Online grocery shopping took off last year but can it be profitable?

At the height of the dotcom boom, a start-up called Webvan debuted on the New York Stock Exchange. By the end of its first day, this internet grocery delivery firm had seen its stock soar by two-thirds and its market value surpass $8billion.

Two years later, it went bankrupt. Since that time, the share of groceries purchased on the web in the UK rose slowly and was only about 7 per cent prior to the Covid-19 pandemic.

Suddenly, within a matter of weeks last year, supermarkets had to ramp up their digital operations as online customer orders went from a ripple to a deluge.

In the meantime, their revenues shot up. Tesco’s online sales jumped 80 per cent In their most recent quarterly results. For Sainsbury’s, it skyrocketed 128 per cent, while internet grocery pioneer Ocado saw retail revenues grow by £150million.

Online supermarket shopping has soared in the last year as people spend more time at home

But these higher sales have not necessarily translated into higher profits.

Ross Hindle, an analyst at Third Bridge, said the sector ‘was ultimately caught with its pants down’ by the coronavirus crisis.

‘It had to resort to labour intensive, short-term solutions to meet a boom in online demand. Rises in labour and delivery costs, together with the extra sanitisation and safety costs have gobbled up what should have been impressive profits.’ He says that even Ocado lacked the capacity to cope with a sudden surge in orders.

That does not mean things were going swimmingly before the pandemic for the firm. In the first two decades after its founding, it made a loss in 17 of the 20 years.

The group’s performance proves what Webvan discovered; making a profit from internet grocery shopping is very difficult. One retail analyst told the Financial Times two years ago it was ‘truly one of the worst business models in existence.’

Online-only firm Ocado was a pioneer in internet supermarket shopping. However, it has struggled to make a profit, making a loss in 17 of the first 20 years after its founding

Though most supermarkets do not provide a breakdown of their online operations’ profitability, their average profit margins are generally far lower than in stores.

This is for many reasons, not least that building up the necessary infrastructure requires vast levels of capital, but also because supermarkets have effectively resorted to subsidising the cost of deliveries to attract customers.

For shopping baskets over £40, Waitrose offers buyers free delivery while Ocado can charge as little as £2.99, and Morrisons’ customers can pay an annual fee of £35 for midweek deliveries.

The public may rejoice at such discounts, but it’s detrimental to grocers’ bottom line. Transporting a small amount of goods by van from a hub to households that could be many miles apart is inefficient and expensive.

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