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How to achieve profitability in online grocery retailing

At face value, the surge in online grocery retailing during this year is a headache for retailers.

Margins in grocery are thin enough to begin with, and much of that margin relies on customers visiting the store, picking their items and getting them back home at their own expense.

It is – inherently – much more costly to retailers when they have to do the picking and delivery which characterises the e-commerce model. No matter how efficient the operation, retailers are taking on a job which customers previously did for free, leading to erosion and even total collapse of operating margin. 

Perhaps most worryingly, even best-in-class online grocery models — without the aid of a $7 delivery fee — still net a -2 per cent margin for retailers. All of which makes e-commerce look distinctly like a trap for retailers, but all of which misses the most important point — customers want and expect online grocery.

A channel-only view is a mirage. Customers want online grocery, and they are exactly the same customers who shop in stores. To focus only on the merits of the online channel risks losing this bigger picture. If retailers don’t meet customer needs with a strong e-commerce offering, they’ll eventually lose those customers altogether. Conversely, retailers who gain a customer’s e-commerce spend are more likely to gain incremental overall spend from that same customer — online does not fully cannibalise store spend, rather it increases share of wallet. Put simply, if customers shop with you online and instore, they’ll spend more with you overall. Customers don’t give a hoot about retailer costs  their willingness to take up and stick with online grocery shows that they increasingly expect the convenience and ease of .

Retailers who don’t embrace and compete in e-commerce—e-commerce risk becoming a DVD in the age of Netflix with a shrinking market all around them. Retailers who do embrace and win in e-commerce will grow their customer base and market share but will still face the same profitability challenge.

A platform for e-commerce success

To solve the challenge of profitability into the future, grocers need to think beyond operational efficiency and the revenue they gain from actually selling groceries. These are clearly of vital importance, but we’ve equally shown that even the best models do not make for a profitable enterprise. 

In fact, grocers need to think beyond grocery altogether and look to the tech giants for a lesson in unlocking new revenue streams, namely through advertising.

Here in Asia-Pacific we can look no further than China. In a market where digital ad spend now makes up more than 75 per cent of all ad spend, who would you think makes the most revenue from digital ads? A social network like Weibo, perhaps? A search engine like Baidu? Actually, it’s a retailer: Alibaba.

Over a third of all digital ad spend in China goes to Alibaba, and in 2020 they forecast more than US$27 billion in advertising revenue alone. Given that Alibaba is forecast to make $72 billion in total revenue this year, their advertising business is truly astounding.

Alibaba realised early on what grocery retailers need to realise now: their e-commerce platforms are a holy grail for advertisers, because they combine all of the things advertisers want:

  1. Huge reach to customers who are interested in their products
  2. Granular data on each customer’s shopping behaviour for effective tailoring of ads
  3. Clear measurement, directly linked to sales

Fundamentally this ticks the major box for APAC marketers: marketing efficiency.

Grocery retailers should see their growing e-commerce businesses as equally appealing to CPG advertisers. CPGs are desperate to reach relevant audiences at the point of purchase to nudge decisions towards their products. Whether that is through sponsored search listings, sponsored special offer tiles, or banner advertising at strategic locations, grocery e-commerce sites have plenty of natural locations where CPGs can be seen by customers.

Better still for retailers, they already own all of these spaces. Management costs aside, any revenue received from this advertising is almost pure profit.

To truly unlock this opportunity though, retailers do need to have the right platform in place. The true key to the sheer scale of Alibaba’s ad revenue is that it uses a self-serve, automated advertiser platform. This means thousands of advertisers can be creating, bidding and running tens of thousands of campaigns simultaneously. The same is true of many tech giants reliant on advertising, from Google to Facebook to Amazon. 

Retailers will not unlock meaningful revenue scale without a strong platform where advertisers can create and manage campaigns — they need to uncouple the revenue from their own labour. Many retailers do allow advertising on their e-commerce sites today, but it’s too often run manually by dedicated teams and this hugely limits the scalability.

E-commerce advertising is unlikely to fully cover retailers’ additional online operational costs, but the revenue will undoubtedly be a significant tool in the locker of tomorrow’s successful retailers. It will be a valuable source of profit which can be re-invested into building an ever better omnichannel business which meets customer needs.

The customer balance

Advertising is a smart choice for grocers to explore now and in the future, but it does need to be implemented in a way which works for customers. Gaining revenue from online advertising will be pointless for retailers if the subsequent experience adds friction and drives customers away.

Grocery is particularly sensitive to poor customer experience because purchases are extremely frequent and often habitual. Customers know their regular brands and products and they expect retailers to be conscious of this. A bad recommendation for an auto or fashion item is rarely noticed, but a poor grocery recommendation online can negatively affect the experience. Showing a Coke recommendation to a Pepsi loyal customer is unlikely to lead to happy customers nor high performing ads.   

Savvy retailers will again lean on data. With a clear view of customer behaviour across online and offline channels, retailers can ensure that customers only see sponsored offers that are relevant to them. dunnhumby’s Digital Onsite Sponsored Products platform, powered by CitrusAd, is the first self-serve platform which combines 1:1 customer relevancy with the power and scale of a self-serve grocery ads platform. 

Whichever method retailers choose to balance the customer experience, they must not lose sight of customer needs when setting up an e-commerce advertising revenue stream. It makes complete sense for retailers to grow a dedicated advertising revenue stream from e-commerce, and this is true even for retailers at the start of their online journey. The economics of e-commerce advertising make solid profit possible even at an early stage.

If retailers keep their customer needs at the heart of their plans, e-commerce advertising can help to solve online profitability challenges while maintaining an exceptional customer experience. Retailers that achieve both of those goals will be in an enviable position as grocery continues to shift online over the coming years. 

  • Mark Burton is media consulting manager at Dunnhumby.

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