Supermarkets are losing around £300m every year by running their online businesses unprofitably, new figures have revealed.
- Supermarkets losing £300m a year from online businesses
- Grocers lose £3 to £5 fulfilling each home delivery
- Kurt Salmon urges retailers to be “honest” with customers and charge more for home delivery
Research compiled exclusively for Retail Week by management consultancy Kurt Salmon said the total cost of fulfilling an average £100 online order when the groceries are picked from store is between £28 and £30, once costs including distribution, wages, marketing, fuel and vehicle leasing or maintenance are taken into account.
But the data revealed that supermarkets were making an average gross margin of £25 for every £100 order, meaning each home delivery is costing them between £3 and £5. Around 90 million home delivery orders are currently placed in the UK every year.
Kurt Salmon said the operating costs of picking groceries from store, including getting stock onto shelves and paying staff to select the goods, were being “hidden” under the costs of operating stores, while other costs including online advertising were allocated under marketing budgets.
“The first step on the journey to profitability must be grounded in a robust financial model, with transparency of all costs.”
Dan Murphy, Kurt Salmon
It added that the actual cost of the “final mile”, delivering an average £100 order to a customer’s home, was between £8 and £9. Supermarkets generally charge between £1 and £6 for home deliveries, depending on the order size.
The figures were revealed days after Asda said it was putting the roll-out of click-and-collect sites on hold to focus on revamping its existing store portfolio. It currently has around 640 sites but had targeted 1,000 by 2018.
The move led some analysts to suggest that the model had not proved a money-spinner, although click-and-collect is widely accepted as the model to adopt to make online grocery profitable.
It also comes less than 24 hours after Sainsbury’s online boss Robbie Feather said supermarket chains had “destroyed” the value of online grocery by under-charging for deliveries. He urged food retailers to “learn to charge for these amazing services we offer our customers”.
Honesty with customers
Kurt Salmon partner Dan Murphy suggested under-charging for deliveries could be justified when online grocery was “an interesting experiment”, but said the supermarkets should now change their stance.
“Online shopping is no longer an interesting experiment, it is here to stay,” Murphy said.
“Online grocery shopping alone is forecast to grow from £9bn to £18bn over the next few years. As retailers invest heavily in their evolving online operations, most are seeing short-term losses.
“The challenge is how to leverage the online channel for long-term profitable growth, and the fact is that many large retailers are still grappling with this challenge.
“The journey to profitability must begin with a robust financial model, with full profit and loss transparency for the channel, clear ownership and accountability for all related costs and a realistic business case.”
Murphy believes the big four’s ecommerce operations will come under increasing pressure in future years as the national living wage is introduced, wages of lorry drivers increase due to a shortage of qualified personnel and the supermarket price war continues to drive down prices and margins.
He added that the supermarkets need to run their online businesses to “tighter budgets” and be “more realistic” with their delivery charges by “being honest with their customers”.
Aldi will launch wine and non-food special buys online next year, but its UK boss Matthew Barnes admitted in an exclusive interview with Retail Week that he could not see a path to profitability in online grocery “anywhere in the market”.
Tesco, Sainsbury’s, Asda and Morrisons are all struggling to reverse falling sales and profits in the face of stiff competition from the discounters. But analysts suggested that Tesco was losing more bricks-and-mortar sales to its online channel than it was to Aldi and Lidl.