Pay for your own butler!

After a huge peak in 2020, online retail’s share of total retail sales seems to have stagnated at around 13-15% in the major European countries and the USA. It is a similar picture for online groceries, with an even slightly lower share and little to no growth.

Many of the online grocery services that saw the light of day in recent years are struggling. Instant delivery companies have all but disappeared now that the last man standing, Getir, is experiencing financial woes. The mega deal between British grocery delivery company Ocado and US-based Kroger to build dozens of distribution centres based on Ocado’s innovative technology has run aground now that Kroger has paused the rollout. I think that all supermarket chains are quietly hoping that the ceiling has been reached for grocery deliveries as well, because home delivery services are considerable eating into their margins.

Upper limit market share for home delivery

Together with my colleague Niels Agatz from Erasmus University, I have modelled whether the market share for home delivery has an upper limit. The economies of scale for deliveries are very limited because vans are restricted by their volume and are already deployed extremely efficiently. The only way to make a few small gains is with very different delivery models, such as a very short time per stop (delivery to the front door instead of into the kitchen) and offering customers less flexibility in choosing time slots. For a lot of countries this means it is difficult to reduce delivery costs to below – say – €7 to €10 per order.

And let’s not forget the €7 to €10 it costs to pick the order. The only solution to this is automation, but the costs of that are steadfastly underestimated. Combined with the delivery costs, the total is around €15 to €20 per order. Needless to say, that can be substantially lower in countries with a low (or no) minimum wage, so such services can flourish in China or Brazil. However, only a very small number of people are willing to pay €20 per delivery (or to place a minimum order of €150 to €200).

True costs passed on to customers

Another colleague of mine, Santiago Gallino from Wharton, recently shared with me a study showing that home-delivering groceries sharply increases – and in some cases doubles – the amount of labour per product for the retailer. In view of the fundamental labour shortages, he predicted that the underlying costs will increase even further, and the true costs will inevitably be passed on to customers eventually. That seems only fair from the point of view of those customers who are still going to stores to buy their groceries, and who are currently in effect indirectly paying for the ‘butler service’ for home-delivery customers.

Jan Fransoo is Professor Operations and Logistics Management at the Tilburg School of Economics and Management