Towards Profitable Growth in E-Grocery Retailing - the Role of Store and Household Density

Abstract

Despite the continued growth of e-grocery sales, few companies actually make any profits in this retail segment. Increasing market shares and associated drop densities may render profitable operations possible, but higher delivery fees seem essential to achieving profitability. Yet such higher fees may put e-groceries at a disadvantage as compared with the traditional store channel, which remains highly competitive. This study models customer choice between the e-grocery channel and the store channel as well as the effects of that choice on those channels’ operational costs and market shares. We identify conditions under which e-grocery retail can be profitable, and we estimate our model’s parameters using secondary industry data. Our results indicate that e-grocery is profitable when household density is high and store density is low. When customer valuation of the e-grocery channel increases substantially, the result may be cannibalization of the store channel’s sales to the extent that stores encounter losses. Thus there are three paths to e-grocery profitability:(i) a substantial increase in the relative consumer valuation of the online channel; (ii) a focus on areas with high household density and low store density; (iii) a long-term subsidy of the online channel until stores begin to close.