten out the demand curve throughout the week or time of day.” Almond recommends a “carrot” rather than “stick” approach where grocers offer special discounts and offers (such as reduced delivery fees during off- peak periods) to try to flow more existing traffic during those times — while potentially attracting new customers in the process.

Grocers also face unique logistical challenges that support shifting the fulfillment mix more to- ward pickup. “Getting ice cream to the doorstep not melted in the summertime is very different than any other type of last-mile operations that e-commerce companies have,” explains Almond. He says the location of stores and fulfillment centers is key for grocers looking to unlock “the ability to deliver speed and proximity to their customers’ doorsteps. [It] not only creates a better customer experience but a lower last-mile delivery cost as well.”

Technological tools that deliver advanced analytics and modeling can also be gamechangers. Artificial intelligence can play a significant role in “forecasting, driving overall operations, and picking and staging lead times. Route Optimization is an extremely important factor in really planning and optimizing those variable costs,” says Almond.

He suggests retailers take a “crawl, walk, run approach rather than going all-in on fully automated robotic fulfillment systems.” A hybrid approach between manual and automated processes is often the best solution. “Just because something can be automated, doesn’t necessarily mean it should or makes sense to from a cost standpoint,” he notes.

‘Just because something can be automated, doesn’t necessarily mean it should.’

In the end, Almond says that grocers need to understand the balance between costs and the customer experience. “There’s a bit of a subjective debate on delivery, experience and the cost of packaging materials and labor. All that is to say that the minimum requirements for food safety will not necessarily equate to a positive customer experience. Slightly warm chicken may be safe to eat from a food safety standpoint, but it may not smell good, which would not be a great customer experience, right?”

Retailers have to find the cost balance in controlling temperature and packaging to support the customer experience, but Almond has seen grocers go too far: “You’re never going to get to profitability with all the costs going into maintaining the temperature state for an extended period of time.”