The quest to improve online grocery profitability: Learning from Walmart & Hy-Vee
Walmart’s decision to test charging higher prices for products sold online vs. in-store is good news for the future of supermarket online sales even if it runs the risk of slowing growth – something that’s very important to the company.
Shoppers have shown they want to buy groceries online. BMC research from 2017 finds that about 24% of consumers are buying groceries online on a monthly basis, and that number is increasing steadily. If grocers don’t offer this service, they risk losing the business – but the challenge is that executing online orders costs more so profitability is lower.
Walmart’s willingness to trial higher prices may provide the cover for others to do something similar. In the meantime, here are two more things grocery retailers can do to improve the profitability of their online business.
1. INCREASE THE FEES FOR THE SERVICE. Hy-Vee recently changed its fee structure in the Des Moines market. Historically, Hy-Vee offered in-store pick up for $2.95 and home delivery for $4.95 for orders under $100 (fees were waived for orders over $100).
This fall they started charging for home delivery orders based on a premium given to shorter delivery time windows.
| Delivery time window | Orders under $100 | Orders over $100 |
| 4-hour |
$5.99
|
free
|
| 2-hour |
$9.99
|
$7.99
|
| 1-hour |
$12.99
|
$9.99
|
While increasing the fees for delivery, HyVee dropped the order size required for free in-store pickup to $50.
2. ADD VALUE AND CHARGE FOR IT. For example, for connecting the consumer directly with a personal shopper as they select the order. The start up Rappi.com is doing this in Latin America.
BMC POV
It’s critical that grocery retailers find ways to improve the profitability of their online business since they can’t afford to subsidize it.
Improved profitability will require finding ways to do some combination of:
- Increasing transaction size
- Reducing costs
- Generating more income from higher prices and/or service fees
We were not able to confirm whether or not Walmart’s test is still running as of November 27 but the fact that they even tried it for a while opens the door to testing these and other ideas, as well.
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