Managing the financial impact of online grocery

In a follow up to his first post on profitability in online grocery, Dave Clements looks at how alternative revenue streams – from insights monetisation and Retail Media, through to the addition of brand new services to a Retailer’s portfolio – can help to counteract rising fulfilment costs.

 It’s not unfair to say that online grocery has a profitability problem, and nor should that assertion come as much of a surprise. Ecommerce systems, pickers, fleet, fuel, drivers: all of these things come at a cost, and – more often than not – that cost equates to a substantial percentage of the basket being delivered. In the worst cases, where a Retailer’s ecommerce operation is optimised either very poorly or not at all, fulfilling an order can actually end up costing them money.

Clearly, such a situation is unsustainable. And, with adoption of online grocery holding steady throughout the course of the pandemic, grocery Retailers are now under greater pressure than ever to turn their ecommerce operations into profitable ventures.

In my last post, I looked at this challenge through the lens of operational optimisation. I believe that by focusing on the complex mechanisms that underpin online grocery, Retailers can begin to mitigate – if not eliminate – some of the costs of fulfilment. This time around, I’d like to approach the issue from a wider point of view; that of alternative revenue streams, and the additional services that can provide alternative paths to profitability.

There are three alternative revenue streams that I’d like to discuss here, two of which are intrinsically linked – from dunnhumby’s perspective, at least. I’ll explain why below.

Data insights

Up first, we have the monetisation of data insights. Grocery Retail businesses are awash with information, generated by everything from EPOS terminals to loyalty cards. When this data is analysed using appropriate data science techniques, insights can be gleaned that offer answers on everything from what an optimal store layout looks like to why shoppers choose one product over another.

This is invaluable to Retailers, helping them to predict new need states and serve their Customers better. For Brands, who can struggle to reach this level of understanding due to their distance from the end Customer, access to this information can provide actionable insights of the kind that a focus group never could. The growth in online means this data is richer than ever before, giving insights into spending across online and offline channels, detail on different shopping missions, and conversion rate for brands online. By combining clickstream data with purchase history across online and offline, this presents a very powerful and highly valuable asset.

this presents a clear opportunity for Retailers to share those insights with their suppliers at an appropriate cost. In our own experience, the monetisation of data insights can generate revenues in the region of 0.2% of a Retailer’s annual sales; a small figure on paper, but a potentially very large one in reality.

Retail Media

Just as Retailer data can provide Brands with insights that they might otherwise struggle to procure, Retail Media gives them something equally rare – the opportunity to communicate with high-intent Customers right at the point of sale.

Across both their store and digital estates, many Retailers are now building up concentrated media portfolios that provide Brand partners with unique and trusted advertising platforms. dunnhumby’s own suite of omnichannel media products covers point-of-sale, digital screens, coupons, banner ads, sponsored search, personalised offers and more, pointing to the sheer scale of the advertising opportunity on offer.

This opportunity is all the greater as we see the demise of third party cookies. The next wave of ad tech will be driven by first party data, giving retailers with large online penetration a real headstart. The online grocery boom also paves the way for new personalised media propositions which, when paired with offline media, makes retail media even more appealing as a channel for CPG digital ad budgets.

Retail Media is – or, at least, should be – fundamentally linked to data insights. Unless Retail Media programmes are built with the Customer’s best interests in mind, and with data-driven decision making used to ensure that communications are timely, relevant, and personalised, they will simply serve to disrupt the shopper journey.

When that linkage does occur though, the financial returns can be impressive. Large Retailers can generate the equivalent of 1% of their existing revenues in the form of ad sales, rising to between 3% and 5% as their media operation grows in both scope and maturity.

Additional services

Service diversification has long been a way for Retailers to generate revenues outside of their core line of business, and forays into financial services and telecoms have been common choices for grocery brands when looking to expand.

One area that could prove to be particularly lucrative, without requiring much in the way of operational expansion, is that of online marketplaces. Allowing specialist and local suppliers to piggyback on Retailer-operated ecommerce platforms, these expanded online offerings can generate between 5% and 10% in commission for every item sold, in addition to associated media revenues.

Marketplaces also have a flywheel effect; they mean more visitors, which means more retail media eyeballs, which in turn attracts more advertisers. Retailers using their data insights to power their digital media and marketplaces will see a virtuous circle of growth in this area.

Elsewhere, expansion of the in-store offering can be similarly rewarding. One of the major trends of the past few years in the US has been a growing focus on healthcare by some grocery Retailers. This goes far beyond pharmaceutical services and instead extends to full-service clinical offerings that support a wide range of healthcare needs.

Customer first, every time

Across all three of these areas, one thing should stay front of mind. While Retailers can undoubtedly harness alternative revenue streams as a way to address the issue of online profitability, they need to do so in a way that is ultimately beneficial to the end Customer. Data insights must be used to create better experiences, media to deliver more relevant and compelling communications, and the diversification of services aligned to what shoppers really want.

It bears pointing out again that alternative revenue streams are only part of the equation, too. While they might help to offset the costs of online fulfilment, they cannot fix the underlying mechanics that threaten ecommerce profitability over the longer term. As adoption of the channel continues to grow, Retailers must optimise every aspect of their business around an increasingly digital future.

This blog series covers issues explored in more detail in The Route to Online Profitability, a new report that looks in depth at the economics of online grocery. Download your complimentary copy here.